Exam 24: Options and Corporate Finance

A new 12-year project has estimated sales of 7,500 units per year, an end-of-year net cash flow of $65 per unit, a discount rate of 15.5 percent, and an initial cost of $2.5 million. Sales will be revised upward to 8,200 units if the first year is a success and revised downward to 5,000 units if the first year is not a success. Suppose the scale of the project can be doubled in one year thereby increasing the sales projected to 16,800 units. Naturally, expansion would be desirable only if the project is a success. The project could also be dismantled after the first year and sold for $1,900,000. Assume that success and failure are equally likely. What is the current value of the option to expand?

You are considering a project that has been assigned a discount rate of 14.3 percent. If you start the project today, you will incur an initial cost of $11,400 and will receive cash inflows of $6,800 a year for two years. If you wait one year to start the project, the initial cost will rise to $12,100 and the cash flows will increase to $7,200 a year for two years. What is the value of the option to wait?

A November $40 call has a premium of $4.60 a share while the underlying stock is priced at $44.15. What is the intrinsic value of this call?

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

Jen is the holder of a European call option. Given this, she:

A stock currently sells for $34 a share but is expected to increase in value over the next six months to at least $36 a share. Assume there are 6-month options available on this stock with an exercise price of $35. Which of these options should have the most value today?

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

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?

Stu purchased six put options on XY stock with a strike price of $45 and an option price of $2.60 per share. The option expires today when the value of the stock is $41.40 per share. What is the net profit on this investment? Ignore trading costs and taxes.

The value of a convertible bond issued by a firm whose stock price exceeds the bond's conversion price will:

The maximum value of a convertible bond is theoretically:

What is another name for an option's strike price?

Cara wrote a put option contract on EZ stock with an exercise price of $40 per share and an option price of $.65 per share. Today, the contracts expire and the stock is selling for $34.30 a share. What is the net profit on this investment? Ignore trading costs and taxes.

Theresa sold ten call option contracts with a strike price of $25 when the option was quoted at $.55 per share. The options expire today when the value of the underlying stock is $24.10. Ignoring trading costs and taxes, what is the net profit on this investment?

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

The price of TSC stock will be either $42 or $46 at the end of the year. Currently, T-bills yield 4.1 percent and TSC sells for $43 a share. What is the per share value of a one-year TSC call option if the exercise price is $45 per share?

Employee stock options are primarily designed to do which one of the following?

A proposed 4-year project has an initial cost of $236,000, projected sales of 4,500 units a year, a cash flow of $32 a unit, and a discount rate of 11 percent. Assume all operating cash flows occur on the last day of each year. If the project is abandoned after two years, the project's assets can be sold for $150,000. Below what level of annual sales, starting in Year 3, should the project be abandoned?

Buckeye Industries has a bond issue with a face value of $20,000 that is coming due in one year. The current value of the firm's assets is $22,200 but these assets are expected to be worth either $18,000 or $26,000 one year from now. The going rate on one-year T-bills is 3.6 percent. What is the current value of the firm's debt?

When you purchase insurance you are in essence: