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Stocks, converible bonds, warrants

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1. A firm with excess cash and few investment alternatives might logically:

a. Declare a stock dividend
b. Split the stock 2-for-1
c. repurchase some of its own stock
d. choose to issue preferred stock

2. A warrant which does not expire until several years in the future and which provides its owner the opportunity to buy a stock which 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

3. The Smith Swimwear's warrant is trading for $10.00. 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. $1.00
b. $2.50
c. $5.00
d. None of the above

4. Which of the following characteristics are drawbacks of convertible bonds?

a. Downside protection is ineffectual if the bond is bought at a large premium over par value
b. Interest rates on the debt-instrument part of a convertible bond are frequently below market interest rates
c. Conversion may be forced on the bondholder by call provisions on the convertible bond
d. All of the above are drawbacks of convertibles

5. 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

6. 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

7. Which of the following is true?

a. As the price of common stock increases, the market price of a convertible bond and the conversion premium increases
b. As the price of common stock increases, the market price of a convertible bond and the conversion value increases
c. As the price of common stock increases, the conversion value and the floor price increase
d. Two of the above are true

8. The "floor" or 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

9. Johnson Corp. has 10,000 6.25% bonds convertible into 40 shares per $1,000 bond. Johnson has 600,000 outstanding shares and a tax rate of 40%. The average Aa bond yield at thime of issue was 10%. Compute basic earnings per share if after-tax earnings are $750,000.

a. $0.71
b. $1.25
c. $1.33
d. $1.51

10. The computation of basic earnings per share will include consideration of:

a. All convertible securities
b. Only shares outstanding
c. Shares outstanding and convertible securities
d. None of the above

11. Expectations of a significant increase in the price of a firm's common stock will result in:

a. Large conversion premiums for the firm's convertible bonds
b. Small conversion premiums for the firm's convertible bonds
c. Negative conversion premiums for the firm's convertible bonds
d. No effect at all on conversion premiums

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Solution Summary

Answers to multiple choice questions on stocks, bonds, converible bonds, warrants.

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1. A firm with excess cash and few investment alternatives might logically:
a. Declare a stock dividend
b. Split the stock 2-for-1
c. repurchase some of its own stock
d. choose to issue preferred stock

Answer: c repurchase some of its own stock
By repurchasing stock, excess cash can be returned to the shareholders

2. A warrant which does not expire until several years in the future and which provides its owner the opportunity to buy a stock which 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

Answer: c More than its intrinsic value

Warrant's value = intrinsic value + speculative premium
If the stock is rising and there are several years to expiration, the speculative premium will be greater than zero and the warrant's value will be more than the intrinsic value

3. The Smith Swimwear's warrant is trading for $10.00. 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. $1.00
b. $2.50
c. $5.00
d. None of the above

Answer: c. $5.00

Intrinsic value = Market price- Exercise price
Since the option is to purchase half share of common stock
Intrinsic value = 1/ 2 x ($50-$40) = $5
Since the warrant is selling for $5, speculative premium= warrant value - ...

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