Exam 20: Financing with Derivatives

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.

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

The capital structure of Springmaid Company is as follows: Long-term debt $ 400 million Common stock, $1 par 50 million Contributed capital in excess of par 250 million Retained earnings 600 million Total $ 1,300 million 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 how much total capital the company will raise as a result of the issuance of debentures with warrants attached (after exercise of the warrants).

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 are allowed to buy the company’s stock.

List some securities that have option features.

The Bates Company has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $50.The convertibles have a coupon interest rate of 9% and mature 20 years from today.Straight debt of equivalent risk is yielding 12% today.The company's common stock today is selling at $60 a share.Calculate the conversion value of the issue.

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.

Jana owns preferred stock from High Brow Cow Dairy Farms, makers of the finest dairy products.The stock has a par value of $1,250 and a conversion ratio of 25.The stock is currently convertible.The firm's common stock is selling for $57 per share.If Jana converts the preferred stock, what would be the conversion value?

The conversion ratio of a convertible security is:

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

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

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 rights for the ex rights case.

JDH, Inc.presently has warrants outstanding that expire 5 years from today.Each warrant entitles the holder to purchase 2 shares of the company's common stock at an exercise price of $30 a share.The warrants currently are trading at $4 each, and the JDH common stock currently is trading at $28 a share.Calculate the warrants' formula value.

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?

Conversion of a convertible security can occur in two ways.Which of the following is/are correct?

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

The conversion ratio of a convertible security may change when

An option has a claim.

Which of the following securities (if any) is not an example of an option?

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