Question 1

Most stock purchase warrants are non-detachable, which means that the bondholders must keep the warrants until they mature.

Accepted Answer

A) True 
 B)False

Question 2

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Accepted Answer

A)  There would be a profit of $800. 
B)  There would be a profit of $400. 
C)  There would be a loss of $400. 
D)  There would be a loss of $800. 
A)  There would be a profit of $800. 
B)  There would be a profit of $400. 
C)  There would be a loss of $400. 
D)  There would be a loss of $800.

Question 3

Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.

Accepted Answer

A) True 
 B)False

Question 4

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Accepted Answer

A)  There would be a profit of $200. 
B)  There would be a profit of $100. 
C)  There would be a loss of $100. 
D)  There would be a loss of $300. 
A)  There would be a profit of $200. 
B)  There would be a profit of $100. 
C)  There would be a loss of $100. 
D)  There would be a loss of $300.

Question 5

The basic characteristics of warrants include all of the following EXCEPT it

Accepted Answer

A)  acts as a sweetener in financing. 
B)  is detachable. 
C)  lowers the required interest rate. 
D)  has an exercise period shorter than one month. 
A)  acts as a sweetener in financing. 
B)  is detachable. 
C)  lowers the required interest rate. 
D)  has an exercise period shorter than one month.

Question 6

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

Accepted Answer

A) True 
 B)False

Question 7

A financial lease is often also referred to as a capital lease.

Accepted Answer

A) True 
 B)False

Question 8

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements about put and call options is false?

Accepted Answer

A)  They are traded on organized exchanges. 
B)  They are a form of deferred equity financing by the firm. 
C)  They can be used to lock in a gain or prevent a loss on a stock holding. 
D)  They provide the buyer with an opportunity to earn larger returns than simply buying or selling common stock. 
A)  They are traded on organized exchanges. 
B)  They are a form of deferred equity financing by the firm. 
C)  They can be used to lock in a gain or prevent a loss on a stock holding. 
D)  They provide the buyer with an opportunity to earn larger returns than simply buying or selling common stock.

Question 10

In general, the market value of a convertible security is likely to be less than its straight value or conversion value.

Accepted Answer

A) True 
 B)False

Question 11

All of the following are true of stock-purchase warrants EXCEPT

Accepted Answer

A)  when a firm makes a large issue of debt, the attachment of stock-purchase warrants may add to the marketability of the issue. 
B)  warrants are similar to conversion features on debt. 
C)  suppliers of debt are more likely to require warrants on an issue of debt from an existing corporation than from a new firm. 
D)  the attachment of warrants may lower the required interest rate. 
A)  when a firm makes a large issue of debt, the attachment of stock-purchase warrants may add to the marketability of the issue. 
B)  warrants are similar to conversion features on debt. 
C)  suppliers of debt are more likely to require warrants on an issue of debt from an existing corporation than from a new firm. 
D)  the attachment of warrants may lower the required interest rate.

Question 12

Both warrants and rights result in new capital equity. However, warrants are issued at an exercise price below the prevailing market price of the stock; rights are generally issued at a subscription price above the prevailing market price.

Accepted Answer

A) True 
 B)False

Question 13

The market value of a warrant is generally ________ the theoretical value of the warrant.

Accepted Answer

A)  below 
B)  equal to 
C)  above 
D)  not related to 
A)  below 
B)  equal to 
C)  above 
D)  not related to

Question 14

The effect of exercising a warrant on the firm's capital structure reduces leverage ________ converting a convertible security.

Accepted Answer

A)  less than 
B)  as much as 
C)  more than 
D)  without relationship to 
A)  less than 
B)  as much as 
C)  more than 
D)  without relationship to

Question 15

As the price of the underlying stock rises above the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  double. 
A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  double.

Question 16

If a lease meets any of the FASB Standard No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 17

In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

Accepted Answer

A) True 
 B)False

Question 18

The key motives for using convertible securities in the firm's financing mix include all of the following EXCEPT

Accepted Answer

A)  a form of deferred stock financing. 
B)  a sweetener for financing. 
C)  a method of raising temporarily cheap funds. 
D)  an eventual shift in the capital structure to a more levered position. 
A)  a form of deferred stock financing. 
B)  a sweetener for financing. 
C)  a method of raising temporarily cheap funds. 
D)  an eventual shift in the capital structure to a more levered position.

Question 19

Since operating leases result in the receipt of services from an asset without increasing the assets or liabilities on the firm's balance sheet, leasing may result in misleading financial ratios.

Accepted Answer

A) True 
 B)False

Question 20

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of the asset might be better off borrowing to purchase it.

Accepted Answer

A) True 
 B)False

Most stock purchase warrants are non-detachable, which means that the bondholders must keep the warrants until they mature.

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

The basic characteristics of warrants include all of the following EXCEPT it

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

A financial lease is often also referred to as a capital lease.

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

Which of the following statements about put and call options is false?

In general, the market value of a convertible security is likely to be less than its straight value or conversion value.

All of the following are true of stock-purchase warrants EXCEPT

Both warrants and rights result in new capital equity. However, warrants are issued at an exercise price below the prevailing market price of the stock; rights are generally issued at a subscription price above the prevailing market price.

The market value of a warrant is generally ________ the theoretical value of the warrant.

The effect of exercising a warrant on the firm's capital structure reduces leverage ________ converting a convertible security.

As the price of the underlying stock rises above the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will

If a lease meets any of the FASB Standard No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on the firm's balance sheet.

In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

The key motives for using convertible securities in the firm's financing mix include all of the following EXCEPT

Since operating leases result in the receipt of services from an asset without increasing the assets or liabilities on the firm's balance sheet, leasing may result in misleading financial ratios.

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of the asset might be better off borrowing to purchase it.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 17: Hybrid and Derivative Securities

Most stock purchase warrants are non-detachable, which means that the bondholders must keep the warrants until they mature.

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Leasing allows the lessee, in effect, to depreciate land, which is prohibited if the land were purchased.

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

The basic characteristics of warrants include all of the following EXCEPT it

The conversion feature permits the firm's capital structure to be changed without increasing the total financing.

A financial lease is often also referred to as a capital lease.

The market premium may be defined as the amount by which the conversion value exceeds its straight value.

Which of the following statements about put and call options is false?

In general, the market value of a convertible security is likely to be less than its straight value or conversion value.

All of the following are true of stock-purchase warrants EXCEPT

Both warrants and rights result in new capital equity. However, warrants are issued at an exercise price below the prevailing market price of the stock; rights are generally issued at a subscription price above the prevailing market price.

The market value of a warrant is generally ________ the theoretical value of the warrant.

The effect of exercising a warrant on the firm's capital structure reduces leverage ________ converting a convertible security.

As the price of the underlying stock rises above the exercise price of a warrant, the investor's ability to earn larger potential return diminishes. Therefore, the warrant premium will

If a lease meets any of the FASB Standard No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on the firm's balance sheet.

In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

The key motives for using convertible securities in the firm's financing mix include all of the following EXCEPT

Since operating leases result in the receipt of services from an asset without increasing the assets or liabilities on the firm's balance sheet, leasing may result in misleading financial ratios.

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of the asset might be better off borrowing to purchase it.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters