Question 1

A(n) ________ is a noncancellable arrangement that requires the lessee to make payments for the use of an asset over a relatively long period of time.

Accepted Answer

A)  operating lease 
B)  financial lease 
C)  sale-leaseback arrangement 
D)  direct lease 
A)  operating lease 
B)  financial lease 
C)  sale-leaseback arrangement 
D)  direct lease

Question 2

A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the same asset is called a(n) ________.

Accepted Answer

A)  operating lease 
B)  leveraged lease 
C)  sale-leaseback arrangement 
D)  direct lease 
A)  operating lease 
B)  leveraged lease 
C)  sale-leaseback arrangement 
D)  direct lease

Question 3

The call privilege is generally not exercised until the conversion value of a security is ________ the call price.

Accepted Answer

A)  5 to 10 percent below 
B)  equal to 
C)  10 to 15 percent above 
D)  50 percent above 
A)  5 to 10 percent below 
B)  equal to 
C)  10 to 15 percent above 
D)  50 percent above

Question 4

Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price.

Accepted Answer

A) True 
 B)False

Question 5

A firm has an outstanding 15-year convertible bond issue with a $1,000 par value and a stated annual interest rate of 7 percent. The bond is convertible into 50 shares of common stock which has a current market price of $15. A straight bond could have been sold with a 10 percent stated interest rate. The market value of the bond is ________.

Accepted Answer

A)  $750 
B)  $772 at the minimum 
C)  $1,250 at the minimum 
D)  $1,000 
A)  $750 
B)  $772 at the minimum 
C)  $1,250 at the minimum 
D)  $1,000

Question 6

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because ________.

Accepted Answer

A)  the common stock price may go up further and the firm cannot have any other mechanism to stop the bondholders from taking undue advantage of the conversion feature 
B)  they already have the market price benefit and may still receive fixed periodic interest payments 
C)  of the dilution of EPS 
D)  interest payments are tax deductible and it will affect their earnings 
A)  the common stock price may go up further and the firm cannot have any other mechanism to stop the bondholders from taking undue advantage of the conversion feature 
B)  they already have the market price benefit and may still receive fixed periodic interest payments 
C)  of the dilution of EPS 
D)  interest payments are tax deductible and it will affect their earnings

Question 7

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of an asset might be better off borrowing to purchase it.

Accepted Answer

A) True 
 B)False

Question 8

Zheng Sen's Pen Company has an outstanding issue of convertible bonds with a $1,000 par value. These bonds are convertible into 50 shares of common stock. They have a 10 percent coupon and a 10-year maturity. The interest rate on a straight bond of similar risk is 8 percent.
(a) Calculate the straight bond value of the bond.
(b) Calculate the conversion value of the bond when the market price of the stock is $30/share.
(c) What is the least you would expect the bond to sell for at a market price of common stock of $18/share?

Accepted Answer

(a) B = $100 (PV factor of 10% for 10 ye

Question 9

A derivative security is neither debt nor equity but instead derives its value from an underlying asset.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is a disadvantage of leasing from a lessee's perspective?

Accepted Answer

A)  capability of effectively depreciating land 
B)  ability to avoid restrictive covenants that are normally part of a long-term loan 
C)  benefit of the salvage value at the end of the term of the lease reverts to the lessor 
D)  100 percent debt financing 
A)  capability of effectively depreciating land 
B)  ability to avoid restrictive covenants that are normally part of a long-term loan 
C)  benefit of the salvage value at the end of the term of the lease reverts to the lessor 
D)  100 percent debt financing

Question 11

Which of the following is true of a stock right and a warrant?

Accepted Answer

A)  They are similar to a put option. 
B)  They both result in new equity capital for a firm. 
C)  They are both issued with exercise or subscription prices below the prevailing market price of stock. 
D)  They both may be traded independently from the security to which they were attached. 
A)  They are similar to a put option. 
B)  They both result in new equity capital for a firm. 
C)  They are both issued with exercise or subscription prices below the prevailing market price of stock. 
D)  They both may be traded independently from the security to which they were attached.

Question 12

Lisa's Riding Equipment Company has entered into two lease arrangements. One lease is an operating lease on an office copier requiring annual lease payments of $2,000 for the next three years. The other lease is a 15-year financial lease on a building requiring annual lease payments of $150,000. If the firm's discount rate is 10 percent, how should each lease be presented on the firm's balance sheet?

Accepted Answer

Operating lease: The basic features such

Question 13

The market value of a warrant is generally below the theoretical value of the warrant.

Accepted Answer

A) True 
 B)False

Question 14

Purchase options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.

Accepted Answer

A) True 
 B)False

Question 15

A(n) ________ lease is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor for five or fewer years for an asset's services. This type of lease may also be canceled at the option of the lessee.

Accepted Answer

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

Question 16

Convertible securities can usually be sold with interest rates ________.

Accepted Answer

A)  lower than those of other nonconvertible securities 
B)  equal to those of other nonconvertible securities 
C)  higher than those of other nonconvertible securities 
D)  that has no relation to those of other nonconvertible securities 
A)  lower than those of other nonconvertible securities 
B)  equal to those of other nonconvertible securities 
C)  higher than those of other nonconvertible securities 
D)  that has no relation to those of other nonconvertible securities

Question 17

Bessey Aviation is considering leasing or purchasing a small aircraft to transport executives between manufacturing facilities and the main administrative headquarters. The firm is in the 40 percent tax bracket and its after-tax cost of debt is 7 percent. The estimated after-tax cash flows for the lease and purchase alternatives are given below:   (a) Given the above cash outflows for each alternative, calculate the present value of the after-tax cash flows using the after-tax cost of debt for each alternative.
(b) Which alternative do you recommend? Why?

Accepted Answer

(a) @#IMG-DLM& (b) T

Question 18

Under FASB Standard No. 13, which of the following element should be present to qualify as a capital lease?

Accepted Answer

A)  The lease does not transfer ownership of the property to the lessee by the end of the lease. 
B)  The lease contains an option to purchase the property at a "bargain" price. 
C)  The lease term is less than 50 percent of the economic life of the property. 
D)  At the beginning of the lease, the present value of the lease payment is equal to 50 percent or more of the fair market value of the leased property less any investment tax credit received by the lessor. 
A)  The lease does not transfer ownership of the property to the lessee by the end of the lease. 
B)  The lease contains an option to purchase the property at a "bargain" price. 
C)  The lease term is less than 50 percent of the economic life of the property. 
D)  At the beginning of the lease, the present value of the lease payment is equal to 50 percent or more of the fair market value of the leased property less any investment tax credit received by the lessor.

Question 19

Convertible bonds normally have ________ to permit the issuer to retire or encourage conversion of outstanding convertibles when appropriate.

Accepted Answer

A)  a put feature 
B)  a call feature 
C)  a stock purchase warrant 
D)  a swap feature 
A)  a put feature 
B)  a call feature 
C)  a stock purchase warrant 
D)  a swap feature

Question 20

Preferred stock is considered a hybrid security because it blends the characteristics of both debt and equity.

Accepted Answer

A) True 
 B)False

A(n) ________ is a noncancellable arrangement that requires the lessee to make payments for the use of an asset over a relatively long period of time.

A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the same asset is called a(n) ________.

The call privilege is generally not exercised until the conversion value of a security is ________ the call price.

Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price.

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because ________.

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of an asset might be better off borrowing to purchase it.

A derivative security is neither debt nor equity but instead derives its value from an underlying asset.

Which of the following is a disadvantage of leasing from a lessee's perspective?

Which of the following is true of a stock right and a warrant?

The market value of a warrant is generally below the theoretical value of the warrant.

Purchase options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.

A(n) ________ lease is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor for five or fewer years for an asset's services. This type of lease may also be canceled at the option of the lessee.

Convertible securities can usually be sold with interest rates ________.

Under FASB Standard No. 13, which of the following element should be present to qualify as a capital lease?

Convertible bonds normally have ________ to permit the issuer to retire or encourage conversion of outstanding convertibles when appropriate.

Preferred stock is considered a hybrid security because it blends the characteristics of both debt and equity.

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

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Exam 17: Hybrid and Derivative Securities

A(n) ________ is a noncancellable arrangement that requires the lessee to make payments for the use of an asset over a relatively long period of time.

A lease under which a lessee sells an asset for cash to a prospective lessor and then leases back the same asset is called a(n) ________.

The call privilege is generally not exercised until the conversion value of a security is ________ the call price.

Converting a convertible security is beneficial when the market price of the common stock into which it can be converted is greater than its conversion price.

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because ________.

One disadvantage of leasing is that in many cases, the return to the lessor is quite high so the firm in need of an asset might be better off borrowing to purchase it.

A derivative security is neither debt nor equity but instead derives its value from an underlying asset.

Which of the following is a disadvantage of leasing from a lessee's perspective?

Which of the following is true of a stock right and a warrant?

The market value of a warrant is generally below the theoretical value of the warrant.

Purchase options are provisions frequently included in both operating and financial leases that allow the lessee to purchase the leased asset at maturity.

A(n) ________ lease is a contractual arrangement whereby the lessee agrees to make periodic payments to the lessor for five or fewer years for an asset's services. This type of lease may also be canceled at the option of the lessee.

Convertible securities can usually be sold with interest rates ________.

Under FASB Standard No. 13, which of the following element should be present to qualify as a capital lease?

Convertible bonds normally have ________ to permit the issuer to retire or encourage conversion of outstanding convertibles when appropriate.

Preferred stock is considered a hybrid security because it blends the characteristics of both debt and equity.

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