Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Carolina Trucking Company (CTC)  is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 9%, and the loan would be amortized over the truck's 4-year life. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $12,000. If CTC buys the truck, it would purchase a maintenance contract that costs $1,500 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total)  at the beginning of each year. CTC's tax rate is 35%. What is the net advantage to leasing? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)

Accepted Answer

A)   $609
B)   $642
C)   $678
D)   $715
E)   $751F) B) and E)
G) None of the above

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.

Accepted Answer

A) True 
 B)False

Question 5

Atlas Anglers Inc. is considering issuing a 15-year convertible bond that will be priced at its $1,000 par value. The bonds have a 6.5% annual coupon rate, and each bond can be converted into 20 shares of common stock. The stock currently sells at $30 a share, has an expected dividend in the coming year of $3, and has an expected constant growth rate of 5.5%. What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight-debt issue is 9.5%?

Accepted Answer

A)   $790.48
B)   $830.01
C)   $871.51
D)   $915.08
E)   $960.84F) All of the above
G) A) and C)

Question 6

What is the bond's initial conversion value when issued?

Accepted Answer

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

Question 7

Cannon Manufacturing is considering issuing 15-year, 8% annual coupon, $1,000 face value convertible bonds at a price of $1,000 each. Each bond would be convertible into 25 shares of common stock. If the bonds were not convertible, investors would require an annual yield of 10%. The stock's current price is $25.00, its expected dividend is $2.50, and its expected growth rate is 5%. The bonds are noncallable for 10 years. What is the bond's conversion value in Year 5?

Accepted Answer

A)   $719.90
B)   $757.79
C)   $797.68
D)   $837.56
E)   $879.44F) A) and D)
G) None of the above

Question 8

Thomson Engineering is issuing new 20-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry an 11% annual interest rate. However, with the warrants attached the bonds will pay an 8% annual coupon. There are 30 warrants attached to each bond, which have a par value of $1,000. What is the value of the straight-debt portion of the bonds?

Accepted Answer

A)   $652.55
B)   $686.89
C)   $723.05
D)   $761.10
E)   $799.16F) None of the above
G) A) and E)

Question 9

A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Accepted Answer

A)   is financed with short-term debt.
B)   is financed with long-term debt.
C)   is financed with debt whose maturity matches the term of the lease.
D)   is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.
E)   is financed with retained earnings.F) C) and D)
G) None of the above

Question 10

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 11

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Accepted Answer

A) True 
 B)False  True

Question 12

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

A)   The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.
B)   One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
C)   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.
D)   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.
E)   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.F) A) and B)
G) A) and C) E

Question 13

Moniker Manufacturing's bonds were recently issued at their $1,000 par value. At any time prior to maturity (20 years from now) , a bondholder can exchange a bond for a share of common stock at a conversion price of $40. What is the conversion ratio?

Accepted Answer

A)   22.56
B)   23.75
C)   25.00
D)   26.25
E)   27.56F) A) and C)
G) B) and D)

Question 14

Operating leases often have terms that include

Accepted Answer

A)   maintenance of the equipment by the lessor.
B)   full amortization over the life of the lease.
C)   very high penalties if the lease is cancelled.
D)   restrictions on how much the leased property can be used.
E)   much longer lease periods than for most financial leases.F) A) and D)
G) D) and E)

Question 15

In the lease-versus-buy decision, leasing is often preferable

Accepted Answer

A)   because it has no effect on the firm's ability to borrow to make other investments.
B)   because, generally, no down payment is required, and there are no indirect interest costs.
C)   because lease obligations do not affect the firm's risk as seen by investors.
D)   because the lessee owns the property at the end of the lease term.
E)   because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.F) C) and D)
G) None of the above

Question 16

Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.

Accepted Answer

A)   $177,169
B)   $196,854
C)   $207,215
D)   $217,576
E)   $228,455F) A) and B)
G) A) and E)

Question 17

A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.

Accepted Answer

A) True 
 B)False

Question 18

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  False

Question 19

Based on your

Accepted Answer

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

Question 20

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2011. At any time prior to maturity on February 1, 2031, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Accepted Answer

A)   $40.00
B)   $42.00
C)   $44.10
D)   $46.31
E)   $48.62F) All of the above
G) A) and B)

Exam 20: Hybrid Financing

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

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

Correct Answer
verified

The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.

Correct Answer
verified

Correct Answer
verified

What is the bond's initial conversion value when issued?

Correct Answer
verified

Correct Answer
verified

Correct Answer
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A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

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

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Correct Answer
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True

Which of the following statements about convertibles is most CORRECT?

Correct Answer
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E

Moniker Manufacturing's bonds were recently issued at their $1,000 par value. At any time prior to maturity (20 years from now) , a bondholder can exchange a bond for a share of common stock at a conversion price of $40. What is the conversion ratio?

Correct Answer
verified

Operating leases often have terms that include

Correct Answer
verified

In the lease-versus-buy decision, leasing is often preferable

Correct Answer
verified

Correct Answer
verified

A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.

Correct Answer
verified

Correct Answer
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False

Based on your

Correct Answer
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Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2011. At any time prior to maturity on February 1, 2031, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Correct Answer
verified

Exam 20: Hybrid Financing

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the bond's initial conversion value when issued?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

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

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Correct AnswerverifiedTrue

Which of the following statements about convertibles is most CORRECT?

Correct AnswerverifiedE

Moniker Manufacturing's bonds were recently issued at their $1,000 par value. At any time prior to maturity (20 years from now) , a bondholder can exchange a bond for a share of common stock at a conversion price of $40. What is the conversion ratio?

Correct AnswerverifiedShow Answer

Operating leases often have terms that include

Correct AnswerverifiedShow Answer

In the lease-versus-buy decision, leasing is often preferable

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedFalse

Based on your

Correct AnswerverifiedShow Answer

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2011. At any time prior to maturity on February 1, 2031, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Correct AnswerverifiedShow Answer

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True

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E

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False

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