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1. Corporate governance has become increasingly important over the years. The Sarbanes-Oxley (SOX) Act was enacted to improve transparency in financial accounting and to prevent fraud. Which of the following is correct. A. fraud has not occurred since enactment of SOX B. SOX has not increased auditing costs C. government agencies are not required to comply with SOX D. SOX requires companies to have a strong board of directors E. None of the above 2. Both Adams and Wolfe are large public corporations with subsidiaries throughout the world. Adams uses a centralized approach and makes most of the decisions for its subsidiaries. Wolfe uses a decentralized approach and its subsidiaries make most of their own decisions. Which of the following is correct? A. the agency problem would probably be more pronounced for Wolfe because of a higher probability that subsidiary decisions would conflict with the parent B. agency costs would be the same for both companies C. a decentralized approach is almost always better D. a centralized approach is almost always better E. none of the above 3. With convertible bonds, A. the company receives additional cash money when the convertibles are converted. B. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt C. Investors require a higher interest rate than on otherwise similar straight debt D. the convertibles cannot be converted for at least 10 years E. none of the above 4. Convertible bonds are: considered equity on the balance sheet similar in risk to the company’s common stock riskier than the company’s common stock less risky than the company’s common stock none of the above 5. KORO Corporation’s common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion price? $25 $40 $23.50 $38 none of the above 6. KORO Corporation’s common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion value of the bond? $688 $593.75 $950 $1,100 none of the above 7. Which of the following is correct? Warrants are similar to long-term put options The company receives additional funds when warrants are exercised The company receives additional funds when bonds are converted Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual. none of the above Number 8 A company will issue 20-year bonds with annual interest payments. Each bond will include 20 warrants that give the holder to purchase one share of stock per warrant. Each warrant is expected to have a value of $5.75. A similar straight-debt issue would require an 8% coupon. What coupon rate should be set on the bonds with warrants so that the package will sell for $1,000? 5.76% 6.83% 7.94% 6.98% none of the above

1. Corporate governance has become increasingly important over the years. The Sarbanes-Oxley (SOX) Act was enacted to improve transparency in financial accounting and to prevent fraud. Which of the following is correct.

A. fraud has not occurred since enactment of SOX

B. SOX has not increased auditing costs

C. government agencies are not required to comply with SOX

D. SOX requires companies to have a strong board of directors

E. None of the above

2. Both Adams and Wolfe are large public corporations with subsidiaries throughout the world. Adams uses a centralized approach and makes most of the decisions for its subsidiaries. Wolfe uses a decentralized approach and its subsidiaries make most of their own decisions. Which of the following is correct?

A. the agency problem would probably be more pronounced for Wolfe because of a higher probability that subsidiary decisions would conflict with the parent

B. agency costs would be the same for both companies

C. a decentralized approach is almost always better

D. a centralized approach is almost always better

E. none of the above

3. With convertible bonds,

A. the company receives additional cash money when the convertibles are converted.

B. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt

C. Investors require a higher interest rate than on otherwise similar straight debt

D. the convertibles cannot be converted for at least 10 years

E. none of the above

4. Convertible bonds are:

 

considered equity on the balance sheet

 

similar in risk to the company’s common stock

 

riskier than the company’s common stock

 

less risky than the company’s common stock

 

none of the above

5. KORO Corporation’s common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion price?

$25

$40

$23.50

$38

none of the above

6. KORO Corporation’s common stock currently sells for $27.50. Its 8% convertible bonds (issued at par $1000) now sell for $950. The bonds can be converted into 40 shares of common stock. What is the conversion value of the bond?

 

$688

 

$593.75

 

$950

 

$1,100

 

none of the above

 

7. Which of the following is correct?

 

Warrants are similar to long-term put options

 

The company receives additional funds when warrants are exercised

 

The company receives additional funds when bonds are converted

 

Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.

 

none of the above

Number 8

A company will issue 20-year bonds with annual interest payments. Each bond will include 20 warrants that give the holder to purchase one share of stock per warrant. Each warrant is expected to have a value of $5.75. A similar straight-debt issue would require an 8% coupon. What coupon rate should be set on the bonds with warrants so that the package will sell for $1,000?

 

5.76%

 

6.83%

 

7.94%

 

6.98%

 

none of the above

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