Chapter 19 Smartbook -- Finance

Select all that apply Employee stock options are used to Blank______. Multiple select question. compensate employees for creating shareholder value align the economic interests of employees with the interests of the owners of the firm compensate the owners of the firm for creating shareholder value compensate key customers for creating shareholder value

compensate employees for creating shareholder value align the economic interests of employees with the interests of the owners of the firm

A warrant is the option to Blank______. Multiple choice question. purchase a share of stock at the market price from the corporation over a specified period of time purchase a share of stock at an exercise price from the corporation over a specified period of time purchase a share of stock at an exercise price from another investor over a specified period of time sell a share of stock at the exercise price to the corporation over a specified period of time

purchase a share of stock at an exercise price from the corporation over a specified period of time

Which of the following would be considered a futures contract? Multiple choice question. A buyer and seller agree to transact at the market price at a future date. A buyer and seller agree on a price and to complete a transaction at a future date. A buyer and a seller transact at the market price today. A buyer and seller agree on a price and to complete a transaction today.

A buyer and seller agree on a price and to complete a transaction at a future date.

Select all that apply Which of the following are risks that can be hedged by a futures contract? Multiple select question. A cereal company is worried about the price of corn rising over the coming year. A gold mine is worried about the price of gold rising over the coming year. An airline is concerned that the price of jet fuel will rise over the coming year. A wheat farmer is worried about the price of wheat rising over the coming year.

A cereal company is worried about the price of corn rising over the coming year. An airline is concerned that the price of jet fuel will rise over the coming year.

Over time, a step-up in the conversion price of a convertible bond will lead to an increase in the conversion price and Blank______ in the conversion ratio: Multiple choice question. no change an increase a decrease

a decrease

True or False: An out-of-the-money warrant has a current stock price above the exercise price.

False

True or False: Corporations that issue warrants can force conversion through a call, while no similar device is available for convertible debentures.

False

True or False: The purchaser of a put option has the right to buy securities and the purchaser of a call option has the right to sell securities

False

True or false: Common stock can be classified as a derivative security.

False

Select all that apply Which of the following are risks to the investor of purchasing convertible bonds? Multiple select question. Many convertible securities are callable at a price above par. There is a floor represented by the pure bond value below which the price of the convertible will not fall. The interest rate on the convertible bond is typically below the market rate for a straight bond of similar risk. The downside risk can be substantial and the pure bond value is subject to interest rate risk.

Many convertible securities are callable at a price above par. The interest rate on the convertible bond is typically below the market rate for a straight bond of similar risk. The downside risk can be substantial and the pure bond value is subject to interest rate risk.

Select all that apply How does diluted earnings per share differ from basic earnings per share? Multiple select question. The shares outstanding excludes shares that may be issued from convertible securities and the exercise of warrants and options. Net income is adjusted for the interest paid on convertible bonds. Net income is always the same for both diluted earnings per share and basic earnings per share. The shares outstanding includes shares that may be issued from convertible securities and the exercise of warrants and options.

Net income is adjusted for the interest paid on convertible bonds. The shares outstanding includes shares that may be issued from convertible securities and the exercise of warrants and options.

Select all that apply Which of the following are advantages to the corporation of issuing convertible debt? Multiple select question. The convertible security offers downside protection if the price of the stock falls below the conversion price. Small, risky companies can raise capital in the bond market. Convertibles can provide a cheaper way to raise capital if the firm believes its stock is undervalued. The interest expense is usually lower than for a straight bond issue.

Small, risky companies can raise capital in the bond market. Convertibles can provide a cheaper way to raise capital if the firm believes its stock is undervalued. The interest expense is usually lower than for a straight bond issue.

Select all that apply Which of the following is true for a company that has in-the-money warrants outstanding? Multiple select question. Net income must be adjusted to calculate diluted earnings per share. The denominator in the diluted earnings per share calculation will be greater than for basic earnings per share. The denominator in the diluted earnings per share calculation will be less than for the basic earnings per share. Its basic earnings per share will differ from its diluted earnings per share.

The denominator in the diluted earnings per share calculation will be greater than for basic earnings per share. Its basic earnings per share will differ from its diluted earnings per share.

Select all that apply Which of the following are true? Multiple select question. The market value of the warrant diverges from its intrinsic value as the warrant moves further into the money. The market value of the warrant is most sensitive when the intrinsic value is close to zero. The market value of the warrant converges to its intrinsic value as the warrant moves further into the money. The conversion premium rises as the warrant moves further into the money.

The market value of the warrant is most sensitive when the intrinsic value is close to zero. The market value of the warrant converges to its intrinsic value as the warrant moves further into the money.

Which of the following are true of options? Multiple choice question. The option purchaser has the obligation to buy or sell. The option purchaser has the right, but not the obligation to buy or sell. The option seller has the right, but not the obligation to buy or sell.

The option purchaser has the right, but not the obligation to buy or sell.

Which of the following are true of options? Multiple choice question. The option seller has the right, but not the obligation to buy or sell. The option purchaser has the right, but not the obligation to buy or sell. The option purchaser has the obligation to buy or sell.

The option purchaser has the right, but not the obligation to buy or sell.

Select all that apply Which of the following are reasons for a company to issue a warrant? Multiple select question. To assist a company that is financially distressed in raising capital from the bond market. In a high interest rate environment, companies may find it difficult to raise debt capital without a warrant attached. It is a low cost way to raise capital from the equity and bond markets.

To assist a company that is financially distressed in raising capital from the bond market. In a high interest rate environment, companies may find it difficult to raise debt capital without a warrant attached.

True or False: Two reasons why investors pay lower premiums at higher stock prices on warrants is the loss of leverage to generate high returns and the reduction of downside protection.

True

A convertible security is most often Blank______. Multiple choice question. a fixed-income instrument that is convertible to common stock equity that is convertible to preferred shares preferred stock that is convertible to debt securities debt securities that are convertible to preferred stock

a fixed-income instrument that is convertible to common stock

A convertible security is most often Blank______. Multiple choice question. debt securities that are convertible to preferred stock a fixed-income instrument that is convertible to common stock equity that is convertible to preferred shares preferred stock that is convertible to debt securities

a fixed-income instrument that is convertible to common stock

A company can force conversion of a convertible bond by including a call provision that allows the company to Blank______. Multiple choice question. buy back the convertible bonds at the current market value buy back the bonds at par value forcing the investor to convert the shares to capture value above the conversion price exchange the bonds for common stock at the conversion price, allowing the investor to capture the difference buy back the bonds at the conversion price, allowing the investor capture the difference

buy back the bonds at par value forcing the investor to convert the shares to capture value above the conversion price

Select all that apply The conversion ratio Blank______. Multiple select question. can be used to derive the conversion price is the conversion price divided by the par value of the bond is the number of bonds an investor receives should he choose to convert the preferred stock is the number of shares an investor receives should he choose to convert the bond

can be used to derive the conversion price is the number of shares an investor receives should he choose to convert the bond

A step-up provision on a convertible bond can force conversion by Blank______. Multiple choice question. increasing the conversion price at distinct points in time, effectively reducing the conversion value of the bond providing the company the opportunity to force the exchange of equity for debt through a call provision decreasing the conversion price at distinct points in time, effectively increasing the conversion value of the bond providing a company the opportunity to call the bonds at distinct points in time

increasing the conversion price at distinct points in time, effectively reducing the conversion value of the bond

Select all that apply The floor value of a convertible security Blank______. Multiple select question. is the value of the fixed income portion of the convertible security represents a floor above which the security cannot rise represents a floor below which the security cannot fall is the pure bond value of the security

is the value of the fixed income portion of the convertible security represents a floor below which the security cannot fall is the pure bond value of the security

As the price of the common stock rises above the conversion value Blank______. Multiple choice question. the convertible security falls in value and diverges from the value of the common stock the convertible security does not change in value the convertible security rises in value and its rate of change converges to the change in the common stock the convertible security rises in value but its rate of change does not converge to the change in common stock

the convertible security rises in value and its rate of change converges to the change in the common stock

As the price of the common stock falls below the conversion value Blank______. Multiple choice question. the convertible security's value rises above the conversion value the pure bond value rises above the conversion value the convertible security's value converges to the equity value the convertible security's value converges to its pure bond value

the convertible security's value converges to its pure bond value

The conversion value of a convertible bond is Blank______. Multiple choice question. the market price times the conversion ratio the present value of the interest payments times the conversion ratio the par value of the bond times the conversion ratio the conversion price times the conversion ratio

the market price times the conversion ratio