Question 1

The option to wait:
I.may be of minimal value if a project is dependent upon rapidly changing technology.
II.is partially dependent upon the discount rate applied to the project being evaluated.
III.is defined as temporarily shutting down a project for a period of time.
IV.has a value equal to the NPV of a project if it is started at a later date minus the NPV if the project is started today.

Accepted Answer

A)   I and III only
B)   II and IV only
C)   I and II only
D)   II,III,and IV only
E)   I,II,and IV onlyF) All of the above
G) A) and B)

Question 2

The difference between the conversion price and the current stock price,divided by the current stock price,is called the:

Accepted Answer

A)   conversion premium.
B)   straight bond value.
C)   conversion value.
D)   conversion price.
E)   conversion ratio.F) A) and B)
G) C) and E)

Question 3

When warrants are exercised,the:

Accepted Answer

A)   earnings per share decrease.
B)   earnings per share remain constant.
C)   total equity in a firm remains constant.
D)   total equity in a firm decreases.
E)   number of bonds outstanding increases.F) B) and D)
G) C) and D) A

Question 4

The Glass House has total assets currently valued at $17,300.These assets are expected to increase in value to either $18,000 or $21,000 by next year.The company has a pure discount bond outstanding with a face value of $20,000.This bond matures in one year.Currently,U.S.Treasury bills are yielding 5.4 percent.What is the value of the equity in this firm?

Accepted Answer

A)   -$3,000.00
B)   -$908.00
C)   $0
D)   $74.07
E)   $122.20F) B) and D)
G) A) and E)

Question 5

What is the final day on which an option can be exercised called?

Accepted Answer

A)   payment date
B)   ex-option date
C)   opening date
D)   expiration date
E)   intrinsic dateF) A) and B)
G) C) and D)

Question 6

Which one of the following statements correctly describes your situation as the holder of a European call option?

Accepted Answer

A)   You are obligated to buy if the option is exercised.
B)   You have a right to sell.
C)   You have a right to buy but only on the expiration date.
D)   You are obligated to sell if the option is exercised.
E)   You have a right to buy at any time before the option expires.F) B) and E)
G) B) and D)

Question 7

You currently own a one-year call option on Rail Company,Inc. ,stock.The current stock price is $52.75 and the risk-free rate of return is 4.25 percent.Your option has a strike price of $50 and you assume the option will finish in the money.What is the current value of your call option?

Accepted Answer

A)   $1.20
B)   $2.59
C)   $4.79
D)   $5.13
E)   $7.27F) A) and B)
G) A) and C)

Question 8

KT Enterprises has expanded its operations into a new field,which is the production of everyday dinnerware.If this project goes well,the firm has the option to expand its production into fine china.What type of option is this?

Accepted Answer

A)   financial
B)   strategic
C)   put
D)   intangible
E)   callF) A) and E)
G) A) and D)

Question 9

Steve owns an option which grants him the right to purchase shares of Lokier Tool stock at a price of $45 a share.Currently,the stock is selling for $52.40 a share.Steve would like to realize his profits but is not permitted to exercise the option for another two weeks.Which one of the following does Steve own?

Accepted Answer

A)   straight bond
B)   American call
C)   American put
D)   European call
E)   European putF) A) and B)
G) A) and C)

Question 10

You sold one call option contract with a strike price of $55 when the option was quoted at $0.80.The option expires today when the value of the underlying stock is $53.70.Ignoring trading costs and taxes,what is the net profit or loss on this investment?

Accepted Answer

A)   -$250
B)   -$80
C)   $0
D)   $50
E)   $80F) A) and B)
G) C) and E) E

Question 11

Which one of the following considers all of the options implicit in a project?

Accepted Answer

A)   expansion planning
B)   contingency planning
C)   asset management review
D)   prospective evaluation
E)   strategic evaluationF) A) and D)
G) B) and C)

Question 12

Last month,Hill Side Markets introduced a new board game.Consumer demand has been overwhelming and appears that strong demand will exist over the long-term as young children absolutely love the game.Given this,which one of the following options should Hill Side Markets consider in respect to this game?

Accepted Answer

A)   suspension
B)   expansion
C)   abandonment
D)   contraction
E)   withdrawalF) B) and D)
G) C) and D)

Question 13

Mark owns both a March $20 put and a March $20 call on Alpha stock.Which one of the following statements correctly relates to Mark's position? Ignore taxes and transaction costs.

Accepted Answer

A)   A price decrease in Alpha stock will increase the value of Mark's call option.
B)   A March $30 call is worth more than Mark's $20 call.
C)   The time premium on an April $20 put is less than the time premium on Mark's put.(Assume both puts expire in the same calendar year. ) 
D)   A price increase in Alpha stock from $26 to $28 will increase the value of Mark's put.
E)   If the intrinsic value of Mark's put increases by $1 then the intrinsic value of his call must either decrease by $1 or equal zero.F) A) and D)
G) A) and C)

Question 14

Three months ago,Central Supply stock was selling for $51.40 a share.At that time,you purchased five put options on the stock with a strike price of $52 per share and an option price of $0.60 per share.The option expires today when the value of the stock is $42.70 per share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

Accepted Answer

A)   -$1,300
B)   -$1,000
C)   -$300
D)   $4,350
E)   $4,650F) B) and E)
G) A) and B)

Question 15

You own one call option with an exercise price of $40 on S'more Good stock.The stock is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in one year.The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent.What is the current call option price if the option expires one year from now?

Accepted Answer

A)   $0.55
B)   $0.69
C)   $1.37
D)   $2.43
E)   $2.75F) All of the above
G) None of the above E

Question 16

Julie opted to exercise her August option on June 20th and as a result received $2,500 for the sale of her shares.Which one of the following did Julie own?

Accepted Answer

A)   warrant
B)   American call
C)   American put
D)   European call
E)   European putF) B) and C)
G) B) and D)

Question 17

You own eight call option contracts on Swift Water Tours stock with a strike price of $15.When you purchased the shares the option price was $0.30 and the stock price was $15.25.What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share?

Accepted Answer

A)   -$83
B)   -$1.08
C)   $0
D)   $108
E)   $864F) A) and B)
G) None of the above

Question 18

Several rumors concerning Value Rite stock are causing the market price of the stock to be quite volatile.Given this situation,you decide to buy both a one-month European $25 put and a one-month European $25 call on this stock.The call price per share is $0.60 and the put price per share is $2.10.What will be your net profit or loss on these option positions if the stock price is $18 on the day the options expire? Ignore trading costs and taxes.

Accepted Answer

A)   -$210
B)   -$150
C)   -$60
D)   $430
E)   $490F) A) and D)
G) C) and E)

Question 19

A convertible bond has a face value of $1,000 and a conversion price of $12.50.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 9 percent.The current price of the stock is $13.40 per share.What is the straight bond value?

Accepted Answer

A)   $782.57
B)   $781.82
C)   $827.74
D)   $832.09
E)   $843.47F) C) and E)
G) B) and D)

Question 20

Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year.The value of Buckeye's assets is currently $1,350.Jim Tressell,the CEO,believes that the assets in the firm will be worth either $600 or $1,700 in a year.The going rate on one-year T-bills is 6 percent.What is the current value of the firm's debt?

Accepted Answer

A)   $601.18
B)   $851.11
C)   $864.24
D)   $878.78
E)   $911.03F) C) and E)
G) C) and D)

Exam 24: Options and Corporate Finance

Correct Answer
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The difference between the conversion price and the current stock price,divided by the current stock price,is called the:

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When warrants are exercised,the:

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A

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What is the final day on which an option can be exercised called?

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Which one of the following statements correctly describes your situation as the holder of a European call option?

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You currently own a one-year call option on Rail Company,Inc. ,stock.The current stock price is $52.75 and the risk-free rate of return is 4.25 percent.Your option has a strike price of $50 and you assume the option will finish in the money.What is the current value of your call option?

Correct Answer
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KT Enterprises has expanded its operations into a new field,which is the production of everyday dinnerware.If this project goes well,the firm has the option to expand its production into fine china.What type of option is this?

Correct Answer
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Correct Answer
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You sold one call option contract with a strike price of $55 when the option was quoted at $0.80.The option expires today when the value of the underlying stock is $53.70.Ignoring trading costs and taxes,what is the net profit or loss on this investment?

Correct Answer
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E

Which one of the following considers all of the options implicit in a project?

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Mark owns both a March $20 put and a March $20 call on Alpha stock.Which one of the following statements correctly relates to Mark's position? Ignore taxes and transaction costs.

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E

Julie opted to exercise her August option on June 20^th and as a result received $2,500 for the sale of her shares.Which one of the following did Julie own?

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You own eight call option contracts on Swift Water Tours stock with a strike price of $15.When you purchased the shares the option price was $0.30 and the stock price was $15.25.What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share?

Correct Answer
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Correct Answer
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A convertible bond has a face value of $1,000 and a conversion price of $12.50.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 9 percent.The current price of the stock is $13.40 per share.What is the straight bond value?

Correct Answer
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Correct Answer
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Exam 24: Options and Corporate Finance

Correct AnswerverifiedShow Answer

The difference between the conversion price and the current stock price,divided by the current stock price,is called the:

Correct AnswerverifiedShow Answer

When warrants are exercised,the:

Correct AnswerverifiedA

Correct AnswerverifiedShow Answer

What is the final day on which an option can be exercised called?

Correct AnswerverifiedShow Answer

Which one of the following statements correctly describes your situation as the holder of a European call option?

Correct AnswerverifiedShow Answer

You currently own a one-year call option on Rail Company,Inc. ,stock.The current stock price is $52.75 and the risk-free rate of return is 4.25 percent.Your option has a strike price of $50 and you assume the option will finish in the money.What is the current value of your call option?

Correct AnswerverifiedShow Answer

KT Enterprises has expanded its operations into a new field,which is the production of everyday dinnerware.If this project goes well,the firm has the option to expand its production into fine china.What type of option is this?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You sold one call option contract with a strike price of $55 when the option was quoted at $0.80.The option expires today when the value of the underlying stock is $53.70.Ignoring trading costs and taxes,what is the net profit or loss on this investment?

Correct AnswerverifiedE

Which one of the following considers all of the options implicit in a project?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Mark owns both a March $20 put and a March $20 call on Alpha stock.Which one of the following statements correctly relates to Mark's position? Ignore taxes and transaction costs.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedE

Julie opted to exercise her August option on June 20th and as a result received $2,500 for the sale of her shares.Which one of the following did Julie own?

Correct AnswerverifiedShow Answer

You own eight call option contracts on Swift Water Tours stock with a strike price of $15.When you purchased the shares the option price was $0.30 and the stock price was $15.25.What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A convertible bond has a face value of $1,000 and a conversion price of $12.50.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 9 percent.The current price of the stock is $13.40 per share.What is the straight bond value?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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A

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E

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E

Julie opted to exercise her August option on June 20^th and as a result received $2,500 for the sale of her shares.Which one of the following did Julie own?

Correct Answer
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