Question 1

Preissle Company,wants to sell some 20-year,annual interest,$1,000 par value bonds.Its stock sells for $42 per share,and each bond would have 75 warrants attached to it,each exercisable into one share of stock at an exercise price of $47.The firm's straight bonds yield 10%.Each warrant is expected to have a market value of $2.00 given that the stock sells for $42.What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

Accepted Answer

A)   7.83%
B)   8.24%
C)   8.65%
D)   9.08%
E)   9.54%F) A) and C)
G) B) and E)

Question 2

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.

Accepted Answer

A) True 
 B)False  True

Question 3

Mariano Manufacturing can issue a 25-year,8.1% annual payment bond at par.Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket.The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%,which would represent an after-tax risk premium.What coupon rate must be set on the preferred in order to issue it at par?

Accepted Answer

A)   6.66%
B)   6.99%
C)   7.34%
D)   7.71%
E)   8.09%F) A) and C)
G) A) and E)

Question 4

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Accepted Answer

A) True 
 B)False

Question 5

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 6

The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.

Accepted Answer

A) True 
 B)False  True

Question 7

Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Accepted Answer

A) True 
 B)False

Question 8

Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.

Accepted Answer

A) True 
 B)False

Question 9

The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000) sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?

Accepted Answer

A)   $707.33
B)   $744.56
C)   $783.75
D)   $825.00
E)   $866.25F) A) and C)
G) A) and D)

Question 10

The owner of a convertible bond owns,in effect,both a bond and a call option.

Accepted Answer

A) True 
 B)False

Question 11

Preferred stockholders have priority over common stockholders with respect to dividends,because dividends must be paid on preferred stock before they can be paid on common stock.However,preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is most CORRECT?

Accepted Answer

A)   One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.
B)   The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.
C)   The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.
D)   Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.
E)   Warrants have an option feature but convertibles do not.F) A) and D)
G) All of the above

Question 13

Which of the following statements concerning warrants is correct?

Accepted Answer

A)   Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
B)   Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
C)   A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
D)   A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
E)   Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.F) A) and E)
G) A) and D)

Question 14

A warrant is an option,and as such it cannot be used as a "sweetener."

Accepted Answer

A) True 
 B)False

Question 15

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Accepted Answer

A) True 
 B)False

Question 16

Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,Pc?

Accepted Answer

A)   $40.00
B)   $42.00
C)   $44.10
D)   $46.31
E)   $48.62F) A) and B)
G) B) and D)

Question 17

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Accepted Answer

A) True 
 B)False  False

Question 18

Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00,and has an expected constant growth rate of 5.00%.The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have an 8.00% annual coupon,and each bond could be converted into 20 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.00%.What is the estimated floor price of the convertible at the end of Year 3?

Accepted Answer

A)   $794.01
B)   $835.81
C)   $879.80
D)   $926.10
E)   $972.41F) B) and D)
G) A) and E)

Question 19

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

A)   One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
B)   Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
C)   At the time it is issued, a convertible's conversion (or exercise)  price is generally set equal to or below the underlying stock's price.
D)   For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.
E)   The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.F) B) and D)
G) A) and C)

Question 20

Which of the following statements is most CORRECT?

Accepted Answer

A)   By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.
B)   From the issuer's point of view, preferred stock is less risky than bonds.
C)   Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.
D)   Unlike bonds, preferred stock cannot have a convertible feature.
E)   Preferred stock generally has a higher component cost of capital to the firm than does common stock.F) B) and C)
G) A) and D)

Exam 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles

Correct Answer
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Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.

Correct Answer
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True

Correct Answer
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A convertible debenture can never sell for more than its conversion value or less than its bond value.

Correct Answer
verified

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Correct Answer
verified

The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.

Correct Answer
verified
True

Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Correct Answer
verified

Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.

Correct Answer
verified

The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000) sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?

Correct Answer
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The owner of a convertible bond owns,in effect,both a bond and a call option.

Correct Answer
verified

Correct Answer
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Which of the following statements is most CORRECT?

Correct Answer
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Which of the following statements concerning warrants is correct?

Correct Answer
verified

A warrant is an option,and as such it cannot be used as a "sweetener."

Correct Answer
verified

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Correct Answer
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Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,P_c?

Correct Answer
verified

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Correct Answer
verified
False

Correct Answer
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Which of the following statements about convertibles is most CORRECT?

Correct Answer
verified

Which of the following statements is most CORRECT?

Correct Answer
verified

Exam 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles

Correct AnswerverifiedShow Answer

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.

Correct AnswerverifiedTrue

Correct AnswerverifiedShow Answer

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Correct AnswerverifiedShow Answer

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Correct AnswerverifiedShow Answer

The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.

Correct AnswerverifiedTrue

Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Correct AnswerverifiedShow Answer

Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.

Correct AnswerverifiedShow Answer

The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000) sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?

Correct AnswerverifiedShow Answer

The owner of a convertible bond owns,in effect,both a bond and a call option.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements concerning warrants is correct?

Correct AnswerverifiedShow Answer

A warrant is an option,and as such it cannot be used as a "sweetener."

Correct AnswerverifiedShow Answer

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Correct AnswerverifiedShow Answer

Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,Pc?

Correct AnswerverifiedShow Answer

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Correct AnswerverifiedFalse

Correct AnswerverifiedShow Answer

Which of the following statements about convertibles is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

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True

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True

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,P_c?

Correct Answer
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Correct Answer
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False

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Correct Answer
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