Ifm10 ch 20 test bank

IFM10 Ch 20 Test Bank
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CHAPTER 20 HYBRID FINANCING: PREFERRED STOCK, WARRANTS, AND CONVERTIBLES (Difficulty: E = Easy, M = Medium, T = Tough) True/False Easy: (20.1) Preferred stock Answer: b Diff: E 1 . The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock. a. True b. False (20.1) Cost of preferred stock Answer: a Diff: E 2 . Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible. a. True b. False (20.2) Warrants Answer: b Diff: E 3 . A warrant is an option, and as such it cannot be used as a "sweetener." a. True b. False (20.2) Warrants Answer: b Diff: E 4 . A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock. a. True b. False (20.2) Warrants Answer: a Diff: E 5 . The problem of dilution of stockholders’ earnings never results from the sale of call options, but it can arise if warrants are used. a. True b. False Chapter 20: Hybrid Financing Page 1
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(20.2) Detachable warrant Answer: a Diff: E 6 . A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks. a. True b. False (20.3) Convertibles Answer: a Diff: E 7 . The owner of a convertible bond owns, in effect, both a bond and a call option. a. True b. False (20.3) Convertibles Answer: b Diff: E 8 . A convertible debenture can never sell for more than its conversion value or less than its bond value. a. True b. False (20.3) Convertibles Answer: a Diff: E 9 . Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder. a. True b. False (20.3) Convertibles Answer: a Diff: E 10 . Firms generally do not call their convertibles unless the conversion value is greater than the call price. a. True b. False Medium: (20.1) Preferred stock Answer: a Diff: M 11 . Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters. a. True b. False (20.1) Preferred stock Answer: b Diff: M 12 . Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common Page 2 Chapter 20: Hybrid Financing
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proceeds in the event of bankruptcy. a. True
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