Question 1

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

McGovern Enterprises is interested in issuing bonds with warrants attached.The bonds will have a 30-year maturity and annual interest payments.Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant.The investment bankers estimate that each warrant will have a value of $10.00.A similar straight-debt issue would require a 10% coupon.What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

Accepted Answer

A)   6.75%
B)   7.11%
C)   7.48%
D)   7.88%
E)   8.27%F) A) and E)
G) None of the above

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Potter & Lopez Inc.just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Accepted Answer

A)   $3.76
B)   $3.94
C)   $4.14
D)   $4.35
E)   $4.56F) None of the above
G) D) and E)

Question 6

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Accepted Answer

A) True 
 B)False

Exam 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles

Potter & Lopez Inc.just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Correct Answer
verified

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

Correct Answer
verified

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Correct Answer
verified

Correct Answer
verified

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Correct Answer
verified

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

Correct Answer
verified

Exam 20: Hybrid Financing: Preferred Stock, warrants, and Convertibles

Potter & Lopez Inc.just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Unlike bonds,the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.This is because dividends on preferred stock are not tax deductible,whereas interest on bonds is deductible.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified