Question 1

The conversion value (i.e., stock value) of a convertible bond is defined as the ____ multiplied by the ____.

Accepted Answer

A)  conversion ratio; conversion price 
B)  conversion premium; exercise price 
C)  conversion ratio; common stock market price 
D)  conversion ratio; exercise price 
A)  conversion ratio; conversion price 
B)  conversion premium; exercise price 
C)  conversion ratio; common stock market price 
D)  conversion ratio; exercise price

Question 2

A type of financial derivative that would allow a firm to hedge against changes in interest rates over a 5-year period is a(n) ____.

Accepted Answer

A)  interest rate futures contract 
B)  commodity soup 
C)  interest rate swap 
D)  interest rate put option 
A)  interest rate futures contract 
B)  commodity soup 
C)  interest rate swap 
D)  interest rate put option

Question 3

To raise capital funds, Twixt Inc. issued $2 million worth of debentures with warrants attached. The warrants had an exercise price of $15, and each warrant entitled the holder to two shares of common stock. If the current market price per share of Twixt is $20, what is the formula value of a Twixt warrant?

Accepted Answer

A)  $10 
B)  $5 
C)  $20 
D)  $0 
A)  $10 
B)  $5 
C)  $20 
D)  $0

Question 4

Conversion price is the ____.

Accepted Answer

A)  number of common stock shares owned after the conversion 
B)  effective price of the common stock per share obtained by converting 
C)  market price of the common stock per share 
D)  difference between the market price of the common stock and the exercise price of the stock 
A)  number of common stock shares owned after the conversion 
B)  effective price of the common stock per share obtained by converting 
C)  market price of the common stock per share 
D)  difference between the market price of the common stock and the exercise price of the stock

Question 5

Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share. If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants?

Accepted Answer

A)  $1 
B)  $5 
C)  $8 
D)  $2 
A)  $1 
B)  $5 
C)  $8 
D)  $2

Question 6

Which of the following securities is not an example of an option?

Accepted Answer

A)  Warrant 
B)  Convertible security 
C)  Right 
D)  Futures contract 
A)  Warrant 
B)  Convertible security 
C)  Right 
D)  Futures contract

Question 7

____ earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares.

Accepted Answer

A)  Primary 
B)  Full primary 
C)  Fully diluted 
D)  First class 
A)  Primary 
B)  Full primary 
C)  Fully diluted 
D)  First class

Question 8

A(n) ____ is a call option issued by a company on its securities, usually common stock.

Accepted Answer

A)  debenture 
B)  warrant 
C)  futures contract 
D)  extendible note 
A)  debenture 
B)  warrant 
C)  futures contract 
D)  extendible note

Question 9

The Ogden Company has warrants outstanding that entitle the holder to purchase 4 shares of the company's common stock at an exercise price of $20 per share. The market price of the warrants is $30, and the common stock price is $25. Determine the premium over the formula value that the warrants are selling for.

Accepted Answer

A)  $20 
B)  $25 
C)  $10 
D)  $30 
A)  $20 
B)  $25 
C)  $10 
D)  $30

Question 10

A debenture of the Allegro Company (par value $1,000) is convertible into the company's common stock at a price of $50 per share. The convertible bond has a coupon interest rate of 7% and matures in 10 years. Straight debt of equivalent risk and maturity is yielding 8%. The company's common stock is currently selling for $60 per share. Determine the conversion value and straight-bond value of Allegro Company's convertible bonds.

Accepted Answer

A)  $1,200; $1,000 
B)  $1,000; $933 
C)  $1,200; $933 
D)  $1,000; $1,000 
A)  $1,200; $1,000 
B)  $1,000; $933 
C)  $1,200; $933 
D)  $1,000; $1,000

Question 11

When a company issues convertible securities, its usual intention is future ____.

Accepted Answer

A)  issuance of common stock 
B)  reduction of outstanding common stock 
C)  issuance of nonconvertible debt and preferred stock 
D)  issuance of preferred stock 
A)  issuance of common stock 
B)  reduction of outstanding common stock 
C)  issuance of nonconvertible debt and preferred stock 
D)  issuance of preferred stock

Question 12

Conversion of a convertible security may be forced by the issuing company by ____.

Accepted Answer

A)  raising the interest rate 
B)  calling the securities for redemption 
C)  lowering the dividend on common stock 
D)  None of these are correct 
A)  raising the interest rate 
B)  calling the securities for redemption 
C)  lowering the dividend on common stock 
D)  None of these are correct

Question 13

Firms issue warrants for which of the following reasons? 
I. Allows the company to sell stock at a price above what other company stock is selling for.
II. Allows the company to choose which investors can buy the company's stock.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 14

What is the difference between a conversion price and a conversion ratio?

Accepted Answer

The conversion price is the stated dolla

Question 15

The market value of a convertible debt issue is usually above the ____.

Accepted Answer

A)  conversion ratio 
B)  conversion value 
C)  straight-bond value 
D)  higher of either the conversion value or the straight-bond value 
A)  conversion ratio 
B)  conversion value 
C)  straight-bond value 
D)  higher of either the conversion value or the straight-bond value

Question 16

People Southwest Airlines (PSW) has warrants outstanding that have an exercise price of $10. Each warrant entitles the holder to purchase one share of PSW common stock. Last week PSW common stock was selling for $12 per share, and at the same time, the warrants traded at $5 each. Determine the warrant's premium over the formula value.

Accepted Answer

A)  $0 
B)  $2 
C)  $3 
D)  $5 
A)  $0 
B)  $2 
C)  $3 
D)  $5

Question 17

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? 
I. Stock shares will decrease.
II. Earnings per share will decrease.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Nether statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Nether statement I nor II is correct.

Question 18

In calculating fully diluted earnings per share, earnings must be adjusted for ____.

Accepted Answer

A)  interest saved 
B)  the number of convertible securities in the marketplace 
C)  the number of executive bonus packages that could impact the firm's earnings 
D)  the company's credit rating 
A)  interest saved 
B)  the number of convertible securities in the marketplace 
C)  the number of executive bonus packages that could impact the firm's earnings 
D)  the company's credit rating

Question 19

Prior to a warrant's expiration, its market price will be ____ the formula value.

Accepted Answer

A)  equal to 
B)  less than 
C)  greater than 
D)  negative as compared to 
A)  equal to 
B)  less than 
C)  greater than 
D)  negative as compared to

Question 20

The capital structure of Springmaid Company is as follows: $$\begin{array} { l r } 
\text { Long-term debt } & \$ 400 \text { million } \
\text { Common stock, } \$ 1 \text { par } & 50 \text { million } \
\text { Contributed capital in excess of par } & 250 \text { million } \
\text { Retained earnings } & 600 \text { million } \
\text { Total } & \$ 1,300 \text { million }
\end{array}$$ ? The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached. Each $1,000 debenture will have 40 warrants attached, and each warrant will entitle the holder to purchase one share of common stock at $20. Assume that no other changes in the capital structure occur between now and the time the warrants are exercised. Determine the contributed capital in excess of par account balance after exercise of the warrants.

Accepted Answer

A)  $250 million 
B)  $330 million 
C)  $254 million 
D)  $326 million 
A)  $250 million 
B)  $330 million 
C)  $254 million 
D)  $326 million

Exam 23: Financing With Derivatives

The conversion value (i.e., stock value) of a convertible bond is defined as the ____ multiplied by the ____.

A type of financial derivative that would allow a firm to hedge against changes in interest rates over a 5-year period is a(n) ____.

Conversion price is the ____.

Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share. If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants?

Which of the following securities is not an example of an option?

____ earnings per share are calculated based on the assumption that all dilutive securities are converted into common shares.

A(n) ____ is a call option issued by a company on its securities, usually common stock.

When a company issues convertible securities, its usual intention is future ____.

Conversion of a convertible security may be forced by the issuing company by ____.

Firms issue warrants for which of the following reasons? I. Allows the company to sell stock at a price above what other company stock is selling for. II. Allows the company to choose which investors can buy the company's stock.

What is the difference between a conversion price and a conversion ratio?

The market value of a convertible debt issue is usually above the ____.

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? I. Stock shares will decrease. II. Earnings per share will decrease.

In calculating fully diluted earnings per share, earnings must be adjusted for ____.

Prior to a warrant's expiration, its market price will be ____ the formula value.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

Filters

The conversion value (i.e., stock value) of a convertible bond is defined as the multiplied by the .