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Test Your Knowledge (True/False?)
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1) The residual theory of dividends implies that if the firm can not earn a return from investment of its earnings that is in excess of cost it should distribute the earnings by paying dividends to stockholder. T/F?
2) A security that is neither debt nor equity but derives its value from an underlying asset that is often another security is called a derivative security. T/F?
3) A warrant enables the firm to force a conversion. T/F?
4) A person who has sold short might buy a call to protect against a rise in the stock price. T/F?
5) A $1,000 par convertible bond can be converted into 25 shares of common stock. If the current price of the common were $20, the purchase of the convertible bond for future conversion would generally be considered a good investment. T/F?
2) A security that is neither debt nor equity but derives its value from an underlying asset that is often another security is called a derivative security. T/F?
3) A warrant enables the firm to force a conversion. T/F?
4) A person who has sold short might buy a call to protect against a rise in the stock price. T/F?
5) A $1,000 par convertible bond can be converted into 25 shares of common stock. If the current price of the common were $20, the purchase of the convertible bond for future conversion would generally be considered a good investment. T/F?
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