HYBRID FINANCING: PREFERRED STOCK, LEASING, WARRANTS, AND CONVERTIBLES
Taking a Wild Ride with Amazon’s Convertible Debt
Should preferred stock be considered as equity or debt? Explain.
Who are the major purchasers of nonconvertible preferred stock? Why?
Briefly explain the mechanics of adjustable rate and market auction
preferred stock.
What are the advantages and disadvantages of preferred stock to the
issuer?
Define each of these terms:
(1) sale-and-leaseback arrangements,
(2) operating leases,
(3) financial, or capital, leases.
What is off balance sheet financing, what is FASB 13, and how are
the two related?
List the sequence of events, for the lessee, leading to a lease
arrangement.
Why is it appropriate to compare the cost of lease financing with
that of debt financing?
Why does the comparison not depend on how the asset will actually be financed if it is not leased?
What is a warrant?
Describe how a new bond issue with warrants is valued.
How are warrants used in corporate financing?
The use of warrants lowers the coupon rate on the corresponding
debt issue.
Does this mean that the component cost of a debt plus warrants package is less than the cost of straight debt? Explain.
A company recently issued bonds with attached warrants. The
bond-plus-warrants package sells at a price equal to its $1,000 face
value.
The bonds mature in 10 years and have a 6 percent annual
coupon.
The company also has 10-year straight debt (with no war-
rants attached) outstanding.
The straight debt has a yield to maturity of 8 percent.
What is the straight-debt value of the bonds? What is the value of the warrants? ($865.80; $134.20)
What is a conversion ratio? A conversion price? A straight-bond value?
What is meant by a convertible’s floor value?
What are the advantages and disadvantages of convertibles to
issuers? To investors?
How do convertibles reduce possible conflicts of interest between
bondholders and stockholders?
A convertible bond has a par value of $1,000 and a conversion price
of $40.
The stock currently trades for $30 a share. What are the
bond’s conversion value and conversion ratio at t 0? [CR 25;
P0(CR) $30 $25 $750
What are some differences between debt-with-warrant financing
and convertible debt?
Explain how bonds with warrants might help small, risky firms sell
debt securities.
What are the three possible methods for reporting EPS when war-
rants and convertibles are outstanding?
Which methods are most used in practice?
Why should investors be concerned about a firm’s outstanding war-
rants and convertibles?