Prevailing market price of the common stock

Question

Problem 1: The interest rate on convertibles is generally __________ the interest rate on similar nonconvertible instruments.

• greater than
• less than
• the same as
• at least twice

Problem 2: Conversion price is usually set __________ the prevailing market price of the common stock at the time the bond issue is sold.

• at
• below
• above
• at one half of

Problem 3: The principle device used by the corporation to force conversion is:

• setting the conversion price above the current market price.
• reducing the amount of interest payments.
• buying bonds back at below par value.
• a call provision.

Problem 4: Mirrlees Corp. has 10,000 6.25% bonds convertible into 40 shares per $1000 bond. Mirrlees has 600,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at time of issue was 10%. Compute basic earnings per share if after-tax earnings are $750,000.

• $0.71
• $1.25
• $1.33
• $1.51

Problem 5: Vickrey Technology has had net income of $2,000,000 in the current fiscal year. There are 1,000,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $8 million. The $8 million is represented by 8,000 different $1,000 bonds. Each $1,000 bond pays 3 percent interest. The conversion ratio is 30. The firm is in a 30 percent tax bracket. What is Vickrey's diluted earnings per share?

• $1.75
• $1.81
• $2.00
• None of the above

Problem 6: Jacobs and Company has warrants outstanding, which are selling at a $3 premium above intrinsic value. Each warrant allows its owner to purchase one share of common stock at $25. If the common stock currently sells for $28, what is the warrant price?

• $6
• $10
• $12
• $14

Problem 7: Warrants are:

• long-term options to sell shares of the issuing firm's stock.
• fairly stable, low-risk investments.
• investments whose value is directly related to the price of the underlying stock.
• structured to sell for precisely their intrinsic value.

Problem 8: Sen Corporation warrants carry the right to buy 10 shares of Sen common stock at $3.50 per share. The common stock has a current market price of $4.25 per share. What is the intrinsic or minimum value of one Sen warrant?

• $.75
• $7.50
• $15
• $0

Problem 9: A warrant which does not expire until several years in the future which provides its owner the opportunity to buy a stock. If the stock price rises, the warrant will probably sell for __________ its intrinsic value.

• less than
• exactly
• more than
• less than or equal to

Problem 10: Which of the following is NOT an advantage to the corporation of issuing convertibles?

• Provides a low-cost financing alternative for large, high-quality companies
• Used when believe stock is undervalued
• Generally lower cost than straight debt
• Provides access for small co's to debt market