Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

A sale and leaseback arrangement is a type of financial,or capital,lease.

Accepted Answer

A) True 
 B)False

Question 4

Cannon Manufacturing is considering issuing 18-year,7.8% annual coupon,$1,000 face value convertible bonds at a price of $1,000 each.Each bond would be convertible into 22 shares of common stock.If the bonds were not convertible,investors would require an annual yield of 11.8%.The stock's current price is $22.00,its expected dividend is $2.60,and its expected growth rate is 5.9%.The bonds are noncallable for 10 years.What is the bond's conversion value in Year 5? Do not round your intermediate calculations.

Accepted Answer

A)  $709.12 
B)  $773.58 
C)  $644.65 
D)  $547.95 
E)  $676.88 
A)  $709.12 
B)  $773.58 
C)  $644.65 
D)  $547.95 
E)  $676.88

Question 5

Moniker Manufacturing's bonds were recently issued at their $1,000 par value.At any time prior to maturity (20 years from now),a bondholder can exchange a bond for a share of common stock at a conversion price of $10.What is the conversion ratio? Do not round your intermediate calculations.

Accepted Answer

A)  85.00 
B)  120.00 
C)  100.00 
D)  110.00 
E)  75.00 
A)  85.00 
B)  120.00 
C)  100.00 
D)  110.00 
E)  75.00

Question 6

Preferred stock can provide a financing alternative for some firms when market conditions are such that the firms cannot issue either pure debt or common stock at any reasonable cost.

Accepted Answer

A) True 
 B)False

Question 7

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)  very 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)  very 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 8

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Accepted Answer

A) True 
 B)False

Question 9

If a leased asset has a negative residual value (e.g.as a result of a statutory requirement to dispose of an asset in an environmentally sound manner),then the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

Accepted Answer

A) True 
 B)False

Question 10

Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have a 7.1% annual coupon,and each bond could be converted into 31 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.1%.The stock currently sells for $43.00 a share,has an expected dividend in the coming year of $2.80,and has an expected constant growth rate of 6.0%.What is the estimated floor price of the convertible at the end of Year 4? Do not round your intermediate calculations.

Accepted Answer

A)  $1,514.59 
B)  $1,935.31 
C)  $2,103.60 
D)  $1,682.88 
E)  $1,767.03 
A)  $1,514.59 
B)  $1,935.31 
C)  $2,103.60 
D)  $1,682.88 
E)  $1,767.03

Question 11

Which of the following is CORRECT?

Accepted Answer

A)  Firms that use "off-balance-sheet" financing,such as leasing,would show lower debt ratios if the effects of their leases were reflected in their financial statements. 
B)  Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure,in an amount sufficient to support the lease payment obligation. 
C)  The fixed charges associated with a lease can be as high as,but never greater than,the fixed payments associated with a loan. 
D)  Capital,or financial,leases generally provide for maintenance by the lessor. 
E)  A key difference between a capital lease and an operating lease is that with a capital lease,the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds,whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment. 
A)  Firms that use "off-balance-sheet" financing,such as leasing,would show lower debt ratios if the effects of their leases were reflected in their financial statements. 
B)  Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure,in an amount sufficient to support the lease payment obligation. 
C)  The fixed charges associated with a lease can be as high as,but never greater than,the fixed payments associated with a loan. 
D)  Capital,or financial,leases generally provide for maintenance by the lessor. 
E)  A key difference between a capital lease and an operating lease is that with a capital lease,the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds,whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

Assume that a piece of leased equipment has a relatively high expected residual value.From the lessee's viewpoint,it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is 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 17

Orient Airlines' common stock currently sells for $32,and its 8.0% convertible debentures (issued at par,or $1,000)sell for $850.Each debenture can be converted into 26 shares of common stock at any time before 2028.What is the conversion value of the bond? Do not round your intermediate calculations.

Accepted Answer

A)  $915.20 
B)  $1,040.00 
C)  $956.80 
D)  $832.00 
E)  $748.80 
A)  $915.20 
B)  $1,040.00 
C)  $956.80 
D)  $832.00 
E)  $748.80

Question 18

Exhibit 20.1
​
The following data apply to Saunders Corporation's convertible bonds: $\begin{array}{lrlr}
\text { Maturity } & 13 & \text { Stock price } & \$ 34.00 \
\text { Par value } & \$ 1,000 & \text { Conversion price } & \$ 43.00 \
\text { Annual coupon } & 5.20 \% & \text { Straight-debt yield } & 9.80 \%
\end{array}$
-Refer to Exhibit 20.1.What is the minimum price (or "floor" price)at which the Saunders' bonds should sell?

Accepted Answer

A)  $669.83 
B)  $632.56 
C)  $830.23 
D)  $869.77 
E)  $790.70 
A)  $669.83 
B)  $632.56 
C)  $830.23 
D)  $869.77 
E)  $790.70

Question 19

Curran Contracting is issuing new 25-year bonds that have warrants attached.If not for the attached warrants,the bonds would carry an 11.2% annual interest rate.However,with the warrants attached the bonds will pay a 9.5% annual coupon.There are 31 warrants attached to each bond,which have a par value of $1,000.What is the implied value of each warrant? Do not round your intermediate calculations.

Accepted Answer

A)  $4.10 
B)  $4.55 
C)  $5.23 
D)  $3.87 
E)  $5.46 
A)  $4.10 
B)  $4.55 
C)  $5.23 
D)  $3.87 
E)  $5.46

Question 20

Exhibit 20.1
​
The following data apply to Saunders Corporation's convertible bonds: $\begin{array}{lrlr}
\text { Maturity } & 13 & \text { Stock price } & \$ 34.00 \
\text { Par value } & \$ 1,000 & \text { Conversion price } & \$ 43.00 \
\text { Annual coupon } & 5.20 \% & \text { Straight-debt yield } & 9.80 \%
\end{array}$
-Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?

Accepted Answer

A)  $703.32 
B)  $535.87 
C)  $502.37 
D)  $669.83 
E)  $803.80 
A)  $703.32 
B)  $535.87 
C)  $502.37 
D)  $669.83 
E)  $803.80

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

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

A sale and leaseback arrangement is a type of financial,or capital,lease.

Moniker Manufacturing's bonds were recently issued at their $1,000 par value.At any time prior to maturity (20 years from now),a bondholder can exchange a bond for a share of common stock at a conversion price of $10.What is the conversion ratio? Do not round your intermediate calculations.

Preferred stock can provide a financing alternative for some firms when market conditions are such that the firms cannot issue either pure debt or common stock at any reasonable cost.

Operating leases often have terms that include

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

If a leased asset has a negative residual value (e.g.as a result of a statutory requirement to dispose of an asset in an environmentally sound manner),then the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

Which of the following is CORRECT?

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

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

Assume that a piece of leased equipment has a relatively high expected residual value.From the lessee's viewpoint,it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.

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

Which of the following statements is CORRECT?

Exhibit 20.1 The following data apply to Saunders Corporation's convertible bonds: Maturity 13 Stock price \ 34.00 Par value \ 1,000 Conversion price \ 43.00 Annual coupon 5.20\% Straight-debt yield 9.80\% -Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

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 Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Mergers and Acquisitions

Filters

Exam 20: Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

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

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

A sale and leaseback arrangement is a type of financial,or capital,lease.

Moniker Manufacturing's bonds were recently issued at their $1,000 par value.At any time prior to maturity (20 years from now),a bondholder can exchange a bond for a share of common stock at a conversion price of $10.What is the conversion ratio? Do not round your intermediate calculations.

Preferred stock can provide a financing alternative for some firms when market conditions are such that the firms cannot issue either pure debt or common stock at any reasonable cost.

Operating leases often have terms that include

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

If a leased asset has a negative residual value (e.g.as a result of a statutory requirement to dispose of an asset in an environmentally sound manner),then the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

Which of the following is CORRECT?

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

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

Assume that a piece of leased equipment has a relatively high expected residual value.From the lessee's viewpoint,it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.

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

Which of the following statements is CORRECT?

Exhibit 20.1 ​ The following data apply to Saunders Corporation's convertible bonds: Maturity 13 Stock price \ 34.00 Par value \ 1,000 Conversion price \ 43.00 Annual coupon 5.20\% Straight-debt yield 9.80\% -Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

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 Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Mergers and Acquisitions

Filters

Exhibit 20.1 The following data apply to Saunders Corporation's convertible bonds: Maturity 13 Stock price \ 34.00 Par value \ 1,000 Conversion price \ 43.00 Annual coupon 5.20\% Straight-debt yield 9.80\% -Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?