Question 1

Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

Accepted Answer

A)   6.75%
B)   7.11%
C)   7.48%
D)   7.88%
E)   8.27%F) D) and E)
G) A) and B)

Question 2

Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.

Accepted Answer

A) True 
 B)False

Question 3

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Accepted Answer

A)   $3.76
B)   $3.94
C)   $4.14
D)   $4.35
E)   $4.56F) B) and D)
G) B) and C)

Question 4

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

Accepted Answer

A) True 
 B)False

Question 5

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) 
The following data apply to Saunders Corporation's convertible bonds:
-What is the bond's conversion ratio?

Accepted Answer

A)   27.14
B)   28.57
C)   30.00
D)   31.50
E)   33.08F) All of the above
G) A) and B)

Question 6

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) 
The following data apply to Saunders Corporation's convertible bonds:
-What is the bond's straight-debt value?

Accepted Answer

A)   $684.78
B)   $720.82
C)   $758.76
D)   $798.70
E)   $838.63F) B) and E)
G) A) and C)

Question 7

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) 
The following data apply to Saunders Corporation's convertible bonds:
-Based on your answers to the three preceding questions, what is the minimum price (or "floor" price)  at which the Saunders' bonds should sell?

Accepted Answer

A)   $698.15
B)   $734.89
C)   $773.57
D)   $814.29
E)   $857.14F) A) and C)
G) A) and D)

Question 8

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A)   Warrants have an option feature but convertibles do not.
B)   One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.
C)   The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.
D)   The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.
E)   Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.F) A) and C)
G) A) and D)

Question 10

Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Accepted Answer

A) True 
 B)False

Exam 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's straight-debt value?

Correct Answer
verified

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Correct Answer
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Which of the following statements is most CORRECT?

Correct Answer
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Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Correct Answer
verified

Correct Answer
verified

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's conversion ratio?

Correct Answer
verified

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Correct Answer
verified

Exam 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's straight-debt value?

Correct AnswerverifiedShow Answer

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

(The following data apply to Problems 27 through 30. The problems MUST be kept together.) The following data apply to Saunders Corporation's convertible bonds: -What is the bond's conversion ratio?

Correct AnswerverifiedShow Answer

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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