Question 1

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

Accepted Answer

A)  The higher the strike price on XYZ's options, the higher the option's price will be. 
B)  Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C)  If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D)  If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E)  The price of these call options is likely to rise if XYZ's stock price rises. 
A)  The higher the strike price on XYZ's options, the higher the option's price will be. 
B)  Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months. 
C)  If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase. 
D)  If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend. 
E)  The price of these call options is likely to rise if XYZ's stock price rises.

Question 2

An option that gives the holder the right to sell a stock at a specified price at some future time is

Accepted Answer

A)  a put option. 
B)  an out-of-the-money option. 
C)  a naked option. 
D)  a covered option. 
E)  a call option. 
A)  a put option. 
B)  an out-of-the-money option. 
C)  a naked option. 
D)  a covered option. 
E)  a call option.

Question 3

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

Accepted Answer

A)  The options with the $25 strike price will sell for less than the options with the $35 strike price. 
B)  The options with the $25 strike price have an exercise value greater than $5. 
C)  The options with the $35 strike price have an exercise value greater than $0. 
D)  If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5. 
E)  The options with the $25 strike price will sell for $5. 
A)  The options with the $25 strike price will sell for less than the options with the $35 strike price. 
B)  The options with the $25 strike price have an exercise value greater than $5. 
C)  The options with the $35 strike price have an exercise value greater than $0. 
D)  If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5. 
E)  The options with the $25 strike price will sell for $5.

Question 4

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17.The annual risk-free rate is 6.0%, based on daily compounding.A 1-year call option on the stock, with an exercise price of $22, is available.Based on the binomial model, what is the option's value? (Hint: Use daily compounding.)

Accepted Answer

A)  $2.43 
B)  $2.70 
C)  $2.99 
D)  $3.29 
E)  $3.62 
A)  $2.43 
B)  $2.70 
C)  $2.99 
D)  $3.29 
E)  $3.62

Question 5

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Accepted Answer

A) True 
 B)False

Question 6

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Accepted Answer

A) True 
 B)False

Question 7

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Accepted Answer

A) True 
 B)False

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

An option that gives the holder the right to sell a stock at a specified price at some future time is

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters

Exam 8: Financial Options and Applications in Corporate Finance

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

An option that gives the holder the right to sell a stock at a specified price at some future time is

Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available, some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

Filters