Question 1

Convertible bonds:

Accepted Answer

A) are secured by shares of common stock. 
B) require conversion on or before the bond's maturity date. 
C) grant the owner the option of receiving either cash or shares of stock on conversion. 
D) are generally issued by firms that have lower bond ratings than the average firm. 
E) are generally granted seniority over all other bonds. 
A) are secured by shares of common stock. 
B) require conversion on or before the bond's maturity date. 
C) grant the owner the option of receiving either cash or shares of stock on conversion. 
D) are generally issued by firms that have lower bond ratings than the average firm. 
E) are generally granted seniority over all other bonds.

Question 2

The gain on a warrant compared to the gain on a similar call is expressed as:

Accepted Answer

A) (N + Nw)/N. 
B) N/(N + Nw). 
C) Nw/(N + Nw). 
D) Nw/N. 
E) 1 + (Nw/N). 
A) (N + Nw)/N. 
B) N/(N + Nw). 
C) Nw/(N + Nw). 
D) Nw/N. 
E) 1 + (Nw/N).

Question 3

Explain why there is neither a "Free Lunch" nor an "Expensive Lunch" when convertible bonds are issued.

Accepted Answer

Convertible bonds are not cheaper or mor

Question 4

Westover Industries has 60,000 shares outstanding.Each share has one-third of a warrant attached.One warrant plus $25 can be exchanged for one new share of stock.The stock is currently selling for $27 per share.All else held constant,what will the stock price be if all the warrants are exercised?

Accepted Answer

A) $26.38 
B) $26.50 
C) $25.00 
D) $27.00 
E) $26.67 
A) $26.38 
B) $26.50 
C) $25.00 
D) $27.00 
E) $26.67

Question 5

A convertible bond is valued at $1,062,has a conversion ratio of 25,and an option premium of $3.What is the conversion value if the straight bond value is equal to the bond's par value?

Accepted Answer

A) $1,062.00 
B) $1,042.36 
C) $1,059.00 
D) $1,042.48 
E) $1,065.00 
A) $1,062.00 
B) $1,042.36 
C) $1,059.00 
D) $1,042.48 
E) $1,065.00

Question 6

Looper Industries bonds have a face value of $1,000 and can be exchanged for 30 shares of stock.The stock is selling for $35 a share.Looper has an outstanding call option on the bonds at $1,040.If the bonds are called,the holders must either convert or surrender their bonds.What should be the current market value of one of these bonds if the option premium per bond is $15? Assume the bond coupon rate equals the market rate of interest at time of call.

Accepted Answer

A) $1,040 
B) $1,065 
C) $1,025 
D) $1,030 
E) $1,035 
A) $1,040 
B) $1,065 
C) $1,025 
D) $1,030 
E) $1,035

Question 7

The lower limit of a warrant's value is defined as:

Accepted Answer

A) zero. 
B) MIN(0,Exercise price − Stock price). 
C) MAX(0,Stock price − Exercise price). 
D) MAX(0,Exercise price − Stock price). 
E) MIN(0,Stock price − Exercise price). 
A) zero. 
B) MIN(0,Exercise price − Stock price). 
C) MAX(0,Stock price − Exercise price). 
D) MAX(0,Exercise price − Stock price). 
E) MIN(0,Stock price − Exercise price).

Question 8

Aztec's convertible bonds each have a face value of $1,000 and a market value of $1,041.25.Each bond can be exchanged 25 shares of stock.The stock is selling for $41.54 a share.The straight bond value is $1,010.What is the option value per bond?

Accepted Answer

A) $0 
B) $2.75 
C) $3.08 
D) $38.50 
E) $.11 
A) $0 
B) $2.75 
C) $3.08 
D) $38.50 
E) $.11

Question 9

The gain on a call is computed as:

Accepted Answer

A) [Firm's value net of debt + Exercise price(Nw)]/(N + Nw). 
B) [Firm's value net of debt + Exercise price(Nw)]/N. 
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. 
A) [Firm's value net of debt + Exercise price(Nw)]/(N + Nw). 
B) [Firm's value net of debt + Exercise price(Nw)]/N. 
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.

Question 10

A convertible preferred stock is similar to a convertible bond except that:

Accepted Answer

A) the conversion ratio is fixed. 
B) the conversion price is fixed. 
C) the time to maturity is infinite. 
D) preferred stock converts to common stock while bonds convert to preferred stock. 
E) preferred stock converts to bonds while bonds convert to common stock. 
A) the conversion ratio is fixed. 
B) the conversion price is fixed. 
C) the time to maturity is infinite. 
D) preferred stock converts to common stock while bonds convert to preferred stock. 
E) preferred stock converts to bonds while bonds convert to common stock.

Question 11

Explain how a noncallable convertible bond's value is determined.

Accepted Answer

A convertible bond has two underlying va

Question 12

Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:

Accepted Answer

A) subordinated straight debt is issued because the senior bondholders provide protection for the subordinated bondholders. 
B) convertible debt is issued because the equity component will reduce agency costs. 
C) convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken. 
D) subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued. 
E) straight debt is issued because there is a clearer distinction between creditors and shareholders. 
A) subordinated straight debt is issued because the senior bondholders provide protection for the subordinated bondholders. 
B) convertible debt is issued because the equity component will reduce agency costs. 
C) convertible debt is issued because the holders can more readily sue when a high-risk project is undertaken. 
D) subordinated debt is issued because monitoring is much easier when subordinated straight debt is issued. 
E) straight debt is issued because there is a clearer distinction between creditors and shareholders.

Question 13

Based on empirical studies,firms tend to call convertible bonds when the conversion value is:

Accepted Answer

A) less than the conversion price. 
B) greater than the straight bond value. 
C) greater than the call price. 
D) less than the face value. 
E) equal to the straight bond value. 
A) less than the conversion price. 
B) greater than the straight bond value. 
C) greater than the call price. 
D) less than the face value. 
E) equal to the straight bond value.

Question 14

Concerning convertible bonds,which one of these statements is false?

Accepted Answer

A) The value of a convertible bond can be greater than its straight bond value. 
B) The value of a convertible bond may be greater than its conversion value. 
C) A convertible bond can be separated into two distinct securities. 
D) The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond. 
E) An increase in the conversion price lowers the conversion ratio. 
A) The value of a convertible bond can be greater than its straight bond value. 
B) The value of a convertible bond may be greater than its conversion value. 
C) A convertible bond can be separated into two distinct securities. 
D) The coupon rate on a nonconvertible bond will generally exceed the coupon rate on an otherwise identical convertible bond. 
E) An increase in the conversion price lowers the conversion ratio.

Question 15

A firm has experienced a significant increase in its share value.In retrospect,which one of the following securities would generally have provided the most benefit to the firm assuming the securities had been issued prior to the change in share value?

Accepted Answer

A) Bonds with attached warrants 
B) Convertible preferred stock 
C) Straight bonds 
D) Convertible bonds 
E) Common stock 
A) Bonds with attached warrants 
B) Convertible preferred stock 
C) Straight bonds 
D) Convertible bonds 
E) Common stock

Question 16

A convertible bond is selling for $800,matures in 10 years,has a face value of $1,000,and a coupon rate of 10 percent.Similar nonconvertible bonds are priced to yield 14 percent.The conversion price is $32.The stock currently sells for $31.30 a share.What is the conversion premium?

Accepted Answer

A) 0 percent 
B) 1.67 percent 
C) 2.50 percent 
D) 3.33 percent 
E) 2.24 percent 
A) 0 percent 
B) 1.67 percent 
C) 2.50 percent 
D) 3.33 percent 
E) 2.24 percent

Question 17

A convertible bond has an option value equal to the market value of the convertible bond minus the:

Accepted Answer

A) straight bond value. 
B) conversion value. 
C) conversion premium. 
D) maximum of the straight bond value or conversion value. 
E) minimum of the conversion value or the straight bond value. 
A) straight bond value. 
B) conversion value. 
C) conversion premium. 
D) maximum of the straight bond value or conversion value. 
E) minimum of the conversion value or the straight bond value.

Question 18

Which one of the following would harm the financial position of a warrant holder?

Accepted Answer

A) A 3-for-1 stock split 
B) A 20 percent stock dividend 
C) A large cash dividend 
D) A listing of the warrants on the NYSE 
E) A reverse stock split 
A) A 3-for-1 stock split 
B) A 20 percent stock dividend 
C) A large cash dividend 
D) A listing of the warrants on the NYSE 
E) A reverse stock split

Question 19

The Gallery has 150,000 shares and 150,000 warrants outstanding.One new share can be purchased for every 10 warrants plus $25 per new share.The stock is currently selling for $28 per share.If all the warrants are exercised immediately,what would be the adjusted market price of the stock?

Accepted Answer

A) $30.50 
B) $25.13 
C) $26.96 
D) $28.00 
E) $27.73 
A) $30.50 
B) $25.13 
C) $26.96 
D) $28.00 
E) $27.73

Question 20

If a corporate security can be exchanged for a fixed number of shares of stock,the security is said to be:

Accepted Answer

A) callable. 
B) convertible. 
C) protected. 
D) putable. 
E) inflated. 
A) callable. 
B) convertible. 
C) protected. 
D) putable. 
E) inflated.

Exam 24: Warrants and Convertibles

Convertible bonds:

The gain on a warrant compared to the gain on a similar call is expressed as:

Explain why there is neither a "Free Lunch" nor an "Expensive Lunch" when convertible bonds are issued.

Westover Industries has 60,000 shares outstanding.Each share has one-third of a warrant attached.One warrant plus $25 can be exchanged for one new share of stock.The stock is currently selling for $27 per share.All else held constant,what will the stock price be if all the warrants are exercised?

A convertible bond is valued at $1,062,has a conversion ratio of 25,and an option premium of $3.What is the conversion value if the straight bond value is equal to the bond's par value?

The lower limit of a warrant's value is defined as:

Aztec's convertible bonds each have a face value of $1,000 and a market value of $1,041.25.Each bond can be exchanged 25 shares of stock.The stock is selling for $41.54 a share.The straight bond value is $1,010.What is the option value per bond?

The gain on a call is computed as:

A convertible preferred stock is similar to a convertible bond except that:

Explain how a noncallable convertible bond's value is determined.

Transfer or expropriation of wealth from bondholders to stockholders is less likely to occur when:

Based on empirical studies,firms tend to call convertible bonds when the conversion value is:

Concerning convertible bonds,which one of these statements is false?

A firm has experienced a significant increase in its share value.In retrospect,which one of the following securities would generally have provided the most benefit to the firm assuming the securities had been issued prior to the change in share value?

A convertible bond is selling for $800,matures in 10 years,has a face value of $1,000,and a coupon rate of 10 percent.Similar nonconvertible bonds are priced to yield 14 percent.The conversion price is $32.The stock currently sells for $31.30 a share.What is the conversion premium?

A convertible bond has an option value equal to the market value of the convertible bond minus the:

Which one of the following would harm the financial position of a warrant holder?

The Gallery has 150,000 shares and 150,000 warrants outstanding.One new share can be purchased for every 10 warrants plus $25 per new share.The stock is currently selling for $28 per share.If all the warrants are exercised immediately,what would be the adjusted market price of the stock?

If a corporate security can be exchanged for a fixed number of shares of stock,the security is said to be:

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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