Question 1

All of the following are reasons why firms issue warrants except:

Accepted Answer

A) lowers agency costs 
B) increases leverage at time of issue 
C) permits a company to sell common stock at a price above the price prevailing at the time of warrant issue 
D) allows a firm to sell common stock in the future without incurring underwriting costs at the time of sale 
A) lowers agency costs 
B) increases leverage at time of issue 
C) permits a company to sell common stock at a price above the price prevailing at the time of warrant issue 
D) allows a firm to sell common stock in the future without incurring underwriting costs at the time of sale

Question 2

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 3

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 4

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 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

Question 5

Mercury Inc.issued bonds with warrants attached that had an exercise price of $22.Each warrant allows the holder to purchase two shares.Since the issuance, the stock split 2 for 1, the current stock price is $24 and the warrant price is $30.How much is the warrant selling above its formula value?

Accepted Answer

A) 84.6% 
B) 130.8% 
C) 15.4% 
D) 269% 
A) 84.6% 
B) 130.8% 
C) 15.4% 
D) 269%

Question 6

A warrant has an exercise price of $15.The underlying common stock has a market price of $10.The formula value of a warrant would be

Accepted Answer

A) $5 
B) $0 
C) -$5 
D) cannot be determined from the information given 
A) $5 
B) $0 
C) -$5 
D) cannot be determined from the information given

Question 7

The the time remaining before an option expires, the the option value.

Accepted Answer

A) longer, lower 
B) shorter, higher 
C) longer, higher 
D) shorter, lower 
A) longer, lower 
B) shorter, higher 
C) longer, higher 
D) shorter, lower

Question 8

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

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 9

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 10

The preemptive right allows shareholders the

Accepted Answer

A) opportunity to maintain their original ownership percentage 
B) right to purchase shares in the secondary markets 
C) right to vote for members of the board of directors 
D) all of these answers are correct 
A) opportunity to maintain their original ownership percentage 
B) right to purchase shares in the secondary markets 
C) right to vote for members of the board of directors 
D) all of these answers are correct

Question 11

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 12

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 straight-bond value of the issue.

Accepted Answer

A) $1,000 
B) $496 
C) $880 
D) $753 
A) $1,000 
B) $496 
C) $880 
D) $753

Question 13

Which of the following (if any) are factors affecting the value of a call option?

Accepted Answer

A) time remaining until expiration date 
B) interest rates 
C) expected stock price volatility 
D) all of these factors affect the value of a call option 
A) time remaining until expiration date 
B) interest rates 
C) expected stock price volatility 
D) all of these factors affect the value of a call option

Question 14

When a company issues convertible securities, its usual intention is:

Accepted Answer

A) future issuance of common stock 
B) future reduction of outstanding common stock 
C) future issuance of non-convertible debt and preferred stock 
D) future issuance of preferred stock 
A) future issuance of common stock 
B) future reduction of outstanding common stock 
C) future issuance of non-convertible debt and preferred stock 
D) future issuance of preferred stock

Question 15

The Marsh Company, whose present balance sheet is summarized below, is considering the issuance of $50 million of 8% subordinated debentures that are convertible into common stock at a price of $20.
 
Determine the amount of long-term debt (LTD) and common equity (CE) on the pro forma balance sheet, assuming conversion of the entire issue (Answers are in $ million).

Accepted Answer

A) LTD $150, CE $250 
B) LTD $150, CE $300 
C) LTD $200, CE $300 
D) LTD $200, CE $250 
A) LTD $150, CE $250 
B) LTD $150, CE $300 
C) LTD $200, CE $300 
D) LTD $200, CE $250

Question 16

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 methods of forcing conversion 
A) raising the interest rate 
B) calling the securities for redemption 
C) lowering the dividend on common stock 
D) none of these are methods of forcing conversion

Question 17

Which companies are the primary issuers of convertible securities and why do they do it?

Accepted Answer

In general, small risky companies whose

Question 18

Jackson Electronics (40% marginal tax rate) is considering issuing convertible debentures.Its investment banker tentatively has agreed to issue a 9.0 percent, 20-year convertible debenture ($1,000 par value).The conversion price will be $50 a share.Jackson's financial managers only want to issue the convertible if its after-tax component cost of capital is less than or equal to 8.0 percent.Otherwise, they plan to issue non-convertible debt.Jackson's current common stock price is $43 a share.The company expects to call the convertible issue 5 years from now when the common stock price is expected to be $60 a share.Under the conditions given in this problem, what is the minimum price per debenture that Jackson can receive and keep the after-tax cost of capital for the debentures at 8.0%?

Accepted Answer

A) about $1,033 
B) about $946 
C) about $897 
D) $1,200 
A) about $1,033 
B) about $946 
C) about $897 
D) $1,200

Question 19

In comparing warrants and rights, they:

Accepted Answer

A) are similar in that the company can discriminate as to who buys new company stock. 
B) are similar in that they allow the purchase of existing stock only 
C) are different in that both allow the firm to receive additional funds at the time they are exercised. 
D) are 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) are similar in that the company can discriminate as to who buys new company stock. 
B) are similar in that they allow the purchase of existing stock only 
C) are different in that both allow the firm to receive additional funds at the time they are exercised. 
D) are 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 20

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

Exam 20: Financing with Derivatives

All of the following are reasons why firms issue warrants except:

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.

are forms of options.

Mercury Inc.issued bonds with warrants attached that had an exercise price of $22.Each warrant allows the holder to purchase two shares.Since the issuance, the stock split 2 for 1, the current stock price is $24 and the warrant price is $30.How much is the warrant selling above its formula value?

A warrant has an exercise price of $15.The underlying common stock has a market price of $10.The formula value of a warrant would be

The the time remaining before an option expires, the the option value.

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

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.

The preemptive right allows shareholders the

Which of the following (if any) are factors affecting the value of a call option?

When a company issues convertible securities, its usual intention is:

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

Which companies are the primary issuers of convertible securities and why do they do it?

In comparing warrants and rights, they:

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

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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