FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

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

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Multiple Choice

Review LaterAdd Note

Review Later

Which of the following statements concerning warrants is CORRECT?

A) Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants were used but remains the same if it used convertibles.
B) Warrants are long-term put options that have value because holders can sell the firm’s common stock at the exercise price regardless of how low the market price drops.
C) Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen.
D) A firm’s investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
E) A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.

F) A) and C)
G) C) and E)

Correct Answer

verified

Show Answer

Question 2

True/False

Review LaterAdd Note

Review Later

Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.

A) True
B) False

Correct Answer

verified

Show Answer

Question 3

True/False

Review LaterAdd Note

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Which of the following statements is most CORRECT?

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, which is desirable for liquidity portfolios, and they also benefit from the 70% tax exemption on preferred dividends received.

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

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.

Preferred stock can provide a financing alternative for some firms when market conditions are such stat they cannot issue either pure debt or common stock at any reasonable cost.

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.

Which of the following statements is most CORRECT?

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

Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?

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.

Firms generally do not call their convertibles unless the conversion value is greater than the call price.

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.

Valdes Enterprises is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. The stock currently sells for $40.00 a share, has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. What is the estimated floor price of the convertible at the end of Year 3?

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

A warrant is an option, and as such it cannot be used as a "sweetener."

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