Exam 17: Hybrid and Derivative Securities

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?

A financial lease is often referred as a capital lease.

An investor has $1,000 that she is interested in investing in ABC stock, which is currently selling for $10 per share. ABC's warrants are selling for $7 per warrant. Each warrant entitles the holder to purchase three shares of ABC's common stock for $8 per share. The warrant premium is ________.

A firm has outstanding warrants that are exercisable at $53 per share and entitle holders to purchase two shares of common stock. The common stock is currently selling for $55 per share. The theoretical value of the warrant is ________.

A stock purchase warrant gives the holder the right to purchase a certain number of shares of common stock at a specified price over a certain period of time.

The conversion feature permits a firm's capital structure to be changed without increasing the total financing.

A firm can raise capital by issuing securities such as convertibles and warrants but a firm has nothing to do with the creation of options to raise capital.

A capital or capitalized lease is also known as ________.

When warrants are exercised, ________.

A lease under which a lessor acts as an equity participant, supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n)________.

All stock purchase warrants are non-detachable, which means that the bondholders must keep the warrants until they mature.

A firm has an outstanding bond with a $1,000 par value that is convertible into 50 shares of common stock. The bond's conversion ratio is ________.

Maintenance clauses are provisions normally included in an operating lease that require the lessor to maintain the assets and to make insurance and tax payments.

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 $25. A straight bond could have been sold with a 10 percent stated interest rate. The straight value of the bond is ________.

Which of the following is a characteristic of convertible bonds?

The market value of a convertible bond will exceed the conversion value or straight bond value, whichever is greater, by an amount called the market premium. This premium exists because ________.

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 4 months. As an alternative, the investor could purchase a 120-day call option at a striking price of $30 for $5,000. At what stock price would the investor break even?

Dwyer Corporation is determining whether to lease or purchase new equipment. The firm is in the 38% tax bracket, and its after-tax cost of debt is currently 7%. The terms of the lease and the purchase are: Lease: Annual end-of-year lease payments of $31,500 are required over the 3-year life of the lease. All maintenance costs will be paid by the lessor; insurance and other costs will be borne by the lessee. The lessee will exercise its option to purchase the equipment for $6,000 at the termination of the lease. Purchase: The equipment, costing $77,000, can be financed entirely with a 12% loan requiring annual end-of-year payments of $32,059 for 3 years. The firm will depreciate the equipment under MACRS using a 3-year recovery period (33% in year 1, 45% in year 2, 15% in year 3 and 7% in year 4). The firm will pay $2,000 per year for a service contract that covers maintenance costs; insurance and other costs will be borne by the firm. The firm plans to keep the equipment and use it beyond its 3-year recovery period. Calculate the present value of the cash outflow for both the lease and purchasing and recommend one alternative.

A firm currently has outstanding a 9 percent, $1,000 convertible bond. The bond is convertible into 100 shares of common stock at a conversion price of $10 per share and callable at $1,090. The current market price of the firm's stock is $12 per share. The bond holder will ________.

Contingent securities such as common stocks and bonds affect the reporting of a firm's earnings per share (EPS).