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38) A firm has 600 shares of stock and 100 warrants outstanding. Assume the warrants are all
exercised. The market value of the firm's assets is $25,000 and the market value of its debt is
$8,000. Each warrant grants its owner the right to buy one new share at $27.50. What is the gain
on one warrant?
A) $.87
B) $.79
C) $.25
D) $.38
E) $.71
39) Kida Consultants has 100,000 shares of stock outstanding. The firm's value net of debt is $2
million. Kida has 1,000 warrants outstanding with an exercise price of $18, where each warrant
entitles the holder to purchase one share of stock. Calculate the gain from exercising a single
warrant.
A) $1.87
B) $1.72
C) $1.45
D) $.38
E) $1.98
40) Lefty Consultants currently has 300,000 shares of common outstanding. Firm value net of
debt is $3,450,000. The firm has warrants outstanding with an exercise price of $10. How many
warrants must the firm have issued if the gain from exercising a single warrant is $1.25? Assume
each warrant entitles its owner to one new share.
A) 24,000
B) 45,000
C) 50,000
D) 80,000
E) 60,000
41) The holders of Xenron Corporation's bonds with a face value of $1,000 can exchange each of
those bonds for 35 shares of stock. The stock is selling for $22 a share. What is the conversion
price?
A) $22.00
B) $28.57
C) $35.00
D) $1.30
E) $1.27
42) Diamond Drill has 150,000 shares of stock outstanding at a market price of $46 a share. The
holder of a $1,000 face value bond can exchange the bond at any time for 25 shares of stock.
What is the conversion price?
A) $40
B) $46
C) $43
D) $25
E) $20
43) A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a current
market price of $22 per share. What would the conversion ratio and conversion price be if the
bond's issuer declared a stock split of 3-for-1?
A) 75; $7.33
B) 105; $9.52
C) 105; $22.00
D) 35; $22.00
E) 105; $7.33
44) A bond with a face value of $1,000 can be converted into 33 shares of stock. What is the
conversion value if the stock is selling for $29.80 a share?
A) $30.30
B) $33.33
C) $983.40
D) $1,000
E) $0
45) The holders of Mikayla Corporation's bond with a face value of $1,000 can exchange that
bond for 30 shares of stock. What is the conversion price if the stock is selling for $28.20 a
share?
A) $25.00
B) $33.33
C) $35.46
D) $28.20
E) $0
46) The holders of Mikayla Corporation's bonds with a face value of $1,000 each can exchange a
bond for 20 shares of stock. The stock is selling for $49.40 a share. What is the conversion
premium?
A) 0 percent
B) 1.33 percent
C) 1.21 percent
D) −1.33 percent
E) 1.67 percent
47) Assume a bond had a conversion price of $40 and a conversion ratio of 25. What would be
the conversion ratio and conversion price if the bond issuer declared a stock split of 4-for-1?
A) 2.50; $400
B) 100; $10
C) 25; $40
D) 6.25; $160
E) 100; $25
48) A convertible bond is selling for $800, matures in 10 years, has a face value of $1,000, and a
coupon rate of 10 percent. Similar nonconvertible bonds are priced to yield 14 percent. The
conversion price is $32. The stock currently sells for $31.30 a share. What is the conversion
premium?
A) 0 percent
B) 1.67 percent
C) 2.50 percent
D) 3.33 percent
E) 2.24 percent
49) SBX bonds have a face value of $1,000 and can be exchanged for 20 shares of stock.
Assume SBX declares a 3-for-1 stock split. What conversion price will be needed following the
stock split for the conversion value and the straight bond value to be equal assuming the bond
continually sells at par?
A) $16.67
B) $33.33
C) $50.00
D) $150.00
E) $66.67
50) A convertible bond is selling for $967, matures in 15 years, has a $1,000 face value, pays
interest semiannually, and has a coupon rate of 8 percent. Similar non-convertible bonds are
priced to yield 4.25 percent per six months. The conversion ratio is 20. The stock currently sells
for $47.50 a share. Calculate the convertible bond's option value.
A) $2.92
B) $7.27
C) $2.03
D) $8.95
E) $1.48
51) A convertible bond is selling for $1,222.70. It has 10 years to maturity, a $1,000 face value, a
coupon rate of 10 percent, and semiannual interest payments. Similar non-convertible bonds are
priced to yield 4 percent per six months. The conversion ratio is 40. The stock currently sells for
$30.13 a share. Calculate the convertible bond's option value.
A) $8.68
B) $22.70
C) $13.59
D) $17.50
E) $86.80
52) A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option premium
of $3. What is the conversion value if the straight bond value is equal to the bond's par value?
A) $1,062.00
B) $1,042.36
C) $1,059.00
D) $1,042.48
E) $1,065.00
53) Cooper Industries has 400,000 shares of stock outstanding with a market price of $32 a
share. The firm also has 10,000 bonds outstanding with a face value of $1,000 and a conversion
price of $40. The bonds mature tomorrow. You currently own 25,000 shares of this stock and no
bonds. What percent ownership in the firm should you expect to have after tomorrow?
A) 3.52 percent
B) 3.85 percent
C) 4.25 percent
D) 6.25 percent
E) 3.13 percent
54) Assume Jamestown Markets has 500 shares of stock and 100 bonds outstanding. The bonds
have a face value of $1,000, are convertible into 5 shares of newly issued common stock, and
mature today. What is the value of this firm to its shareholders if the total value of the firm is
$184,500? What if the value is $225,000?
A) $0; $125,000
B) $84,500; $112,500
C) $92,250; $112,500
D) $84,500; $125,000
E) $92,250; $125,000
55) A bond with a face value of $5,000 can be exchanged for 70 shares of stock. The bond has a
coupon rate of 6.5 percent which equals the market rate of interest. Assume the option premium
is $50. What is the market value of the bond if the stock is selling for $68.90 a share and the
bond matures in exactly one year?
A) $4,744.84
B) $4,873.00
C) $5,000.00
D) $4,940.00
E) $5,050.00
56) Aztec's convertible bonds each have a face value of $1,000 and a market value of $1,041.25.
Each bond can be exchanged 25 shares of stock. The stock is selling for $41.54 a share. The
straight bond value is $1,010. What is the option value per bond?
A) $0
B) $2.75
C) $3.08
D) $38.50
E) $.11
57) A convertible bond matures in 15 years, pays annual coupons, and has a coupon rate of 8
percent. The face value is $1,000 and the conversion ratio is 40. The stock currently sells for
$22.80 a share. Similar nonconvertible bonds are priced to yield 9 percent. What is the minimal
value of the convertible bond?
A) $835.00
B) $919.39
C) $1,000.00
D) $1,070.11
E) $912.00
58) Looper Industries bonds have a face value of $1,000 and can be exchanged for 30 shares of
stock. The stock is selling for $35 a share. Looper has an outstanding call option on the bonds at
$1,040. If the bonds are called, the holders must either convert or surrender their bonds. What
should be the current market value of one of these bonds if the option premium per bond is $15?
Assume the bond coupon rate equals the market rate of interest at time of call.
A) $1,040
B) $1,065
C) $1,025
D) $1,030
E) $1,035
59) Identify five factors that help determine the value of a warrant above its lower limit.
60) Explain how a noncallable convertible bond's value is determined.
61) Explain why there is neither a "Free Lunch" nor an "Expensive Lunch" when convertible
bonds are issued.
62) Why are warrants and convertibles issued?
63) Discuss the factors that management must consider before calling a convertible bond.
