1. Masco is issuing new 15-year convertible bonds that can be exchanged for 40 shares of stock. If not for the convertibility feature, the bonds would carry a 9% interest rate. However, with the convertibility feature attached the bonds will pay a 7% annual coupon and can still be issued at the par value of $1,000. What is the value of the convertibility feature?

a) $78 b) $161 c) $182 d) $217

2. Which is not an advantage of leasing (to the lessee)?

a) Higher depreciation expenses

b) Lower upfront costs

c) Greater access to financing

d) Less risk of owning obsolescent assets

3 Which of the following statements is CORRECT?

a. Both warrants and convertibles are types of option securities.

b. Convertibles bring in additional funds when converted, while warrants do not.

c. Return on Assets will rise after a Convertible Bond is exchanged for equity.

d. Off balance sheet financing may make a company appear less risky than it actually is because its stated debt ratio will appear lower.

4. Which statement is false?

a) A convertible bond gives the bondholder the right to exchange their bonds for a preset number of shares of stock.

b) A right is a bond with a call option held by the bondholder and thus has a higher price and a lower yield than similar bonds.

c) A warrant is basically a long term option that is sold with bonds but that can be detached (bought and sold separately) from the bond

d) Most preferred stock is owned by other companies due to the 70% exclusion of dividends.

5. Which of the following statements is CORRECT?

a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future.

b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky.

c. If a company issuing coupon-paying debt wanted to reduce the cash outflows associated with the coupon payments, it could issue warrants with the debt to accomplish this.

d. One of the disadvantages of warrants to the issuing firm is that they are detachable and can be traded separately from the debt with which they are issued.

6. A firm has 20,000,000 shares of stock outstanding at a price of $40 per share. They gave each shareholder the right to buy .25 shares of stock for $7 (4 rights would give them the right to buy one share for $28. How much is each right worth?

a) $.83 b) $1.45 c) $1.94 d) $2.40

7. Which statement is TRUE?

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

b) 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.

c) Preferred stock typically has a par value, but the par value has no real meaning

d) Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, but they have to pay taxes on any preferred dividends received.