Question 1

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 2

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.

Accepted Answer

A)  $0.455 
B)  $0.50 
C)  $0.625 
D)  $0.556 
A)  $0.455 
B)  $0.50 
C)  $0.625 
D)  $0.556

Question 3

An option has a ____ claim.

Accepted Answer

A)  fixed 
B)  contingent 
C)  subordinated claim 
D)  superior claim 
A)  fixed 
B)  contingent 
C)  subordinated claim 
D)  superior claim

Question 4

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.

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 5

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 6

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 7

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 8

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 9

The similarities between convertible securities and warrants include all of the following except:

Accepted Answer

A)  both tend to reduce agency costs 
B)  the purpose of both is the deferred issuance of common stock 
C)  both give the company full control over when the common stock is issued 
D)  all of these answers are correct 
A)  both tend to reduce agency costs 
B)  the purpose of both is the deferred issuance of common stock 
C)  both give the company full control over when the common stock is issued 
D)  all of these answers are correct

Question 10

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 11

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

Question 12

A ____ is a fixed-income security issued by a company with a call option on its common stock.

Accepted Answer

A)  warrant 
B)  convertible debenture 
C)  lease 
D)  extendible note 
A)  warrant 
B)  convertible debenture 
C)  lease 
D)  extendible note

Question 13

People Southwest Airlines (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 formula value of PSW warrants.

Accepted Answer

A)  $0 
B)  $2 
C)  $5 
D)  $11 
A)  $0 
B)  $2 
C)  $5 
D)  $11

Question 14

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 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

What is the value of a CKS Food's option prior to expiration if the exercise price is $20 and the current stock price is $20?

Accepted Answer

A)  greater than $0 
B)  $0 
C)  less than $0 
D)  can not be valued 
A)  greater than $0 
B)  $0 
C)  less than $0 
D)  can not be valued

Question 17

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 how much total capital the company will raise as a result of the issuance of debentures with warrants attached (after exercise of the warrants).

Accepted Answer

A)  $100 million 
B)  $ 80 million 
C)  $180 million 
D)  $20 million 
A)  $100 million 
B)  $ 80 million 
C)  $180 million 
D)  $20 million

Question 18

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.

Accepted Answer

A)  $0 
B)  $2 
C)  $3 
D)  $5 
A)  $0 
B)  $2 
C)  $3 
D)  $5

Question 19

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

Accepted Answer

The conversion price is the stated dolla

Question 20

Which of the following is/are a feature of convertible securities?
I. Conversion price
II. Conversion stock

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

Exam 20: Financing With Derivatives

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

An option has a ____ claim.

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.

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

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.

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

The similarities between convertible securities and warrants include all of the following except:

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

A ____ is a fixed-income security issued by a company with a call option on its common stock.

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

What is the value of a CKS Food's option prior to expiration if the exercise price is $20 and the current stock price is $20?

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

Which of the following is/are a feature of convertible securities? I. Conversion price II. Conversion stock

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