Lagos Inc. issued bonds with detachable warrants for $ 5,000,000 (par value). The bonds have a present value of $ 4,934,400. The fair value of the warrants is determined to be $ 220,000. Using the relative fair value method, how much of the issue price should be allocated to the warrants?
A) $ 65,600
B) $ 211,200
C) $ 213,500
D) $ 220,000

Question

Quizplus · Accepted Answer

The relative fair value method allocates the issue price based on the relative fair values of the bonds and warrants. The fair value of the warrants is $220,000, and the present value of the bonds is $4,934,400. The total fair value of the issue is $5,154,400 ($220,000 + $4,934,400). The proportion of the issue price allocated to the warrants is $220,000/$5,154,400 = 4.27%. Therefore, the amount of the issue price allocated to the warrants is $5,000,000 x 4.27% = $213,500.

Lagos Inc Issued Bonds with Detachable Warrants for $ 5,000,000 (Par