Managerial Finance II

Question 1 of 20 5.0 Points
A convertible security is almost always:
A. a security that can be converted into any other type of security.
B. a debt security that can be converted into preferred stock.
C. a security that can be converted into common stock at the holder's option.
D. a security that can be converted into common stock at the option of the issuing corporation.
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Question 2 of 20 5.0 Points
Warrants are:
A. long-term options to sell shares of the issuing firm's stock.
B. fairly stable, low-risk investments.
C. investments whose value is directly related to the price of the underlying stock.
D. structured to sell for precisely their intrinsic value.
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Question 3 of 20 5.0 Points
A warrant that does not expire until several years in the future and that provides its owner the opportunity to buy a stock that is rising in price will probably sell for:
A. less than its intrinsic value.
B. exactly its intrinsic value.
C. more than its intrinsic value.
D. less than or equal to its intrinsic value.
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Question 4 of 20 5.0 Points
A convertible bond is often utilized:
A. as a sweetener when selling debt.
B. to sell common stock at prices higher than those prevailing when funds are needed.
C. when there is no demand for straight debt.
D. All of the above
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Question 5 of 20 5.0 Points
If the stock price rises substantially above the conversion price, an advantage to the corporation would be:
A. the premium would decrease.
B. the floor price would offer the investor downside protection.
C. the bond would most likely be converted into common stock and the debt would not have to be repaid.
D. None of the above
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Question 6 of 20 5.0 Points
Which of the following is TRUE about warrants?
A. As the market value of a warrant increases, so does the premium.
B. A rising stock price is usually followed by an increase in the price of the warrant.
C. Both A and B
D. None of the above
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Question 7 of 20 5.0 Points
One advantage to the corporation in selling a convertible bond is:
A. the interest rate on a convertible is lower than a straight debt issue of equal risk.
B. the bond may never get converted into common stock and create dilution.
C. if interest rates fall the bond is likely to be refunded.
D. All of the above
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Question 8 of 20 5.0 Points
The principal device used by the corporation to force conversion:
A. is setting the conversion price above the current market price.
B. is reducing the amount of interest payments.
C. is buying bonds back at below par value.
D. is a call provision.
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Question 9 of 20 5.0 Points
When a company has a convertible bond in its capital structure:
A. it can reduce its debt-to-equity ratio by calling the bond.
B. there is no effect on the firm's primary earnings per share.
C. there is no advantage to the firm in forcing conversion of the bonds.
D. All of the above
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Question 10 of 20 5.0 Points
The theoretical floor value for a convertible bond is its:
A. conversion price.
B. conversion value.
C. par value.
D. pure bond value.
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Question 11 of 20 5.0 Points
The floor price of a convertible bond cannot fall below:
A. the conversion ratio.
B. the conversion price.
C. the conversion premium.
D. the pure bond value.
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Question 12 of 20 5.0 Points
The conversion premium is the greatest and the downside risk the smallest when:
A. the conversion value equals the pure bond value.
B. the conversion value is greater than the pure bond value.
C. the conversion value is less than the pure bond value.
D. the stock price is expected to go up drastically.
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Question 13 of 20 5.0 Points
The pure bond value of a convertible bond is found by:
A. multiplying the price of the firm's common stock by the conversion ratio.
B. multiplying the bond's conversion premium by the price of the firm's common stock.
C. multiplying the price of the firm's common stock by the conversion ratio and adding the present value of the bond's face value.
D. finding the present value of the bond's interest payments and adding the present value of the bond's face value.
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Question 14 of 20 5.0 Points
The intrinsic value of a warrant to buy 5 shares of Merton stock at $55 per share is $20. What is the current market price of Merton stock?
A. $55
B. $59
C. $60
D. None of the above
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Question 15 of 20 5.0 Points
Sen Corporation warrants carry the right to buy 10 shares of Sen common stock at $3.50 per share. The common stock has a current market price of $4.25 per share. What is the intrinsic or minimum value of one Sen warrant?
A. $0.75
B. $7.50
C. $15
D. $7.75
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Question 16 of 20 5.0 Points
The Burma Hat Company's warrant is trading for $10.20. The warrant carries the option to purchase two shares of common stock for $48. What is the speculative premium if the stock price is $51.30?
A. $3.30
B. $3.60
C. $6.60
D. $3
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Question 17 of 20 5.0 Points
The Rocky Scholes Swimwear's warrant is trading for $10. The warrant carries the option to purchase a half share of common stock for $40. What is the speculative premium if the stock price is $50?
A. $1
B. $2.50
C. $5
D. $10
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Question 18 of 20 5.0 Points
A contract giving the owner the right to buy or sell an asset at a fixed price for a given period of time is:
A. a common stock.
B. an option.
C. a futures.
D. a capital investment
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Question 19 of 20 5.0 Points
Options contracts contrast with futures because:
A. options are not traded on organized exchanges.
B. options create an obligation for the owner of the instrument.
C. options are derivatives.
D. None of the above
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Question 20 of 20 5.0 Points
Which contract is an option?
A. A call
B. A put
C. A future
D. Both A and B