Question 1

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

Accepted Answer

In a sale and leaseback arrangement, the owner of the property sells it to a buyer and then immediately leases it back from the buyer. Therefore, the seller becomes the lessee and the buyer becomes the lessor.

Question 2

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.

Accepted Answer

Convertible securities can be bonds or preferred stocks that give the holder the option to exchange them for common stock under specific terms and conditions.

Question 3

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.

Accepted Answer

This statement is accurate and true. Preferred stock usually has a par value and the dividend may be expressed as a percentage of that par value. Additionally, in the event of liquidation, preferred stockholders typically have priority over common stockholders and are entitled to receive their par value before common stockholders receive anything.

Question 4

Preferred stock can provide a financing alternative for some firms when market conditions are such that the firms cannot issue either pure debt or common stock at any reasonable cost.

Accepted Answer

Preferred stock can offer a hybrid form of financing for firms that may be more attractive than issuing pure debt or common stock, especially in times when interest rates are high or market conditions are volatile.

Question 5

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

Detachable warrants can be removed and traded separately from the security they were originally attached to, often bonds or preferred stocks.

Question 6

Unlike with 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.

Accepted Answer

Dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible. Therefore, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis.

Question 7

The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.

Accepted Answer

True lease payments are fully tax deductible according to IRS guidelines.

Question 8

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 warrant holder does not have the rights of a shareholder, such as voting rights or receiving dividends, until they exercise their warrants to purchase the underlying stock.

Question 9

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.

Accepted Answer

In the event of bankruptcy, preferred stockholders also have priority over common stockholders with respect to liquidating proceeds. This means they are paid out from the company's assets before common stockholders.

Question 10

Preferred stock normally has no voting rights.However,most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.

Accepted Answer

This statement is true. Some preferred stocks have a provision known as "cumulative voting", which allows preferred shareholders to elect a certain number of directors if the company fails to pay the preferred dividend for a certain period of time. This provision helps to protect the interests of the preferred shareholders and ensure that their voices are heard in the company's decision-making processes.

Question 11

A sale and leaseback arrangement is a type of financial,or capital,lease.

Accepted Answer

This statement is true. A sale and leaseback arrangement is a type of financial or capital lease. It involves selling an asset and then leasing it back from the buyer as the new owner, allowing the original owner to free up cash while still retaining the use of the asset.

Question 12

The owner of a convertible bond owns,in effect,both a bond and a call option.

Accepted Answer

A convertible bond is a bond that can be converted into a predetermined number of shares of stock at the bondholder's discretion. This means that the owner of a convertible bond has the right to convert the bond into stock, which is similar to holding a call option. Additionally, the convertible bond provides the bondholder with regular interest payments, which is similar to holding a bond. Therefore, the owner of a convertible bond owns both a bond and a call option.

Question 13

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

Accepted Answer

Operating leases often include clauses that allow the lessee to return the leased asset at the end of the lease term, freeing them from the risk of obsolescence or loss of value. This risk is shifted to the lessor, who must bear the cost of disposing of the asset or finding another use for it.

Question 14

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

Accepted Answer

Firms would not call their convertibles if the conversion value is greater than the call price, as it would not make financial sense for them to do so. However, if the conversion value is less than the call price, firms may choose to call their convertibles in order to avoid paying interest on the debt securities.

Question 15

Corporations that invest surplus funds in floating-rate preferred stock benefit from a relatively stable price and from the 70% tax exemption on preferred dividends received.

Accepted Answer

Corporations that invest surplus funds in floating-rate preferred stock do benefit from a relatively stable price and from the 70% tax exemption on preferred dividends received.

Question 16

Historically,leasing was often referred to as off-balance-sheet financing because lease payments were shown as operating expenses on a firm's income statement,and leased assets and associated liabilities did not appear on the firm's balance sheet under certain conditions.

Accepted Answer

This is true. Historically, lease payments were treated as operating expenses, and the assets and liabilities associated with the lease did not appear on the balance sheet unless certain conditions were met. This allowed firms to keep the leased assets and associated debt off their balance sheets, making it appear as though they had less debt and were more financially stable than they actually were. However, accounting rules have changed over time, and today most leases must be recorded on a firm's balance sheet, regardless of whether they are classified as operating leases or capital leases.

Question 17

The sale of call options cannot give rise to the problem of dilution of stockholders' earnings,but the use of warrants can.

Accepted Answer

Call options do not create new shares when exercised, thus they do not dilute existing shareholders' earnings. Warrants, however, can lead to the issuance of new shares upon exercise, potentially diluting existing shareholders' earnings.

Question 18

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

Accepted Answer

The "preferred" in preferred stock refers to the preference in dividend payments and claims on assets in the event of liquidation, not necessarily a higher expected return compared to common stock.

Question 19

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

Accepted Answer

A convertible debenture can sell for more than its conversion value if investors value the option to convert into equity. It can also sell for less than its bond value if market conditions or the financial health of the issuer deteriorate.

Question 20

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

Accepted Answer

A warrant can be used as a "sweetener" in a financing deal, as it adds an additional incentive for investors by giving them the option to purchase additional shares at a set price in the future.

Quiz 20: Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles