Question 1

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Accepted Answer

A)   is financed with short-term debt.
B)   is financed with long-term debt.
C)   is financed with debt whose maturity matches the term of the lease.
D)   is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.
E)   is financed with retained earnings.F) B) and D)
G) A) and B)

Question 2

Operating leases often have terms that include

Accepted Answer

A)   maintenance of the equipment by the lessor.
B)   full amortization over the life of the lease.
C)   high penalties if the lease is cancelled.
D)   restrictions on how much the leased property can be used.
E)   much longer lease periods than for most financial leases.F) A) and D)
G) A) and C)

Question 3

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Accepted Answer

A) True 
 B)False

Question 4

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 5

Based on your answers to the three preceding questions, what is the minimum price (or "floor" price)  at which the Saunders' bonds should sell?

Accepted Answer

A)   $698.15
B)   $734.89
C)   $773.57
D)   $814.29
E)   $857.14F) A) and E)
G) D) and E) E

Question 6

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Accepted Answer

A) True 
 B)False

Question 7

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Accepted Answer

A)   27.14
B)   28.57
C)   30.00
D)   31.50
E)   33.08F) C) and E)
G) All of the above

Question 8

Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par. They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?

Accepted Answer

A)   6.66%
B)   6.99%
C)   7.34%
D)   7.71%
E)   8.09%F) A) and B)
G) C) and D)

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A)   Preferred stock generally has a higher component cost of capital to the firm than does common stock.
B)   By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.
C)   From the issuer's point of view, preferred stock is less risky than bonds.
D)   Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.
E)   Unlike bonds, preferred stock cannot have a convertible feature.F) D) and E)
G) C) and D)

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

A)   The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.
B)   One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
C)   Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
D)   At the time it is issued, a convertible's conversion (or exercise)  price is generally set equal to or below the underlying stock's price.
E)   For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.F) A) and D)
G) None of the above

Question 12

A warrant is an option, and as such it cannot be used as a "sweetener."

Accepted Answer

A) True 
 B)False

Question 13

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Accepted Answer

A) True 
 B)False  False

Question 14

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

Accepted Answer

A) True 
 B)False  True

Question 15

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

Accepted Answer

A)   equity cash flows.
B)   capital budgeting project cash flows.
C)   debt cash flows.
D)   pension fund cash flows.
E)   sales.F) B) and E)
G) A) and E)

Question 16

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Accepted Answer

A)   $40.00
B)   $42.00
C)   $44.10
D)   $46.31
E)   $48.62F) A) and C)
G) None of the above

Question 17

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Accepted Answer

A) True 
 B)False

Question 18

Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000 par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

Accepted Answer

A)   7.83%
B)   8.24%
C)   8.65%
D)   9.08%
E)   9.54%F) A) and D)
G) A) and E)

Question 19

Heavy use of off-balance sheet lease financing will tend to

Accepted Answer

A)   make a company appear more risky than it actually is because its stated debt ratio will be increased.
B)   make a company appear less risky than it actually is because its stated debt ratio will appear lower.
C)   affect a company's cash flows but not its degree of risk.
D)   have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
E)   affect the lessee's cash flows but only due to tax effects.F) B) and C)
G) A) and E)

Question 20

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Accepted Answer

A) True 
 B)False

Exam 20: Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Correct Answer
verified

Operating leases often have terms that include

Correct Answer
verified

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Correct Answer
verified

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Correct Answer
verified

Based on your answers to the three preceding questions, what is the minimum price (or "floor" price) at which the Saunders' bonds should sell?

Correct Answer
verified
E

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Correct Answer
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The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Correct Answer
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Correct Answer
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Which of the following statements is most CORRECT?

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

Correct Answer
verified

Which of the following statements about convertibles is most CORRECT?

Correct Answer
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A warrant is an option, and as such it cannot be used as a "sweetener."

Correct Answer
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A convertible debenture can never sell for more than its conversion value or less than its bond value.

Correct Answer
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False

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

Correct Answer
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True

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

Correct Answer
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Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Correct Answer
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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.

Correct Answer
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Correct Answer
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Heavy use of off-balance sheet lease financing will tend to

Correct Answer
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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.

Correct Answer
verified

Exam 20: Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

Correct AnswerverifiedShow Answer

Operating leases often have terms that include

Correct AnswerverifiedShow Answer

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Correct AnswerverifiedShow Answer

Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Correct AnswerverifiedShow Answer

Based on your answers to the three preceding questions, what is the minimum price (or "floor" price) at which the Saunders' bonds should sell?

Correct AnswerverifiedE

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Correct AnswerverifiedShow Answer

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements about convertibles is most CORRECT?

Correct AnswerverifiedShow Answer

A warrant is an option, and as such it cannot be used as a "sweetener."

Correct AnswerverifiedShow Answer

A convertible debenture can never sell for more than its conversion value or less than its bond value.

Correct AnswerverifiedFalse

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

Correct AnswerverifiedTrue

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

Correct AnswerverifiedShow Answer

Chocolate Factory's convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

Correct AnswerverifiedShow Answer

Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Heavy use of off-balance sheet lease financing will tend to

Correct AnswerverifiedShow Answer

A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

Correct AnswerverifiedShow Answer

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E

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False

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True

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