Question 1

The conversion ratio of a convertible security may change when

Accepted Answer

A)  a cash dividend is paid 
B)  there is a change in the market value of the security 
C)  a stock dividend is paid 
D)  there is a rights offering 
A)  a cash dividend is paid 
B)  there is a change in the market value of the security 
C)  a stock dividend is paid 
D)  there is a rights offering

Question 2

____ 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 3

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 4

The price at which convertible securities are exchangeable for common stock is the

Accepted Answer

A)  conversion value 
B)  par value 
C)  put price 
D)  conversion price 
A)  conversion value 
B)  par value 
C)  put price 
D)  conversion price

Question 5

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 6

Craig Supermarkets, Inc. has convertible debentures ($1,000 par value) that are callable at 108 percent of par value. The conversion price of the debenture is $40 per share, and the Craig common stock currently is selling at $55 a share. The company

Accepted Answer

A)  could not get the convertible holders to convert if it called the debt 
B)  has no intention of calling the convertibles 
C)  could force conversion by calling the issue 
D)  could realize a gain of $15 a share if it called the convertibles 
A)  could not get the convertible holders to convert if it called the debt 
B)  has no intention of calling the convertibles 
C)  could force conversion by calling the issue 
D)  could realize a gain of $15 a share if it called the convertibles

Question 7

The conversion price of CRX's convertible ($1000 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 8

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 9

Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share. If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants?

Accepted Answer

A)  $1 
B)  $5 
C)  $8 
D)  $2 
A)  $1 
B)  $5 
C)  $8 
D)  $2

Question 10

What variables affect the call option valuation?

Accepted Answer

Variables affecting the call option valu

Question 11

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 12

A(n) ____ is a call option issued by a company on its securities, usually common stock.

Accepted Answer

A)  debenture 
B)  warrant 
C)  futures contract 
D)  extendible note 
A)  debenture 
B)  warrant 
C)  futures contract 
D)  extendible note

Question 13

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 14

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 15

The Bates Company has debentures ($1,000 par value) outstanding that are convertible into the company's common stock at a price of $50. The convertibles have a coupon interest rate of 9% and mature 20 years from today. Straight debt of equivalent risk is yielding 12% today. The company's common stock today is selling at $60 a share. Calculate the conversion value of the issue.

Accepted Answer

A)  $1,000 
B)  $1,200 
C)  $ 800 
D)  $300 
A)  $1,000 
B)  $1,200 
C)  $ 800 
D)  $300

Question 16

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 17

Sam owns a $1000 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 $2000 and Sam should convert. 
B)  The conversion value is $1200 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 $2000 and Sam should convert. 
B)  The conversion value is $1200 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 18

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 19

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 20

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.

Exam 20: Financing With Derivatives

The conversion ratio of a convertible security may change when

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

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

The price at which convertible securities are exchangeable for common stock is the

Craig Supermarkets, Inc. has convertible debentures ($1,000 par value) that are callable at 108 percent of par value. The conversion price of the debenture is $40 per share, and the Craig common stock currently is selling at $55 a share. The company

The conversion price of CRX's convertible ($1000 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.

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

Sharp Innovations has warrants outstanding and each entitles the holder to purchase 1 share of common stock at an exercise price of $14 a share. If the current market price of the warrant is $9 and the common stock price is $22, what is the premium over the formula value for the warrants?

What variables affect the call option valuation?

In comparing warrants and rights, they:

A(n) ____ is a call option issued by a company on its securities, usually common stock.

A firm that issues warrants

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.

Sam owns a $1000 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 ____ the time remaining before an option expires, the ____ the option value.

The preemptive right allows shareholders the

Conversion price 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 the time remaining before an option expires, the the option value.