Question 1

An operating lease is often referred as a capital lease.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is a motive for using convertible securities in a firm's financing mix?

Accepted Answer

A)  a form of long-term financing 
B)  opportunity bondholders to share in the firm's future success 
C)  a method of raising permanent cheap funds for long time 
D)  an eventual shift in the capital structure to a more levered position 
A)  a form of long-term financing 
B)  opportunity bondholders to share in the firm's future success 
C)  a method of raising permanent cheap funds for long time 
D)  an eventual shift in the capital structure to a more levered position

Question 3

When a call is made on a convertible security, the holder of the security will most likely ________.

Accepted Answer

A)  not take any action 
B)  allow the call to be exercised and accept the call premium if the conversion value is 10% above the call price 
C)  convert the security into common stock if the conversion value is 10% above the call price 
D)  sell the security in the secondary market 
A)  not take any action 
B)  allow the call to be exercised and accept the call premium if the conversion value is 10% above the call price 
C)  convert the security into common stock if the conversion value is 10% above the call price 
D)  sell the security in the secondary market

Question 4

If a lease meets any of the FASB Standards No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on a firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 5

The market value of a convertible security is likely to be less than its straight value or conversion value.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following must be considered when making a lease-versus-purchase decision?

Accepted Answer

A)  the before-tax cash outflows for each year under the lease alternative 
B)  the before-tax cash outflows for each year under the purchase alternative 
C)  the after-tax cash outflows for each year under the lease alternative 
D)  the depreciation expense under the lease 
A)  the before-tax cash outflows for each year under the lease alternative 
B)  the before-tax cash outflows for each year under the purchase alternative 
C)  the after-tax cash outflows for each year under the lease alternative 
D)  the depreciation expense under the lease

Question 7

One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a higher interest rate if a warrant is attached than if it is not.

Accepted Answer

A) True 
 B)False

Question 8

Assets leased under ________ leases generally have a usable life longer than the term of the lease.

Accepted Answer

A)  financial 
B)  operating 
C)  capital 
D)  direct 
A)  financial 
B)  operating 
C)  capital 
D)  direct

Question 9

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to ________.

Accepted Answer

A)  vote along with common stockholders 
B)  share the possible future success of the firm 
C)  protect their interest 
D)  receive extra income 
A)  vote along with common stockholders 
B)  share the possible future success of the firm 
C)  protect their interest 
D)  receive extra income

Question 10

Since the purchaser of a convertible security is given an opportunity to become a common stockholder, convertibles can normally be sold with higher interest rates than nonconvertibles.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is a basic characteristic of warrants?

Accepted Answer

A)  It improves the marketability of an issue. 
B)  It is non detachable. 
C)  It increases the required interest rate. 
D)  It has an exercise period shorter than one month. 
A)  It improves the marketability of an issue. 
B)  It is non detachable. 
C)  It increases the required interest rate. 
D)  It has an exercise period shorter than one month.

Question 12

An overhanging issue is a convertible security that cannot be forced into conversion by using the call feature.

Accepted Answer

A) True 
 B)False

Question 13

An operating lease need not be capitalized, but its basic features must be disclosed in a footnote to the financial statements.

Accepted Answer

A) True 
 B)False

Question 14

An investor is considering buying 500 shares of ABC Company at $32 per share. Analysts agree that the firm's stock price may increase to $45 per share in the next four months. As an alternative, the investor could purchase a 120-day call option at a striking price of $30 for $5,000. What profit would the investor realize if the stock price increased to $42 per share?

Accepted Answer

A)  $0 
B)  $1,000 
C)  $4,000 
D)  $6,000 
A)  $0 
B)  $1,000 
C)  $4,000 
D)  $6,000

Question 15

When the price of a firm's common stock ________ the conversion price, the market price of the convertible security will ________ to a level close to its conversion value.

Accepted Answer

A)  falls below; rise 
B)  rises above; fall 
C)  rises above; rise 
D)  equals; fall 
A)  falls below; rise 
B)  rises above; fall 
C)  rises above; rise 
D)  equals; fall

Question 16

Contingent securities such as convertibles, warrants, and stock options affect the reporting of a firm's earnings per share (EPS).

Accepted Answer

A) True 
 B)False

Question 17

The presence of contingent securities such as warrants and stock options affects the reporting of a firm's earnings per share.

Accepted Answer

A) True 
 B)False

Question 18

Julian's Sports Equipment must decide whether to obtain $1,000,000 of financing by selling common stock at its current price of $40 per share or selling convertible bonds. The firm currently has 250,000 shares of common stock outstanding. Convertible bonds can be sold for their $1,000 par value and would be convertible at $45. The firm expects its earnings available to common stockholders to be $700,000 each year over the next several years.
(a) Calculate the number of shares the firm would need to sell to raise the $1,000,000.
(b) Calculate the earnings per share resulting from the sale of common stock.
(c) Calculate the number of shares outstanding once all bonds have been converted.
(d) Calculate the earnings per share associated with the bond financing after conversion.
(e) Which of the financing alternatives would you recommend the company adopt? Why?

Accepted Answer

(a) $1,000,000 / $40 = 25,000 shares
(b)

Question 19

If an investor buys a 100-share put option for $150 with an exercise price of $38 and the underlying price per share of the stock at expiration is $39, what is the amount of profit or loss, ignoring brokerage fees?

Accepted Answer

A)  There would be a profit of $250. 
B)  There would be a profit of $150. 
C)  There would be a loss of $250. 
D)  There would be a loss of $150. 
A)  There would be a profit of $250. 
B)  There would be a profit of $150. 
C)  There would be a loss of $250. 
D)  There would be a loss of $150.

Question 20

Tangshan Mining Company has an outstanding issue of convertible bonds with a $1,000 par value. The bonds have a 10 percent coupon rate, have a 10-year maturity, and are convertible into 100 shares of common stock. The yield to maturity on bonds of similar risk is 10 percent. Based on this information, the straight bond value of the bond is ________.

Accepted Answer

A)  $1,000.00 
B)  $978.39 
C)  $1,087.36 
D)  $1,123.86 
A)  $1,000.00 
B)  $978.39 
C)  $1,087.36 
D)  $1,123.86

An operating lease is often referred as a capital lease.

Which of the following is a motive for using convertible securities in a firm's financing mix?

When a call is made on a convertible security, the holder of the security will most likely ________.

If a lease meets any of the FASB Standards No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on a firm's balance sheet.

The market value of a convertible security is likely to be less than its straight value or conversion value.

Which of the following must be considered when making a lease-versus-purchase decision?

One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a higher interest rate if a warrant is attached than if it is not.

Assets leased under ________ leases generally have a usable life longer than the term of the lease.

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to ________.

Since the purchaser of a convertible security is given an opportunity to become a common stockholder, convertibles can normally be sold with higher interest rates than nonconvertibles.

Which of the following is a basic characteristic of warrants?

An overhanging issue is a convertible security that cannot be forced into conversion by using the call feature.

An operating lease need not be capitalized, but its basic features must be disclosed in a footnote to the financial statements.

When the price of a firm's common stock the conversion price, the market price of the convertible security will to a level close to its conversion value.

Contingent securities such as convertibles, warrants, and stock options affect the reporting of a firm's earnings per share (EPS).

The presence of contingent securities such as warrants and stock options affects the reporting of a firm's earnings per share.

If an investor buys a 100-share put option for $150 with an exercise price of $38 and the underlying price per share of the stock at expiration is $39, what is the amount of profit or loss, ignoring brokerage fees?

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 17: Hybrid and Derivative Securities

An operating lease is often referred as a capital lease.

Which of the following is a motive for using convertible securities in a firm's financing mix?

When a call is made on a convertible security, the holder of the security will most likely ________.

If a lease meets any of the FASB Standards No. 13 criteria, it should be shown as a capitalized lease, meaning the present value of all its payments should be included as an asset and corresponding liability on a firm's balance sheet.

The market value of a convertible security is likely to be less than its straight value or conversion value.

Which of the following must be considered when making a lease-versus-purchase decision?

One of the major reasons for not attaching a warrant is that investors require the issuing firm to pay a higher interest rate if a warrant is attached than if it is not.

Assets leased under ________ leases generally have a usable life longer than the term of the lease.

When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to ________.

Since the purchaser of a convertible security is given an opportunity to become a common stockholder, convertibles can normally be sold with higher interest rates than nonconvertibles.

Which of the following is a basic characteristic of warrants?

An overhanging issue is a convertible security that cannot be forced into conversion by using the call feature.

An operating lease need not be capitalized, but its basic features must be disclosed in a footnote to the financial statements.

When the price of a firm's common stock ________ the conversion price, the market price of the convertible security will ________ to a level close to its conversion value.

Contingent securities such as convertibles, warrants, and stock options affect the reporting of a firm's earnings per share (EPS).

The presence of contingent securities such as warrants and stock options affects the reporting of a firm's earnings per share.

If an investor buys a 100-share put option for $150 with an exercise price of $38 and the underlying price per share of the stock at expiration is $39, what is the amount of profit or loss, ignoring brokerage fees?

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

When the price of a firm's common stock the conversion price, the market price of the convertible security will to a level close to its conversion value.