Question 1

Conversion premium is the amount by which the market value of a convertible security is higher than the ____. 
I. conversion value of the security
II. combined interest or dividend payments of the security

Accepted Answer

The answer of Conversion premium is the amount by which...

Question 2

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? 
I. Stock shares will decrease.
II. Earnings per share will decrease.

Accepted Answer

When a convertible security is exchanged for common stock, the number of shares increases, which typically leads to a decrease in earnings per share (EPS) because the same earnings are now spread over a larger number of shares.

Question 3

Explain how conversion of a convertible security affects earnings and how a firm handles this on its financial statements.

Accepted Answer

The answer of Explain how conversion of a convertible security...

Question 4

Jana owns preferred stock from High Brow Cow Dairy Farms, makers of the finest dairy products. The stock has a par value of $1,250 and a conversion ratio of 25. The stock is currently convertible. The firm's common stock is selling for $57 per share. If Jana converts the preferred stock, what would be the conversion value?

Accepted Answer

The conversion value can be calculated by multiplying the current price of the common stock by the conversion ratio. Here, it's $57 per share * 25 = $1,425.

Question 5

Sam owns a $1,000 par value, convertible bond that can be converted now. The conversion ratio is 20, and each share of stock is currently selling for $40 per share. What would be the conversion value of the bond, and should Sam convert the bond or hold it to maturity?

Accepted Answer

The conversion value is calculated by multiplying the conversion ratio (20) by the current market price of the stock ($40), which gives a conversion value of $800. However, since the par value of the bond is $1,000, Sam would receive a higher value by converting the bond into stock at the conversion ratio of 20. Therefore, Sam should choose to convert the bond and receive the $2,000 value (20 shares x $40 per share).

Question 6

The conversion ratio of a convertible security is the ____.

Accepted Answer

The conversion ratio of a convertible security is the number of shares that can be obtained upon conversion of the security.

Question 7

An option has a ____ claim.

Accepted Answer

An option has a contingent claim because it is dependent on the underlying asset. Its value is contingent upon the price and performance of the underlying asset.

Question 8

What is an interest rate swap? Describe how it is used.

Accepted Answer

The answer of What is an interest rate swap? Describe...

Question 9

Firms issue warrants for which of the following reasons? 
I. Allows the company to sell stock at a price above what other company stock is selling for.
II. Allows the company to choose which investors can buy the company's stock.

Accepted Answer

Warrants are issued to provide an incentive for investors to buy bonds or preferred stock, not to sell stock above market price or choose specific investors.

Question 10

Conversion price is the ____.

Accepted Answer

Conversion price is the effective price of the common stock per share obtained by converting the convertible security. It represents the price at which the convertible security can be converted into common stock.

Question 11

In calculating fully diluted earnings per share, earnings must be adjusted for ____.

Accepted Answer

Interest saved is added back to earnings when calculating fully diluted earnings per share because it reflects the interest expense that would not be incurred if convertible securities were converted into equity.

Question 12

What is the difference between a conversion price and a conversion ratio?

Accepted Answer

The answer of What is the difference between a conversion...

Question 13

Conversion of a convertible security can occur in two ways. Which of the following is (are) correct? 
I. It can be a voluntary conversion at specific times prior to the expiration date.
II. It can be a forced conversion at any time prior to the expiration date.

Accepted Answer

The answer of Conversion of a convertible security can occur...

Question 14

In a comparison of warrants and rights, it is found the two are ____.

Accepted Answer

Rights and warrants both allow the firm to receive additional funds when they are exercised, as they typically involve the purchase of new shares directly from the company.

Question 15

The value of the right can be calculated under which one of the following circumstances?

Accepted Answer

The value of the right can be calculated when trading ex-rights, as it involves determining the value of rights to purchase additional shares at a discount before the stock trades without the rights.

Question 16

Which of the following is (are) a feature of convertible securities? 
I. Conversion price
II. Conversion stock

Accepted Answer

The answer of Which of the following is (are) a...

Quiz 23: Financing With Derivatives

Conversion premium is the amount by which the market value of a convertible security is higher than the ____. I. conversion value of the security II. combined interest or dividend payments of the security

In general, when a convertible security is exchanged for common stock, the overall effect is which of the following? I. Stock shares will decrease. II. Earnings per share will decrease.