Question 1

The value of a warrant can be directly derived from the value of a call option.

Accepted Answer

A warrant is essentially a type of call option that is issued by a company, and the value of a warrant can be calculated based on the same principles as a call option. Therefore, the value of a warrant is directly derived from the value of a call option.

Question 2

Options generally have no effect on the value of a venture capital investment.

Accepted Answer

Options can have an impact on the value of a venture capital investment. If the company grants options to employees or other stakeholders, it can dilute the ownership percentage of the existing investors, which can affect the value of their shares. Additionally, if the company raises additional funding through the issuance of options, it can further dilute the ownership stake of the existing investors. Therefore, the presence of options should be considered by venture capitalists when making investment decisions.

Question 3

An option granting the right to sell a stock at $10 when that stock currently has a market price $8 is "in the money."

Accepted Answer

"In the money" refers to an option that has intrinsic value, meaning it would result in a profit if exercised. In this case, the option to sell at $10 is in the money because it is currently profitable to exercise the option and sell the stock for $10 when it has a market price of $8.

Question 4

If a share of preferred stock has a $10 par value,and the stock has a 2:1 conversion ratio,then the conversion price would be $5.

Accepted Answer

The conversion price is calculated by dividing the par value of the preferred stock by the conversion ratio. In this case, $10 divided by 2 equals $5, so the conversion price would be $5.

Question 5

A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time.

Accepted Answer

The answer of A warrant is a call option issued...

Question 6

Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date.

Accepted Answer

Convertible preferred stockholders have the right to convert their shares into a specified number of common shares, but this can typically be done at any time after the conversion feature becomes effective, not necessarily after an expiration date.

Question 7

Convertible debt is debt that converts into preferred stock.

Accepted Answer

Convertible debt typically converts into common stock, not preferred stock, upon certain conditions being met.

Question 8

For preferred noncumulative stock,all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

Accepted Answer

For noncumulative preferred stock, if dividends are not declared in a given year, they do not accumulate, and shareholders are not entitled to receive missed payments in the future before common stock dividends can be paid.

Question 9

A call option is the obligation to purchase a specific asset at a pre-determined price.

Accepted Answer

A call option is the right, but not the obligation, to purchase a specific asset at a pre-determined price.

Question 10

An option not currently worth exercising is said to be an out of the money option.

Accepted Answer

An out of the money option is one where the current market price is not profitable for the option holder to exercise. Therefore, it is not currently worth exercising.

Question 11

A warrant is a type of call option.

Accepted Answer

A warrant gives the holder the right, but not the obligation, to buy a stock at a set price before a certain expiration date, similar to a call option.

Question 12

As the underlying stock price increases in value,a put option to sell it becomes more valuable.

Accepted Answer

When the underlying stock price increases in value, the value of a put option to sell it decreases. This is because the likelihood of the stock price falling to the strike price of the put option decreases.

Question 13

A European-Style Option may only be exercised on a specific date.

Accepted Answer

A European-Style Option can only be exercised on its expiration date and not before.

Question 14

By issuing preferred stock,and thus forfeiting bankruptcy rights from the use of debt,the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

Accepted Answer

By issuing preferred stock, the venture and its investors can give up some bankruptcy rights that are associated with debt. This can allow for a commitment to internal reorganization instead of filing for bankruptcy.

Question 15

For American and Bermudan embedded options,the exercise price can change over time as specified in the security agreement.

Accepted Answer

Both American and Bermudan embedded options can have exercise prices that change over time as specified in the security agreement. This is known as a dynamic or floating strike price.

Question 16

An option is a right to buy or sell additional shares of stock.

Accepted Answer

An option is a type of financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset (such as a stock, commodity, or currency) at a predetermined price and time. Therefore, an option can be used to buy or sell additional shares of stock.

Question 17

Preferred stock is the equity claim senior to common stock providing preference on dividends but not liquidation proceeds.

Accepted Answer

The answer of Preferred stock is the equity claim senior...

Question 18

If a call option can be bought for $12 and the stock's market value is $12,it's said to be "at the money".

Accepted Answer

"At the money" refers to when the strike price of an option is equal or very close to the current market price of the underlying asset. In this case, the call option with a strike price of $12 is "at the money" because the stock's market value is also $12.

Question 19

A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

Accepted Answer

A preemptive right allows existing owners to maintain their ownership percentage by providing the right to purchase enough shares to maintain their percentage before any shares are offered to new investors.

Question 20

An American-style option is an option that can be exercised only at the expiration date

Accepted Answer

An American-style option can be exercised at any time before expiration, while a European-style option can only be exercised at expiration.

Quiz 14: Security Structures and Determining Enterprise Values