Question 1

Western Industrial Products is considering a project with a four-year life and an initial cost of $212,000.The discount rate for the project is 16 percent.The firm expects to sell 9,600 units on the last day of each year.The cash flow per unit is $50.The firm will have the option to abandon this project at the end of year one (after year one's sales) at which time the project's assets could be sold for an estimated $125,000.The firm should abandon the project at the end of year one if the expected level of annual sales,starting with year 2,falls to _____ units or less.Ignore taxes.

Accepted Answer

A)  1,113 units
B)  1,267 units
C)  1,922 units
D)  2,034 units
E)  2,108 unitsF) C) and D)
G) B) and D)

Question 2

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) C) and E)
G) B) and E)

Question 3

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

Question 4

The price of Time Squared Corp.stock will be either $80 or $95 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 6 percent and the current price of Time Squared Corp.stock is $85.What is the value of a call option if the exercise price is $75 per share?

Accepted Answer

A)  $14.25
B)  $15.06
C)  $18.78
D)  $24.25
E)  $25.06F) B) and C)
G) None of the above A

Question 5

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

Accepted Answer

A)  strike price minus the initial cost of the option
B)  exercise price plus the price of the underlying stock
C)  strike price
D)  market price of the underlying stock
E)  purchase priceF) A) and B)
G) A) and C)

Question 6

Elizabeth owns a call option on 100 shares of Microsoft stock.She has decided to buy those shares.This purchase is commonly referred to as:

Accepted Answer

A)  striking the asset.
B)  expiring the option.
C)  exercising the option.
D)  putting the collar.
E)  the collar option.F) D) and E)
G) C) and D)

Question 7

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) A) and E)

Question 8

Call options are frequently attached to bonds,making them callable at the option of the issuer.Consider a firm that just issued two sets of bonds:
 One is callable,has a 7 percent coupon rate,15 years to maturity,and cannot be called during the first three years; the second is noncallable,has a 7 percent coupon rate,15 years to maturity,and is identical to the first bond in every way except for the call option.Suppose the noncallable bonds are sold for $1,000 each.Will the callable bonds sell for more or less than $1,000?
 Who "purchases" the option in this case and who "sells" it?

Accepted Answer

The callable bond will sell for less tha...

Question 9

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 D)

Question 10

Which of the following will decrease the value of a call option?
I.a decrease in the exercise price
II.a decrease in the value of the underlying security
III.an increase in the risk-free rate
IV.an increase in the time to expiration

Accepted Answer

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

Question 11

Explain how the floor and the ceiling prices for a convertible bond are determined.

Accepted Answer

The floor,or minimum,value of ...

Question 12

Latetia owns a convertible bond.Which one of the following terms would describe the value of this bond if it were not convertible?

Accepted Answer

A)  conversion premium
B)  straight bond value
C)  conversion value
D)  inverted value
E)  market valueF) D) and E)
G) All of the above

Question 13

Which one of the following terms applies to an option that has an office building as its underlying asset?

Accepted Answer

A)  financial option
B)  liquid option
C)  fixed option
D)  real option
E)  concrete optionF) C) and E)
G) All of the above D

Question 14

What are the basic similarities and basic differences between warrants and call options?

Accepted Answer

Both warrants and call options grant the...

Question 15

An increase in which of the following will increase the value of a call?
I.time to expiration
II.underlying stock price
III.risk-free rate of return
IV.price volatility of the underlying stock

Accepted Answer

A)  I and III only
B)  II, III, and IV only
C)  I, III, and IV only
D)  I, II, and III only
E)  I, II, III, and IVF) A) and B)
G) None of the above

Question 16

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) A) and B)
G) A) and C)

Question 17

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 D)
G) A) and E) E

Question 18

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 C)
G) A) and B)

Question 19

Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _____ option on the assets of the firm with a strike price of _____.

Accepted Answer

A)  put; $180,000.
B)  put; $265,000.
C)  warrant; $265,000.
D)  call; $180,000.
E)  call; $265,000.F) A) and D)
G) A) and C)

Question 20

Employee stock options:

Accepted Answer

A)  usually have a positive intrinsic value when issued.
B)  must be backdated at least six months to comply with Sarbanes-Oxley.
C)  are generally "underwater" when issued.
D)  are frequently repriced if the options are in-the-money.
E)  are generally issued with a zero intrinsic value.F) B) and E)
G) A) and E)

Exam 24: Options and Corporate Finance

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

Correct Answer
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Correct Answer
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A

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

Correct Answer
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Elizabeth owns a call option on 100 shares of Microsoft stock.She has decided to buy those shares.This purchase is commonly referred to as:

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:

Correct Answer
verified

Correct Answer
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The callable bond will sell for less tha...
View Answer

Correct Answer
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Which of the following will decrease the value of a call option? I.a decrease in the exercise price II.a decrease in the value of the underlying security III.an increase in the risk-free rate IV.an increase in the time to expiration

Correct Answer
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Explain how the floor and the ceiling prices for a convertible bond are determined.

Correct Answer
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The floor,or minimum,value of ...
View Answer

Latetia owns a convertible bond.Which one of the following terms would describe the value of this bond if it were not convertible?

Correct Answer
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Which one of the following terms applies to an option that has an office building as its underlying asset?

Correct Answer
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D

What are the basic similarities and basic differences between warrants and call options?

Correct Answer
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Both warrants and call options grant the...
View Answer

An increase in which of the following will increase the value of a call? I.time to expiration II.underlying stock price III.risk-free rate of return IV.price volatility of the underlying stock

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

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

Correct Answer
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E

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 Answer
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Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _ option on the assets of the firm with a strike price of _.

Correct Answer
verified

Employee stock options:

Correct Answer
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Exam 24: Options and Corporate Finance

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

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

Elizabeth owns a call option on 100 shares of Microsoft stock.She has decided to buy those shares.This purchase is commonly referred to as:

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

Correct AnswerverifiedThe callable bond will sell for less tha...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Which of the following will decrease the value of a call option? I.a decrease in the exercise price II.a decrease in the value of the underlying security III.an increase in the risk-free rate IV.an increase in the time to expiration

Correct AnswerverifiedShow Answer

Explain how the floor and the ceiling prices for a convertible bond are determined.

Correct AnswerverifiedThe floor,or minimum,value of ...View AnswerShow Answer

Latetia owns a convertible bond.Which one of the following terms would describe the value of this bond if it were not convertible?

Correct AnswerverifiedShow Answer

Which one of the following terms applies to an option that has an office building as its underlying asset?

Correct AnswerverifiedD

What are the basic similarities and basic differences between warrants and call options?

Correct AnswerverifiedBoth warrants and call options grant the...View AnswerShow Answer

An increase in which of the following will increase the value of a call? I.time to expiration II.underlying stock price III.risk-free rate of return IV.price volatility of the underlying stock

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedE

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

Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _____ option on the assets of the firm with a strike price of _____.

Correct AnswerverifiedShow Answer

Employee stock options:

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A

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Correct Answer
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Correct Answer
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Correct Answer
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The callable bond will sell for less tha...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
verified
The floor,or minimum,value of ...
View Answer

Correct Answer
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Correct Answer
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D

Correct Answer
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Both warrants and call options grant the...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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E

Correct Answer
verified

Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _ option on the assets of the firm with a strike price of _.

Correct Answer
verified

Correct Answer
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