Question 1

All of the following are true of calls and puts EXCEPT

Accepted Answer

A)  options are issued by businesses. 
B)  the presence of options trading in the firm's stock could, by increasing trading activity, stabilize the firm's share price in the marketplace. 
C)  options are not a source of funding to the corporation. 
D)  the financial manager of a corporation has very little need to deal with options. 
A)  options are issued by businesses. 
B)  the presence of options trading in the firm's stock could, by increasing trading activity, stabilize the firm's share price in the marketplace. 
C)  options are not a source of funding to the corporation. 
D)  the financial manager of a corporation has very little need to deal with options.

Question 2

A ________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. ________ are purchased if the stock price is expected to fall.

Accepted Answer

A)  put; call; Puts 
B)  call; put; Puts 
C)  put; call; Calls 
D)  call; put; Calls 
A)  put; call; Puts 
B)  call; put; Puts 
C)  put; call; Calls 
D)  call; put; Calls

Question 3

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making periodic payments for its use.

Accepted Answer

A) True 
 B)False

Question 4

When a call is made on a convertible security, the holder of the security will most likely

Accepted Answer

A)  not take any action. 
B)  allow the call to be exercised and accept the call premium. 
C)  convert the security into common stock. 
D)  sell the security in the secondary market. 
A)  not take any action. 
B)  allow the call to be exercised and accept the call premium. 
C)  convert the security into common stock. 
D)  sell the security in the secondary market.

Question 5

All of the following must be considered when making a lease-versus-purchase decision EXCEPT

Accepted Answer

A)  the after-tax cash flows for each year under the lease alternative. 
B)  the after-tax cash flows for each year under the purchase alternative. 
C)  the present value of all cash flows. 
D)  the depreciation expense under the lease. 
A)  the after-tax cash flows for each year under the lease alternative. 
B)  the after-tax cash flows for each year under the purchase alternative. 
C)  the present value of all cash flows. 
D)  the depreciation expense under the lease.

Question 6

Derivatives are used by corporations as a useful tool for managing certain aspects of the firm's risk.

Accepted Answer

A) True 
 B)False

Question 7

Call options are purchased with the expectation that the market price of the underlying security will fall while put options are purchased with the expectation that the market price of the underlying security will rise.

Accepted Answer

A) True 
 B)False

Question 8

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?

Accepted Answer

A)  There would be a profit of $525. 
B)  There would be a loss of $125. 
C)  There would be a loss of $325. 
D)  There would be a loss of $525. 
A)  There would be a profit of $525. 
B)  There would be a loss of $125. 
C)  There would be a loss of $325. 
D)  There would be a loss of $525.

Question 9

The lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.

Accepted Answer

A) True 
 B)False

Question 10

Lisa's Riding Equipment Company has entered into two lease arrangements. One lease is an operating lease on an office copier requiring annual lease payments of $2,000 for the next three years. The other lease is a 15-year financial lease on a building requiring annual lease payments of $150,000. If the firm's discount rate is 10 percent, how should each lease be presented on the firm's balance sheet?

Accepted Answer

Operating lease: The basic features such

Question 11

A form of debt or equity financing that possesses characteristics of both debt and equity financing is called

Accepted Answer

A)  hybrid security. 
B)  convertible security. 
C)  derivative security. 
D)  none of the above. 
A)  hybrid security. 
B)  convertible security. 
C)  derivative security. 
D)  none of the above.

Question 12

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because

Accepted Answer

A)  the common stock price may go up further. 
B)  they already have the market price benefit and may still receive fixed periodic interest payments. 
C)  of the dilution of EPS. 
D)  interest payments are tax deductible. 
A)  the common stock price may go up further. 
B)  they already have the market price benefit and may still receive fixed periodic interest payments. 
C)  of the dilution of EPS. 
D)  interest payments are tax deductible.

Question 13

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

Accepted Answer

A)  vote along with common stockholders. 
B)  share in the possible future success of the firm. 
C)  protect their interest. 
D)  receive extra income. 
A)  vote along with common stockholders. 
B)  share in the possible future success of the firm. 
C)  protect their interest. 
D)  receive extra income.

Question 14

FASB Standard No. 13 establishes requirements for the explicit disclosure of certain types of lease obligations on the firm's balance sheet. To qualify as a capital lease, any of the following elements may be present EXCEPT

Accepted Answer

A)  the lease transfers ownership of the property to the lessee by the end of the lease. 
B)  the lease contains an option to purchase the property at a "bargain" price. 
C)  the lease term is less than 75 percent of the economic life of the property. 
D)  at the beginning of the lease, the present value of the lease payment is equal to 90 percent or more of the fair market value of the leased property less any investment tax credit received by the lessor. 
A)  the lease transfers ownership of the property to the lessee by the end of the lease. 
B)  the lease contains an option to purchase the property at a "bargain" price. 
C)  the lease term is less than 75 percent of the economic life of the property. 
D)  at the beginning of the lease, the present value of the lease payment is equal to 90 percent or more of the fair market value of the leased property less any investment tax credit received by the lessor.

Question 15

A lease under which a lessor acts as an equity participant supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n)

Accepted Answer

A)  operating lease. 
B)  leveraged lease. 
C)  sale-leaseback arrangement. 
D)  direct lease. 
A)  operating lease. 
B)  leveraged lease. 
C)  sale-leaseback arrangement. 
D)  direct lease.

Question 16

A security that is neither debt nor equity but derives its value from an underlying asset is called a(n)

Accepted Answer

A)  derivative security. 
B)  hybrid security. 
C)  option. 
D)  operating lease. 
A)  derivative security. 
B)  hybrid security. 
C)  option. 
D)  operating lease.

Question 17

The call price of the security generally ________ the security's par value.

Accepted Answer

A)  is less than 
B)  is equal to 
C)  is greater than 
D)  has no relation to 
A)  is less than 
B)  is equal to 
C)  is greater than 
D)  has no relation to

Question 18

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

Accepted Answer

A)  $15.00 
B)  $16.67 
C)  $17.33 
D)  $20.00 
A)  $15.00 
B)  $16.67 
C)  $17.33 
D)  $20.00

Question 19

Julian's Sports Equipment must decide whether to obtain $1,000,000 of financing by selling common stock at its current price of $40 per share or selling convertible bonds. The firm currently has 250,000 shares of common stock outstanding. Convertible bonds can be sold for their $1,000 par value and would be convertible at $45. The firm expects its earnings available to common stockholders to be $700,000 each year over the next several years.
(a) Calculate the number of shares the firm would need to sell to raise the $1,000,000.
(b) Calculate the earnings per share resulting from the sale of common stock.
(c) Calculate the number of shares outstanding once all bonds have been converted.
(d) Calculate the earnings per share associated with the bond financing after conversion.
(e) Which of the financing alternatives would you recommend the company adopt? Why?

Accepted Answer

(a) 1,000,000/40 = 25,000 shares
(b) 700

Question 20

A capital or capitalized lease is otherwise known as

Accepted Answer

A)  an operating lease. 
B)  a financial lease. 
C)  a direct lease. 
D)  a leveraged lease. 
A)  an operating lease. 
B)  a financial lease. 
C)  a direct lease. 
D)  a leveraged lease.

All of the following are true of calls and puts EXCEPT

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making periodic payments for its use.

When a call is made on a convertible security, the holder of the security will most likely

All of the following must be considered when making a lease-versus-purchase decision EXCEPT

Derivatives are used by corporations as a useful tool for managing certain aspects of the firm's risk.

Call options are purchased with the expectation that the market price of the underlying security will fall while put options are purchased with the expectation that the market price of the underlying security will rise.

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?

The lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.

A form of debt or equity financing that possesses characteristics of both debt and equity financing is called

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

FASB Standard No. 13 establishes requirements for the explicit disclosure of certain types of lease obligations on the firm's balance sheet. To qualify as a capital lease, any of the following elements may be present EXCEPT

A lease under which a lessor acts as an equity participant supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n)

A security that is neither debt nor equity but derives its value from an underlying asset is called a(n)

The call price of the security generally ________ the security's par value.

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

A capital or capitalized lease is otherwise known as

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

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Exam 17: Hybrid and Derivative Securities

All of the following are true of calls and puts EXCEPT

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making periodic payments for its use.

When a call is made on a convertible security, the holder of the security will most likely

All of the following must be considered when making a lease-versus-purchase decision EXCEPT

Derivatives are used by corporations as a useful tool for managing certain aspects of the firm's risk.

Call options are purchased with the expectation that the market price of the underlying security will fall while put options are purchased with the expectation that the market price of the underlying security will rise.

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?

The lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.

A form of debt or equity financing that possesses characteristics of both debt and equity financing is called

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

FASB Standard No. 13 establishes requirements for the explicit disclosure of certain types of lease obligations on the firm's balance sheet. To qualify as a capital lease, any of the following elements may be present EXCEPT

A lease under which a lessor acts as an equity participant supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n)

A security that is neither debt nor equity but derives its value from an underlying asset is called a(n)

The call price of the security generally ________ the security's par value.

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

A capital or capitalized lease is otherwise known as

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

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