FIN Chapter 17

A firm has outstanding warrants that are exercisable at $47 per share and entitle the holders to purchase 4 shares of common stock. The common stock is currently selling for $50 per share. The theoretical warrant value is: ANSWER $47 $3 $12

$12

What is the conversion price of common stock for a $1,000 par value convertible bond that has a conversion ratio of 22.5? ANSWER $22.50 $1,000 $44.44

$44.44

What is the straight bond value of a 5% coupon, $1,000 par value bond that is convertible to 30 shares of common stock that is currently trading at $34.50 per share if the bond has 10 years to maturity and market rates of interest on similar risk bonds are 6%? ANSWER $926.40 $1,000.00 $1,035.00

$926.40

__________ will increase the value of a put option. A decrease in the volatility of the underlying stock A decrease in the strike price A decrease in the stock price

A decrease in the stock price

A(n) __________ lease is treated the same as any asset purchase and listed on the firm's balance sheet as an asset. ANSWER capital direct operating

Capital

Which of the following is a primary advantage for the firm of issuing convertible debt? ANSWER The ability to offer debt at a lower coupon rate. The opportunity for decreasing equity at conversion. The option to participate in an increase in the value of common stock.

The ability to offer debt at a lower coupon rate.

Which of the following is a disadvantage of leasing to the lessee? ANSWER Leasing allows the lessee to effectively depreciate land. If the asset being leased becomes obsolete, the lessor much replace it. The terminal value of the asset is realized by the lessor. The lessee must abide by restrictive covenants typically associated with lending.

The terminal value of the asset is realized by the lessor.

Margie has the right to buy 100 shares of ABC stock at a price of $32 a share any time in the next 3 months. Margie is the holder of a _______. ANSWER call option put option voucher

call option

The option buyer who expects a stock price will rise will purchase a: ANSWER call option stock option put option

call option

Convertible preferred stock, warrants, and stock options are forms of _____ securities. ANSWER leveraged extended contingent diluted

contingent

A ______ is a security that is neither debt nor equity but derives its value from an underlying asset that is often another security. ANSWER derivative security capital lease golden parachute contigent liability

derivative security

The term _____ EPS refers to the calculation of earnings per share assuming that all contingent securities were exercised. ANSWER basic diluted contingent converted

diluted

A firm that specializes in acquiring equipment with the sole purpose of leasing it out in order to make a profit is engaged in __________. ANSWER leverage leasing direct leasing a sales-leaseback arrangement

direct leasing

The conversion price of a convertible bond is equal to the par value of the bond: ANSWER discounted by 10% divided by the conversion ratio multiplied by the conversion ratio

divided by the conversion ratio

An investor who uses options to protect against risk is __________, while an investor who uses options to bet which direction the market will move is __________. ANSWER hedging, striking hedging, speculating calling, putting

hedging, speculating

A __________ is the party responsible for making periodic payments in exchange for the use of some type of asset. ANSWER director lessor lessee

lessee

In a __________, the lessor acts as an equity participant, with a lender supplying the majority of the funds. ANSWER direct lease leveraged lease sales-leaseback arrangement

leveraged lease

Which of the following may be included in an operating lease to require the lessor to make insurance and tax payments? ANSWER maintenance clause renewal option purchase option leverage provision

maintenance clause

A(n) __________ lease allows the lessee to expense the entire amount of the lease payment for tax purposes. ANSWER finance operating capital

operating

Anthony owns Apple stock. He is concerned that the stock might decline in value but does not want to give up the possibility of making money if the stock price increases. Anthony can insure against a loss by: writing a call option purchasing a put option purchasing a call option

purchasing a put option

The option buyer who expects a stock price will fall will purchase a: ANSWER stock option put option call option

put option

In a ________, the lessee sells an asset to a prospective lessor and then leases back the same asset. ANSWER leveraged lease direct lease sales-leaseback arrangement

sales-leaseback arrangement

The __________ value is the price the bond would sell for in the market without the conversion feature. ANSWER call premium straight bond convertible bond

straight bond

Margie has the right to buy 100 shares of ABC stock at a price of $32 a share any time in the next 3 months. The $32 price is known as the: strike price expiration price market price

strike price

A __________ is a call option included as part of a bond or preferred stock that permits the holder to buy a specified number of shares of common stock. ANSWER call option conversion feature warrant

warrant