Question 1

Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?

Accepted Answer

Convertible bonds are not cheaper or mor

Question 2

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

Accepted Answer

A) Ordinary equity. 
B) Bond/warrant package. 
C) Convertible preference share. 
D) Straight bonds. 
E) Convertible bonds. 
A) Ordinary equity. 
B) Bond/warrant package. 
C) Convertible preference share. 
D) Straight bonds. 
E) Convertible bonds.

Question 3

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

Accepted Answer

A) €22.00 
B) €28.57 
C) €35.00 
D) €1,000.00 
E) No conversion premium is given. 
A) €22.00 
B) €28.57 
C) €35.00 
D) €1,000.00 
E) No conversion premium is given.

Question 4

A bond/warrant package is priced to sell at face value of €1,000.Each bond comes with 50 detachable warrants.A warrant gives the owner the right to buy 1 share of equity at €20 per share.The value of a warrant has been estimated at €2.The bonds mature in 20 years.Similar bonds without warrants yield 10%.What is the bond's annual coupon?

Accepted Answer

Set the price of bond/warrant

Question 5

BrightView Windows issued warrants with an exercise price of €17 for one share per warrant.On May 1,BrightView's ordinary equity 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 6

Kida Consultants has 100,000 shares of equity outstanding.The firm's value net of debt is €2 million.Kida has 1,000 warrants outstanding with an exercise price of €18,where each warrant entitles the holder to purchase one share of equity.Calculate the gain from exercising a single warrant.

Accepted Answer

(100,000/101,000)[ (

Question 7

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

Accepted Answer

Refer to Essentially,the optio

Question 8

If a corporate security can be exchanged for a fixed number of shares of equity,the security is said to be:

Accepted Answer

A) callable. 
B) convertible. 
C) protected. 
D) putable. 
E) None of the above. 
A) callable. 
B) convertible. 
C) protected. 
D) putable. 
E) None of the above.

Question 9

Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient?

Accepted Answer

A) Cash flow from these securities best match cash flow of the firm. 
B) If the firm does well,convertible bonds will turn out to have been the better alternative versus issuing ordinary equity. 
C) The securities are useful when it is costly to assess the risk of the issuing firm. 
D) The securities may resolve agency problems associated with raising money. 
E) All of the above are sensible explanations. 
A) Cash flow from these securities best match cash flow of the firm. 
B) If the firm does well,convertible bonds will turn out to have been the better alternative versus issuing ordinary equity. 
C) The securities are useful when it is costly to assess the risk of the issuing firm. 
D) The securities may resolve agency problems associated with raising money. 
E) All of the above are sensible explanations.

Question 10

A convertible preference share is similar to a convertible bond except:

Accepted Answer

A) the conversion ratio is fixed (given). 
B) the conversion price is fixed (given). 
C) the time to maturity is infinite. 
D) All of the above. 
E) None of the above. 
A) the conversion ratio is fixed (given). 
B) the conversion price is fixed (given). 
C) the time to maturity is infinite. 
D) All of the above. 
E) None of the above.

Question 11

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 the above. 
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 the above.

Question 12

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

Accepted Answer

Value of the Straight Bond = €

Question 13

A convertible bond is selling for €800.It has 10 years to maturity,a €1000 face value,and a 10% coupon paid semi-annually.Similar nonconvertible bonds are priced to yield 14%.The conversion price is €50 per share.The equity currently sells for €31.375 per share.Determine the bond's option premium.

Accepted Answer

Minimum Value: greater of CV =

Question 14

A firm has 500 shares of equity 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

Concerning convertible bonds,which of the following statements is not correct?

Accepted Answer

A) The value of a convertible bond will generally be greater than its straight bond value. 
B) The value of a convertible bond will generally be greater than its conversion value. 
C) The difference between the conversion value and the straight bond value is the conversion or option premium. 
D) The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond. 
E) All of the above are correct. 
A) The value of a convertible bond will generally be greater than its straight bond value. 
B) The value of a convertible bond will generally be greater than its conversion value. 
C) The difference between the conversion value and the straight bond value is the conversion or option premium. 
D) The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond. 
E) All of the above are correct.

Question 16

The holders of Xenron Corporation's bond with a face value of €1,000 can exchange that bond for 35 shares of equity.The equity is selling for €22.00.What would the conversion price and conversion ratio be if Xenron had a 3 for 1 equity split?

Accepted Answer

A) € 7.33; 75 
B) € 9.52; 105 
C) €22.00; 25 
D) €28.57; 35 
E) None of the above. 
A) € 7.33; 75 
B) € 9.52; 105 
C) €22.00; 25 
D) €28.57; 35 
E) None of the above.

Question 17

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's 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 the above. 
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's 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 the above.

Question 18

The holder of a €1,000 face value bond has the right to exchange the bond anytime before maturity for shares 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 the above. 
A) conversion price. 
B) stated price. 
C) exercise price. 
D) striking price. 
E) None of the above.

Question 19

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

Accepted Answer

A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk,the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issued these instruments. 
D) the equity value is dependent on current risks only,not the future risk at conversion. 
E) None of the above. 
A) the effects of risk are opposite on the two value components and tend to cancel each other out. 
B) if the firm is high risk,the option premium will be higher while the straight bond value is fixed. 
C) only risky companies issued these instruments. 
D) the equity value is dependent on current risks only,not the future risk at conversion. 
E) None of the above.

Question 20

A warrant gives the owner:

Accepted Answer

A) the obligation to sell securities directly to the firm at a fixed price for a specified time. 
B) the right to purchase securities directly from the firm at a fixed price for a specified time. 
C) the obligation to purchase securities directly from the firm at a fixed price for a specified time. 
D) the right to sell securities directly to the firm at a fixed price for a specified time. 
E) None of the above. 
A) the obligation to sell securities directly to the firm at a fixed price for a specified time. 
B) the right to purchase securities directly from the firm at a fixed price for a specified time. 
C) the obligation to purchase securities directly from the firm at a fixed price for a specified time. 
D) the right to sell securities directly to the firm at a fixed price for a specified time. 
E) None of the above.

Exam 24: Warrants and Convertibles

Explain why there is neither a "Free" nor "Expensive Lunch" when convertible bonds are issued?

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

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

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

Kida Consultants has 100,000 shares of equity outstanding.The firm's value net of debt is €2 million.Kida has 1,000 warrants outstanding with an exercise price of €18,where each warrant entitles the holder to purchase one share of equity.Calculate the gain from exercising a single warrant.

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

If a corporate security can be exchanged for a fixed number of shares of equity,the security is said to be:

Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient?

A convertible preference share is similar to a convertible bond except:

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

Concerning convertible bonds,which of the following statements is not correct?

The holders of Xenron Corporation's bond with a face value of €1,000 can exchange that bond for 35 shares of equity.The equity is selling for €22.00.What would the conversion price and conversion ratio be if Xenron had a 3 for 1 equity split?

The exercise of warrants creates new shares which:

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

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

A warrant gives the owner:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: An Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters