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Exam 17: Hybrid and Derivative Securities

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Question 61

Multiple Choice

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When warrants are used as "sweeteners" by a new firm, the firm is essentially allowing creditors to

A) vote along with common stockholders.
B) share in the possible future success of the firm.
C) protect their interest.
D) receive extra income.

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Question 62

Multiple Choice

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The call price of the security generally ________ the security's par value.

A) is less than
B) is equal to
C) is greater than
D) has no relation to

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Question 63

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Derivatives are used by corporations as a useful tool for managing certain aspects of the firm's risk.

FASB Standard No. 13 establishes requirements for the explicit disclosure of certain types of lease obligations on the firm's balance sheet. To qualify as a capital lease, any of the following elements may be present EXCEPT

Julian's Sports Equipment must decide whether to obtain $1,000,000 of financing by selling common stock at its current price of $40 per share or selling convertible bonds. The firm currently has 250,000 shares of common stock outstanding. Convertible bonds can be sold for their $1,000 par value and would be convertible at $45. The firm expects its earnings available to common stockholders to be $700,000 each year over the next several years. (a) Calculate the number of shares the firm would need to sell to raise the $1,000,000. (b) Calculate the earnings per share resulting from the sale of common stock. (c) Calculate the number of shares outstanding once all bonds have been converted. (d) Calculate the earnings per share associated with the bond financing after conversion. (e) Which of the financing alternatives would you recommend the company adopt? Why?

All of the following must be considered when making a lease-versus-purchase decision EXCEPT

The lessor is the receiver of the services of the assets under a lease whereas a lessee is the owner of the assets that are being leased.

A capital or capitalized lease is otherwise known as

A ________ option is an option to purchase a specified number of shares of a stock on or before some future date at a specified price, whereas a ________ option is an option to sell a specified number of shares of a stock on or before some future date at a specified price. ________ are purchased if the stock price is expected to fall.

A lease under which a lessor acts as an equity participant supplying only about 20 percent of the cost of the asset, while a lender supplies the balance is called a(n)

When a call is made on a convertible security, the holder of the security will most likely

A direct lease is a lease under which the lessee sells an asset for cash to a prospective lessor and then leases back the same asset, making periodic payments for its use.

Many holders of convertible bonds will not convert when the firm's common stock price exceeds the conversion price because

A security that is neither debt nor equity but derives its value from an underlying asset is called a(n)

Lisa's Riding Equipment Company has entered into two lease arrangements. One lease is an operating lease on an office copier requiring annual lease payments of $2,000 for the next three years. The other lease is a 15-year financial lease on a building requiring annual lease payments of $150,000. If the firm's discount rate is 10 percent, how should each lease be presented on the firm's balance sheet?

A firm has outstanding convertible preferred stock with a $50 par value which is convertible into three shares of common stock. The conversion value is $45. What is the current market price of a share of common stock?

Call options are purchased with the expectation that the market price of the underlying security will fall while put options are purchased with the expectation that the market price of the underlying security will rise.

If an investor buys a 100-share call option for $325 with an exercise price of $15 and the underlying price per share of the stock at expiration is $13, what is the amount of profit or loss, ignoring brokerage fees?

All of the following are true of calls and puts EXCEPT

A form of debt or equity financing that possesses characteristics of both debt and equity financing is called