FINANCE

Which of the following actions does not help managers defend against a hostile takeover?

Answer

[removed]   Establishing a poison pill provision.
[removed]   Granting lucrative golden parachutes to senior managers.
[removed]   Establishing a super-majority provision in the company’s bylaws to raise the percentage of the board of directors that must approve an acquisition from 50% to 75%.
[removed]   Retiring long-term debt early to reduce total debt on the balance sheet which will increase the firm’s financial position.
[removed]   Finding a “white squire” that will buy enough of the target firm’s shares to block the hostile takeover.

 

 

The following data apply to Saunders Corporation’s convertible bonds.
Maturity  10   Stock price $30.00
Par value  $1,000   Conversion price $50.00
Annual coupon 7.00%   Straight-debt yield 8.00%

Based on your answers to the three preceding questions, what is the minimum price (or “floor” price) at which the Saunders’ bonds should sell?

Answer

[removed]   $754.29
[removed]   $900.00
[removed]   $951.43
[removed]   $932.90
[removed]   $882.86

 

 

Suppose the March CBT Treasury bond futures contract has a quoted price of 88-30.  If annual interest rates go down by 3.75 percentage point, what is the gain or loss on the futures contract?  (Assume a $1,000 par value, round the new interest rate to 4 decimal places when written as a decimal, and round the change in price up to the nearest whole dollar.)

Answer

[removed]   $429.00
[removed]   $304.00
[removed]   $405.00
[removed]   $474.00
[removed]   $413.00

 

 

Suppose 144 yen could be purchased in the foreign exchange market for one U.S. dollar today.  If the yen depreciates by 23.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?

Answer

[removed]   136.3824
[removed]   177.1200
[removed]   132.8400
[removed]   145.2384
[removed]   157.6368

 

 

Which of the following statements concerning warrants is most CORRECT?

Answer

[removed]   Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants are used but remains the same if convertibles are used.
[removed]   Warrants are long-term put options that have value because holders can sell the firm’s common stock at the exercise price regardless of how low the market price drops.
[removed]   Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen.
[removed]   A firm’s investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
[removed]   A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.

 

 

A 6-month call option on Romer Technologies’ stock has a strike price of $45.00 and sells in the market for $8.25.  Romer’s current stock price is $48.75.  What is the exercise value of the option?

Answer

[removed]   $4.25
[removed]   $3.70
[removed]   $3.15
[removed]   $3.75
[removed]   $3.40

 

 

Which of the following statements is most CORRECT?

Answer

[removed]   Warrants have an option feature but convertibles do not.
[removed]   One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.
[removed]   The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.
[removed]   The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.
[removed]   Warrants can sometimes be detached and traded separately from the security with which they were issued, but this is unusual.

 

 

Stover Corporation, a U.S. based importer, makes a purchase of crystal glassware from a firm in Switzerland for 39,960 Swiss francs, or $24,000, at the spot rate of 1.665 francs per dollar.  The terms of the purchase are net 90 days, and the U.S. firm wants to cover this trade payable with a forward market hedge to eliminate its exchange rate risk.  Suppose the firm completes a forward hedge at the 90-day forward rate of 1.682 francs.  If the spot rate in 90 days is actually 1.665 francs, how much will the U.S. firm have saved or lost in U.S. dollars by hedging its exchange rate exposure?

Answer

[removed]   $242.57
[removed]   $259.55
[removed]   $208.61
[removed]   $213.46
[removed]   $269.25

 

 

A swap is a method used to reduce financial risk.  Which of the following statements about swaps, if any, is NOT CORRECT?

Answer

[removed]   A swap involves the exchange of cash payment obligations.
[removed]   The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
[removed]   Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
[removed]   A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
[removed]   Swaps can involve side payments in order to get the counterparty to agree to the swap.

 

 

Chocolate Factory’s convertible debentures were issued at their $1,000 par value in 2009. At any time prior to maturity on February 1, 2029, a debenture holder can exchange a bond for 50 shares of common stock. What is the conversion price, PC?

Answer

[removed]   $20.80
[removed]   $23.40
[removed]   $20.00
[removed]   $15.40
[removed]   $22.60

 

 

Ballentine Inc. 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 $1,225,000. By how much does the lease payment exceed the loan payment?

Answer

[removed]   $93,841
[removed]   $110,401
[removed]   $128,065
[removed]   $129,169
[removed]   $123,649

 

 

A riskless hedge can best be defined as

Answer

[removed]   A situation in which aggregate risk can be reduced by derivatives transactions between two parties.
[removed]   A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.
[removed]   Standardized contracts that are traded on exchanges and are “marked to market” daily, but where physical delivery of the underlying asset is virtually never taken.
[removed]   Two parties agree to exchange obligations to make specified payment streams.
[removed]   Simultaneously buying and selling a call option with the same exercise price.

 

 

An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)

Answer

[removed]   Call option.
[removed]   Put option.
[removed]   Out-of-the-money option.
[removed]   Naked option.
[removed]   Covered option.

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