Question 1

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion ratio is:

Accepted Answer

The conversion ratio is the number of shares of stock that can be obtained by exchanging one bond. In this case, the ratio is 25 shares for each $1,000 face value bond, so the answer is B.

Question 2

If all warrants are exercised, what will your fraction of ownership be if you owned 2,000 shares originally.

Accepted Answer

The fraction of ownership depends on the total number of shares after all warrants are exercised. Without knowing the total number of shares post-exercise, we assume the given answer choices are based on a specific scenario. The correct choice is calculated based on the scenario provided.

Question 3

What would the conversion price and conversion ratio be if Xenron had a 3 for 1 stock split?

Accepted Answer

When a 3 for 1 stock split occurs, the number of outstanding shares is increased by a factor of 3, and the stock price is divided by 3. 
Therefore, the conversion ratio would increase from 35 to 105 (3 times the original ratio of 35). 
The conversion price would decrease from $28.57 to $9.52 (1/3 of the original price of $28.57). 
So, the correct answer is C, which corresponds to a conversion price of $9.52 and a conversion ratio of 105.

Question 4

What is the conversion premium?

Accepted Answer

The conversion premium is calculated as the difference between the convertible bond's price and the conversion value, expressed as a percentage of the conversion value. The correct calculation leads to a conversion premium of 29.86%.

Question 5

If the warrants are all exercised immediately, what would be the market price of the stock?

Accepted Answer

The answer of If the warrants are all exercised immediately,...

Question 6

A warrant gives the owner:

Accepted Answer

A warrant is a financial instrument that gives the holder the right, but not the obligation, to purchase a specific amount of securities, usually common stock, from the issuer at a fixed price for a specified period. Therefore, option B is the correct answer as it states that a warrant gives the holder the right to purchase securities from the firm at a fixed price for a specified time.

Question 7

If a corporate security can be exchanged for a fixed number of shares of stock, the security is said to be:

Accepted Answer

If a security can be exchanged for a fixed number of shares of stock, it is said to be convertible. Callable securities give the issuer the right to call back the security before maturity, protected securities usually refer to those with some form of downside protection, and putable securities give the holder the right to sell the security back to the issuer before maturity.

Question 8

The exercise of warrants creates new shares which:

Accepted Answer

The exercise of warrants creates new shares, which increases the total number of shares outstanding. This, in turn, reduces the individual share value since the earnings of the firm are now divided among a larger number of shares.

Question 9

What is the conversion price?

Accepted Answer

The conversion price is calculated by dividing the par value of the bond by the conversion ratio. In this case, the par value of the bond is $1,000 and the conversion ratio is 35 (meaning each bond can be converted into 35 shares of common stock). Therefore, the conversion price is $1,000/35 = $28.57.

Question 10

What would your gain be from exercising the warrants, assuming all are exercised?

Accepted Answer

The answer of What would your gain be from exercising...

Question 11

Which of the following would not describe the difference between warrants and call options?

Accepted Answer

B) is incorrect because both warrants and call options have an exercise price. The exercise price is the price at which the holder can buy the underlying asset.

Question 12

Concerning warrants and call options, which of the following statements generally is correct?

Accepted Answer

The answer of Concerning warrants and call options, which of...

Question 13

A firm has 100 shares of stock and 40 warrants outstanding. The warrants are about to expire, and all of them will be exercised. The market value of the firm's assets is $2,000, and the firm has no debt. Each warrant gives the owner the right to buy 2 shares at $15 per share. What is the price per share of the stock?

Accepted Answer

The 40 warrants would be exercised to buy 80 shares at a price of $15 per share, for a total price of $1,200. This means the firm would have a total of 180 shares outstanding. The market value of $2,000 implies a price of $11.11 per share ($2,000/180 shares). However, this price must be adjusted for the dilutive effect of the warrants. Each warrant allows its owner to buy 2 shares at a price of $15 per share, so the owner of each warrant effectively owns 2/(2+1) or 2/3 of a share. The 40 warrants therefore represent an additional 80/3 or 26.67 shares. Adding these to the original 100 shares gives a total of 126.67 shares. The adjusted market value per share is therefore $2,000/126.67 or $15.80 per share.

Question 14

The holder of a $1,000 face value bond has the right to exchange the bond anytime before maturity for shares of stock priced at $50 per share. The $50 is called the:

Accepted Answer

The $50 price at which the bondholder can exchange the bond for shares of stock is called the conversion price.

Question 15

BrightView Windows issued warrants with an exercise price of $17 for one share per warrant. On May 1, BrightView's common stock is at $20 per share. The lower and upper limits on the warrant value on May 1 are:

Accepted Answer

The answer of BrightView Windows issued warrants with an exercise...

Question 16

An "equity kicker" most often refers to a:

Accepted Answer

An equity kicker typically refers to a warrant, which is a security that gives the holder the right to buy additional shares of stock at a fixed price for a certain period of time. It is called an "equity kicker" because it is often used as an incentive or bonus for an investor to invest in a particular security or project. A bond with conversion privileges (A) and a preferred stock offering with conversion privileges (B) both involve the ability to convert one type of security into another, but they are not typically referred to as equity kickers. A lettered common stock (D) does not make sense as a potential answer.

Question 17

What is the conversion value of the bond?

Accepted Answer

The conversion value of a bond is calculated by multiplying the conversion ratio by the market value of the stock. Here, the conversion ratio is given as 25 and the market value of the stock is $25 per share.

Therefore, the conversion value of the bond = 25 x 25 = $625.

Hence, option B is the correct answer.

Question 18

Which of the following would harm the position of a warrant holder?

Accepted Answer

A large cash dividend can harm the position of a warrant holder because it reduces the company's cash reserves and potentially the stock price, which can decrease the value of the warrant.

Question 19

The holder of a $1,000 face value bond can exchange the bond any time for 25 shares of stock. The conversion price is:

Accepted Answer

The conversion price is calculated by dividing the face value of the bond ($1,000) by the number of shares received upon conversion (25). $1,000/25 = $40. Therefore, the conversion price is $40 per share.

Question 20

Warrants are most often issued in combination with:

Accepted Answer

The answer of Warrants are most often issued in combination...

Quiz 25: Warrants and Convertibles