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Exam 24: Options and Corporate Finance

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Question 31

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What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.

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The upper bound on a call is the stock p...

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Question 32

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

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

F) A) and B)
G) C) and D)

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Question 33

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

We are examining a new project.We expect to sell 8,000 units per year at $80 net cash flow apiece for the next 15 years.In other words,the annual operating cash flow is projected to be $80 × 8,000 = $640,000.The relevant discount rate is 16 percent,and the initial investment required is $2,740,000.The project can be dismantled after the first year and sold for $2,130,000.Suppose you think it is likely that expected sales will be revised upward to 9,600 units if the first year is a success and revised downward to 3,000 units if the first year is not a success.Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold.Naturally,expansion would be desirable only if the project is a success.This implies that if the project is a success,projected sales after expansion will be 19,200.Assume that success and failure are equally likely.Note that abandonment is still an option if the project is a failure.What is the value of the option to expand?

Patience is reviewing a project with projected sales of 4,200 units a year,a cash flow of $28 a unit,and a four-year project life.Assume all operating cash flows occur on the last day of each year.The initial cost of the project is $247,000.The relevant discount rate is 13 percent.Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $110,000.At what level of annual sales,starting in year 3,should she be willing to abandon this project?

Suzie is the controller of The Price Rite Company.She has been granted the right to buy 1,000 shares of her employer's stock at $25 a share anytime within the next three years.Which one of the following has Suzie been granted?

Which one of the following terms applies to the value of an option on its expiration date?

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

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?

Lucinda owns a convertible bond that matures in six years.The bond has a 9 percent coupon and pays interest annually.The face value of the bond is $1,000 and the conversion price is $22.Similar bonds have a market return of 8.75 percent.The current price of the stock is $21.60 per share.What is the conversion value of this bond?

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

Marti owns an option that allows him to purchase ABC stock at $50 a share.The $50 price is referred to as the:

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

The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?

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

Which one of the following is an example of a strategic option for a restaurant?

Which one of the following statements is correct?

You own nine convertible bonds.These bonds have a 7 percent coupon,a $1,000 face value,and mature in 6 years.The bonds are convertible into shares of common stock at a conversion price of $25.How many shares of stock will you receive if you convert all of your bonds?

You are considering a project that has been assigned a discount rate of 14 percent.If you start the project today,you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years.If you wait one year to start the project,the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years.What is the value of the option to wait?

Amy is a current shareholder of DJ Industries.She has been given the right to purchase an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right within the next 12 months.What is this security called that Amy has been given?