Question 1

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

Accepted Answer

A) True 
 B)False  False

Question 2

Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They 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% 
A)  6.66% 
B)  6.99% 
C)  7.34% 
D)  7.71% 
E)  8.09% A

Question 3

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

Accepted Answer

A) True 
 B)False  False

Question 4

(The following data apply to following Problems . The problems MUST be kept together.)
The following data apply to Saunders 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)  33.08 
A)  27.14 
B)  28.57 
C)  30.00 
D)  31.50 
E)  33.08

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

Valdes Enterprises 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%. The stock currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. 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)  $972.41
Multi-part: 
A)  $794.01 
B)  $835.81 
C)  $879.80 
D)  $926.10 
E)  $972.41
Multi-part:

Question 8

(The following data apply to following Problems . The problems MUST be kept together.)
The following data apply to Saunders Corporation's convertible bonds:
  
-What is the bond's straight-debt value?

Accepted Answer

A)  $684.78 
B)  $720.82 
C)  $758.76 
D)  $798.70 
E)  $838.63 
A)  $684.78 
B)  $720.82 
C)  $758.76 
D)  $798.70 
E)  $838.63

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A) 	Preferred stock generally has a higher component cost of capital to the firm than does common stock. 
B) 	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. 
C) 	From the issuer’s point of view, preferred stock is less risky than bonds. 
D) 	Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. 
E) 	Unlike bonds, preferred stock cannot have a convertible feature. 
A) 	Preferred stock generally has a higher component cost of capital to the firm than does common stock. 
B) 	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. 
C) 	From the issuer’s point of view, preferred stock is less risky than bonds. 
D) 	Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. 
E) 	Unlike bonds, preferred stock cannot have a convertible feature.

Question 10

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

Question 11

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, 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)  $48.62 
A)  $40.00 
B)  $42.00 
C)  $44.10 
D)  $46.31 
E)  $48.62

Question 12

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

Question 13

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 14

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 15

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 16

Which of the following statements is most CORRECT?

Accepted Answer

A)  Warrants have an option feature but convertibles do not. 
B)  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. 
C)  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. 
D)  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. 
A)  Warrants have an option feature but convertibles do not. 
B)  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. 
C)  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. 
D)  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.

Question 17

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 18

Which of the following statements concerning warrants is CORRECT?

Accepted Answer

A) 	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. 
B) 	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. 
C) 	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. 
D) 	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. 
E) 	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. 
A) 	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. 
B) 	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. 
C) 	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. 
D) 	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. 
E) 	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.

Question 19

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 20

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

Exam 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

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

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

(The following data apply to following Problems . The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's conversion ratio?

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

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

(The following data apply to following Problems . The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's straight-debt value?

Which of the following statements is most CORRECT?

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

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

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

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.

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.

Which of the following statements is most CORRECT?

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.

Which of the following statements concerning warrants is CORRECT?

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

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.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Working Capital Management

Multinational Financial Management

Lease Financing

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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