Question 1

The ____ the expected stock price volatility, the ____ the value of the call option.

Accepted Answer

A)  greater; higher 
B)  lower; higher 
C)  greater; lower 
D)  lower; lower 
A)  greater; higher 
B)  lower; higher 
C)  greater; lower 
D)  lower; lower

Question 2

If the exercise price of an M-tel warrant is $48 and the stock splits 2 for 1, what will be the post-split exercise price of the warrant? Assume the warrant was selling for $20 before the stock split.

Accepted Answer

A)  $24 
B)  $20 
C)  $10 
D)  $48 
A)  $24 
B)  $20 
C)  $10 
D)  $48

Question 3

Explain how conversion of a convertible security affects earnings and how a firm handles this on its financial statements.

Accepted Answer

If a convertible security is ultimately

Question 4

The Coatesville Company has decided to sell additional common stock through a rights offering. The company has 12 million shares outstanding and plans to sell an additional 1.5 million shares through a rights offering. Each shareholder will receive one right for each share currently held, and thus each right will entitle shareholders to purchase 0.125 shares. The Coatesville common stock is currently selling at $50 per share, and the subscription price of the rights will be $45 per share. Determine the theoretical value of the right for the rights on case.

Accepted Answer

A)  $0.556 
B)  $0.455 
C)  $0.50 
D)  $0.625 
A)  $0.556 
B)  $0.455 
C)  $0.50 
D)  $0.625

Question 5

Sam owns a $1,000 par value, convertible bond that can be converted now. The conversion ratio is 20, and each share of stock is currently selling for $40 per share. What would be the conversion value of the bond, and should Sam convert the bond or hold it to maturity?

Accepted Answer

A)  The conversion value is $2,000, and Sam should convert. 
B)  The conversion value is $1,200, and Sam should convert. 
C)  The conversion value is $975, and Sam should hold the bond to maturity. 
D)  The conversion value is $800, and Sam should hold the bond to maturity. 
A)  The conversion value is $2,000, and Sam should convert. 
B)  The conversion value is $1,200, and Sam should convert. 
C)  The conversion value is $975, and Sam should hold the bond to maturity. 
D)  The conversion value is $800, and Sam should hold the bond to maturity.

Question 6

Which of the following is (are) a feature of convertible securities? 
I. Conversion price
II. Conversion 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 7

Lear Holdings plans to sell 60,000 units, each unit consisting of a $1,000 debenture and 15, 7-year warrants. Each warrant allows the holder to purchase one common-share at $30. If the stock price goes to $38 and all warrants were exercised, what is the total capital raised by Lear?

Accepted Answer

A)  $94.2 million 
B)  $90.6 million 
C)  $87 million 
D)  $77 million 
A)  $94.2 million 
B)  $90.6 million 
C)  $87 million 
D)  $77 million

Question 8

A Sorsi bond has a par value of $1,000 but is currently selling for $920. If the bond has a conversion ratio of 23, what is the conversion price? Current stock price is $30.

Accepted Answer

A)  $40.00 
B)  $43.48 
C)  $33.33 
D)  $30.67 
A)  $40.00 
B)  $43.48 
C)  $33.33 
D)  $30.67

Question 9

The ____ is the price that the call option buyer pays the writer of the option if the buyer decides to exercise the option.

Accepted Answer

A)  option premium 
B)  option discount 
C)  conversion price 
D)  exercise price 
A)  option premium 
B)  option discount 
C)  conversion price 
D)  exercise price

Question 10

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 common stock at par account balance after exercise of the warrants.

Accepted Answer

A)  $50 million 
B)  $54 million 
C)  $56 million 
D)  $35 million 
A)  $50 million 
B)  $54 million 
C)  $56 million 
D)  $35 million

Question 11

As a financing device, warrants have been used in connection with ____.

Accepted Answer

A)  bond swaps only 
B)  equity offerings only 
C)  debt restructurings and bond swaps only 
D)  bond swaps, equity offerings, and debt restructurings 
A)  bond swaps only 
B)  equity offerings only 
C)  debt restructurings and bond swaps only 
D)  bond swaps, equity offerings, and debt restructurings

Question 12

Which of the following is NOT a common feature of financing with warrants?

Accepted Answer

A)  An exercise price that is below the market price of common stock at the time the warrant is issued 
B)  Typical life of a warrant is between 5 and 10 years 
C)  Warrant is usually detachable from a debenture or preferred stock 
D)  If a warrant is issued as part of a "unit," it is usually detachable from a debenture or preferred stock 
A)  An exercise price that is below the market price of common stock at the time the warrant is issued 
B)  Typical life of a warrant is between 5 and 10 years 
C)  Warrant is usually detachable from a debenture or preferred stock 
D)  If a warrant is issued as part of a "unit," it is usually detachable from a debenture or preferred stock

Question 13

In a comparison of warrants and rights, it is found the two are ____.

Accepted Answer

A)  similar in that the company can discriminate as to who buys new company stock 
B)  similar in that they allow the purchase of existing stock only 
C)  different in that both allow the firm to receive additional funds at the time they are exercised 
D)  different in that rights allow the holder of the right to vote in corporate elections based on the number of shares the right can purchase 
A)  similar in that the company can discriminate as to who buys new company stock 
B)  similar in that they allow the purchase of existing stock only 
C)  different in that both allow the firm to receive additional funds at the time they are exercised 
D)  different in that rights allow the holder of the right to vote in corporate elections based on the number of shares the right can purchase

Question 14

Rizzo Company has debentures ($1,000 par) outstanding that are convertible into the company's common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature in 12 years. In addition, the convertible debenture is callable at 110% of the par value. Straight debt of equivalent risk is yielding 12%. The company's common stock is selling at $22 per share. The company has a marginal tax rate of 40%. Determine the conversion value of the issue.

Accepted Answer

A)  $1,000 
B)  $880 
C)  $1,136 
D)  $1,120 
A)  $1,000 
B)  $880 
C)  $1,136 
D)  $1,120

Question 15

What is an interest rate swap? Describe how it is used.

Accepted Answer

A swap is a type of financial derivative

Question 16

The most basic type of interest rate swap is the ____.

Accepted Answer

A)  fixed for floating rate swap 
B)  exchange-rated swap 
C)  LIBOR for prime rate swap 
D)  interest rate rights offering 
A)  fixed for floating rate swap 
B)  exchange-rated swap 
C)  LIBOR for prime rate swap 
D)  interest rate rights offering

Question 17

____ are forms of options.

Accepted Answer

A)  Warrants 
B)  Convertible securities 
C)  Leases 
D)  Warrants and convertible securities 
A)  Warrants 
B)  Convertible securities 
C)  Leases 
D)  Warrants and convertible securities

Question 18

____ are examples of contingent claims.

Accepted Answer

A)  Convertible bonds and warrants 
B)  Warrants and extendible notes 
C)  Options and extendible notes 
D)  Convertible bonds, options, and warrants 
A)  Convertible bonds and warrants 
B)  Warrants and extendible notes 
C)  Options and extendible notes 
D)  Convertible bonds, options, and warrants

Question 19

Bonds may have a ____, which gives the holder of the bond the right to sell it back to the issuer under certain conditions.

Accepted Answer

A)  warrant 
B)  put option 
C)  rights offering 
D)  call option 
A)  warrant 
B)  put option 
C)  rights offering 
D)  call option

Question 20

Mills Trucking Inc. has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $25. The convertibles have a coupon interest rate of 8% and mature 20 years from today. Straight debt of equivalent risk is yielding 10% today. The company's common stock today is selling at $23 a share. Calculate the straight-bond value of the issue.

Accepted Answer

A)  about $830 
B)  about $1,000 
C)  about $950 
D)  about $1,500 
A)  about $830 
B)  about $1,000 
C)  about $950 
D)  about $1,500

Exam 23: Financing With Derivatives

The ____ the expected stock price volatility, the ____ the value of the call option.

If the exercise price of an M-tel warrant is $48 and the stock splits 2 for 1, what will be the post-split exercise price of the warrant? Assume the warrant was selling for $20 before the stock split.

Explain how conversion of a convertible security affects earnings and how a firm handles this on its financial statements.

Sam owns a $1,000 par value, convertible bond that can be converted now. The conversion ratio is 20, and each share of stock is currently selling for $40 per share. What would be the conversion value of the bond, and should Sam convert the bond or hold it to maturity?

Which of the following is (are) a feature of convertible securities? I. Conversion price II. Conversion stock

Lear Holdings plans to sell 60,000 units, each unit consisting of a $1,000 debenture and 15, 7-year warrants. Each warrant allows the holder to purchase one common-share at $30. If the stock price goes to $38 and all warrants were exercised, what is the total capital raised by Lear?

A Sorsi bond has a par value of $1,000 but is currently selling for $920. If the bond has a conversion ratio of 23, what is the conversion price? Current stock price is $30.

The ____ is the price that the call option buyer pays the writer of the option if the buyer decides to exercise the option.

As a financing device, warrants have been used in connection with ____.

Which of the following is NOT a common feature of financing with warrants?

In a comparison of warrants and rights, it is found the two are ____.

What is an interest rate swap? Describe how it is used.

The most basic type of interest rate swap is the ____.

____ are forms of options.

____ are examples of contingent claims.

Bonds may have a ____, which gives the holder of the bond the right to sell it back to the issuer under certain conditions.

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 the expected stock price volatility, the the value of the call option.