Question 1

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

Accepted Answer

A)  conversion ratio, conversion price 
B)  conversion premium, exercise price 
C)  conversion ratio, common stock market price 
D)  conversion ratio, exercise price 
A)  conversion ratio, conversion price 
B)  conversion premium, exercise price 
C)  conversion ratio, common stock market price 
D)  conversion ratio, exercise price

Question 2

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.

Accepted Answer

A)  -$4.00 
B)  -$2.00 
C)  $0.00 
D)  $2.00 
A)  -$4.00 
B)  -$2.00 
C)  $0.00 
D)  $2.00

Question 3

What is an interest rate swap? Describe how they are used.

Accepted Answer

A swap is a type of financial derivative

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

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?

Accepted Answer

A)  $1,250 
B)  $31,250 
C)  $2,850 
D)  $1,425 
A)  $1,250 
B)  $31,250 
C)  $2,850 
D)  $1,425

Question 6

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 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 7

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

Accepted Answer

A)  an exercise price that is below the market price of common stock at the time the warrant is issued 
B)  typical life of a warrant is between 5 and 10 years 
C)  warrant is usually detachable from a debenture or preferred stock 
D)  if a warrant is issued as part of a "unit,"it is usually detachable from a debenture or preferred stock 
A)  an exercise price that is below the market price of common stock at the time the warrant is issued 
B)  typical life of a warrant is between 5 and 10 years 
C)  warrant is usually detachable from a debenture or preferred stock 
D)  if a warrant is issued as part of a "unit,"it is usually detachable from a debenture or preferred stock

Question 8

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 9

____ are examples of contingent claims.

Accepted Answer

A)  Convertible bonds and warrants 
B)  Warrants and extendible notes 
C)  Options and extendible notes 
D)  Convertible bonds, options, and warrants 
A)  Convertible bonds and warrants 
B)  Warrants and extendible notes 
C)  Options and extendible notes 
D)  Convertible bonds, options, and warrants

Question 10

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 ($1000 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)  $1200 
A)  about $1,033 
B)  about $ 946 
C)  about $ 897 
D)  $1200

Question 11

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.

Accepted Answer

A)  about $830 
B)  about $1,000 
C)  about $950 
D)  about $1,500 
A)  about $830 
B)  about $1,000 
C)  about $950 
D)  about $1,500

Question 12

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

Accepted Answer

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

Question 13

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 14

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

Accepted Answer

A)  bond swaps 
B)  equity offerings 
C)  debt restructurings and bond swaps 
D)  bond swaps, equity offerings, and debt restructurings 
A)  bond swaps 
B)  equity offerings 
C)  debt restructurings and bond swaps 
D)  bond swaps, equity offerings, and debt restructurings

Question 15

A security whose payoffs (returns) depend on the value of another security is known as a(n) ____.

Accepted Answer

A)  interest rate swap 
B)  master limited partnership 
C)  contingent claim 
D)  extendible note 
A)  interest rate swap 
B)  master limited partnership 
C)  contingent claim 
D)  extendible note

Question 16

In general, the market price of a "right" is ____ than the theoretical value and this difference in values ____ as the right's expiration date approaches.

Accepted Answer

A)  less, decreases 
B)  less, increases 
C)  greater, decreases 
D)  greater, increases 
A)  less, decreases 
B)  less, increases 
C)  greater, decreases 
D)  greater, increases

Question 17

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 18

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 19

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 20

The conversion ratio of a convertible security is:

Accepted Answer

A)  the number of shares that can be obtained 
B)  the value of the shares obtained 
C)  the price at which the security is exchangeable 
D)  the loss in the security's value once it is exchanged. 
A)  the number of shares that can be obtained 
B)  the value of the shares obtained 
C)  the price at which the security is exchangeable 
D)  the loss in the security's value once it is exchanged.

Exam 20: Financing With Derivatives

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

What is an interest rate swap? Describe how they are used.

The most basic type of interest rate swap is the:

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

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

____ are examples of contingent claims.

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

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

A security whose payoffs (returns) depend on the value of another security is known as a(n) ____.

In general, the market price of a "right" is ____ than the theoretical value and this difference in values ____ as the right's expiration date approaches.

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

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

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

The conversion ratio of a convertible security is:

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

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

In general, the market price of a "right" is than the theoretical value and this difference in values as the right's expiration date approaches.