Exam 24: Options and Corporate Finance

Lucinda owns a $1,000 face value convertible bond that matures in six years, has a coupon rate of 6.5 percent, paid annually, and a conversion price of $17.50. Similar bonds have a current market return of 6.35 percent while the related stock is priced at $18.03 per share. What is the conversion value of this bond?

A $1,000 convertible debenture has a conversion price of $75 per share, an annual coupon payment of $55, and a related stock price of $72.40 a share. What is the conversion value of this bond?

QLM stock is currently selling for $28.60 a share. The December 25 call is quoted at $1.15 a share compared to $.05 a share for the December 25 put. What is the cost of two December $25 put option contracts on this stock?

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?

Su Lee wrote three call option contracts with a strike price of $22.50 and an option price of $.55 per share. What is the net profit on this investment if the price of the underlying stock is $22.95 per share on the option expiration date? Ignore trading costs and taxes.

Last week, you purchased a call option on a stock with a strike price of $35. The stock price was $33.30 and the option price was $.35 at that time. What is the current intrinsic value per share if the stock is now selling at $36.60 a share?

You recently purchased six put option contracts on a stock with an exercise price of $45 and an option premium of $.65. What is the total intrinsic value of these contracts if the stock is currently selling for $46.20 a share?

Suppose the current share price of Dimension stock is $46. One year from now, this stock will sell for either $38 or $52 a share. T-bills currently yield 3.3 percent. What is the per share value of a Dimension call option if the exercise price is $40 per share and the expiration is one year from now?

Employee stock options:

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.

Three months ago, Toy Town introduced a new toy for preschool children. The store expected this toy to be an instant success and a fast-moving item. To their surprise, children have zero interest in this toy so sales have been abysmal. Which one of the following options should Toy Town consider in respect to this toy?

A convertible bond currently sells for $1,125, has a $1,000 face value, pays interest annually, and matures in six years. The bond is convertible into shares of common stock at a conversion price of $20. How many shares of stock will be received if five bonds are converted?

Les sold a one-month European $25 call and a one-month European $25 put on ABC stock. The call price per share is $.70 and the put price per share is $1.80. What will be the net profit on these option positions if the stock price is $23 on the day the options expire? Ignore trading costs and taxes.

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

You sold two $42.50 put contracts on CTB stock at an option price per share of $1.90. The options were exercised today when the market price was $38.60 a share. What is your net profit on this investment? Ignore transaction costs and taxes.

The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within ________ days of the grant.

The market price of NM stock has been volatile recently. Since you think the volatility will continue, you purchase a two-month European NM call option with a strike price of $30 and an option price of $.60. You also purchase a two-month European NM put option with a strike price of $30 and an option price of $1.20. What will be your net profit on these option positions if the stock price is $28 on the day the options expire? Ignore trading costs and taxes.

Steve owns an option that grants him the right to purchase shares of LK Tool stock at $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?

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

You own one call option with an exercise price of $27.50 on World Wide Stores stock. The stock is currently selling for $28 a share but is expected to sell for either $26 or $30 a share in one year. The risk-free rate of return is 3.65 percent and the inflation rate is 3.2 percent. What is the current call option price if the option expires one year from now?