Quiz Work Pages

Below are some of the questions that others may have also missed in the quizzes, as given in the Finance 622 class offered by Prof. Rubash at Bradley University Fall 2007 (all questions are directly from those in his quizzes). Any of the equations used below are from the following text book, used in the Finance 622 course:
Grinblatt, Mark, and Sheridan Titman. Financial Markets and Corporate Strategy. 2nd ed., New York: McGraw-Hill Irwin, 2002.

In my answers, I have also included in most cases what I think I did wrong, then (hopefully) the correct answer.

# Quiz010203

Q
What is the conversion premium expressed as a percent of a convertible bond that has a face value of \$1000 if it is convertible into 25 shares of common stock that presently sells for \$55 per share?
My answer: 15
Correct answer: .27
How I incorrectly calculated it:
1000/25=40. \$55-\$40=\$15

How to correctly calculate it:
Conversion Price = (Face Value)/(# of Shares) = \$1000/25 = \$40
Then,
Conversion premium: (Conversion \$ - Current Stock Price)/(Current Stock Price)
(\$40-\$55)/\$55 = -0.27, but really 0.27 - I guess?

Q
If a company’s cumulative preferred stock promises to pay a dividend of \$11 each year, but it has not paid any dividends for the last 6 years, how much should it pay to preferred stock holders before it issues any dividends on its common stock?
My answer: 11
Correct answer: 66 +/- 1
How I incorrectly calculated it:
I just figured that the preferred stock holders would get the current years value of the dividend, \$11, instead of the cumulative value of \$66.
How to correctly calculate it:
Dividend per year x Number of years without a dividend
\$11 x 6 = \$66

Q
Institutions such as banks that collect individual and corporate savings and re-lend these funds to others are known as [a]
My answer: financial banks
Correct answer: financial intermediaries
Why I was incorrect:
Intermediaries was the key term that was required. I forgot the term!

Q
What impact does under pricing IPOs have on the investment bank handling them?
My answer: it makes their work harder
Correct answer: it makes their work easier
Why I was incorrect:
This is reversed (oops!). I knew this, I just read it too fast!

Q
What is the conversion price per share of a convertible bond with a face value of \$1000 that is selling in the market with a discount of \$177 if the bond can be exchanged at its owner’s discretion for 19 shares of common stock that now sell for \$30 per share?
My answer: 43.32
Correct answer: 53.63
How I incorrectly calculated it:
I utilized the discount of \$177, figuring all of the information was to be used and took the following: \$1000-\$177=\$823
Then used that in the conversion price calculation:
\$823/19 = \$43.32

How to correctly calculate it:
\$1000/19=\$52.63

Q
If a company fails to declare a dividend on a preferred stock and that stock has a provision that all such past due dividends must be paid before any dividends can be paid on the company’s common stock, the preferred stock is called:
My answer: superior
Correct answer: cumulative
Why I was incorrect:
I didn't remember this term!

Q
What advantage does an ADR provide to a foreign firm?
My answer: The US has one of the world’s largest but most inefficient capital market so their issues are poorly priced.
Correct answer: Firms with ADRs effectively have access to US capital markets….
Why I was incorrect:
I simply read: 'The US has one of the world's largest…captial markets…' I should have read closer!

page revision: 12, last edited: 09 Dec 2007 23:55