Question 1

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 premium?

Accepted Answer

A)   10.25%
B)   35.00%
C)   42.86%
D)   142.86%
E)   None of these. C

Question 2

Concerning warrants and call options,which of the following statements generally is correct?

Accepted Answer

A)   The issue procedures for both are quite similar.
B)   When a call option is exercised, the firm must issue new stock.
C)   When a warrant is exercised, existing stock changes hands.
D)   Exercise of a call option does not affect share value, but warrant exercise does.
E)   None of these. is correct. D

Question 3

A convertible bond has an option value which is equal to:

Accepted Answer

A)   the market value of the convertible bond minus the straight bond value.
B)   The market value of the convertible bond minus the conversion value.
C)   the market value of the convertible bond minus the conversion premium.
D)   the market value of the convertible bond minus the maximum of the straight bond value or conversion value.
E)   None of these. D

Question 4

Kida Consultants has 100,000 shares of stock 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 stock. Calculate the gain from exercising a single warrant.

Accepted Answer

The answer of Kida Consultants has 100,000 shares of stock...

Question 5

From the shareholder's point of view,the optimum time to call a convertible bond is when the bond's conversion value is:

Accepted Answer

A)   less than the call price, but greater than the face value.
B)   greater than the call price, but less than straight debt's value.
C)   equal to the face value.
D)   less than straight debt's value, but greater than the call price.
E)   None of these.

Question 6

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. If the warrants are all exercised immediately,what would be the market price of the stock?

Accepted Answer

A)   $22.78
B)   $25.13
C)   $26.96
D)   $28.00
E)   $29.00

Question 7

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

Accepted Answer

The answer of Explain why there is neither a "Free"...

Question 8

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

Accepted Answer

A)   With regard to security, most convertible bonds are secured by common stock (i.e., they are collateral trust bonds) .
B)   For most convertible bonds, the issuing firm can, under certain circumstances, effectively force bondholders to convert to common stock.
C)   When a convertible bond is called, the owner has the option of receiving cash or stock for the bond.
D)   All of these are incorrect.
E)   All of these are correct.

Question 9

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. If all warrants are exercised,what will your fraction of ownership be if you owned 20,000 shares originally?

Accepted Answer

A)   12.12%
B)   13.07%
C)   13.33%
D)   14.04%
E)   Without knowing the exercise price the percent cannot be determined.

Question 10

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 price?

Accepted Answer

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

Question 11

A bond/warrant package is priced to sell at a face value of $1,000. Each bond comes with 50 detachable warrants. A warrant gives the owner the right to buy 1 share of stock 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

The answer of A bond/warrant package is priced to sell...

Question 12

An "equity kicker" most often refers to a:

Accepted Answer

A)   bond with conversion privileges.
B)   preferred stock offering with conversion privileges.
C)   warrant.
D)   lettered common stock.
E)   None of these.

Question 13

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. What would your gain per share be from exercising the warrants,assuming all are exercised?

Accepted Answer

A)   $0.00 per share
B)   $1.96 per share
C)   $2.00 per share
D)   $25.00 per share
E)   $27.00 per share

Question 14

Which of the following would harm the position of a warrant holder?

Accepted Answer

A)   A 3 for 1 stock split
B)   A large stock dividend of 20%
C)   A large cash dividend
D)   Listing of the warrants on the NYSE
E)   None of these. would harm the warrant holders.

Question 15

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 value of the bond?

Accepted Answer

A)   $25
B)   $40
C)   $750
D)   $1,000
E)   No conversion premium is given.

Question 16

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

Accepted Answer

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

Question 17

Why are warrants and convertibles issued?

Accepted Answer

The answer of Why are warrants and convertibles issued?...

Question 18

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 ratio is:

Accepted Answer

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

Question 19

Kida Consultants currently has 300,000 shares of common outstanding. Firm value net of debt is $3,900,000. Kida has warrants outstanding with an exercise price of $10. How many warrants must the firm have issued if the gain from exercising a single warrant is $8.25?

Accepted Answer

The answer of Kida Consultants currently has 300,000 shares of...

Question 20

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

Accepted Answer

A)   A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond.
B)   Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds.
C)   If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value.
D)   Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable.
E)   More than one of these is incorrect.

Exam 24: Warrants and Convertibles

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 premium?

Concerning warrants and call options,which of the following statements generally is correct?

A convertible bond has an option value which is equal to:

Kida Consultants has 100,000 shares of stock 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 stock. Calculate the gain from exercising a single warrant.

From the shareholder's point of view,the optimum time to call a convertible bond is when the bond's conversion value is:

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

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 stock. The stock is selling for $22.00. What is the conversion price?

An "equity kicker" most often refers to a:

Which of the following would harm the position of a warrant holder?

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 value of the bond?

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

Why are warrants and convertibles issued?

Kida Consultants currently has 300,000 shares of common outstanding. Firm value net of debt is $3,900,000. Kida has warrants outstanding with an exercise price of $10. How many warrants must the firm have issued if the gain from exercising a single warrant is $8.25?

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