Question 1

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued.Most traded warrants are originally attached to bonds or preferred stocks.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Refer to the data for the Neuman Corporation's convertible bonds.What is the bond's conversion ratio?

Accepted Answer

A)   27.14
B)   28.57
C)   30.00
D)   31.50
E)   33.08F) A) and E)
G) D) and E)

Question 4

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Accepted Answer

A) True 
 B)False

Question 5

Refer to the data for the Neuman Corporation's convertible bonds.What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?

Accepted Answer

A)   $698.15
B)   $734.89
C)   $773.57
D)   $814.29
E)   $857.14F) C) and D)
G) All of the above

Question 6

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 7

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 D)
G) B) and E)

Question 8

Refer to the data for the Neuman Corporation's convertible bonds.What is the bond's conversion value?

Accepted Answer

A)   $698.15
B)   $734.89
C)   $773.57
D)   $814.29
E)   $857.14F) B) and D)
G) A) and B)

Question 9

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) C) and E)
G) B) and D)

Question 10

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Accepted Answer

A) True 
 B)False

Question 11

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) C) and D)
G) D) and E)

Question 12

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

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) A) and D)
G) B) and E)

Question 16

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 17

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 18

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 B)
G) A) and C) D

Question 19

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 20

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) None of the above
G) A) and B) A

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

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued.Most traded warrants are originally attached to bonds or preferred stocks.

Correct Answer
verified

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

Correct Answer
verified

Refer to the data for the Neuman Corporation's convertible bonds.What is the bond's conversion ratio?

Correct Answer
verified

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Correct Answer
verified

Refer to the data for the Neuman Corporation's convertible bonds.What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?

Correct Answer
verified

Correct Answer
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Correct Answer
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Refer to the data for the Neuman Corporation's convertible bonds.What is the bond's conversion value?

Correct Answer
verified

Correct Answer
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Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Correct Answer
verified

Which of the following statements concerning warrants is correct?

Correct Answer
verified

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

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
verified

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

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

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 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
verified
D

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

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
A

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

A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued.Most traded warrants are originally attached to bonds or preferred stocks.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Refer to the data for the Neuman Corporation's convertible bonds.What is the bond's conversion ratio?

Correct AnswerverifiedShow Answer

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Correct AnswerverifiedShow Answer

Refer to the data for the Neuman Corporation's convertible bonds.What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Refer to the data for the Neuman Corporation's convertible bonds.What is the bond's conversion value?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Correct AnswerverifiedShow Answer

Which of the following statements concerning warrants is correct?

Correct AnswerverifiedShow Answer

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

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

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

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

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 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 AnswerverifiedD

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

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 AnswerverifiedA

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D

Correct Answer
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True

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
A