Question 1

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Accepted Answer

A) True 
 B)False  False

Question 2

Exhibit 20.1
The following data apply to Neuman Corporation's convertible bonds: $\begin{array}{c}
\begin{array}{lll}
\text {Maturity:}\
\text {Par value:}\
\text {Annual coupon:}
\end{array}
\begin{array}{lll}
\text{ 10 Stock price:}\
\text  {\$ 1,000.00  Conversion price:}\
\text {5.00 \% Straight-debt yield:}
\end{array}
\begin{array}{l}
\$ 30.00 \
\$ 35.00 \
8.00 \% 
\end{array}
\end{array}$

-Refer to Exhibit 20.1.What is the bond's straight-debt value?

Accepted Answer

A) $684.78 
B) $720.82 
C) $758.76 
D) $798.70 
E) $838.63 
A) $684.78 
B) $720.82 
C) $758.76 
D) $798.70 
E) $838.63 D

Question 3

Preferred stockholders have priority over common stockholders with respect to dividends,because dividends must be paid on preferred stock before they can be paid on common stock.However,preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.

Accepted Answer

A) True 
 B)False  False

Question 4

Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Accepted Answer

A) True 
 B)False

Question 5

The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000)sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?

Accepted Answer

A) $707.33 
B) $744.56 
C) $783.75 
D) $825.00 
E) $866.25 
A) $707.33 
B) $744.56 
C) $783.75 
D) $825.00 
E) $866.25

Question 6

Exhibit 20.1
The following data apply to Neuman Corporation's convertible bonds: $\begin{array}{c}
\begin{array}{lll}
\text {Maturity:}\
\text {Par value:}\
\text {Annual coupon:}
\end{array}
\begin{array}{lll}
\text{ 10 Stock price:}\
\text  {\$ 1,000.00  Conversion price:}\
\text {5.00 \% Straight-debt yield:}
\end{array}
\begin{array}{l}
\$ 30.00 \
\$ 35.00 \
8.00 \% 
\end{array}
\end{array}$

-Refer to Exhibit 20.1.What is the bond's conversion ratio?

Accepted Answer

A) 27.14 
B) 28.57 
C) 30.00 
D) 31.50 
E) 33.08 
A) 27.14 
B) 28.57 
C) 30.00 
D) 31.50 
E) 33.08

Question 7

A warrant is an option,and as such it cannot be used as a "sweetener."

Accepted Answer

A) True 
 B)False

Question 8

Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.

Accepted Answer

A) True 
 B)False

Question 9

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.

Accepted Answer

A) True 
 B)False

Question 10

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Accepted Answer

A) True 
 B)False

Question 11

Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00,and has an expected constant growth rate of 5.00%.The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have an 8.00% annual coupon,and each bond could be converted into 20 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.00%.What is the estimated floor price of the convertible at the end of Year 3?

Accepted Answer

A) $794.01 
B) $835.81 
C) $879.80 
D) $926.10 
E) $972.41 
A) $794.01 
B) $835.81 
C) $879.80 
D) $926.10 
E) $972.41

Question 12

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

A) One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted. 
B) Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. 
C) At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. 
D) For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock. 
E) The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt. 
A) One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted. 
B) Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt. 
C) At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price. 
D) For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock. 
E) The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.

Question 14

Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,Pc?

Accepted Answer

A) $40.00 
B) $42.00 
C) $44.10 
D) $46.31 
E) $48.62 
A) $40.00 
B) $42.00 
C) $44.10 
D) $46.31 
E) $48.62

Question 15

Preissle Company,wants to sell some 20-year,annual interest,$1,000 par value bonds.Its stock sells for $42 per share,and each bond would have 75 warrants attached to it,each exercisable into one share of stock at an exercise price of $47.The firm's straight bonds yield 10%.Each warrant is expected to have a market value of $2.00 given that the stock sells for $42.What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

Accepted Answer

A) 7.83% 
B) 8.24% 
C) 8.65% 
D) 9.08% 
E) 9.54% 
A) 7.83% 
B) 8.24% 
C) 8.65% 
D) 9.08% 
E) 9.54%

Question 16

Which of the following statements is most CORRECT?

Accepted Answer

A) One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds. 
B) The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt. 
C) The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant. 
D) Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual. 
E) Warrants have an option feature but convertibles do not. 
A) One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds. 
B) The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt. 
C) The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant. 
D) Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual. 
E) Warrants have an option feature but convertibles do not.

Question 17

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is most CORRECT?

Accepted Answer

A) By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. 
B) From the issuer's point of view, preferred stock is less risky than bonds. 
C) Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. 
D) Unlike bonds, preferred stock cannot have a convertible feature. 
E) Preferred stock generally has a higher component cost of capital to the firm than does common stock. 
A) By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock. 
B) From the issuer's point of view, preferred stock is less risky than bonds. 
C) Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less. 
D) Unlike bonds, preferred stock cannot have a convertible feature. 
E) Preferred stock generally has a higher component cost of capital to the firm than does common stock.

Question 19

The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.

Accepted Answer

A) True 
 B)False

Question 20

The owner of a convertible bond owns,in effect,both a bond and a call option.

Accepted Answer

A) True 
 B)False

Exam 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Exhibit 20.1 The following data apply to Neuman Corporation's convertible bonds: Maturity: Par value: Annual coupon: 10 Stock price: \ 1,000.00 Conversion price: 5.00 \% Straight-debt yield: \ 30.00 \ 35.00 8.00\% -Refer to Exhibit 20.1.What is the bond's straight-debt value?

Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000)sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?

Exhibit 20.1 The following data apply to Neuman Corporation's convertible bonds: Maturity: Par value: Annual coupon: 10 Stock price: \ 1,000.00 Conversion price: 5.00 \% Straight-debt yield: \ 30.00 \ 35.00 8.00\% -Refer to Exhibit 20.1.What is the bond's conversion ratio?

A warrant is an option,and as such it cannot be used as a "sweetener."

Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Which of the following statements about convertibles is most CORRECT?

Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,Pc?

Which of the following statements is most CORRECT?

A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.

Which of the following statements is most CORRECT?

The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.

The owner of a convertible bond owns,in effect,both a bond and a call option.

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: a Review

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012.At any time prior to maturity on February 1,2032,a debenture holder can exchange a bond for 25 shares of common stock.What is the conversion price,P_c?