Reference no: EM132459882

(1) Define each of the following terms.

a. Preferred stock

b. Cumulative dividends; arrearages

c. Warrant; detachable warrant

d. Stepped-up price

e. Convertible security

f. Conversion ratio; conversion price; conversion value

g. Sweetener

(2) Is preferred stock more like bonds or common stock? Explain.

(3) What effect does the trend in stock prices (subsequent to issue) have on a firm's ability to raise funds through (a) convertibles and (b) warrants?

(4) If a firm expects to have additional financial requirements in the future, would you recommend that it use convertibles or bonds with warrants? What factors would influence your decision?

(5) How does a firm's dividend policy affect each of the following?

a. The value of its long-term warrants

b. The likelihood that its convertible bonds will be converted

c. The likelihood that its warrants will be exercised

(6) Evaluate the following statement: "Issuing convertible securities is a means by which a firm can sell common stock for more than the existing market price."

(7) Suppose a company simultaneously issues $50 million of convertible bonds with a coupon rate of 10% and $50 million of straight bonds with a coupon rate of 14%. Both bonds have the same maturity. Does the convertible issue's lower coupon rate suggest that it is less risky than the straight bond? Is the cost of capital lower on the convertible than on the straight bond? Explain.