Valuation of Convertible Instruments

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Chartered Accountancy Strategic Financial Management Quiz on Valuation of Convertible Instruments, created by Dinesh Jain on 01/11/2019.
Dinesh  Jain
Quiz by Dinesh Jain, updated more than 1 year ago
Dinesh  Jain
Created by Dinesh Jain about 5 years ago
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Resource summary

Question 1

Question
Face value of bond = Rs.100; Rate of interest on bond = 8%; Return on similar bonds = 9.5%. Term = 4 years. Bond is convertible into 5 shares. CMP of equity share = 15. What is bond's conversion value?
Answer
  • 100
  • 95.24
  • 75
  • 15

Question 2

Question
Face value of bond = Rs.100; CMP of bond = Rs.100 Rate of interest on bond = 8%; Return on similar bonds = 9.5%. Term = 4 years. Bond is convertible into 5 shares. CMP of equity share = 15. What is bond's conversion premium per share?
Answer
  • 20
  • 15
  • 5
  • 25

Question 3

Question
Face value of bond = Rs.100; CMP of bond = Rs.100; Rate of interest on bond = 8%; Return on similar bonds = 9.5%. Term = 4 years. Bond is convertible into 5 shares. CMP of equity share = 15. What is conversion parity price?
Answer
  • 20
  • 15
  • 100
  • 10

Question 4

Question
Face value of bond = Rs.100; Rate of interest on bond = 8%; Return on similar bonds = 9.5%. Term = 4 years. Bond is convertible into 5 shares. CMP of equity share = 15. What is bond's straight value?
Answer
  • 100
  • 75
  • 95.26
  • 89.67

Question 5

Question
Face value of bond = Rs.100; CMP of bond = Rs.100; Rate of interest on bond = 8%; Return on similar bonds = 9.5%. Term = 4 years. Bond is convertible into 5 shares. CMP of equity share = 15. What is downside risk (in Rs.)?
Answer
  • 0
  • 10.33
  • 4.76
  • 25

Question 6

Question
Face value of bond = Rs.100; Interest rate on bond = 10%. Bond is convertible into 10 shares. Likely dividend per share is Rs.0.2. What is favorable income differential per share?
Answer
  • 9.80
  • 0.20
  • 0.80
  • 8

Question 7

Question
Existing EPS = Rs.2; Existing no of shares = 1,00,000. Company plans to issue 7% preference capital of Rs.10,00,000. What should be the increase in earnings post preference issue to maintain EPS?
Answer
  • No change required
  • Increase by 7%
  • Increase by 35%
  • Increase by 70%

Question 8

Question
Conversion premium per bond = Rs.100. One bond is convertible into 10 shares. Favorable income differential per share = Rs.4. How much is the premium payback period?
Answer
  • 25 years
  • 2.5 years
  • 10 years
  • None of the above

Question 9

Question
Face value = Rs.1,000; Rate of interest = 10%. The bond is convertible into 10 equity shares whose current market price is Rs.80. Growth rate in equity share is 10%. What will be the terminal cash flow at end of year 5?
Answer
  • 800
  • 1,000
  • 1,288.41
  • None of the above

Question 10

Question
CMP of bond = Rs.1,200. One bond is convertible into 10 shares. CMP of share is Rs.125. Should the investor opt for conversion?
Answer
  • Yes
  • No
  • Investor would be indifferent on conversion
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