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Financial Management

Business

Quiz 20 :

Hybrid Financing: Preferred Stock, warrants, and Convertibles

Quiz 20 :

Hybrid Financing: Preferred Stock, warrants, and Convertibles

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Which of the following statements is most CORRECT?
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Multiple Choice
Answer:

Answer:

B

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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.
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True False
Answer:

Answer:

True

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Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.
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True False
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Answer:

True

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The common stock of Southern Airlines currently sells for $33,and its 8% convertible debentures (issued at par,or $1,000)sell for $850.Each debenture can be converted into 25 shares of common stock at any time before 2025.What is the conversion value of the bond?
Multiple Choice
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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.
True False
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Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period,for example,4 quarters.
True False
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The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.
True False
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Preferred stockholders have priority over common stockholders with respect to dividends,because dividends must be paid on preferred stock before they can be paid on common stock.However,preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
True False
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Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.
True False
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A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.
True False
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Firms generally do not call their convertibles unless the conversion value is greater than the call price.
True False
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Which of the following statements is most CORRECT?
Multiple Choice
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The owner of a convertible bond owns,in effect,both a bond and a call option.
True False
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The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.
True False
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A warrant is an option,and as such it cannot be used as a "sweetener."
True False
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Which of the following statements concerning warrants is correct?
Multiple Choice
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Preferred stock typically has a par value,and the dividend is often stated as a percentage of par.The par value is also important in the event of liquidation,as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.
True False
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A convertible debenture can never sell for more than its conversion value or less than its bond value.
True False
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Which of the following statements about convertibles is most CORRECT?
Multiple Choice
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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.
True False
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