1. Which of the following statements about convertibles is most CORRECT?

a.	One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
b.	Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
c.	At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price.
d.	For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.
e.	The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.

2. Which of the following statements concerning warrants is correct?

a.	Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.
b.	Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.
c.	A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
d.	A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
e.	Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.

3. Which of the following statements is most CORRECT?

a.	One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.
b.	The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.
c.	The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.
d.	Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.
e.	Warrants have an option feature but convertibles do not.

4. Which of the following statements is most CORRECT?

a.	Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.
b.	Defensive mergers are designed to make a company less vulnerable to a takeover.
c.	Hostile mergers always create value for the acquiring firm.
d.	In a tender offer, the target firm's management always remain after the merger is completed.
e.	A conglomerate merger is one where a firm combines with another firm in the same industry.

5. Which of the following statements is most CORRECT?

a.	The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.
b.	Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.
c.	Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.
d.	Operating economies are never a motive for mergers.
e.	Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.