Chapter 22 Quiz, Real Options
1.
Warrants are sometimes issued
A.
With private placement bonds
B.
To investment bankers as compensation
C.
To creditors in the event of bankruptcy
D.
To common stock holders
E.
All of the above
2.
Warrants are similar to traded options except:
A.
Both have exercise prices
B.
Both depend on changes in the underlying stock to determine value
C.
Both do not affect the number of shares outstanding
D.
A and C above
3.
Two major differences between a warrant and a call option are:
A.
Warrants are contracts outside of the firm while options are within the firm
B.
Warrants have long maturities while options are usually short maturities
C.
Warrant exercise dilutes the value of equity while option exercise does not
D.
Both B and C
4.
Irwin Company warrant gives its owner the right to buy one share of common stock anytime in the next three years at a price of $35. The common stock price is currently $38 and the warrant price is $9. What is the theoretical value (i.e. lower limit) of the warrant?
A.
$0
B.
$3
C.
$6
D.
$9
5.
Atway Company has 400,000 shares outstanding and 80,000 warrants. Each warrant entitles its owner to buy one share anytime in the next two years at a price of $10. Undiluted earnings per share are $6.73. What are diluted earnings per share?
A.
$6.73
B.
$3.37
C.
$2.38
D.
$5.61
6.
A bond-warrant package:
A.
Always increases the riskiness of the common equity
B.
Always decreases the riskiness of the common equity
C.
Could either increase or decrease the riskiness of the common equity
D.
All of the above
7.
The exercise of warrants creates new shares which:
A.
Increase the total number of shares but does not affect share value
B.
Increases the total number of shares which reduces the individual share value
C.
Does not change the number of shares outstanding similar to options
D.
Increases share value because cash is paid into the firm at the time of warrant exercise
8.
If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:
A.
Callable
B.
Convertible
C.
Protected
D.
Putable
9.
The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion ratio is:
A.
40
B.
25
C.
100
D.
Depends on the current market price of the bond
10.
The holders of ZZZ corporation's bond with a face value of $1,000 can exchange that bond for 35 shares of stock. The stock is selling for $22.00. What is the conversion price?
A.
$35
B.
$22
C.
$28.57
D.
None of the above
11.
Which of the following statements regarding the convertible bond is not correct?
A.
A convertible bond issue would generally have fewer restrictive covenants than an otherwise identical nonconvertible bond
B.
Convertible bonds can be issued at a lower coupon compared with otherwise non-convertible bonds
C.
If the value of a convertible bond exceeds the maximum of its straight bond value or its conversion value, the difference would be referred to as the option value
D.
Since convertible bonds will be exchanged for common stock, convertible bonds are generally not callable
12.
Which of the following could be a sensible reason for issuing convertibles?
A.
Convertibles are convenient and flexible – they're usually unsecured and subordinated, and cash requirements for debt service are relatively low
B.
Interest rates on convertible issues are significantly less than on straight debt
C.
Firms that need equity capital use convertibles as a roundabout way of issuing stock
D.
Firms prefer to issue convertibles when their shares are under-valued
13.
Convertible bonds have less restrictive debt covenants than straight bonds because:
A.
Investors prefer bonds that are easier for the trustee to manage
B.
Firms that issue convertible bonds do not have any potential bondholder-stockholder conflicts
C.
There is a free lunch available when convertible bonds are issued
D.
Agency costs are mitigated as the equity component of a convertible will gain as the straight bond component suffers
14.
A warrant holder is not entitled to vote but receives dividends.
A.
True
B.
False
15.
The value of a warrant is always less than the value of an equivalent call option.
A.
True
B.
False
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