1. Corporate governance has become increasingly important over the years. The Sarbanes-Oxley (SOX) Act was enacted to improve transparency in financial accounting and to prevent fraud. Which of the following is correct?
- fraud has not occurred since enactment of SOX
- SOX has not increased auditing costs
- government agencies are not required to comply withSOX
- SOX requires companies to have a strong board ofdirectors
- none of the above
2. Tactics that firms use to avoid hostile takeovers include:
- greenmail
- shareholder rights provisions.
- restricted voting rights.
- poison pills.
- all of the above
3. Both Adams and Wolfe are large public corporations with subsidiaries throughout the world. Adams uses a centralized approach and makes most of the decisions for its subsidiaries. Wolfe uses a decentralized approach and its subsidiaries make most of their own decisions. Which of the following is correct?
- the agency problem would probably be more pronounced for Wolfe because of a higher probability that subsidiary decisions would conflict with the parent
- agency costs would be the same for both companies
- a decentralized approach is almost always better
- a centralized approach is almost always better
- none of the above
4. With convertible bonds,
- the company receives additional cash money when the convertibles are converted.
- Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt
- Investors require a higher interest rate than on otherwise similar straight debt
- the convertibles cannot be converted for at least 10 years
- none of the above
5. A firm's common stock currently sells for $17.50. Its 10% convertible bonds (issued at par $1000) now sell for $900 and the conversion price is $20. What is the conversion ratio?
- 87.5
- 17.5
- 50.0
- 45.00
- none of theabove
6. Convertible bonds are:
- considered equity on the balance sheet
- similar in risk to the company's common stock
- riskier than the company's common stock
- less risky than the company's common stock
- none of the above
7. KORO Corporation's common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion price?
- $25
- $40
- $23.50
- $38
- none of the above
8. KORO Corporation's common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion value of the bond?
- $688
- $593.75
- $950
- $1,100
- none of the above
9. Which of the following is correct?
- Warrants are similar to long-term put options
- The company receives additional funds when warrants are exercised
- The company receives additional funds when bonds are converted
- Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.
- none of the above
10. A company will issue 20-year bonds with annual interest payments. Each bond will include 20 warrants that give the holder to purchase one share of stock per warrant. Each warrant is expected to have a value of $5.75. A similar straight-debt issue would require an 8% coupon. What coupon rate should be set on the bonds with warrants so that the package will sell for $1,000?
- 5.76%
- 6.83%
- 7.94%
- 6.98%
- none of the above