Week 4_Quiz: FINC 5880 MP S2 2018 Advanced Corporate Finance | Download solved quiz for quality grades |

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Ques 1 / 1 pts tion 1 Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deducti... ble, whereas interest on bonds is deductible. True False Ques 1 / 1 pts tion 2 Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders. True False Ques 1 / 1 pts tion 3 Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par? 9.08% 9.54% 7.83% 8.24% 8.65% Rationale: Stock price: $42.00Bond par value: $1,000 Exercise price: $47.00Bond maturity: 20 No. of warrants: 75Straight-debt yield: 10.0% Value of warrants: $2.00 Total value = Straight-debt value + Warrant value = $1,000 = Bond value + $150 V = $1,000 − $150 = $850 Now set N = 20, I/YR = 10, PV = −850, FV = 1000 and solve for PMT: $82.38 To get this payment on a $1,000 bond, the coupon rate must be: 8.24% Rationale: [Show More]

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