Exam 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

A) One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
B) Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
C) At the time it is issued,a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price.
D) For equilibrium to exist,the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.
E) The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.

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

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

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A) 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.
B) 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.
C) 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.
D) Warrants can sometimes be detached and traded separately from the debt with which they were issued,but this is unusual.
E) Warrants have an option feature but convertibles do not.

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

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A) By law in most states,all preferred stock must be cumulative,meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.
B) From the issuer's point of view,preferred stock is less risky than bonds.
C) Whereas common stock has an indefinite life,preferred stocks always have a specific maturity date,generally 25 years or less.
D) Unlike bonds,preferred stock cannot have a convertible feature.
E) Preferred stock generally has a higher component cost of capital to the firm than does common stock.

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