Question 1

Why would a company issue convertible securities instead of straight bonds?

Accepted Answer

Convertibles are generally offered by re

Question 2

The conversion premium of a convertible bond tends to be when the conversion value is the straight-bond value.

Accepted Answer

A) smallest, nearly equal to 
B) largest, less than 
C) largest, greater than 
D) largest, nearly equal to 
A) smallest, nearly equal to 
B) largest, less than 
C) largest, greater than 
D) largest, nearly equal to

Question 3

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 4

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 5

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 6

The conversion price of CRX's convertible ($1,000 par) subordinated debentures is $40 and the present market price of CRX common stock is $48.Determine the present conversion value of the convertible issue.

Accepted Answer

A) $1,000 
B) $1,200 
C) $833 
D) $1,680 
A) $1,000 
B) $1,200 
C) $833 
D) $1,680

Question 7

All of the following are reasons why companies issue convertible securities except:

Accepted Answer

A) cheaper total cost than nonconvertible securities 
B) lower interest payments than nonconvertible securities 
C) sell common stock at a price above current market price 
D) deferred issuance of common stock 
A) cheaper total cost than nonconvertible securities 
B) lower interest payments than nonconvertible securities 
C) sell common stock at a price above current market price 
D) deferred issuance of common stock

Question 8

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 9

Explain how conversion of a convertible security affects earnings and how does a firm handle this on its financial statements?

Accepted Answer

If a convertible security is ultimately

Question 10

Conversion price is:

Accepted Answer

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

Question 11

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 12

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 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 13

Sam owns a $1,000 par value, convertible bond which 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 14

The value of the right can be calculated under one of the following circumstances.

Accepted Answer

A) using the Gordon model 
B) trading ex-rights 
C) market order 
D) based on a margin account 
A) using the Gordon model 
B) trading ex-rights 
C) market order 
D) based on a margin account

Question 15

The difference between the market value of a convertible bond and the higher of its conversion or straight-bond value is the

Accepted Answer

A) exercise premium 
B) investment premium 
C) conversion premium 
D) liquidation premium 
A) exercise premium 
B) investment premium 
C) conversion premium 
D) liquidation premium

Question 16

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 17

A firm that issues warrants

Accepted Answer

A) can expect to receive additional funds if the formula value of the warrant is zero at the expiration date 
B) has to pay the same per share dividend to the warrant holders as it pays to its stockholders 
C) cannot issue convertible securities while the warrants are outstanding 
D) can expect to receive additional funds if the formula value of the warrant is positive at the expiration date 
A) can expect to receive additional funds if the formula value of the warrant is zero at the expiration date 
B) has to pay the same per share dividend to the warrant holders as it pays to its stockholders 
C) cannot issue convertible securities while the warrants are outstanding 
D) can expect to receive additional funds if the formula value of the warrant is positive at the expiration date

Question 18

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 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

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

Exam 20: Financing with Derivatives

Why would a company issue convertible securities instead of straight bonds?

The conversion premium of a convertible bond tends to be when the conversion value is the straight-bond value.

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

The most basic type of interest rate swap is the:

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

The conversion price of CRX's convertible ($1,000 par) subordinated debentures is $40 and the present market price of CRX common stock is $48.Determine the present conversion value of the convertible issue.

All of the following are reasons why companies issue convertible securities except:

Explain how conversion of a convertible security affects earnings and how does a firm handle this on its financial statements?

Conversion price is:

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

Sam owns a $1,000 par value, convertible bond which 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?

The value of the right can be calculated under one of the following circumstances.

The difference between the market value of a convertible bond and the higher of its conversion or straight-bond value is the

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

A firm that issues warrants

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

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

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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