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CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
37. Moniker Manufacturing's bonds were recently issued at their $1,000 par value. At any time prior to maturity (20 years
from now), a bondholder can exchange a bond for a share of common stock at a conversion price of $40. What is the
conversion ratio?
a.
22.56
b.
23.75
c.
25.00
d.
26.25
e.
27.56
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
38. Its investment bankers have told Donner Corporation that it can issue a 25-year, 8.1% annual payment bond at par.
They also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in
the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return
on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in
order to issue it at par?
a.
6.66%
b.
6.99%
c.
7.34%
d.
7.71%
e.
8.09%
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
39. Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank
loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-
of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger
or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.
a.
$177,169
b.
$196,854
c.
$207,215
d.
$217,576
e.
$228,455
40. Ballentine Inc., which has a zero tax rate due to tax loss carry-forwards, is considering a 6-year, $5,000,000 bank loan
in order to buy a new piece of equipment. The loan will be amortized over 6 years with end-of-year payments and has an
interest rate of 9%. Alternatively, Ballentine can also lease the equipment for an end-of-year payment of $1,250,000. By
how much does the lease payment exceed the loan payment?
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
a.
$110,285
b.
$116,090
c.
$122,199
d.
$128,631
e.
$135,401
41. Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3
years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-
line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3
equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple
interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated
with ownership are estimated at $240,000 payable at the end of the year, but this cost would be borne by the lessor if the
equipment is leased. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars
and work in thousands.)
a.
$ 96
b.
$106
c.
$112
d.
$117
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
e.
$123
42. Warren Corporation's stock sells for $42 per share. The company wants to sell some 20-year, annual interest, $1,000
par value bonds. Each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the
stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants
at par?
a.
7.83%
b.
8.24%
c.
8.65%
d.
9.08%
e.
9.54%
43. Curry Corporation is setting the terms on a new issue of bonds with warrants. The bonds will have a 30-year maturity
and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share
of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-
debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package
would sell for $1,000?
a.
6.75%
b.
7.11%
c.
7.48%
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
d.
7.88%
e.
8.27%
44. Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual
coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What
is the implied value of each warrant?
a.
$3.76
b.
$3.94
c.
$4.14
d.
$4.35
e.
$4.56
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
45. Curran Contracting is issuing new 25-year bonds that have warrants attached. If not for the attached warrants, the
bonds would carry an 11% annual interest rate. However, with the warrants attached the bonds will pay an 8% annual
coupon. There are 30 warrants attached to each bond, which have a par value of $1,000. What is the implied value of each
warrant?
a.
$8.00
b.
$8.42
c.
$8.84
d.
$9.28
e.
$9.75
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
46. Herbert Engineering is issuing new 15-year bonds that have warrants attached. If not for the attached warrants, the
bonds would carry a 9% annual interest rate. However, with the warrants attached the bonds will pay a 6% annual coupon.
There are 30 warrants attached to each bond, which has a par value of $1,000. What is the value of the straight-debt
portion of the bonds?
a.
$720.27
b.
$758.18
c.
$796.09
d.
$835.89
e.
$877.69
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
47. Thomson Engineering is issuing new 20-year bonds that have warrants attached. If not for the attached warrants, the
bonds would carry an 11% annual interest rate. However, with the warrants attached the bonds will pay an 8% annual
coupon. There are 30 warrants attached to each bond, which have a par value of $1,000. What is the value of the straight-
debt portion of the bonds?
a.
$652.55
b.
$686.89
c.
$723.05
d.
$761.10
e.
$799.16
48. Herring Inc. is considering issuing 15-year, 8% semiannual coupon, $1,000 face value convertible bonds at a price of
$1,000 each. Each bond would be convertible into 25 shares of common stock. If the bonds were not convertible,
investors would require an annual nominal yield of 10%. What is the straight-debt value of each bond at the time of issue?
a.
$725.58
b.
$763.76
c.
$803.96
d.
$846.28
e.
$888.59
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
49. Cannon Manufacturing is considering issuing 15-year, 8% annual coupon, $1,000 face value convertible bonds at a
price of $1,000 each. Each bond would be convertible into 25 shares of common stock. If the bonds were not convertible,
investors would require an annual yield of 10%. The stock's current price is $25.00, its expected dividend is $2.50, and its
expected growth rate is 5%. The bonds are noncallable for 10 years. What is the bond's conversion value in Year 5?
a.
$719.90
b.
$757.79
c.
$797.68
d.
$837.56
e.
$879.44
CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND
CONVERTIBLES
50. Ellis Enterprises is considering whether to lease or buy some necessary equipment it needs for a project that will last
the next 3 years. If the firm buys the equipment, it will borrow $4,800,000 at 8% interest. The firm's tax rate is 35% and
the firm's before-tax cost of debt is 8%. Annual maintenance costs associated with ownership are estimated to be
$300,000 and the equipment will be depreciated on a straight-line basis over 3 years. What is the annual end-of-year lease
payment (in thousands of dollars) for a 3-year lease that would make the firm indifferent between buying or leasing the
equipment? (Suggestion: Delete 3 zeros from dollars and work in thousands.)
a.
$1,950
b.
$2,052
c.
$2,160
d.
$2,268
e.
$2,382
