Question 1

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 D

Question 2

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 B

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 D

Question 4

The capital structure of Springmaid Company is as follows:  
The company has decided to raise additional capital by selling $100 million of 8% debentures with warrants attached. Each $1000 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

List some securities that have option features.

Accepted Answer

There are many securities that contain o

Question 6

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 7

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

Accepted Answer

Convertibles are generally offered by re

Question 8

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

Accepted Answer

In general, small risky companies whose

Question 9

A ____ is a fixed income security with a call option on common stock.

Accepted Answer

A)  convertible security 
B)  warrant 
C)  futures contract 
D)  derivative security 
A)  convertible security 
B)  warrant 
C)  futures contract 
D)  derivative security

Question 10

All other things being equal, the ____ the exercise price, given the stock price, the ____ is the call option value.

Accepted Answer

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

Question 11

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 12

Conversion premium is the amount by which the market value of a convertible security is higher than:
I. the conversion value of the security
II. the combined interest or dividend payments of the security

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 13

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 14

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 15

Conversion of a convertible security can occur in two ways. Which of the following is/are correct?
I. It can be a voluntary conversion at specific times prior to the expiration date.
II. It can be a forced conversion at any time prior to the expiration date.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 16

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 17

Graybar recently sold a convertible bond with a $1,000 par value for a flotation cost of 2 percent (each bond produced $980 for the firm). What is the conversion price if the conversion ratio is 22?

Accepted Answer

A)  $44.55 
B)  $45.45 
C)  $50.00 
D)  $4.45 
A)  $44.55 
B)  $45.45 
C)  $50.00 
D)  $4.45

Question 18

In calculating fully diluted earnings per share, earnings must be adjusted for:

Accepted Answer

A)  interest saved. 
B)  the number of convertible securities in the marketplace. 
C)  the number of executive bonus packages that could impact the firm's earnings. 
D)  the company's credit rating. 
A)  interest saved. 
B)  the number of convertible securities in the marketplace. 
C)  the number of executive bonus packages that could impact the firm's earnings. 
D)  the company's credit rating.

Question 19

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 20

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following?
I. stock shares will decrease
II. earnings per share will decrease.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Nether I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Nether I nor II

Exam 20: Financing With Derivatives

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

____ are forms of options.

List some securities that have option features.

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

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

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

A ____ is a fixed income security with a call option on common stock.

All other things being equal, the ____ the exercise price, given the stock price, the ____ is the call option value.

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

Conversion premium is the amount by which the market value of a convertible security is higher than: I. the conversion value of the security II. the combined interest or dividend payments of the security

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? I. It can be a voluntary conversion at specific times prior to the expiration date. II. It can be a forced conversion at any time prior to the expiration date.

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

Graybar recently sold a convertible bond with a $1,000 par value for a flotation cost of 2 percent (each bond produced $980 for the firm). What is the conversion price if the conversion ratio is 22?

In calculating fully diluted earnings per share, earnings must be adjusted for:

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

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? I. stock shares will decrease II. earnings per share will decrease.

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

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

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

Filters

All other things being equal, the the exercise price, given the stock price, the is the call option value.

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