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Exam 20: Hybrid Financing Preferred Stock-Warrants and Convertibles

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Question 21

True/False

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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.

A) True
B) False

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Question 22

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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.

A) True
B) False

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Question 23

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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.

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Neuman Corporation Convertible Bonds The following data apply to Neuman Corporation's convertible bonds: $\begin{array}{lcr}\text { Maturity: } & \text { 10Stock price: } & \$ 30.00 \\\text { Par value: } & \$ 1,000.00 \text { Conversion price: } & \$ 35.00 \\\text { Annual coupon: } & 5.00 \% \text { Straight-debt yield: } & 8.00 \%\end{array}$ -Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's conversion ratio?

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

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.

Which of the following statements is most CORRECT?

Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. What is the estimated floor price of the convertible at the end of Year 3?

Neuman Corporation Convertible Bonds The following data apply to Neuman Corporation's convertible bonds: $\begin{array}{lcr}\text { Maturity: } & \text { 10Stock price: } & \$ 30.00 \\\text { Par value: } & \$ 1,000.00 \text { Conversion price: } & \$ 35.00 \\\text { Annual coupon: } & 5.00 \% \text { Straight-debt yield: } & 8.00 \%\end{array}$ -Refer to the data for the Neuman Corporation's convertible bonds. What is the bond's straight-debt value?