Question 1

The gain on a warrant is computed as:

Accepted Answer

A) {[Firm's value net of debt + Exercise price(Nw)]/(N + Nw)} − Exercise price. 
B) [Firm's value net of debt + Exercise price(Nw)]/N − Exercise price. 
C) Firm's value net of debt/N − Exercise price. 
D) Firm's value net of debt/(N + Nw)− Exercise price. 
E) (Firm's value net of debt − Exercise price)/(N + Nw). 
A) {[Firm's value net of debt + Exercise price(Nw)]/(N + Nw)} − Exercise price. 
B) [Firm's value net of debt + Exercise price(Nw)]/N − Exercise price. 
C) Firm's value net of debt/N − Exercise price. 
D) Firm's value net of debt/(N + Nw)− Exercise price. 
E) (Firm's value net of debt − Exercise price)/(N + Nw). A

Question 2

Discuss the factors that management must consider before calling a convertible bond.

Accepted Answer

When a firm calls a bond it generally does so by offering a call premium.So,first of all,firms would not want to do this if the call price is going to exceed the convertible's market value.The minimum market value of a convertible bond is the maximum of the bond's straight bond price and its conversion value.The straight bond price is affected by market interest rates and the conversion value is affected by stock market prices,both of which fluctuate throughout every trading day.Since bondholders generally have 30 days to decide whether to convert a bond or surrender it at the call price,managers must forecast market movements for at least that long prior to making a call offer.

Question 3

Identify five factors that help determine the value of a warrant above its lower limit.

Accepted Answer

∙ Variance of the underlying security's returns ∙ Time to expiration ∙ Risk-free rate of interest ∙ Underlying stock price ∙ Exercise price

Question 4

A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a current market price of $22 per share.What would the conversion ratio and conversion price be if the bond's issuer declared a stock split of 3-for-1?

Accepted Answer

A) 75; $7.33 
B) 105; $9.52 
C) 105; $22.00 
D) 35; $22.00 
E) 105; $7.33 
A) 75; $7.33 
B) 105; $9.52 
C) 105; $22.00 
D) 35; $22.00 
E) 105; $7.33

Question 5

Modern Windows issued warrants for one share per warrant with an exercise price of $21.On May 1,the common stock is selling for $23 a share.The lower and upper limits on the warrant value on this date are:

Accepted Answer

A) $0 and $23. 
B) $0 and $21. 
C) $2 and $21. 
D) $2 and $23. 
E) $21 and $23. 
A) $0 and $23. 
B) $0 and $21. 
C) $2 and $21. 
D) $2 and $23. 
E) $21 and $23.

Question 6

The holders of Xenron Corporation's bonds with a face value of $1,000 can exchange each of those bonds for 35 shares of stock.The stock is selling for $22 a share.What is the conversion price?

Accepted Answer

A) $22.00 
B) $28.57 
C) $35.00 
D) $1.30 
E) $1.27 
A) $22.00 
B) $28.57 
C) $35.00 
D) $1.30 
E) $1.27

Question 7

SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of stock.Assume SBX declares a 3-for-1 stock split.What conversion price will be needed following the stock split for the conversion value and the straight bond value to be equal assuming the bond continually sells at par?

Accepted Answer

A) $16.67 
B) $33.33 
C) $50.00 
D) $150.00 
E) $66.67 
A) $16.67 
B) $33.33 
C) $50.00 
D) $150.00 
E) $66.67

Question 8

A bond with a face value of $5,000 can be exchanged for 70 shares of stock.The bond has a coupon rate of 6.5 percent which equals the market rate of interest.Assume the option premium is $50.What is the market value of the bond if the stock is selling for $68.90 a share and the bond matures in exactly one year?

Accepted Answer

A) $4,744.84 
B) $4,873.00 
C) $5,000.00 
D) $4,940.00 
E) $5,050.00 
A) $4,744.84 
B) $4,873.00 
C) $5,000.00 
D) $4,940.00 
E) $5,050.00

Question 9

A convertible bond is selling for $1,222.70.It has 10 years to maturity,a $1,000 face value,a coupon rate of 10 percent,and semiannual interest payments.Similar non-convertible bonds are priced to yield 4 percent per six months.The conversion ratio is 40.The stock currently sells for $30.13 a share.Calculate the convertible bond's option value.

Accepted Answer

A) $8.68 
B) $22.70 
C) $13.59 
D) $17.50 
E) $86.80 
A) $8.68 
B) $22.70 
C) $13.59 
D) $17.50 
E) $86.80

Question 10

A firm has 600 shares of stock and 100 warrants outstanding.Assume the warrants are all exercised.The market value of the firm's assets is $25,000 and the market value of its debt is $8,000.Each warrant grants its owner the right to buy one new share at $27.50.What is the gain on one warrant?

Accepted Answer

A) $.87 
B) $.79 
C) $.25 
D) $.38 
E) $.71 
A) $.87 
B) $.79 
C) $.25 
D) $.38 
E) $.71

Question 11

Kida Consultants has 100,000 shares of stock outstanding.The firm's value net of debt is $2 million.Kida has 1,000 warrants outstanding with an exercise price of $18,where each warrant entitles the holder to purchase one share of stock.Calculate the gain from exercising a single warrant.

Accepted Answer

A) $1.87 
B) $1.72 
C) $1.45 
D) $.38 
E) $1.98 
A) $1.87 
B) $1.72 
C) $1.45 
D) $.38 
E) $1.98

Question 12

Outer Wear has 12,000 shares of stock outstanding.Each share has a .5 warrant attached.These warrants expire today.The market value of the firm's assets net of its debt is $192,000.One new share can be obtained for one warrant plus $18.Assuming all else held constant,what would you expect the market price per share to be tomorrow morning when the stock market opens?

Accepted Answer

A) $16.67 
B) $15.33 
C) $16.00 
D) $18.00 
E) $17.50 
A) $16.67 
B) $15.33 
C) $16.00 
D) $18.00 
E) $17.50

Question 13

Bright View Windows issued warrants with an exercise price of $17.Bright View's common stock currently sells for $16 per share.The warrants are:

Accepted Answer

A) in the money. 
B) out of the money. 
C) valuable. 
D) not very valuable. 
E) both in the money and valuable. 
A) in the money. 
B) out of the money. 
C) valuable. 
D) not very valuable. 
E) both in the money and valuable.

Question 14

Why are warrants and convertibles issued?

Accepted Answer

Warrants and convertibles are issued to

Question 15

From the bondholder's point of view,the optimum time to convert a convertible bond is when the bond's conversion value is:

Accepted Answer

A) less than the call price,but greater than the face value. 
B) greater than the call price,but less than the straight debt's value. 
C) equal to the face value. 
D) less than the straight debt's value,but greater than the call price. 
E) greater than the both the call value and straight bond value on the call date. 
A) less than the call price,but greater than the face value. 
B) greater than the call price,but less than the straight debt's value. 
C) equal to the face value. 
D) less than the straight debt's value,but greater than the call price. 
E) greater than the both the call value and straight bond value on the call date.

Question 16

The exercise of warrants creates new shares which:

Accepted Answer

A) increases the total number of shares but does not affect share value. 
B) increases the total number of shares and can reduce the per share value. 
C) does not change the number of shares outstanding,similar to options. 
D) increases share value because cash is paid into the firm at the time of warrant exercise. 
E) increases the number of shares outstanding while maintaining the current price per share. 
A) increases the total number of shares but does not affect share value. 
B) increases the total number of shares and can reduce the per share value. 
C) does not change the number of shares outstanding,similar to options. 
D) increases share value because cash is paid into the firm at the time of warrant exercise. 
E) increases the number of shares outstanding while maintaining the current price per share.

Question 17

Assume Jamestown Markets has 500 shares of stock and 100 bonds outstanding.The bonds have a face value of $1,000,are convertible into 5 shares of newly issued common stock,and mature today.What is the value of this firm to its shareholders if the total value of the firm is $184,500? What if the value is $225,000?

Accepted Answer

A) $0; $125,000 
B) $84,500; $112,500 
C) $92,250; $112,500 
D) $84,500; $125,000 
E) $92,250; $125,000 
A) $0; $125,000 
B) $84,500; $112,500 
C) $92,250; $112,500 
D) $84,500; $125,000 
E) $92,250; $125,000

Question 18

A convertible bond:

Accepted Answer

A) generally has fewer restrictive covenants than an otherwise identical nonconvertible bond. 
B) is generally issued with a higher coupon than a comparable non-convertible bond. 
C) provides a greater benefit to its issuer than a straight bond if the underlying stock price rises in the future. 
D) retains its option value even after the bond matures. 
E) tends to increase agency costs. 
A) generally has fewer restrictive covenants than an otherwise identical nonconvertible bond. 
B) is generally issued with a higher coupon than a comparable non-convertible bond. 
C) provides a greater benefit to its issuer than a straight bond if the underlying stock price rises in the future. 
D) retains its option value even after the bond matures. 
E) tends to increase agency costs.

Question 19

Warrants are most often issued in combination with new:

Accepted Answer

A) publicly placed shares of common stock. 
B) privately placed shares of common stock. 
C) publicly placed bonds. 
D) privately placed bonds. 
E) shares of preferred stock. 
A) publicly placed shares of common stock. 
B) privately placed shares of common stock. 
C) publicly placed bonds. 
D) privately placed bonds. 
E) shares of preferred stock.

Question 20

A convertible bond matures in 15 years,pays annual coupons,and has a coupon rate of 8 percent.The face value is $1,000 and the conversion ratio is 40.The stock currently sells for $22.80 a share.Similar nonconvertible bonds are priced to yield 9 percent.What is the minimal value of the convertible bond?

Accepted Answer

A) $835.00 
B) $919.39 
C) $1,000.00 
D) $1,070.11 
E) $912.00 
A) $835.00 
B) $919.39 
C) $1,000.00 
D) $1,070.11 
E) $912.00

Exam 24: Warrants and Convertibles

The gain on a warrant is computed as:

Discuss the factors that management must consider before calling a convertible bond.

Identify five factors that help determine the value of a warrant above its lower limit.

A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a current market price of $22 per share.What would the conversion ratio and conversion price be if the bond's issuer declared a stock split of 3-for-1?

Modern Windows issued warrants for one share per warrant with an exercise price of $21.On May 1,the common stock is selling for $23 a share.The lower and upper limits on the warrant value on this date are:

The holders of Xenron Corporation's bonds with a face value of $1,000 can exchange each of those bonds for 35 shares of stock.The stock is selling for $22 a share.What is the conversion price?

SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of stock.Assume SBX declares a 3-for-1 stock split.What conversion price will be needed following the stock split for the conversion value and the straight bond value to be equal assuming the bond continually sells at par?

A firm has 600 shares of stock and 100 warrants outstanding.Assume the warrants are all exercised.The market value of the firm's assets is $25,000 and the market value of its debt is $8,000.Each warrant grants its owner the right to buy one new share at $27.50.What is the gain on one warrant?

Kida Consultants has 100,000 shares of stock outstanding.The firm's value net of debt is $2 million.Kida has 1,000 warrants outstanding with an exercise price of $18,where each warrant entitles the holder to purchase one share of stock.Calculate the gain from exercising a single warrant.

Bright View Windows issued warrants with an exercise price of $17.Bright View's common stock currently sells for $16 per share.The warrants are:

Why are warrants and convertibles issued?

From the bondholder's point of view,the optimum time to convert a convertible bond is when the bond's conversion value is:

The exercise of warrants creates new shares which:

A convertible bond:

Warrants are most often issued in combination with new:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

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