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Convertibles, Warrants and Derivatives

The interest rate on convertibles is generally __________ the interest rate on similar nonconvertible instruments.
greater than
less than
the same as
at least twice

Conversion price is usually set __________ the prevailing market price of the common stock at the time the bond issue is sold.
at one half of

The principle device used by the corporation to force conversion is:
setting the conversion price above the current market price.
reducing the amount of interest payments.
buying bonds back at below par value.
a call provision.

Mirrlees Corp. has 10,000 6.25% bonds convertible into 40 shares per $1000 bond. Mirrlees has 600,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at time of issue was 10%. Compute basic earnings per share if after-tax earnings are $750,000.

Vickrey Technology has had net income of $2,000,000 in the current fiscal year. There are 1,000,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $8 million. The $8 million is represented by 8,000 different $1,000 bonds. Each $1,000 bond pays 3 percent interest. The conversion ratio is 30. The firm is in a 30 percent tax bracket. What is Vickrey's diluted earnings per share?
None of the above

Jacobs and Company has warrants outstanding, which are selling at a $3 premium above intrinsic value. Each warrant allows its owner to purchase one share of common stock at $25. If the common stock currently sells for $28, what is the warrant price?

Warrants are:
long-term options to sell shares of the issuing firm's stock.
fairly stable, low-risk investments.
investments whose value is directly related to the price of the underlying stock.
structured to sell for precisely their intrinsic value.

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 warrant which does not expire until several years in the future which provides its owner the opportunity to buy a stock. If the stock price rises, the warrant will probably sell for __________ its intrinsic value.
less than
more than
less than or equal to

Which of the following is NOT an advantage to the corporation of issuing convertibles?
Provides a low-cost financing alternative for large, high-quality companies
Used when believe stock is undervalued
Generally lower cost than straight debt
Provides access for small co's to debt market

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Solution Preview

Hello Student,

In order to answer each question, I will provide you with information that will assist you to do same. Information is given under each question.

1) The interest rate on convertibles is generally __________ the interest rate on similar nonconvertible instruments.
greater than
less than
the same as
at least twice

Note the following excerpt:

"Both convertible and ...

Solution Summary

This solution includes a step-by-step explanation to a set of questions pertaining to convertibles, derivatives and warrants. In particular, information is provided in the solution which relates to convertible and non-convertible debentures; conversion price; forced conversion; how to calculate earnings per share, as well as diluted earnings per share; and finally, information on warrants and how to calculate warrant price and the intrinsic value of a warrant is also provided. Note, the solution is adequately referenced.