Friday

April 18, 2014

April 18, 2014

Posted by **Raj** on Saturday, January 5, 2013 at 3:22pm.

1.) A convertible bond is currently selling for $945. It is convertible into 15 shares of common which presently sell for $57 per share. What is the conversion premium?

A. $90

B. $45

C. 57 shares

D. 13 shares

Answer c

2.) A $1,000 par value bond with a conversion price of $40 has a conversion ratio of:

A. $25.

B. 25 shares.

C. $40.

D. 40 shares.

answer D

3. The conversion premium is the greatest and the downside risk the smallest when the:

A. conversion value equals the pure bond value.

B. conversion value is greater than the pure bond value.

C. conversion value is less than the pure bond value.

D. stock price is expected to go up drastically.

answer b

4 The interest rate on convertibles is generally __________ the interest rate on similar nonconvertible instruments.

A. greater than

B. less than

C. the same as

D. at least twice

answer A

5. The principle device used by the corporation to force conversion is:

A. setting the conversion price above the current market price.

B. reducing the amount of interest payments.

C. buying bonds back at below par value.

D. a call provision.

answer A

6 Mirrlees Corp. has 10,000 6.25% bonds convertible into 40 shares per $1000 bond. Mirrlees has 600,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at time of issue was 10%. Compute basic earnings per share if after-tax earnings are $750,000.

A. $0.71

B. $1.25

C. $1.33

D. $1.51

answer C

7 Vickrey Technology has had net income of $2,000,000 in the current fiscal year. There are 1,000,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $8 million. The $8 million is represented by 8,000 different $1,000 bonds. Each $1,000 bond pays 3 percent interest. The conversion ratio is 30. The firm is in a 30 percent tax bracket. What is Vickrey's diluted earnings per share?

A. $1.75

B. $1.81

C. $2.00

D. None of the above

answer D

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