Question 1

If a share of preferred stock has a $10 par value,and the stock has a 2:1 conversion ratio,then the conversion price would be $5.

Accepted Answer

A) True 
 B)False

Question 2

An alternative approach to the Enterprise Valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 3

For American and Bermudan embedded options,the exercise price can change over time as specified in the security agreement.

Accepted Answer

A) True 
 B)False

Question 4

An option not currently worth exercising is said to be an out of the money option.

Accepted Answer

A) True 
 B)False

Question 5

A round of financing where shares sell for a lower price than previous rounds is known as a:

Accepted Answer

A)  down round
B)  recessive round
C)  reset round
D)  a and cE) B) and C)
F) A) and D)

Question 6

Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?

Accepted Answer

A)  paid in kind preferred stock
B)  cumulative preferred stock
C)  participating preferred stock
D)  convertible preferred stock
E)  non-cumulative preferred stockF) B) and D)
G) C) and E)

Question 7

When consistent assumptions are used,we

Accepted Answer

A)  get the same value for equity under the enterprise and equity methods of valuation
B)  we get a higher value of equity under the equity method of valuation
C)  we get a lower value of equity under the equity method of valuation
D)  we get equity values that cannot be compared across the equity and enterprise methods of valuationE) All of the above
F) B) and D) A

Question 8

Which of the following is an example of a put option which is at the money?

Accepted Answer

A)  The option to sell at $11,the stock is worth $12.
B)  The option to buy at $13,the stock is worth $12.
C)  The option to sell at $12,the stock is worth $12.
D)  The option to sell at $13,the stock is worth $12.
E)  The option to buy at $11,the stock is worth $12F) A) and B)
G) B) and E)

Question 9

For preferred noncumulative stock,all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following are components of common equity?

Accepted Answer

A)  common stock
B)  preferred stock
C)  a and b
D)  none of the aboveE) B) and C)
F) A) and B)

Question 11

Warrant valuation (as presented in this text)is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

Accepted Answer

A) True 
 B)False  True

Question 12

Which of the following provides the option to transform preferred stock into common stock?

Accepted Answer

A)  paid in kind preferred stock
B)  cumulative preferred stock
C)  participating preferred stock
D)  convertible preferred stock
E)  non-cumulative preferred stockF) A) and B)
G) All of the above

Question 13

The concept of an enterprise value is that it is the combined value of all of venture's financing,typically equity plus all of the debt.

Accepted Answer

A) True 
 B)False

Question 14

By issuing preferred stock,and thus forfeiting bankruptcy rights from the use of debt,the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

Accepted Answer

A) True 
 B)False

Question 15

The Black and Scholes model requires an exercise price as an input.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is an example of a call option which is in the money?

Accepted Answer

A)  The option to sell at $11,the stock is worth $12.
B)  The option to buy at $13,the stock is worth $12.
C)  The option to buy at $12,the stock is worth $12.
D)  The option to sell at $13,the stock is worth $12.
E)  The option to buy at $11,the stock is worth $12.F) C) and D)
G) A) and D)

Question 17

Which of the following is never a component of a preferred stock's security structure?

Accepted Answer

A)  the right to participate in any dividends paid to common stock shareholders
B)  payment of dividends in the form of additional shares of preferred stock
C)  the option for the holder to convert preferred stock into common stock
D)  the option for the venture to call outstanding preferred stock
E)  none of the above; all of these may be included in the structure ofPreferred stockF) A) and D)
G) C) and D)

Question 18

Owning a put option on a stock is the same as selling a call option on that same stock.

Accepted Answer

A) True 
 B)False

Question 19

The right to buy a specified asset at a specified price on a specified date is called:

Accepted Answer

A)  a forward contract
B)  an American-style put option
C)  an American-style call option
D)  a European-style call option
E)  a European style put optionF) A) and E)
G) All of the above

Question 20

A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

Accepted Answer

A) True 
 B)False  True

Exam 14: Security Structures and Determining Enterprise Values

If a share of preferred stock has a $10 par value,and the stock has a 2:1 conversion ratio,then the conversion price would be $5.

Correct AnswerverifiedShow Answer

An alternative approach to the Enterprise Valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital.

Correct AnswerverifiedShow Answer

For American and Bermudan embedded options,the exercise price can change over time as specified in the security agreement.

Correct AnswerverifiedShow Answer

An option not currently worth exercising is said to be an out of the money option.

Correct AnswerverifiedShow Answer

A round of financing where shares sell for a lower price than previous rounds is known as a:

Correct AnswerverifiedShow Answer

Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?

Correct AnswerverifiedShow Answer

When consistent assumptions are used,we

Correct AnswerverifiedA

Which of the following is an example of a put option which is at the money?

Correct AnswerverifiedShow Answer

For preferred noncumulative stock,all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

Correct AnswerverifiedShow Answer

Which of the following are components of common equity?

Correct AnswerverifiedShow Answer

Warrant valuation (as presented in this text)is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

Correct AnswerverifiedTrue

Which of the following provides the option to transform preferred stock into common stock?

Correct AnswerverifiedShow Answer

The concept of an enterprise value is that it is the combined value of all of venture's financing,typically equity plus all of the debt.

Correct AnswerverifiedShow Answer

By issuing preferred stock,and thus forfeiting bankruptcy rights from the use of debt,the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

Correct AnswerverifiedShow Answer

The Black and Scholes model requires an exercise price as an input.

Correct AnswerverifiedShow Answer

Which of the following is an example of a call option which is in the money?

Correct AnswerverifiedShow Answer

Which of the following is never a component of a preferred stock's security structure?

Correct AnswerverifiedShow Answer

Owning a put option on a stock is the same as selling a call option on that same stock.

Correct AnswerverifiedShow Answer

The right to buy a specified asset at a specified price on a specified date is called:

Correct AnswerverifiedShow Answer

A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

Correct AnswerverifiedTrue

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