Question 1

Warrants are similar to options,in that the value of the warrant is limited by:

Accepted Answer

A)  expiring worthless if the stock price is below the total warrant exercise price. 
B)  the trading capabilities of the exchange used. 
C)  the price of the underlying stock divided by the number of warrants needed to purchase a share. 
D)  Both expiring worthless if the stock price is below the total warrant exercise price; and the price of the underlying stock divided by the number of warrants needed to purchase a share. 
E)  Both the trading capabilities of the exchange used; and the price of the underlying stock divided by the number of warrants needed to purchase a sharE. 
A)  expiring worthless if the stock price is below the total warrant exercise price. 
B)  the trading capabilities of the exchange used. 
C)  the price of the underlying stock divided by the number of warrants needed to purchase a share. 
D)  Both expiring worthless if the stock price is below the total warrant exercise price; and the price of the underlying stock divided by the number of warrants needed to purchase a share. 
E)  Both the trading capabilities of the exchange used; and the price of the underlying stock divided by the number of warrants needed to purchase a sharE.

Question 2

The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share. The $50 is called the:

Accepted Answer

A)  conversion price. 
B)  stated price. 
C)  exercise price. 
D)  striking price. 
E)  None of these. 
A)  conversion price. 
B)  stated price. 
C)  exercise price. 
D)  striking price. 
E)  None of these.

Question 3

A firm has experienced a significant increase in share value. In retrospect,which of the following securities would have been best to have been issued prior to the change in share value?

Accepted Answer

A)  Common stock 
B)  Bond/warrant package 
C)  Convertible preferred stock 
D)  Straight bonds 
E)  Convertible bonds 
A)  Common stock 
B)  Bond/warrant package 
C)  Convertible preferred stock 
D)  Straight bonds 
E)  Convertible bonds

Question 4

BrightView Windows issued warrants with an exercise price of $17 for one share per warrant. On May 1,BrightView's common stock is at $20 per share. The lower and upper limits on the warrant value on May 1 are:

Accepted Answer

A)  $0 and $3 
B)  $0 and $17 
C)  $3 and $17 
D)  $3 and $20 
E)  $17 and $20 
A)  $0 and $3 
B)  $0 and $17 
C)  $3 and $17 
D)  $3 and $20 
E)  $17 and $20

Question 5

Illustrate and explain how a convertible bond value is based on both debt and equity value. What is the option value?

Accepted Answer

Essentially,the option value i

Question 6

A convertible bond has an 8% annual coupon and 15 years to maturity. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for $20.875 per share. Similar nonconvertible bonds are priced to yield 9%. The value of the convertible bond is at least:

Accepted Answer

A)  $835.00. 
B)  $919.39. 
C)  $1,000.00. 
D)  $1,570.11. 
E)  None of these. 
A)  $835.00. 
B)  $919.39. 
C)  $1,000.00. 
D)  $1,570.11. 
E)  None of these.

Question 7

The holders of Looper Industries bond with a face value of $1,000 can exchange that bond for 20 shares of stock. The stock is selling for $35.00. What is the conversion price?

Accepted Answer

A)  $20.00 
B)  $33.33 
C)  $50.00 
D)  $1,000.00 
E)  No conversion premium is given. 
A)  $20.00 
B)  $33.33 
C)  $50.00 
D)  $1,000.00 
E)  No conversion premium is given.

Question 8

The exercise of warrants creates new shares which:

Accepted Answer

A)  increases the total number of shares but does not affect share value. 
B)  increases the total number of shares which can reduce an individual share value. 
C)  does not change the number of shares outstanding, similar to options. 
D)  increases share value because cash is paid into the firm at the time of warrant exercise. 
E)  None of these. 
A)  increases the total number of shares but does not affect share value. 
B)  increases the total number of shares which can reduce an individual share value. 
C)  does not change the number of shares outstanding, similar to options. 
D)  increases share value because cash is paid into the firm at the time of warrant exercise. 
E)  None of these.

Question 9

The holders of Mikayla Corporation's bond with a face value of $1,000 can exchange that bond for 30 shares of stock. The stock is selling for $25.00. What is the conversion price?

Accepted Answer

A)  $25.00 
B)  $33.33 
C)  $35.00 
D)  $1,000.00 
E)  No conversion premium is given. 
A)  $25.00 
B)  $33.33 
C)  $35.00 
D)  $1,000.00 
E)  No conversion premium is given.

Question 10

Diamond Drill Inc. has 150,000 shares and 15,000 warrants outstanding. A warrant holder can purchase a new share of stock for five warrants and $5.00 per warrant. The stock is currently selling for $27 per share. The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion price is:

Accepted Answer

A)  $25. 
B)  $40. 
C)  $100. 
D)  Depends on the current market price of the bond. 
E)  None of these. 
A)  $25. 
B)  $40. 
C)  $100. 
D)  Depends on the current market price of the bond. 
E)  None of these.

Question 11

Two major differences between a warrant and a call option are:

Accepted Answer

A)  warrants are contracts outside of the firm while options are within the firm. 
B)  warrants have long maturities while options are usually short maturities. 
C)  warrant exercise dilutes the value of equity while option exercise does not. 
D)  Both warrants are contracts outside of the firm while options are within the firm; and warrant exercise dilutes the value of equity while option exercise does not. 
E)  Both warrants have long maturities while options are usually short maturities; and warrant exercise dilutes the value of equity while option exercise does not. 
A)  warrants are contracts outside of the firm while options are within the firm. 
B)  warrants have long maturities while options are usually short maturities. 
C)  warrant exercise dilutes the value of equity while option exercise does not. 
D)  Both warrants are contracts outside of the firm while options are within the firm; and warrant exercise dilutes the value of equity while option exercise does not. 
E)  Both warrants have long maturities while options are usually short maturities; and warrant exercise dilutes the value of equity while option exercise does not.

Question 12

A convertible bond is selling for $993. It has 15 years to maturity,a $1,000 face value,and an 8% coupon paid semi-annually. Similar non-convertible bonds are priced to yield 8.5%. The conversion ratio is 20. The stock currently sells for $47.50 per share. Calculate the convertible bond's option value.

Accepted Answer

Value of the Straight Bond = $

Question 13

The holders of Xenron Corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $22.00. What is the conversion value of the bond?

Accepted Answer

A)  $25 
B)  $40 
C)  $770 
D)  $1,000 
E)  No conversion premium is given. 
A)  $25 
B)  $40 
C)  $770 
D)  $1,000 
E)  No conversion premium is given.

Question 14

A firm has 500 shares of stock and 100 warrants outstanding. The warrants are about to expire,and all of them will be exercised. The market value of the firm's assets is $25,000,and the market value of the debt is $8,000. Each warrant gives the owner the right to buy 5 shares at $25 per share. What is the value of a warrant?

Accepted Answer

Value of a warrant to buy 1 sh

Question 15

Warrants are most often issued in combination with:

Accepted Answer

A)  new publicly placed common stock. 
B)  new privately placed common stock. 
C)  new publicly placed debt. 
D)  new privately placed debt. 
E)  preferred stock. 
A)  new publicly placed common stock. 
B)  new privately placed common stock. 
C)  new publicly placed debt. 
D)  new privately placed debt. 
E)  preferred stock.

Question 16

Based on empirical studies,firms tend to call convertible bonds when the conversion value is:

Accepted Answer

A)  less than the conversion price. 
B)  greater than the straight bond value. 
C)  greater than the call price. 
D)  less than the face value. 
E)  None of these. 
A)  less than the conversion price. 
B)  greater than the straight bond value. 
C)  greater than the call price. 
D)  less than the face value. 
E)  None of these.

Question 17

BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are:

Accepted Answer

A)  in the money. 
B)  out of the money. 
C)  valuable. 
D)  not very valuable. 
E)  Both in the money and valuablE. 
A)  in the money. 
B)  out of the money. 
C)  valuable. 
D)  not very valuable. 
E)  Both in the money and valuablE.

Question 18

Warrants are similar to traded options except:

Accepted Answer

A)  only warrants have exercise prices. 
B)  only warrants depend on changes in the underlying stock to determine value. 
C)  warrants affect the number of shares outstanding. 
D)  Both only warrants have exercise prices and warrants affect the number of shares outstanding. 
E)  Both only warrants have exercise prices and only warrants depend on changes in the underlying stock to determine valuE. 
A)  only warrants have exercise prices. 
B)  only warrants depend on changes in the underlying stock to determine value. 
C)  warrants affect the number of shares outstanding. 
D)  Both only warrants have exercise prices and warrants affect the number of shares outstanding. 
E)  Both only warrants have exercise prices and only warrants depend on changes in the underlying stock to determine valuE.

Question 19

Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:

Accepted Answer

A)  subordinated straight debt is issued because there are other senior bondholders to protect them. 
B)  convertible debt is issued because the equity component will reduce these agency costs when value is shared. 
C)  convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken. 
D)  subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued. 
E)  None of these. 
A)  subordinated straight debt is issued because there are other senior bondholders to protect them. 
B)  convertible debt is issued because the equity component will reduce these agency costs when value is shared. 
C)  convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken. 
D)  subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued. 
E)  None of these.

Question 20

A convertible bond is selling for $1,222.70. It has 10 years to maturity,a $1,000 face value,and a 10% coupon paid semi-annually. Similar non-convertible bonds are priced to yield 8%. The conversion ratio is 40. The stock currently sells for $30.125 per share. Calculate the convertible bond's option value.

Accepted Answer

Value of the Straight Bond = $

Exam 24: Warrants and Convertibles

Warrants are similar to options,in that the value of the warrant is limited by:

The holder of a $1,000 face value bond has the right to exchange the bond any time before maturity for shares of stock priced at $50 per share. The $50 is called the:

A firm has experienced a significant increase in share value. In retrospect,which of the following securities would have been best to have been issued prior to the change in share value?

BrightView Windows issued warrants with an exercise price of $17 for one share per warrant. On May 1,BrightView's common stock is at $20 per share. The lower and upper limits on the warrant value on May 1 are:

Illustrate and explain how a convertible bond value is based on both debt and equity value. What is the option value?

A convertible bond has an 8% annual coupon and 15 years to maturity. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for $20.875 per share. Similar nonconvertible bonds are priced to yield 9%. The value of the convertible bond is at least:

The holders of Looper Industries bond with a face value of $1,000 can exchange that bond for 20 shares of stock. The stock is selling for $35.00. What is the conversion price?

The exercise of warrants creates new shares which:

The holders of Mikayla Corporation's bond with a face value of $1,000 can exchange that bond for 30 shares of stock. The stock is selling for $25.00. What is the conversion price?

Two major differences between a warrant and a call option are:

The holders of Xenron Corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $22.00. What is the conversion value of the bond?

Warrants are most often issued in combination with:

Based on empirical studies,firms tend to call convertible bonds when the conversion value is:

BrightView Windows issued warrants with an exercise price of $17. BrightView's common stock currently sells for $20 per share. The warrants are:

Warrants are similar to traded options except:

Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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