Question 1

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.

Accepted Answer

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

Question 2

Which of the following statements is most CORRECT?

Accepted Answer

C

Question 3

Which of the following statements about convertibles is most CORRECT?

Accepted Answer

E

Question 4

The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.

Accepted Answer

The answer of The problem of dilution of stockholders' earnings...

Question 5

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

This is true, as many preferred stocks include a provision known as "cumulative voting" which allows preferred shareholders to vote alongside common shareholders in the event that the preferred dividend has been omitted for a certain period of time. This provision is designed to protect the interests of preferred shareholders and give them some measure of control over the company's operations if their preferred dividend payments are not being met.

Question 6

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

Accepted Answer

Warrant holders do not have voting rights or receive dividends from the underlying stock, as they only have the right to purchase the stock at a specified price before the expiration date.

Question 7

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

Accepted Answer

The "preferred" in preferred stock refers to the preferential treatment in dividend payments and upon liquidation, not necessarily a higher expected return compared to common stock.

Question 8

Orient Airlines' common stock 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 2019. What is the conversion value of the bond?

Accepted Answer

The answer of Orient Airlines' common stock currently sells for...

Question 9

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

Most convertible securities, including convertible bonds and convertible preferred stocks, can be exchanged for common stock at the option of the holder based on specified terms and conditions.

Question 10

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

Accepted Answer

A convertible bond is a hybrid security that combines the features of a traditional bond with an embedded call option, giving the holder the choice to convert the bond into a predetermined number of shares of the company's common stock. So, the owner of a convertible bond owns both a bond and a call option.

Question 11

Which of the following statements is most CORRECT?

Accepted Answer

The answer of Which of the following statements is most...

Question 12

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.

Accepted Answer

Corporations investing in floating-rate preferred stock benefit from both a relatively stable price and a 70% tax exemption on preferred dividends received.

Question 13

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

Accepted Answer

A warrant is indeed a type of option, but it can be used as a "sweetener" by companies in various financial transactions, such as in bond issues, to make the deal more attractive to investors by giving them the right to purchase the company's stock at a specific price in the future.

Question 14

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

Accepted Answer

Preferred stock can provide a financing alternative for firms when they are unable to issue common stock or pure debt at a reasonable cost due to market conditions. Preferred stock is a hybrid security that provides features of both debt and equity, which can make it an attractive option for some companies.

Question 15

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 the market price of the underlying stock increases, making conversion more valuable. It can also sell for less than its bond value if interest rates rise, causing the bond portion of the debenture to become less attractive.

Question 16

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

The statement is true. Preferred stock does typically have a par value, and in the event of liquidation, preferred stockholders usually have priority in receiving their par value before any distribution is made to common stockholders.

Question 17

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

Accepted Answer

Firms are unlikely to call their convertibles unless the conversion value is greater than the call price, as calling the convertible would force investors to convert their shares into common stock at a price that is higher than the market price, resulting in a loss for the investors. As a result, most firms wait until the conversion value exceeds the call price before calling their convertibles.

Question 18

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.

Accepted Answer

A detachable warrant is indeed a warrant that can be detached and traded separately from the bond or preferred stock with which it was issued.

Question 19

Which of the following statements concerning warrants is CORRECT?

Accepted Answer

Warrants are long-term call options that give the holder the right to buy the underlying stock at a fixed price (exercise price) before a certain expiration date. The value of the warrant increases as the stock price increases, allowing the holder to potentially profit from a rise in the stock price.

Question 20

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 have priority over common stockholders with respect to liquidating proceeds, meaning they are paid out before common stockholders.

Quiz 19: Hybrid Financing: Preferred Stock, Warrants, and Convertibles

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.

Which of the following statements is most CORRECT?

Which of the following statements about convertibles is most CORRECT?

The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.

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

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.

Orient Airlines' common stock 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 2019. What is the conversion value of the bond?

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.

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

Which of the following statements is most CORRECT?

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

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

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

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.

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

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.

Which of the following statements concerning warrants is CORRECT?