Question 1

Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

Accepted Answer

A)  option
B)  forward contract
C)  futures contract
D)  swap
E)  intrinsic contractF) D) and E)
G) B) and C)

Question 2

What is the primary difference between an American call option and a European call option?

Accepted Answer

A)  The American call has a fixed strike price while the European strike price varies over time.
B)  An American call is a right to buy while a European call is an obligation to buy.
C)  An American call has an expiration date while the European call does not.
D)  An American call is written on 100 shares of the underlying security while the European call covers 1,000 shares.
E)  An American call can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.F) B) and E)
G) A) and B)

Question 3

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Accepted Answer

A)  right to sell
B)  right to buy
C)  obligation to sell
D)  obligation to buy
E)  obligation to tradeF) All of the above
G) D) and E)

Question 4

You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

Accepted Answer

A)  -$115
B)  -$105
C)  $20
D)  $105
E)  $210F) B) and C)
G) B) and E)

Question 5

The assets of Uptown Stores are currently worth $138,000.These assets are expected to be worth either $120,000 or $150,000 one year from now.The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year.The risk-free rate is 4.3 percent.What is the value of the equity in this firm?

Accepted Answer

A)  $11,920
B)  $15,298
C)  $19,507
D)  $21,347
E)  $26,408F) B) and E)
G) None of the above

Question 6

Your company is deciding when to invest in a new machine.The new machine will increase cash flow by $240,000 per year.You believe the technology used in the machine has a 10-year life; in other words,no matter when you purchase the machine,it will be obsolete 10 years from today.The machine is currently priced at $1,200,000.The cost of the machine will decline by $120,000 per year until it reaches $720,000,where it will remain.Your required return is 8 percent.In which year should you purchase the machine?

Accepted Answer

A)  Year 0
B)  Year 1
C)  Year 2
D)  Year 3
E)  Year 4F) A) and B)
G) A) and C)

Question 7

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) B) and D)
G) A) and E)

Question 8

Which one of the following statements regarding employee stock options (ESOs) is correct?

Accepted Answer

A)  ESOs grant an employee the right to buy a fixed number of shares of company stock at the market price.
B)  Employees must exercise their ESOs prior to those ESOs becoming vested.
C)  Employees may forfeit their ESOs if they terminate their employment with the issuing firm.
D)  If a firm issues ESOs it must make them available to all employees.
E)  Employees can sell their ESOs if they do not want to personally exercise them.F) B) and C)
G) A) and B)

Question 9

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) B) and D)
G) None of the above

Question 10

Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year.The risk-free rate of return is 3.8 percent.The assets of the business are expected to be worth either $23,000 or $35,000 in one year.Currently,these assets are worth $27,500.What is the current value of the bond?

Accepted Answer

A)  $17,746
B)  $19,207
C)  $20,222
D)  $22,549
E)  $23,048F) C) and D)
G) A) and B)

Question 11

What is the value of five August $25 call contracts on Dove stock?

Accepted Answer

A)  $34
B)  $68
C)  $340
D)  $690
E)  $3,450F) B) and C)
G) A) and E)

Question 12

Last week,you purchased a call option on Edgewater stock with a strike price of $40.The stock price was $39.80 and the option price was $0.45 at that time.What is the intrinsic value per share if the stock is currently priced at $39.10?

Accepted Answer

A)  -$90
B)  -$70
C)  $0
D)  $70
E)  $90F) D) and E)
G) A) and C)

Question 13

Which of the following are managerial options once a project is commenced?
I.modifying the production process
II.re-pricing the product
III.revising the marketing plan
IV.modifying the product's color and shape

Accepted Answer

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

Question 14

Circle Stores stock is priced at $28 a share.A $40 call on this stock has five months until expiration and a call price of $0.15.Why would an investor purchase a call that is so far out of the money?

Accepted Answer

Students should discuss the impact of ti...

Question 15

Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?

Accepted Answer

The analogy only works for leveraged fir...

Question 16

Which one of the following describes the intrinsic value of a call option?

Accepted Answer

A)  the call's upper bound value
B)  the call's lower bound value
C)  market price of the underlying security
D)  zero, if the call is in-the-money
E)  negative amount, if the call is out-of-the-money.F) C) and E)
G) A) and B)

Question 17

The price of Dimension,Inc.stock will be either $65 or $87 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 5 percent.Suppose the current price of Dimension stock is $70.What is the value of the call option if the exercise price is $70 per share?

Accepted Answer

A)  $6.26
B)  $8.48
C)  $11.58
D)  $15.39
E)  $17.62F) B) and D)
G) A) and B)

Question 18

Which of the following statements are correct concerning convertible bonds?
I.New shares of stock are issued when a convertible bond is converted.
II.A convertible bond is similar to a bond with a call option.
III.A convertible bond should always be worth less than a comparable straight bond.
IV.A convertible bond can be described as having upside potential with downside protection.

Accepted Answer

A)  I and III only
B)  I, II, and IV only
C)  I, II, and III only
D)  I, III, and IV only
E)  II, III, and IV onlyF) A) and D)
G) B) and E)

Question 19

The common stock of Westover Foods is currently priced at $28.80 a share.One year from now,the stock price is expected to be either $25 or $30 a share.The risk-free rate of return is 4.2 percent.What is the current value of one call option on this stock if the exercise price is $27.50?

Accepted Answer

A)  $0
B)  $2.40
C)  $3.00
D)  $3.80
E)  $4.00F) None of the above
G) A) and D)

Question 20

Jeff owns a $1,000 face value bond.He can exchange that bond for 25 shares of KNJ stock at any time within the next 2 years.What type of bond does Jeff own?

Accepted Answer

A)  secured
B)  warranted
C)  convertible
D)  junk
E)  callableF) B) and E)
G) B) and D)

Exam 24: Options and Corporate Finance

Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

Correct Answer
verified

Which of the following are managerial options once a project is commenced? I.modifying the production process II.re-pricing the product III.revising the marketing plan IV.modifying the product's color and shape

Correct Answer
verified

Jeff owns a $1,000 face value bond.He can exchange that bond for 25 shares of KNJ stock at any time within the next 2 years.What type of bond does Jeff own?

Correct Answer
verified

The common stock of Westover Foods is currently priced at $28.80 a share.One year from now,the stock price is expected to be either $25 or $30 a share.The risk-free rate of return is 4.2 percent.What is the current value of one call option on this stock if the exercise price is $27.50?

Correct Answer
verified

Correct Answer
verified

Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?

Correct Answer
verified
The analogy only works for leveraged fir...
View Answer

What is the primary difference between an American call option and a European call option?

Correct Answer
verified

Which one of the following describes the intrinsic value of a call option?

Correct Answer
verified

You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

Correct Answer
verified

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
verified

What is the value of five August $25 call contracts on Dove stock?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Correct Answer
verified

Last week,you purchased a call option on Edgewater stock with a strike price of $40.The stock price was $39.80 and the option price was $0.45 at that time.What is the intrinsic value per share if the stock is currently priced at $39.10?

Correct Answer
verified

Correct Answer
verified

The price of Dimension,Inc.stock will be either $65 or $87 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 5 percent.Suppose the current price of Dimension stock is $70.What is the value of the call option if the exercise price is $70 per share?

Correct Answer
verified

Circle Stores stock is priced at $28 a share.A $40 call on this stock has five months until expiration and a call price of $0.15.Why would an investor purchase a call that is so far out of the money?

Correct Answer
verified
Students should discuss the impact of ti...
View Answer

Correct Answer
verified

Which one of the following statements regarding employee stock options (ESOs) is correct?

Correct Answer
verified

Exam 24: Options and Corporate Finance

Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

Correct AnswerverifiedShow Answer

Which of the following are managerial options once a project is commenced? I.modifying the production process II.re-pricing the product III.revising the marketing plan IV.modifying the product's color and shape

Correct AnswerverifiedShow Answer

Jeff owns a $1,000 face value bond.He can exchange that bond for 25 shares of KNJ stock at any time within the next 2 years.What type of bond does Jeff own?

Correct AnswerverifiedShow Answer

The common stock of Westover Foods is currently priced at $28.80 a share.One year from now,the stock price is expected to be either $25 or $30 a share.The risk-free rate of return is 4.2 percent.What is the current value of one call option on this stock if the exercise price is $27.50?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?

Correct AnswerverifiedThe analogy only works for leveraged fir...View AnswerShow Answer

What is the primary difference between an American call option and a European call option?

Correct AnswerverifiedShow Answer

Which one of the following describes the intrinsic value of a call option?

Correct AnswerverifiedShow Answer

You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

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

What is the value of five August $25 call contracts on Dove stock?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Correct AnswerverifiedShow Answer

Last week,you purchased a call option on Edgewater stock with a strike price of $40.The stock price was $39.80 and the option price was $0.45 at that time.What is the intrinsic value per share if the stock is currently priced at $39.10?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The price of Dimension,Inc.stock will be either $65 or $87 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 5 percent.Suppose the current price of Dimension stock is $70.What is the value of the call option if the exercise price is $70 per share?

Correct AnswerverifiedShow Answer

Circle Stores stock is priced at $28 a share.A $40 call on this stock has five months until expiration and a call price of $0.15.Why would an investor purchase a call that is so far out of the money?

Correct AnswerverifiedStudents should discuss the impact of ti...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements regarding employee stock options (ESOs) is correct?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The analogy only works for leveraged fir...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
Students should discuss the impact of ti...
View Answer

Correct Answer
verified

Correct Answer
verified