Question 1

Renewal 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 2

Convertibles can be used as a form of deferred common stock financing.

Accepted Answer

A) True 
 B)False

Question 3

A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.

Accepted Answer

A) True 
 B)False

Question 4

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Accepted Answer

A)  There would be a profit of $200. 
B)  There would be a profit of $100. 
C)  There would be a loss of $100. 
D)  There would be a loss of $300. 
A)  There would be a profit of $200. 
B)  There would be a profit of $100. 
C)  There would be a loss of $100. 
D)  There would be a loss of $300.

Question 5

A ________ is an option included as part of a bond or preferred stock that permits the holder to convert the security into a specified number of shares of common stock.

Accepted Answer

A)  put option 
B)  call option 
C)  conversion feature 
D)  repurchase agreement 
A)  put option 
B)  call option 
C)  conversion feature 
D)  repurchase agreement

Question 6

The conversion value of a bond is the minimum price at which a convertible bond would be traded.

Accepted Answer

A) True 
 B)False

Question 7

When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments.

Accepted Answer

A) True 
 B)False

Question 8

In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

Accepted Answer

A) True 
 B)False

Question 9

A lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the assets that are being leased.

Accepted Answer

A) True 
 B)False

Question 10

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

Accepted Answer

A)  There would be a profit of $800. 
B)  There would be a profit of $400. 
C)  There would be a loss of $400. 
D)  There would be a loss of $800. 
A)  There would be a profit of $800. 
B)  There would be a profit of $400. 
C)  There would be a loss of $400. 
D)  There would be a loss of $800.

Question 11

A firm needs $1.5 million of new long-term financing. The firm is considering the sale of common stock or a convertible bond. The current market price of the common stock is $16 per share. To sell this new issue, the stock would have to be underpriced by $1 and sold for $15 per share. The firm currently has 600,000 shares of common stock outstanding. The alternative is to issue 30-year, 8 percent, and $1,000 par-value convertible bonds. The conversion price would be set at $20 per share, and the bond could be sold at par. The earnings for the firm are expected to be $700,000 in the coming year. Which plan results in less dilution of the earnings per share?

Accepted Answer

A)  The common stock with an EPS of $1.17. 
B)  The convertible bond with an EPS of $1.17. 
C)  The common stock with an EPS of $1.00. 
D)  The convertible bond with an EPS of $1.00. 
A)  The common stock with an EPS of $1.17. 
B)  The convertible bond with an EPS of $1.17. 
C)  The common stock with an EPS of $1.00. 
D)  The convertible bond with an EPS of $1.00.

Question 12

The dominant organized options exchange is the ________.

Accepted Answer

A)  over-the-counter exchange 
B)  CBOE 
C)  NASDAQ 
D)  NYSE 
A)  over-the-counter exchange 
B)  CBOE 
C)  NASDAQ 
D)  NYSE

Question 13

A(n) ________ is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset's services.

Accepted Answer

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

Question 14

The straight bond value is ________.

Accepted Answer

A)  the conversion premium minus the conversion value 
B)  the present value of the interest and principal payments discounted at a rate the firm would have to pay on a convertible bond 
C)  the market value minus the conversion value 
D)  the present value of the interest and principal payments discounted at a rate the firm would have to pay on a nonconvertible bond 
A)  the conversion premium minus the conversion value 
B)  the present value of the interest and principal payments discounted at a rate the firm would have to pay on a convertible bond 
C)  the market value minus the conversion value 
D)  the present value of the interest and principal payments discounted at a rate the firm would have to pay on a nonconvertible bond

Question 15

In case of an overhanging issue, if a firm were to call the issue, the bondholders would accept the call price rather than converting their bonds.

Accepted Answer

A) True 
 B)False

Question 16

The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.

Accepted Answer

A) True 
 B)False

Question 17

The exercise price or option price of a warrant is normally set ________.

Accepted Answer

A)  below the book value of the firm's stock at the time of issuance 
B)  equal to the market price of the firm's stock at the time of issuance 
C)  above the market price of the firm's stock at the time of issuance 
D)  above the book value of the firm's stock at the time of issuance 
A)  below the book value of the firm's stock at the time of issuance 
B)  equal to the market price of the firm's stock at the time of issuance 
C)  above the market price of the firm's stock at the time of issuance 
D)  above the book value of the firm's stock at the time of issuance

Question 18

Convertible preferred stock is converted into ________.

Accepted Answer

A)  secured bonds 
B)  debentures 
C)  shares of common stock 
D)  warrants 
A)  secured bonds 
B)  debentures 
C)  shares of common stock 
D)  warrants

Question 19

Mia's Pet Store has warrants that allow the purchase of two shares of its outstanding common stock at $30 per share. The common stock price per share is $33 and the market value of the warrant is $8.
(a) Calculate the theoretical value of the warrant.
(b) Calculate the market premium for the warrant.

Accepted Answer

(a) ($33 -

Question 20

The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).

Accepted Answer

A) True 
 B)False

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

Convertibles can be used as a form of deferred common stock financing.

A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

A ________ is an option included as part of a bond or preferred stock that permits the holder to convert the security into a specified number of shares of common stock.

The conversion value of a bond is the minimum price at which a convertible bond would be traded.

When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments.

In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

A lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the assets that are being leased.

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

The dominant organized options exchange is the ________.

A(n) ________ is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset's services.

The straight bond value is ________.

In case of an overhanging issue, if a firm were to call the issue, the bondholders would accept the call price rather than converting their bonds.

The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.

The exercise price or option price of a warrant is normally set ________.

Convertible preferred stock is converted into ________.

The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).

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

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

Convertibles can be used as a form of deferred common stock financing.

A strike price is a price at which the holder of a call option can buy a specified amount of stock at any time prior to the option's expiration date.

If an investor buys a 100-share call option for $300 with an exercise price of $30 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

A ________ is an option included as part of a bond or preferred stock that permits the holder to convert the security into a specified number of shares of common stock.

The conversion value of a bond is the minimum price at which a convertible bond would be traded.

When a firm becomes bankrupt or is reorganized, the maximum claim of lessors against the corporation is three years of lease payments.

In comparison to convertibles, the exercise of a warrant shifts the firm's capital structure to a less highly levered position.

A lessee is the receiver of the services of the assets under a lease whereas a lessor is the owner of the assets that are being leased.

If an investor buys a 100-share put option for $400 with an exercise price of $40 and the underlying price per share of the stock at expiration is $32, what is the amount of profit or loss, ignoring brokerage fees?

The dominant organized options exchange is the ________.

A(n) ________ is a cancelable contractual arrangement whereby the lessee agrees to make periodic payments to the lessor, often for 5 or fewer years, to obtain an asset's services.

The straight bond value is ________.

In case of an overhanging issue, if a firm were to call the issue, the bondholders would accept the call price rather than converting their bonds.

The conversion ratio can be obtained by dividing the par value of the convertible by the conversion price.

The exercise price or option price of a warrant is normally set ________.

Convertible preferred stock is converted into ________.

The dominant organized options exchange in which options are traded is the Chicago Board Options Exchange (CBOE).

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