7/30/2019 Chapter 20 - Hybrid Financing - Prefernce Shares,
Leasing, Options, Warrants, & Convertibles
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MANAGEMENT CONSULTANCY - Solutions Manual
CHAPTER 20
HYBRID FINANCING: PREFERENCE SHARES,
LEASING, OPTIONS, WARRANTS, AND
CONVERTIBLES
I. Questions
1. Capitalizing lease payments means computing the present value
of futurelease payments and showing them as an asset and liability
on the balancesheet.
2. The preemptive right provides current shareholders with a
first option tobuy new shares. In this fashion, their voting right
and claim to earningscannot be diluted without their consent.
3. The actual owners have the last claim to any and all funds
that remain. Ifthe firm is profitable, this could represent a
substantial amount. Thus, theresidual claim may represent a
privilege as well as a potential drawback.Generally, other
providers of capital may only receive a fixed amount.
4. Preference share is a hybrid or intermediate form of security
possessingsome of the characteristics of debt and ordinary shares.
The fixed amount
provision is similar to debt, but the noncontractual obligation
is similar toordinary shares. Though the preference shareholder
does not have anownership interest in the firm, the priority of
claim is higher than that ofthe ordinary shareholder.
5. With the cumulative feature, if preference share dividends
are not paid inany one year, they accumulate and must be paid in
total before ordinaryshareholders can receive dividends. Even
though preference sharedividends are not a contractual obligation
as is true of interest on debt, thecumulative feature tends to make
corporations very aware of obligationsto preference shareholders.
Preference shareholders may even receive newsecurities for
forgiveness of missed dividend payments.
II. Multiple Choice
1. B 11. C 21. B 31. C
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7/30/2019 Chapter 20 - Hybrid Financing - Prefernce Shares,
Leasing, Options, Warrants, & Convertibles
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Chapter 20 Hybrid Financing: Preference Shares, Leasing,
Options, Warrants, and Convertibles
2. C 12. D 22. B 32. A
3. D 13. A 23. C 33. C4. D 14. C 24. A 34. B5. A 15. B 25. B 35.
A
6. C 16. D 26. D7. D 17. D 27. C8. D 18. B 28. B9. D 19. D 29.
A10. A 20. A 30. C
Supporting computations:
8. Cost of retained earnings = + g = + 12%
= 17.6%
where D1 equals the expected dividends one period from today,
which isP4.48 (P4 x 1.12); g equals the expected growth rate in
dividends and I0equals the value of the shares.
9. kp = = = 19.15%
where D1 equals the expected dividend one period from today
(P9), and I0equals the market rate as in case of a new issue the
net proceeds of P47(P50 P3).
10.Source Cost Weight WAC LT debt 10% .30 .03
PS 15% .20 .03CE 20% .50 .10
.16
12. The weighted average cost of capital (WACCAT) is:
k0t = Wiki (1 Tc) + Weke = 9% (1 .4) + 18% = 11.7%
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D1
I0
D1
I0
P4.48
P80
P9
P47
