Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

What is the defining characteristic that makes preferred stock a hybrid security, positioning it between debt and common equity from a finance perspective?

What is the term for unpaid preferred dividends on a cumulative preferred stock issue?

What type of lease is not fully amortized, is often cancelable by the lessee, and typically includes maintenance services provided by the lessor?

What was the primary objective of the Financial Accounting Standards Board (FASB) in issuing FAS 13 (now ASC 840) regarding the accounting treatment of financial leases?

What is a long-term option, issued by a company, that gives the holder the right to buy a specific number of shares of the firm’s stock at a predetermined price?

Infomatics Corporation issues a 20-year bond at its dollar 1,000 par value. Without warrants, the bond would require a 10 percent coupon rate. However, the bond is issued with a coupon rate of 8 percent because it has warrants attached. What is the approximate straight-debt value of this bond?

What is the key difference between the exercise of warrants and the conversion of a convertible security in terms of their impact on the issuing firm's capital?

Silicon Valley Software issues a convertible bond with a dollar 1,000 par value. The bond can be exchanged for 20 shares of common stock. What is the conversion price (Pc) of the stock?

What is the primary purpose of including a stepped-up exercise price in a warrant agreement?

A firm's convertible bond has a straight-bond value of dollar 789 and a conversion value of dollar 700. According to the analysis in the chapter, what constitutes the floor price for the bond?

Under what condition must a lease be classified as a capital lease according to the rules that were in effect prior to the new ASC 842 guidelines?

When a firm is performing a lease-versus-buy analysis, what is the most appropriate discount rate to use for the cash flows?

What is the primary reason that a company's stock price might not rise by the full value of the synergistic benefits after a merger is announced?

O'Brien Computers issues a 20-year convertible bond with a 10 percent annual coupon and a dollar 1,000 par value. The bond is convertible into 20 shares of stock. The stock's current price is dollar 35 per share. What is the bond's conversion value at the time of issue?

Under what circumstances does the SEC require a firm to report diluted EPS in addition to basic EPS?

From the perspective of the issuing corporation, which of the following is a primary advantage of financing with preferred stock instead of debt?

What is the primary reason a rapidly growing, high-tech company like Infomatics Corporation would choose to issue bonds with warrants?

What is the net advantage to leasing (NAL) for Mitchell Electronics if the present value of the cost of owning is dollar 7,523,000 and the present value of the cost of leasing is dollar 7,077,000?

How does the call provision in a convertible bond contract allow the issuing company to force conversion?

For which type of investors is preferred stock most attractive, and why?

The Olsen Company has decided to acquire a new truck. It can lease the truck on a 4-year contract for a payment of dollar 10,000 per year, made at the beginning of each year. The firm's tax rate is 40 percent and its after-tax cost of debt is 6 percent. What is the present value of the cost of leasing?

Why must a company that issues convertible bonds also include a clause protecting the convertible against dilution from stock splits and stock dividends?

What is the primary disadvantage of financing with preferred stock from the issuer's point of view?

Which of the following describes a financial lease, also known as a capital lease?

Whiston Securities issues convertible bonds with a par value of dollar 1,000 and a conversion price of dollar 20 per share. What is the bond's conversion ratio (CR)?

In a lease-versus-buy analysis, what is the primary reason for comparing the cost of leasing to the cost of debt financing?

What type of security is defined as being similar to bonds in some respects and to common stock in others, and is classified by accountants as equity but viewed by finance professionals as a hybrid?

What is the primary reason that the market value of a convertible bond will typically exceed its floor value?

What is a significant difference between basic EPS and diluted EPS?

What distinguishes detachable warrants from non-detachable warrants?

Which of the following is an advantage for a firm to use leasing as a source of financing?

If a convertible security is called by the issuer, what choice does the holder typically face?

What type of preferred stock has dividends that are tied to a benchmark rate such as LIBOR or the rate on Treasury securities?

From the lessee's standpoint in a lease-versus-buy analysis, which of the following is treated as a cash outflow in the cost of owning calculation?

What is a primary way that convertibles can reduce agency costs between bondholders and stockholders?

Rubash Company issues a 20-year, 6 percent annual coupon bond with warrants attached at a par value of dollar 1,000. A similar straight-debt bond from the company would have a 9 percent coupon. What is the approximate value of the warrants attached to the second issue?

If a company’s stock price is dollar 21 and the exercise price of its warrant is dollar 18, what is the exercise value of the warrant?

The Gallatin Company is considering issuing a convertible preferred stock with a dividend of dollar 1.07 per share when its common stock is selling for dollar 21 per share. Management projects a future growth rate of 12 percent. If the stock continues to sell at 15 times earnings, what is a reasonable conversion price for the issuer to set?

How does an adjustable-rate preferred stock differ from a standard fixed-rate preferred stock?

What is the primary motivation for a firm to include a call provision on a convertible bond issue?

Which of the following is a primary difference between warrants and convertible securities?

When the Olsen Company is analyzing the lease of a truck, it determines the truck falls into the MACRS 3-year class. The applicable depreciation rates are 33 percent, 45 percent, 15 percent, and 7 percent. If the truck costs dollar 40,000, what is the depreciation expense in Year 2?

What is the primary reason that a sale-and-leaseback arrangement is considered a financing decision rather than an investment decision?

A convertible bond has a par value of dollar 1,000 and a conversion ratio of 25. The current stock price is dollar 35. What is the bond's conversion value?

From an investor's perspective, why is preferred stock considered riskier than the same company's bonds?

What distinguishes an operating lease from a financial lease in terms of amortization?

Why might a firm with a very low tax rate be more inclined to issue preferred stock than a firm with a high tax rate?

The residual value of a leased asset is owned by whom at the end of the lease term?

What is a primary reason that firms which are small and rapidly growing might use warrants as 'sweeteners' for their debt issues?

The Olsen Company can purchase a truck for dollar 40,000. It falls into the MACRS 3-year class with rates of 33, 45, 15, and 7 percent. The firm's tax rate is 40 percent. What is the depreciation tax saving in Year 1?