Question 1

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Accepted Answer

A) True 
 B)False  False

Question 2

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

Accepted Answer

A) True 
 B)False  True

Question 3

Based on your answers to the three preceding questions, what is the minimum price (or "floor" price) at which the Saunders' bonds should sell?

Accepted Answer

A)  $698.15 
B)  $734.89 
C)  $773.57 
D)  $814.29 
E)  $857.14 
A)  $698.15 
B)  $734.89 
C)  $773.57 
D)  $814.29 
E)  $857.14 E

Question 4

A warrant is an option, and as such it cannot be used as a "sweetener."

Accepted Answer

A) True 
 B)False

Question 5

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

Accepted Answer

A)  equity cash flows. 
B)  capital budgeting project cash flows. 
C)  debt cash flows. 
D)  pension fund cash flows. 
E)  sales. 
A)  equity cash flows. 
B)  capital budgeting project cash flows. 
C)  debt cash flows. 
D)  pension fund cash flows. 
E)  sales.

Question 6

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Accepted Answer

A)  is financed with short-term debt. 
B)  is financed with long-term debt. 
C)  is financed with debt whose maturity matches the term of the lease. 
D)  is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC. 
E)  is financed with retained earnings. 
A)  is financed with short-term debt. 
B)  is financed with long-term debt. 
C)  is financed with debt whose maturity matches the term of the lease. 
D)  is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC. 
E)  is financed with retained earnings.

Question 7

Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?

Accepted Answer

A)  6.66% 
B)  6.99% 
C)  7.34% 
D)  7.71% 
E)  8.09% 
A)  6.66% 
B)  6.99% 
C)  7.34% 
D)  7.71% 
E)  8.09%

Question 8

Which of the following statements is most CORRECT?

Accepted Answer

A)  Preferred stock generally has a higher component cost of capital to the firm than does common stock. 
B)  By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. 
C)  From the issuer's point of view, preferred stock is less risky than bonds. 
D)  Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. 
E)  Unlike bonds, preferred stock cannot have a convertible feature. 
A)  Preferred stock generally has a higher component cost of capital to the firm than does common stock. 
B)  By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. 
C)  From the issuer's point of view, preferred stock is less risky than bonds. 
D)  Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. 
E)  Unlike bonds, preferred stock cannot have a convertible feature.

Question 9

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Accepted Answer

A) True 
 B)False

Question 10

Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

Accepted Answer

A)  7.83% 
B)  8.24% 
C)  8.65% 
D)  9.08% 
E)  9.54% 
A)  7.83% 
B)  8.24% 
C)  8.65% 
D)  9.08% 
E)  9.54%

Question 11

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Accepted Answer

A) True 
 B)False

Question 12

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Accepted Answer

A) True 
 B)False

Question 13

A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.

Accepted Answer

A) True 
 B)False

Question 14

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 15

Operating leases often have terms that include

Accepted Answer

A)  maintenance of the equipment by the lessor. 
B)  full amortization over the life of the lease. 
C)  high penalties if the lease is cancelled. 
D)  restrictions on how much the leased property can be used. 
E)  much longer lease periods than for most financial leases. 
A)  maintenance of the equipment by the lessor. 
B)  full amortization over the life of the lease. 
C)  high penalties if the lease is cancelled. 
D)  restrictions on how much the leased property can be used. 
E)  much longer lease periods than for most financial leases.

Question 16

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

A)  The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt. 
B)  One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted. 
C)  Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. 
D)  At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. 
E)  For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock. 
A)  The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt. 
B)  One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted. 
C)  Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. 
D)  At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. 
E)  For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.

Question 18

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Accepted Answer

A)  27.14 
B)  28.57 
C)  30.00 
D)  31.50 
E)  33.08 
A)  27.14 
B)  28.57 
C)  30.00 
D)  31.50 
E)  33.08

Question 19

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Accepted Answer

A)  $40.00 
B)  $42.00 
C)  $44.10 
D)  $46.31 
E)  $48.62 
A)  $40.00 
B)  $42.00 
C)  $44.10 
D)  $46.31 
E)  $48.62

Question 20

Heavy use of off-balance sheet lease financing will tend to

Accepted Answer

A)  make a company appear more risky than it actually is because its stated debt ratio will be increased. 
B)  make a company appear less risky than it actually is because its stated debt ratio will appear lower. 
C)  affect a company's cash flows but not its degree of risk. 
D)  have no effect on either cash flows or risk because the cash flows are already reflected in the income statement. 
E)  affect the lessee's cash flows but only due to tax effects. 
A)  make a company appear more risky than it actually is because its stated debt ratio will be increased. 
B)  make a company appear less risky than it actually is because its stated debt ratio will appear lower. 
C)  affect a company's cash flows but not its degree of risk. 
D)  have no effect on either cash flows or risk because the cash flows are already reflected in the income statement. 
E)  affect the lessee's cash flows but only due to tax effects.

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

Based on your answers to the three preceding questions, what is the minimum price (or "floor" price) at which the Saunders' bonds should sell?

A warrant is an option, and as such it cannot be used as a "sweetener."

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Which of the following statements is most CORRECT?

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Operating leases help to shift the risk of obsolescence from the user to the lessor.

A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Operating leases often have terms that include

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Which of the following statements about convertibles is most CORRECT?

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Heavy use of off-balance sheet lease financing will tend to

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Mergers and Acquisitions

Financial Management and Stock Equilibrium

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Exam 20: Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

Based on your answers to the three preceding questions, what is the minimum price (or "floor" price) at which the Saunders' bonds should sell?

A warrant is an option, and as such it cannot be used as a "sweetener."

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Which of the following statements is most CORRECT?

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Operating leases help to shift the risk of obsolescence from the user to the lessor.

A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Operating leases often have terms that include

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Which of the following statements about convertibles is most CORRECT?

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Heavy use of off-balance sheet lease financing will tend to

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Mergers and Acquisitions

Financial Management and Stock Equilibrium

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