Question Details

Which of the following statements concerning preferred stock is
most correct 



i. Which of the following statements about convertibles is true?
a. The coupon interest rate on convertibles is generally higher
than on straight debt.
b. New equity funds are raised by the issuer when convertibles are
converted.
c. Investors are willing to accept lower interest rates on
convertibles because they are less risky than straight debt.
d. At issue, a convertible's conversion (exercise) price is often
set equal to the current underlying stock price.
e. None of the above statements is true.

ii. Which of the following statements about warrants and convertibles
is false?
a. Both warrants and convertibles are types of option securities.
b. One primary difference between warrants and convertibles is that
warrants bring in additional funds when exercised, while
convertibles do not.
c. The coupon rate on convertible debt is lower than the coupon
rate on similar straight debt because convertibles are less
risky.
d. The value of a warrant depends on its exercise price, its term,
and the underlying stock price.
e. Warrants usually can be detached and traded separately from
their associated debt.

iii. Which of the following statements concerning preferred stock is
most correct ?
a. Preferred stock generally has a higher component cost to the
firm than does common stock.
b. By law in most states, all preferred stock issues must be
cumulative, meaning that the cumulative, compounded total of all
unpaid preferred dividends must be paid before dividends can be
paid on the firm- common stock.
c. From the issuer- point of view, preferred stock is less risky
than bonds.
d. Preferred stock, because of the current tax treatment of
dividends, is bought mostly by individuals in high tax brackets.
e. Unlike bonds, preferred stock cannot have a convertible feature.

iv. Shearson PLC's stock sells for $42 per share. The company wants to
sell some 20-year, annual interest, $1,000 par value bonds. Each
bond will have attached 75 warrants, each exercisable into one
share of stock at an exercise price of $47. Shearson's straight
bonds yield 10 percent. The warrants will have a market value of
$2 each when the stock sells for $42. What coupon interest rate
must the company set on the bonds-with-warrants if the bonds are to
sell at par?
a. 8.00%
b. 8.24%
c. 8.96%
d. 9.25%
e. 10.00%

v. Florida Enterprises is considering issuing a 10-year convertible
bond that will be priced at its $1,000 par value. The bonds have
an 8.0 percent annual coupon rate, and each bond can be converted
into 20 shares of common stock. The stock currently sells at $40 a
share, has an expected dividend in the coming year of $5, and has
an expected constant growth rate of 5.0 percent. What is the
estimated floor price of the convertible at the end of Year 3 if
the required rate of return on a similar straight-debt issue is
10.0 percent?
a. $ 902.63
b. $ 926.10
c. $ 961.25
d. $ 988.47
e. $1,000.00



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