FIN 480 ACTUAL EVALUATION EXAM QUESTIONS AND
ANSWERS SURE A+
✔✔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 price and conversion
ratio be if the bond's issuer declared a 3-for-1 stock split? - ✔✔- $9.52; 105
- New conversion ratio = 35 x 3 New conversion ratio = 105 New conversion price =
$1, New conversion price = $9.52
✔✔The lower limit of a warrant's value is defined as: - ✔✔MAX(0, Stock price - Exercise
price).
✔✔From the bondholder's point of view, the optimum time to convert a convertible bond
is when the bond's conversion value is: - ✔✔greater than the both the call value and
straight bond value on the call date.
✔✔Based on empirical studies, firms tend to call convertible bonds when the conversion
value is: - ✔✔greater than the call price.
✔✔Which one of the following would harm the financial position of a warrant holder? -
✔✔a large cash dividend
✔✔Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently
outstanding. A warrant holder can purchase one new share of stock in exchange for
four warrants plus $20. The stock is currently selling for $20.60 per share. What would
be the gain per new share from exercising the warrants, assuming all warrants are
exercised? - ✔✔- $.51
- Gain per share = (New total value / New total shares) - Exercise price Gain per share
= {[(75,000 × $20.60) + (50,) × $20] / [75,000 + (50,)]} - $20 Gain per
share = $20.51 - 20 Gain per share = $.51
✔✔The upper limit of a warrant's value is best defined as the: - ✔✔underlying stock
price.
✔✔Assuming market efficiency, which one of these is the least sensible explanation of
why convertibles and warrants are issued? - ✔✔The firm is relatively large with a low
level of financial leverage.
✔✔Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised? - ✔✔- 26.67
- Price = Total value / Total shares Price = (60,000 × $27 + 60,000 × $5) / [60,000 +
(60,)] Price = $26.67
,✔✔An inverse floater and a super-inverse floater can be more valuable to a purchaser
if: - ✔✔interest rates fall.
✔✔Derivatives can be used to either hedge or speculate. These strategies: - ✔✔offset
risk by hedging and increase risk by speculating
✔✔The duration of a pure discount bond is: - ✔✔is equal to the bond's maturity.
✔✔A $1,000 face value Treasury note with a coupon rate of 6 percent matures in one
year and pays interest semiannually. If the effective annual yield for all maturities is 6.5
percent annually, what is the current price of the Treasury note? - ✔✔- $996.21
- Semiannual spot rate = (1 + .065).5 - 1 = .031988
- P0 = [(.06 × $1,000) / 2] / (1 + .031988) + {[(.06 × $1,000) / 2] + $1,000} / (1 +
.031988)2
- P0 = $996.21
✔✔A financial institution has equity equal to one-tenth of its assets. If its asset duration
is currently equal to its liability duration, then to immunize, the firm needs to: -
✔✔decrease the duration of its assets.
✔✔A bond manager who wishes to hold the bonds with the greatest potential volatility
should acquire: - ✔✔long-term, zero-coupon bonds.
✔✔The party most apt to take a long position in agriculture futures is the firm that -
✔✔uses cocoa to make candy.
✔✔Calculate the duration of a $1,000 face value bond with annual coupon payments, a
coupon rate of 7 percent, a maturity of 4 years, and a yield to maturity of 8.2 percent -
✔✔3.62 years
✔✔Caps and floors are used in conjunction with derivatives to: - ✔✔limit any impact
from interest rate changes.
✔✔Which one of these bonds has the highest duration? - ✔✔15-year zero coupon
✔✔You have gathered the following market value and duration information on the
Eastern Bank: Calculate the duration of the bank's assets and of its liabilities. - ✔✔-
2.97 years; 1.23 years
- DA = (3..4)(0) + (7..4)(.6) + (18..4)(2.1) + (9..4)(7.6)
- DA = 2.97 years
- DL = (14..3)(0) + (4..3)(.3) + (11..3)(3.1)
- DL = 1.23 years
, ✔✔Comparing long-term bonds with short-term bonds, long-term bonds are _____
volatile and therefore experience _____ price change than short-term bonds for the
same interest rate shift. - ✔✔more; more
✔✔Hedging in the futures markets can reduce all risk if: - ✔✔price movements in both
the cash and futures markets are perfectly correlated.
✔✔If a financial institution has equated the dollar effects of interest rate risk on its
assets with the dollar effects on its liabilities, it has engaged in: - ✔✔hedging by
matching.
✔✔Mortgage bankers earn income principally by: - ✔✔charging origination and
servicing fees.
✔✔In a merger the: - ✔✔acquiring firm retains its name and legal status.
✔✔The purchase accounting method for mergers requires that: - ✔✔the assets of the
acquired firm be recorded at their fair market value on the balance sheet of the
acquiring firm.
✔✔Which one of these is least associated with takeovers? - ✔✔spin-offs
✔✔Firm A and Firm B join to create Firm AB. This is an example of: - ✔✔a
consolidation.
✔✔Southern Goods has an estimated going-concern value of $2 million. As a result of
negotiations the firm's bankruptcy reorganization plan consists of $600,000 in new
mortgage debt, $250,000 in subordinated debt, and $1,150,000 in new equity. Currently
the firm has a mortgage of $823,000, other secured debt of $89,000, and unsecured
debt of $1.34 million. According to the APR, what will the stockholders receive if they
currently have 2 million shares with a par value of $1 each? - ✔✔- $0
- Stockholder claims have the least priority in a bankruptcy. Since the debts exceed the
firm's value, there is nothing left for the current shareholders.
✔✔Turner's has $3.8 million in net working capital. The firm has fixed assets with a
book value of $48.6 million and a market value of $54.2 million. Martin amp; Sons is
buying Turner's for $61.5 million in cash. The acquisition will be recorded using the
purchase accounting method. What is the amount of goodwill that Martin amp; Sons will
record on its balance sheet as a result of this acquisition? - ✔✔- $3.5 million
- Goodwill = $61.5m - ($3.8m + 54.2m) = $3.5 million
✔✔Firms are least apt to deal with financial distress by: - ✔✔acquiring a competitor.
ANSWERS SURE A+
✔✔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 price and conversion
ratio be if the bond's issuer declared a 3-for-1 stock split? - ✔✔- $9.52; 105
- New conversion ratio = 35 x 3 New conversion ratio = 105 New conversion price =
$1, New conversion price = $9.52
✔✔The lower limit of a warrant's value is defined as: - ✔✔MAX(0, Stock price - Exercise
price).
✔✔From the bondholder's point of view, the optimum time to convert a convertible bond
is when the bond's conversion value is: - ✔✔greater than the both the call value and
straight bond value on the call date.
✔✔Based on empirical studies, firms tend to call convertible bonds when the conversion
value is: - ✔✔greater than the call price.
✔✔Which one of the following would harm the financial position of a warrant holder? -
✔✔a large cash dividend
✔✔Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently
outstanding. A warrant holder can purchase one new share of stock in exchange for
four warrants plus $20. The stock is currently selling for $20.60 per share. What would
be the gain per new share from exercising the warrants, assuming all warrants are
exercised? - ✔✔- $.51
- Gain per share = (New total value / New total shares) - Exercise price Gain per share
= {[(75,000 × $20.60) + (50,) × $20] / [75,000 + (50,)]} - $20 Gain per
share = $20.51 - 20 Gain per share = $.51
✔✔The upper limit of a warrant's value is best defined as the: - ✔✔underlying stock
price.
✔✔Assuming market efficiency, which one of these is the least sensible explanation of
why convertibles and warrants are issued? - ✔✔The firm is relatively large with a low
level of financial leverage.
✔✔Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised? - ✔✔- 26.67
- Price = Total value / Total shares Price = (60,000 × $27 + 60,000 × $5) / [60,000 +
(60,)] Price = $26.67
,✔✔An inverse floater and a super-inverse floater can be more valuable to a purchaser
if: - ✔✔interest rates fall.
✔✔Derivatives can be used to either hedge or speculate. These strategies: - ✔✔offset
risk by hedging and increase risk by speculating
✔✔The duration of a pure discount bond is: - ✔✔is equal to the bond's maturity.
✔✔A $1,000 face value Treasury note with a coupon rate of 6 percent matures in one
year and pays interest semiannually. If the effective annual yield for all maturities is 6.5
percent annually, what is the current price of the Treasury note? - ✔✔- $996.21
- Semiannual spot rate = (1 + .065).5 - 1 = .031988
- P0 = [(.06 × $1,000) / 2] / (1 + .031988) + {[(.06 × $1,000) / 2] + $1,000} / (1 +
.031988)2
- P0 = $996.21
✔✔A financial institution has equity equal to one-tenth of its assets. If its asset duration
is currently equal to its liability duration, then to immunize, the firm needs to: -
✔✔decrease the duration of its assets.
✔✔A bond manager who wishes to hold the bonds with the greatest potential volatility
should acquire: - ✔✔long-term, zero-coupon bonds.
✔✔The party most apt to take a long position in agriculture futures is the firm that -
✔✔uses cocoa to make candy.
✔✔Calculate the duration of a $1,000 face value bond with annual coupon payments, a
coupon rate of 7 percent, a maturity of 4 years, and a yield to maturity of 8.2 percent -
✔✔3.62 years
✔✔Caps and floors are used in conjunction with derivatives to: - ✔✔limit any impact
from interest rate changes.
✔✔Which one of these bonds has the highest duration? - ✔✔15-year zero coupon
✔✔You have gathered the following market value and duration information on the
Eastern Bank: Calculate the duration of the bank's assets and of its liabilities. - ✔✔-
2.97 years; 1.23 years
- DA = (3..4)(0) + (7..4)(.6) + (18..4)(2.1) + (9..4)(7.6)
- DA = 2.97 years
- DL = (14..3)(0) + (4..3)(.3) + (11..3)(3.1)
- DL = 1.23 years
, ✔✔Comparing long-term bonds with short-term bonds, long-term bonds are _____
volatile and therefore experience _____ price change than short-term bonds for the
same interest rate shift. - ✔✔more; more
✔✔Hedging in the futures markets can reduce all risk if: - ✔✔price movements in both
the cash and futures markets are perfectly correlated.
✔✔If a financial institution has equated the dollar effects of interest rate risk on its
assets with the dollar effects on its liabilities, it has engaged in: - ✔✔hedging by
matching.
✔✔Mortgage bankers earn income principally by: - ✔✔charging origination and
servicing fees.
✔✔In a merger the: - ✔✔acquiring firm retains its name and legal status.
✔✔The purchase accounting method for mergers requires that: - ✔✔the assets of the
acquired firm be recorded at their fair market value on the balance sheet of the
acquiring firm.
✔✔Which one of these is least associated with takeovers? - ✔✔spin-offs
✔✔Firm A and Firm B join to create Firm AB. This is an example of: - ✔✔a
consolidation.
✔✔Southern Goods has an estimated going-concern value of $2 million. As a result of
negotiations the firm's bankruptcy reorganization plan consists of $600,000 in new
mortgage debt, $250,000 in subordinated debt, and $1,150,000 in new equity. Currently
the firm has a mortgage of $823,000, other secured debt of $89,000, and unsecured
debt of $1.34 million. According to the APR, what will the stockholders receive if they
currently have 2 million shares with a par value of $1 each? - ✔✔- $0
- Stockholder claims have the least priority in a bankruptcy. Since the debts exceed the
firm's value, there is nothing left for the current shareholders.
✔✔Turner's has $3.8 million in net working capital. The firm has fixed assets with a
book value of $48.6 million and a market value of $54.2 million. Martin amp; Sons is
buying Turner's for $61.5 million in cash. The acquisition will be recorded using the
purchase accounting method. What is the amount of goodwill that Martin amp; Sons will
record on its balance sheet as a result of this acquisition? - ✔✔- $3.5 million
- Goodwill = $61.5m - ($3.8m + 54.2m) = $3.5 million
✔✔Firms are least apt to deal with financial distress by: - ✔✔acquiring a competitor.
