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MultipleChoiceQuestionsChapter24WarrantsandConvertiblesAwarrantgivestheowner:theobligationtosellsecuritiesdirectlytothefirmatafixedpriceforaspecifiedtime.therighttopurchasesecuritiesdirectlyfromthefirmatafixedpriceforaspecifiedtime.theobligationtopurchasesecuritiesdirectlyfromthefirmatafixedpriceforaspecifiedtime.therighttosellsecuritiesdirectlytothefirmatafixedpriceforaspecifiedtime.Noneoftheabove.Warrantsaremostoftenissuedincombinationwith:newpubliclyplacedcommonstock.newprivatelyplacedcommonstock.newpubliclyplaceddebt.newprivatelyplaceddebt.preferredstock.An"equitykicker"mostoftenreferstoa:bondwithconversionprivileges.preferredstockofferingwithconversionprivileges.warrant.letteredcommonstock.Noneoftheabove.Warrantsaresimilartotradedoptionsexcept:onlywarrantshaveexerciseprices.onlywarrantsdependonchangesintheunderlyingstocktodeterminevalue.warrantsaffectthenumberofsharesoutstanding.BothAandC.BothAandB.BrightViewWindowsissuedwarrantswithanexercisepriceof$17.BrightView'scommonstockcurrentlysellsfor$20pershare.Thewarrantsare:inthemoney.outofthemoney.valuable.notveryvaluable.BothAandC.Warrantsaresimilartooptions,inthatthevalueofthewarrantislimitedby:expiringworthlessifthestockpriceisbelowthetotalwarrantexerciseprice.thetradingcapabilitiesoftheexchangeused.thepriceoftheunderlyingstockdividedbythenumberofwarrantsneededtopurchaseashare.BothAandC.BothBandC.WhichofthefollowingwouldnotdescribethedifferencebetweenwarrantsandcalloptionsWarrantsareissuedbyfirmswhereascalloptionsareissuedbyindividuals.Calloptionshaveanexercisepricewhereaswarrantsdonot.Exercisingofwarrantscreatesdilutionwhereasexercisingcalloptionsdoesnot.Whencalloptionsareexercisedexistingsharestradehandswhereasifwarrantsareexercisednewstockmustbeissued.Noneoftheabove.Twomajordifferencesbetweenawarrantandacalloptionare:warrantsarecontractsoutsideofthefirmwhileoptionsarewithinthefirm.warrantshavelongmaturitieswhileoptionsareusuallyshortmaturities.doeswarrantexercisedilutesthevalueofequitywhileoptionexercisenot.doesBothAandC.BothBandC.Concerningwarrantsandcalloptions,whichofthefollowingstatementsgenerallyiscorrectTheissueproceduresforbotharequitesimilar.Whenacalloptionisexercised,thefirmmustissuenewstock.Whenawarrantisexercised,existingstockchangeshands.Exerciseofacalloptiondoesnotaffectsharevalue,butwarrantexercisedoes.Noneoftheaboveiscorrect.Whichofthefollowingwouldharmthepositionofawarrantholdera3for1stocksplitalargestockdividendof20%alargecashdividendlistingofthewarrantsontheNYSENoneoftheabovewouldharmthewarrantholders.Thegainfromexercisingawarrantissimilartothegainfromexercisingacalloptionexcept:thegainonawarrantisgreaterbythefractionofwarrantsharesdividedbytotalshares.thegainonawarrantislimitedbythefirm'svalueafterbeingreducedbythedebtofthefirm.thegainonawarrantisdecreasedbythefractionoforiginalsharesdividedbytotalpostexerciseshares.BothAandB.BothBandC.Theexerciseofwarrantscreatesnewshareswhich:increasesthetotalnumberofsharesbutdoesnotaffectsharevalue.increasesthetotalnumberofshareswhichcanreduceanindividualsharevalue.doesnotchangethenumberofsharesoutstanding,similartooptions.increasessharevaluebecausecashispaidintothefirmatthetimeofwarrantexercise.Noneoftheabove.Ifacorporatesecuritycanbeexchangedforafixednumberofsharesofstock,thesecurityissaidtobe:tected.putable.Noneoftheabove.Aconvertiblepreferredstockissimilartoaconvertiblebondexcept:theconversionratioisfixed(given).theconversionpriceisfixed(given).thetimetomaturityisinfinite.Alloftheabove.Noneoftheabove.Theholderofa$1,000facevaluebondhastherighttoexchangethebondanytimebeforematurityforsharesofstockpricedat$50pershare.The$50iscalledthe:conversionprice.statedprice.exerciseprice.strikingprice.Noneoftheabove.Concerningconvertiblebonds,whichofthefollowingstatementsisnotcorrectThevalueofaconvertiblebondwillgenerallybegreaterthanitsstraightbondvalue.Thevalueofaconvertiblebondwillgenerallybegreaterthanitsconversionvalue.bondvalueThedifferencebetweentheconversionvalueandthestraightistheconversionoroptionpremium.bondvalueThecouponrateonanonconvertiblebondwillgenerallyexceedthecouponrateonanotherwiseidenticalconvertiblebond.Alloftheabovearecorrect.Concerningconvertiblebonds,whichofthefollowingstatementsisnotcorrectAconvertiblebondissuewouldgenerallyhavefewerrestrictivecovenantsthananotherwiseidenticalnonconvertiblebond.Convertiblebondscanbeissuedatalowercouponcomparedwithotherwisenon-convertiblebonds.Ifthevalueofaconvertiblebondexceedsthemaximumofitsstraightbondvalueoritsconversionvalue,thedifferencewouldbereferredtoastheoptionvalue.Sinceconvertiblebondswillbeexchangedforcommonstock,convertiblebondsaregenerallynotcallable.Morethanoneoftheaboveisincorrect.Concerningconvertiblebonds,whichofthefollowingstatementsisnotcorrectWithregardtosecurity,mostconvertiblebondsaresecuredbycommonstock(i.e.,theyarecollateraltrustbonds).Formostconvertiblebonds,theissuingfirmcan,undercertaincircumstances,effectivelyforcebondholderstoconverttocommonstock.Whenaconvertiblebondiscalled,theownerhastheoptionofreceivingcashorstockforthebond.Alloftheaboveareincorrect.Alloftheabovearecorrect.Aconvertiblebondhasanoptionvaluewhichisequalto:themarketvalueoftheconvertiblebondminusthestraightbondvalue.Themarketvalueoftheconvertiblebondminustheconversionvalue.themarketvalueoftheconvertiblebondminustheconversionpremium.themarketvalueoftheconvertiblebondminusthemaximumofthestraightbondvalueorconversionvalue.Noneoftheabove.Afirmhasexperiencedasignificantincreaseinsharevalue.Inretrospect,whichofthefollowingsecuritieswouldhavebeenbesttohavebeenissuedpriortothechangeinsharevalueCommonstockBond/warrantpackageConvertiblepreferredstockStraightbondsConvertiblebondsAfirmhasexperiencedasignificantdecreaseinsharevalue.Inretrospect,whichofthefollowingsecuritieswouldhavebeenbesttohavebeenissuedpriortothechangeinsharevalueConvertiblebondsConvertiblepreferredstockStraightdebtIndifferentbetweenAandB.IndifferentbetweenA,B,andC.Issuingconvertiblebondsorbondswithwarrantsisusefulforacompanyofunknownriskbecause:theeffectsofriskareoppositeonthetwovaluecomponentsandtendtocanceleachotherout.ifthefirmishighrisk,theoptionpremiumwillbehigherwhilethestraightbondvalueisfixed.onlyriskycompaniesissuetheseinstruments.theequityvalueisdependentoncurrentrisksonly,notthefutureriskatconversion.Noneoftheabove.Transferorexpropriationofwealthfrombondholderstostockholdersislesslikelytooccurwhen:subordinatedstraightdebtisissuedbecausethereareotherseniorbondholderstoprotectthem.convertibledebtisissuedbecausetheequitycomponentwillreducetheseagencycostswhenvalueisshared.convertibledebtisissuedbecausetheholderscanmorereadilysuewhenahigh-riskprojectisundertaken.subordinateddebtisissuedbecausemonitoringismucheasierwhensubordinatedstraightdebtisissued.Noneoftheabove.Fromtheshareholder'spointofview,theoptimumtimetocallaconvertiblebondiswhenthebond'sconversionvalueis:lessthanthecallprice,butgreaterthanthefacevalue.greaterthanthecallprice,butlessthanstraightdebt'svalue.equaltothefacevalue.lessthanstraightdebt'svalue,butgreaterthanthecallprice.Noneoftheabove.Basedonempiricalstudies,firmstendtocallconvertiblebondswhentheconversionvalueis:lessthantheconversionprice.greaterthanthestraightbondvalue.greaterthanthecallprice.lessthanthefacevalue.Noneoftheabove.WhichofthefollowingwouldnotbeasensibleexplanationofwhyconvertiblesandwarrantsareissuedifmarketsareefficientCashflowfromthesesecuritiesbestmatchcashflowofthefirm.Ifthefirmdoeswell,convertiblebondswillturnouttohavebeenthebetteralternativeversusissuingcommonstock.Thesecuritiesareusefulwhenitiscostlytoassesstheriskoftheissuingfirm.Thesecuritiesmayresolveagencyproblemsassociatedwithraisingmoney.Alloftheabovearesensibleexplanations.BrightViewWindowsissuedwarrantswithanexercisepriceof$17foroneshareperwarrant.OnMay1,BrightView'scommonstockisat$20pershare.ThelowerandupperlimitsonthewarrantvalueonMay1are:$0and$3$0and$17$3and$17$3and$20$17and$20DiamondDrillInc.has150,000sharesand15,000warrantsoutstanding.Awarrantholdercanpurchaseanewshareofstockforfivewarrantsand$5.00perwarrant.Thestockiscurrentlysellingfor$27pershare.Theholderofa$1,000facevaluebondcanexchangethebondanytimefor25sharesofstock.Theconversionratiois:25.40.100.Dependsonthecurrentmarketpriceofthebond.Noneoftheabove.Theholderofa$1,000facevaluebondcanexchangethebondanytimefor25sharesofstock.Theconversionpriceis:$25.$40.$100.Dependsonthecurrentmarketpriceofthebond.Noneoftheabove.Ifallwarrantsareexercised,whatwillyourfractionofownershipbeifyouowned20,000sharesoriginally12.12%13.07%13.33%14.04%Withoutknowingtheexercisepricethepercentcannotbedetermined.Ifthewarrantsareallexercisedimmediately,whatwouldbethemarketpriceofthestock$22.78$25.13$26.96$28.00$29.00Whatwouldyourgainpersharebefromexercisingthewarrants,assumingallareexercised$0.00pershare$1.96pershare$2.00pershare$25.00pershare$27.00pershare37.37.WhatistheconversionvalueofthebondAfirmhas100sharesofstockand40warrantsoutstanding.Thewarrantsareabouttoexpire,andallofthemwillbeexercised.Themarketvalueofthefirm'sassetsis$2,000,andthefirmhasnodebt.Eachwarrantgivestheownertherighttobuy2sharesat$15pershare.Whatisthepricepershareofthestock$11.11$15.00$17.78$20.00Noneoftheabove.TheholdersofXenronCorporation'sbondwithafacevalueof$1,000canexchangethatbondfor35sharesofstock.Thestockissellingfor$22.00.Whatistheconversionprice$22.00$28.57$35.00D.$1,000.00E.Noconversionpremiumisgiven.Whatistheconversionpremium0.00%29.86%59.01%106.61%Noneoftheabove.WhatwouldtheconversionpriceandconversionratiobeifXenronhada3for1stocksplit$7.33;75$9.52;105$22.00;25$28.57;35Noneoftheabove.A.$25$40$770$1,000Noconversionpremiumisgiven.41.41.WhatistheconversionvalueofthebondTheholdersofMikaylaCorporation'sbondwithafacevalueof$1,000canexchangethatbondfor30sharesofstock.Thestockissellingfor$25.00.Whatistheconversionprice$25.00$33.33$35.00D.$1,000.00E.Noconversionpremiumisgiven.Whatistheconversionpremium10.00%27.58%33.32%103.23%Noneoftheabove.WhatwouldtheconversionpriceandconversionratiobeifMikaylahada4for1stocksplit$5.33;75$8.33;120$22.00;125$27.50;135Noneoftheabove.A.$25$40$750$1,000Noconversionpremiumisgiven.Aconvertiblebondhasan8%annualcouponand15yearstomaturity.Thefacevalueis$1,000andtheconversionratiois40.Thestockcurrentlysellsfor$20.875pershare.Similarnonconvertiblebondsarepricedtoyield9%.Thevalueoftheconvertiblebondisatleast:$835.00.$919.39.$1,000.00.$1,570.11.Noneoftheabove.Aconvertiblebondissellingfor$800.Ithas10yearstomaturity,a$1,000facevalue,anda10%coupon.Similarnonconvertiblebondsarepricedtoyield14%.Theconversionpriceis$50pershare.Thestockcurrentlysellsfor$31.375pershare.Theconversionpremiumis:37.25%.43.33%.59.36%.66.67%.Noneoftheabove.EssayQuestionsAfirmhas500sharesofstockand100warrantsoutstanding.Thewarrantsareabouttoexpire,andallofthemwillbeexercised.Themarketvalueofthefirm'sassetsis$25,000,andthemarketvalueofthedebtis$8,000.Eachwarrantgivestheownertherighttobuy5sharesat$25pershare.WhatisthevalueofawarrantAfirmhas2,000sharesofstockand200warrantsoutstanding.Thewarrantsareabouttoexpire,andallofthemwillbeexercised.Themarketvalueofthefirm'sassetsis$14,000,andthefirmhasnodebt.Eachwarrantgivestheownertherighttobuy1shareat$5.Whatisthewarrant'seffectiveexercisepriceKidaConsultantshas100,000sharesofstockoutstanding.Thefirm'svaluenetofdebtis$2million.Kidahas1,000warrantsoutstandingwithanexercisepriceof$18,whereeachwarrantentitlestheholdertopurchaseoneshareofstock.Calculatethegainfromexercisingasinglewarrant.KidaConsultantscurrentlyhas300,000sharesofcommonoutstanding.Firmvaluenetofdebtis$3,900,000.Kidahaswarrantsoutstandingwithanexercisepriceof$10.Howmanywarrantsmustthefirmhaveissuedifthegainfromexercisingasinglewarrantis$8.25Aconvertiblebondissellingfor$993.Ithas15yearstomaturity,a$1,000facevalue,andan8%couponpaidsemi-annually.Similarnon-convertiblebondsarepricedtoyield8.5%.Theconversionratiois20.Thestockcurrentlysellsfor$47.50pershare.Calculatetheconvertiblebond'soptionvalue.Aconvertiblebondissellingfor$1,222.70.Ithas10yearstomaturity,a$1,000facevalue,anda10%couponpaidsemi-annually.Similarnon-convertiblebondsarepricedtoyield8%.Theconversionratiois40.Thestockcurrentlysellsfor$30.125pershare.Calculatetheconvertiblebond'soptionvalue.Abond/warrantpackageispricedtosellatafacevalueof$1,000.Eachbondcomeswith50detachablewarrants. Awarrantgivestheownertherighttobuy1shareofstockat$20pershare.Thevalueofawarranthasbeenestimatedat$2.Thebondsmaturein20years.Similarbondswithoutwarrantsyield10%.Whatisthebond'sannualcouponAconvertiblebondissellingfor$800.Ithas10yearstomaturity,a$1000facevalue,anda10%couponpaidsemi-annually.Similarnonconvertiblebondsarepricedtoyield14%.Theconversionpriceis$50pershare.Thestockcurrentlysellsfor$31.375pershare.Determinethebond'soptionpremium.Explainwhythereisneithera"Free"nor"ExpensiveLunch"whenconvertiblebondsareissuedIllustrateandexplainhowaconvertiblebondvalueisbasedonbothdebtandequityvalue.WhatistheoptionvalueWhyarewarrantsandconvertiblesissuedAnswerKeyChapter24WarrantsandConvertiblesAnswerKeyMultipleChoiceQuestionsAwarrantgivestheowner:theobligationtosellsecuritiesdirectlytothefirmatafixedpriceforaspecifiedtime.therighttopurchasesecuritiesdirectlyfromthefirmatafixedpriceforaspecifiedtime.theobligationtopurchase securities directlyfromthefirm atafixedpriceforaspecifiedtime.therightto sellsecuritiesdirectly tothefirmatafixed priceforaspecifiedtime.Noneoftheabove.Difficultylevel:EasyTopic:WARRANTType:DEFINITIONSWarrantsaremostoftenissuedincombinationwith:newpubliclyplacedcommonstock.newprivatelyplacedcommonstock.newpubliclyplaceddebt.newprivatelyplaceddebt.preferredstock.Difficultylevel:EasyTopic:WARRANTType:DEFINITIONSAn"equitykicker"mostoftenreferstoa:bondwithconversionprivileges.preferredstockofferingwithconversionprivileges.warrant.letteredcommonstock.Noneoftheabove.Difficultylevel:EasyTopic:WARRANTType:DEFINITIONSWarrantsaresimilartotradedoptionsexcept:onlywarrantshaveexerciseprices.onlywarrantsdependonchangesintheunderlyingstocktodeterminevalue.warrantsaffectthenumberofsharesoutstanding.BothAandC.BothAandB.Difficultylevel:MediumTopic:WARRANTType:DEFINITIONSBrightViewWindowsissuedwarrantswithanexercisepriceof$17.BrightView'scommonstockcurrentlysellsfor$20pershare.Thewarrantsare:inthemoney.outofthemoney.valuable.notveryvaluable.BothAandC.Difficultylevel:MediumTopic:VALUEOFWARRANTSType:DEFINITIONSWarrantsaresimilartooptions,inthatthevalueofthewarrantislimitedby:expiringworthlessifthestockpriceisbelowthetotalwarrantexerciseprice.thetradingcapabilitiesoftheexchangeused.thepriceoftheunderlyingstockdividedbythenumberofwarrantsneededtopurchaseashare.BothAandC.BothBandC.Difficultylevel:MediumTopic:VALUEOFWARRANTType:CONCEPTSWhichofthefollowingwouldnotdescribethedifferencebetweenwarrantsandcalloptionsWarrantsareissuedbyfirmswhereascalloptionsareissuedbyindividuals.Calloptionshaveanexercisepricewhereaswarrantsdonot.Exercisingofwarrantscreatesdilutionwhereasexercisingcalloptionsdoesnot.Whencalloptionsareexercisedexistingsharestradehandswhereasifwarrantsareexercisednewstockmustbeissued.Noneoftheabove.Difficultylevel:EasyTopic:WARRANTSANDCALLOPTIONSType:CONCEPTSTwomajordifferencesbetweenawarrantandacalloptionare:warrantsarecontractsoutsideofthefirmwhileoptionsarewithinthefirm.warrantshavelongmaturitieswhileoptionsareusuallyshortmaturities.doeswarrantexercisedilutesthevalueofequitywhileoptionexercisenot.doesBothAandC.BothBandC.Difficultylevel:MediumTopic:WARRANTSANDCALLOPTIONSType:CONCEPTSConcerningwarrantsandcalloptions,whichofthefollowingstatementsgenerallyiscorrectTheissueproceduresforbotharequitesimilar.Whenacalloptionisexercised,thefirmmustissuenewstock.Whenawarrantisexercised,existingstockchangeshands.Exerciseofacalloptiondoesnotaffectsharevalue,butwarrantexercisedoes.Noneoftheaboveiscorrect.Difficultylevel:MediumTopic:WARRANTSANDCALLOPTIONSType:CONCEPTSWhichofthefollowingwouldharmthepositionofawarrantholdera3for1stocksplitalargestockdividendof20%alargecashdividendlistingofthewarrantsontheNYSENoneoftheabovewouldharmthewarrantholders.Difficultylevel:ChallengeTopic:WARRANTSANDDIVIDENDSType:CONCEPTSThegainfromexercisingawarrantissimilartothegainfromexercisingacalloptionexcept:thegainonawarrantisgreaterbythefractionofwarrantsharesdividedbytotalshares.thegainonawarrantislimitedbythefirm'svalueafterbeingreducedbythedebtofthefirm.thegainonawarrantisdecreasedbythefractionoforiginalsharesdividedbytotalpostexerciseshares.BothAandB.BothBandC.Difficultylevel:ChallengeTopic:WARRANTSANDCALLOPTIONSType:CONCEPTSTheexerciseofwarrantscreatesnewshareswhich:increasesthetotalnumberofsharesbutdoesnotaffectsharevalue.increasesthetotalnumberofshareswhichcanreduceanindividualsharevalue.doesnotchangethenumberofsharesoutstanding,similartooptions.increasessharevaluebecausecashispaidintothefirmatthetimeofwarrantexercise.Noneoftheabove.Difficultylevel:EasyTopic:EXERCISEOFWARRANTSType:CONCEPTSIfacorporatesecuritycanbeexchangedforafixednumberofsharesofstock,thesecurityissaidtobe:tected.putable.Noneoftheabove.Difficultylevel:EasyTopic:CONVERTIBLESType:CONCEPTSDifficultylevel:MediumDifficultylevel:MediumTopic:CONVERTIBLEBONDSType:CONCEPTSAconvertiblepreferredstockissimilartoaconvertiblebondexcept:theconversionratioisfixed(given).theconversionpriceisfixed(given).thetimetomaturityisinfinite.Alloftheabove.Noneoftheabove.Difficultylevel:EasyTopic:CONVERTIBLESType:CONCEPTSTheholderofa$1,000facevaluebondhastherighttoexchangethebondanytimebeforematurityforsharesofstockpricedat$50pershare.The$50iscalledthe:conversionprice.statedprice.exerciseprice.strikingprice.Noneoftheabove.Difficultylevel:EasyTopic:CONVERSIONPRICEType:CONCEPTSConcerningconvertiblebonds,whichofthefollowingstatementsisnotcorrectThevalueofaconvertiblebondwillgenerallybegreaterthanitsstraightbondvalue.Thevalueofaconvertiblebondwillgenerallybegreaterthanitsconversionvalue.Thedifferencebetweentheconversionvalueandthestraightbondvalueistheconversionoroptionpremium.Thecouponrateonanonconvertiblebondwillgenerallyexceedthecouponrateonanotherwiseidenticalconvertiblebond.Alloftheabovearecorrect.Concerningconvertiblebonds,whichofthefollowingstatementsisnotcorrectAconvertiblebondissuewouldgenerallyhavefewerrestrictivecovenantsthananotherwiseidenticalnonconvertiblebond.Convertiblebondscanbeissuedatalowercouponcomparedwithotherwisenon-convertiblebonds.Ifthevalueofaconvertiblebondexceedsthemaximumofitsstraightbondvalueoritsconversionvalue,thedifferencewouldbereferredtoastheoptionvalue.Sinceconvertiblebondswillbeexchangedforcommonstock,convertiblebondsaregenerallynotcallable.Morethanoneoftheaboveisincorrect.Difficultylevel:MediumTopic:CONVERTIBLEBONDSType:CONCEPTSConcerningconvertiblebonds,whichofthefollowingstatementsisnotcorrectWithregardtosecurity,mostconvertiblebondsaresecuredbycommonstock(i.e.,theyarecollateraltrustbonds).Formostconvertiblebonds,theissuingfirmcan,undercertaincircumstances,effectivelyforcebondholderstoconverttocommonstock.Whenaconvertiblebondiscalled,theownerhastheoptionofreceivingcashorstockforthebond.Alloftheaboveareincorrect.Alloftheabovearecorrect.Difficultylevel:MediumTopic:CONVERTIBLEBONDSType:CONCEPTSAconvertiblebondhasanoptionvaluewhichisequalto:themarketvalueoftheconvertiblebondminusthestraightbondvalue.Themarketvalueoftheconvertiblebondminustheconversionvalue.themarketvalueoftheconvertiblebondminustheconversionpremium.themarketvalueoftheconvertiblebondminusthemaximumofthestraightbondvalueorconversionvalue.Noneoftheabove.Difficultylevel:MediumTopic:CONVERTIBLEBONDSType:CONCEPTSAfirmhasexperiencedasignificantincreaseinsharevalue.Inretrospect,whichofthefollowingsecuritieswouldhavebeenbesttohavebeenissuedpriortothechangeinsharevalueCommonstockBond/warrantpackageConvertiblepreferredstockStraightbondsConvertiblebondsDifficultylevel:MediumTopic:STRAIGHTBONDSANDSHAREVALUEType:CONCEPTSAfirmhasexperiencedasignificantdecreaseinsharevalue.Inretrospect,whichofthefollowingsecuritieswouldhavebeenbesttohavebeenissuedpriortothechangeinsharevalueConvertiblebondsConvertiblepreferredstockStraightdebtIndifferentbetweenAandB.IndifferentbetweenA,B,andC.Difficultylevel:MediumTopic:CONVERTIBLEBONDSANDSHAREVALUEType:CONCEPTSIssuingconvertiblebondsorbondswithwarrantsisusefulforacompanyofunknownriskbecause:theeffectsofriskareoppositeonthetwovaluecomponentsandtendtocanceleachotherout.ifthefirmishighrisk,theoptionpremiumwillbehigherwhilethestraightbondvalueisfixed.onlyriskycompaniesissuetheseinstruments.theequityvalueisdependentoncurrentrisksonly,notthefutureriskatconversion.Noneoftheabove.Difficultylevel:ChallengeTopic:CONVERTIBLESANDRISKType:CONCEPTSTransferorexpropriationofwealthfrombondholderstostockholdersislesslikelytooccurwhen:subordinatedstraightdebtisissuedbecausethereareotherseniorbondholderstoprotectthem.convertibledebtisissuedbecausetheequitycomponentwillreducetheseagencycostswhenvalueisshared.convertibledebtisissuedbecausetheholderscanmorereadilysuewhenahigh-riskprojectisundertaken.subordinateddebtisissuedbecausemonitoringismucheasierwhensubordinatedstraightdebtisissued.Noneoftheabove.Difficultylevel:ChallengeTopic:CONVERTIBLEDEBTType:CONCEPTSFromtheshareholder'spointofview,theoptimumtimetocallaconvertiblebondiswhenthebond'sconversionvalueis:lessthanthecallprice,butgreaterthanthefacevalue.greaterthanthecallprice,butlessthanstraightdebt'svalue.equaltothefacevalue.lessthanstraightdebt'svalue,butgreaterthanthecallprice.Noneoftheabove.Difficultylevel:MediumTopic:TIMINGOFCONVERSIONType:CONCEPTSBasedonempiricalstudies,firmstendtocallconvertiblebondswhentheconversionvalueis:lessthantheconversionprice.greaterthanthestraightbondvalue.greaterthanthecallprice.lessthanthefacevalue.Noneoftheabove.Difficultylevel:MediumTopic:EMPIRICALRESEARCH-CALLINGCONVERTIBLESType:CONCEPTSWhichofthefollowingwouldnotbeasensibleexplanationofwhyconvertiblesandwarrantsareissuedifmarketsareefficientCashflowfromthesesecuritiesbestmatchcashflowofthefirm.Ifthefirmdoeswell,convertiblebondswillturnouttohavebeenthebetteralternativeversusissuingcommonstock.Thesecuritiesareusefulwhenitiscostlytoassesstheriskoftheissuingfirm.Thesecuritiesmayresolveagencyproblemsassociatedwithraisingmoney.Alloftheabovearesensibleexplanations.Difficultylevel:MediumTopic:MARKETEFFICIENCYANDCONVERTIBLESType:CONCEPTSBrightViewWindowsissuedwarrantswithanexercisepriceof$17foroneshareperwarrant.OnMay1,BrightView'scommonstockisat$20pershare.ThelowerandupperlimitsonthewarrantvalueonMay1are:$0and$3$0and$17$3and$17$3and$20$17and$20(Price-Exercise)/#Required=($20-$17)/1=$3Difficultylevel:MediumTopic:UPPERANDLOWERLIMITSType:PROBLEMSDiamondDrillInc.has150,000sharesand15,000warrantsoutstanding.Awarrantholdercanpurchaseanewshareofstockforfivewarrantsand$5.00perwarrant.Thestockiscurrentlysellingfor$27pershare.Theholderofa$1,000facevaluebondcanexchangethebondanytimefor25sharesofstock.Theconversionratiois:25.40.100.Dependsonthecurrentmarketpriceofthebond.Noneoftheabove.25sharesofstock(given)Difficultylevel:EasyTopic:CONVERSIONRATIOType:PROBLEMSTheholderofa$1,000facevaluebondcanexchangethebondanytimefor25sharesofstock.Theconversionpriceis:$25.$40.$100.Dependsonthecurrentmarketpriceofthebond.Non