Please help – Coupon rate calculations

Hi.
I would appreciate if someone could explain the second part to the question mentioned below(Dec/2009)

Alaska Salvage is in discussion with potential lenders about financing an ambitious five-year project searching for lost
gold in the central Atlantic. The company has had great success in the past with its various salvage operations and
is now quoted on the London Alternative Investment Market. The company is currently financed by 120,000 equity
shares trading at $85 per share. It needs to borrow $1·6 million and is concerned about the level of the fixed rates
being suggested by the lenders. After lengthy discussions the lenders are prepared to offer finance against a mezzanine
issue of fixed rate five-year notes with warrants attached. Each $10,000 note, repayable at par, would carry a warrant
for 100 equity shares at an exercise price of $90 per share. The estimated volatility of the returns on the company’s
equity is 20% and the risk free rate of interest is 5%. The company does not pay dividends to its equity investors.
You may assume that the issue of these loan notes will not influence the current value of the firm’s equity. The issue will be made at par.

Required:
(a) Estimate, using Black-Scholes Option Pricing Model as appropriate, the current value of each warrant to the
lender noting the assumptions that you have made in your valuation. (10 marks)
(b) Estimate the coupon rate that would be required by the lenders if they wanted a 13% rate of return on their
investment. (4 marks)
(c) Discuss the advantages and disadvantages of issuing mezzanine debt in the situation outlined in the case.

CAN ANYONE PLEASE EXPLAIN THE SECOND PART OF THE QUESTION (12/09)