Issuing Convertible Bonds or Bonds with Warrants Is Useful for a Company

question 56

Multiple Choice

Issuing convertible bonds or bonds with warrants is useful for a company of unknown risk because:

• A) the effects of risk are opposite on the two value components and tend to cancel each other out.
• B) if the firm is high risk, the option premium will be higher while the straight bond value is fixed.
• C) only risky companies issue these instruments.
• D) the equity value is dependent on current risks only, not the future risk at conversion.
• E) None of these.

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Definitions:

Financing Activities

Transactions that result in changes in the size and composition of the equity capital or borrowings of the company.

Dividends

A distribution of a portion of a company's earnings to its shareholders, usually determined by the board of directors.

Operating Activities

Cash flows directly related to the production and delivery of a company's goods and services.

Direct Method

A method of reporting the cash flows from operating activities as the difference between the operating cash receipts and the operating cash payments.