Question 1

Which one of the following statements concerning warrants is correct?

Accepted Answer

A)  Warrants are similar to put options. 
B)  Warrants generally have very short maturity periods. 
C)  Owning a warrant is the same as selling a call option. 
D)  When a warrant is exercised, the number of outstanding shares increases. 
E)  Shares are transferred from one shareholder to another when a warrant is exercised. 
A)  Warrants are similar to put options. 
B)  Warrants generally have very short maturity periods. 
C)  Owning a warrant is the same as selling a call option. 
D)  When a warrant is exercised, the number of outstanding shares increases. 
E)  Shares are transferred from one shareholder to another when a warrant is exercised.

Question 2

The dollar amount of a bond's par value that is exchangeable for one share of stock is called the:

Accepted Answer

A)  conversion premium. 
B)  par value. 
C)  conversion value. 
D)  conversion price. 
E)  conversion ratio. 
A)  conversion premium. 
B)  par value. 
C)  conversion value. 
D)  conversion price. 
E)  conversion ratio.

Question 3

Warrants are:

Accepted Answer

A)  generally issued as an attachment to publicly issued bonds. 
B)  excluded from trading on an organized exchange. 
C)  structured as long-term put options. 
D)  issued by individual investors. 
E)  often added as an incentive to a private debt issue. 
A)  generally issued as an attachment to publicly issued bonds. 
B)  excluded from trading on an organized exchange. 
C)  structured as long-term put options. 
D)  issued by individual investors. 
E)  often added as an incentive to a private debt issue.

Question 4

A convertible bond has a face value of $1,000, a market value of $987 and can be converted into 24 shares of stock. What is the conversion price?

Accepted Answer

A)  $41.67 
B)  $44.63 
C)  $41.43 
D)  $41.13 
E)  $44.33 
A)  $41.67 
B)  $44.63 
C)  $41.43 
D)  $41.13 
E)  $44.33

Question 5

Which one of the following will decrease the value of an American call option?

Accepted Answer

A)  A decrease in the price volatility of the underlying asset 
B)  An increase in time to expiration 
C)  An increase in the underlying stock price 
D)  A decrease in the exercise price 
E)  An increase in the risk-free rate of return 
A)  A decrease in the price volatility of the underlying asset 
B)  An increase in time to expiration 
C)  An increase in the underlying stock price 
D)  A decrease in the exercise price 
E)  An increase in the risk-free rate of return

Question 6

Jack and Jill are house hunting and find a house (House A) they really like but want to continue searching the market for one more week before making the final decision to buy House A. To avoid having someone else purchase House A while they continue their house hunting, they decide to place a $2,500 deposit on House A. This deposit will apply to the purchase price if they buy House A. If they do not buy House A, they will forfeit the $2,500. Essentially, Jack and Jill have a ________ on House A.

Accepted Answer

A)  financial put option 
B)  financial call option 
C)  warrant 
D)  real put option 
E)  real call option 
A)  financial put option 
B)  financial call option 
C)  warrant 
D)  real put option 
E)  real call option

Question 7

Kurt owns a convertible bond that matures in 16 years. The bond has a coupon rate of 6 percent paid semi-annually, a face value of $1,000 and a conversion price of $25. Similar bonds have a current market return of 5.85 percent. The current price of the related stock is $26.50 per share. What is the straight bond value?

Accepted Answer

A)  $1,060.00 
B)  $1,015.45 
C)  $972.80 
D)  $980.78 
E)  $1,030.00 
A)  $1,060.00 
B)  $1,015.45 
C)  $972.80 
D)  $980.78 
E)  $1,030.00

Question 8

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 $215,000. 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 
A)  put; $180,000 
B)  put; $265,000 
C)  warrant; $265,000 
D)  call; $180,000 
E)  call; $265,000

Question 9

Rosa purchased three call option contracts on ABC stock with a strike price of $27.50 when the option was quoted at $1.10 per share. The option expires today when the value of ABC stock is $29.30. Ignoring trading costs and taxes, what is the net profit on this investment?

Accepted Answer

A)  $0 
B)  $210 
C)  $330 
D)  $140 
E)  $70 
A)  $0 
B)  $210 
C)  $330 
D)  $140 
E)  $70

Question 10

Which term applies to the final day on which an option can be exercised?

Accepted Answer

A)  Payment date 
B)  Ex-option date 
C)  Opening date 
D)  Expiration date 
E)  Intrinsic date 
A)  Payment date 
B)  Ex-option date 
C)  Opening date 
D)  Expiration date 
E)  Intrinsic date

Question 11

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)  Implicit option 
C)  Fixed option 
D)  Real option 
E)  Concrete option 
A)  Financial option 
B)  Implicit option 
C)  Fixed option 
D)  Real option 
E)  Concrete option

Question 12

Currently, T-bills yield 3.8 percent and MTM stock sells for $38 a share. There is no possibility that the stock will be worth less than $36 per share in one year. What is the value of a call option on this stock if the exercise price is $35 per share?

Accepted Answer

A)  $.32 
B)  $3.45 
C)  $2.89 
D)  $4.28 
E)  $.96 
A)  $.32 
B)  $3.45 
C)  $2.89 
D)  $4.28 
E)  $.96

Question 13

Which one of the following will decrease the value of an American call option?

Accepted Answer

A)  A decrease in the value of the underlying security 
B)  An increase in the risk-free rate 
C)  A decrease in the exercise price 
D)  An increase in the price volatility of the underlying asset 
E)  An increase in the time to expiration 
A)  A decrease in the value of the underlying security 
B)  An increase in the risk-free rate 
C)  A decrease in the exercise price 
D)  An increase in the price volatility of the underlying asset 
E)  An increase in the time to expiration

Question 14

A convertible bond has a face value of $5,000, a conversion price of $40, a coupon rate of 6 percent, semi-annual payments, and a maturity of 12 years. Similar bonds are currently yielding 7.5 percent. The current price of the related stock is $38 per share. What is the conversion value of this bond?

Accepted Answer

A)  $5,600 
B)  $5,000 
C)  $4,750 
D)  $4,930 
E)  $5,300 
A)  $5,600 
B)  $5,000 
C)  $4,750 
D)  $4,930 
E)  $5,300

Question 15

The owner of an American put option has the ________ an asset at a fixed price during a stated period of time.

Accepted Answer

A)  right to sell 
B)  right to buy 
C)  obligation to sell 
D)  obligation to buy 
E)  obligation to trade 
A)  right to sell 
B)  right to buy 
C)  obligation to sell 
D)  obligation to buy 
E)  obligation to trade

Question 16

Electronic Importers has a pure discount bond with a face value of $30,000 that matures in one year. The risk-free rate of return is 3.8 percent. The assets of the business are expected to be worth either $29,000 or $35,000 in one year. Currently, these assets are worth $28,600. What is the current value of the bond?

Accepted Answer

A)  $28,146 
B)  $29,207 
C)  $28,222 
D)  $29,547 
E)  $28,049 
A)  $28,146 
B)  $29,207 
C)  $28,222 
D)  $29,547 
E)  $28,049

Question 17

Julie opted to exercise her August option on June 20th and as a result received $2,500 for the sale of her shares. Which one of the following did Julie own?

Accepted Answer

A)  Warrant 
B)  American call 
C)  American put 
D)  European call 
E)  European put 
A)  Warrant 
B)  American call 
C)  American put 
D)  European call 
E)  European put

Question 18

The common stock of Hazelton Refiners is selling for $56.10 a share. U.S. Treasury bills are currently yielding 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $55 and you assume the option will finish in the money?

Accepted Answer

A)  $0 
B)  $3.74 
C)  $2.57 
D)  $3.18 
E)  $2.91 
A)  $0 
B)  $3.74 
C)  $2.57 
D)  $3.18 
E)  $2.91

Question 19

Vince sold two $45 call option contracts at a quoted price of $1.15 per share. What is the net profit on this investment if the price of the underlying asset is $48.10 on the option expiration date? Ignore trading costs and taxes.

Accepted Answer

A)  −$390 
B)  −$195 
C)  $0 
D)  $115 
E)  $230 
A)  −$390 
B)  −$195 
C)  $0 
D)  $115 
E)  $230

Question 20

The assets of Uptown Stores are currently worth $346,000. These assets are expected to be worth either $320,000 or $365,000 one year from now. The company has a pure discount bond outstanding with a $350,000 face value and a maturity date of one year. The risk-free rate is 3.9 percent. What is the value of the equity in this firm?

Accepted Answer

A)  $9,915 
B)  $12,671 
C)  $9,507 
D)  $11,347 
E)  $10,015 
A)  $9,915 
B)  $12,671 
C)  $9,507 
D)  $11,347 
E)  $10,015

Exam 24: Options and Corporate Finance

Which one of the following statements concerning warrants is correct?

The dollar amount of a bond's par value that is exchangeable for one share of stock is called the:

Warrants are:

A convertible bond has a face value of $1,000, a market value of $987 and can be converted into 24 shares of stock. What is the conversion price?

Which one of the following will decrease the value of an American call option?

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 $215,000. The shareholders in this firm basically own a ________ option on the assets of the firm with a strike price of ________.

Rosa purchased three call option contracts on ABC stock with a strike price of $27.50 when the option was quoted at $1.10 per share. The option expires today when the value of ABC stock is $29.30. Ignoring trading costs and taxes, what is the net profit on this investment?

Which term applies to the final day on which an option can be exercised?

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

Currently, T-bills yield 3.8 percent and MTM stock sells for $38 a share. There is no possibility that the stock will be worth less than $36 per share in one year. What is the value of a call option on this stock if the exercise price is $35 per share?

Which one of the following will decrease the value of an American call option?

The owner of an American put option has the ________ an asset at a fixed price during a stated period of time.

Julie opted to exercise her August option on June 20th and as a result received $2,500 for the sale of her shares. Which one of the following did Julie own?

The common stock of Hazelton Refiners is selling for $56.10 a share. U.S. Treasury bills are currently yielding 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $55 and you assume the option will finish in the money?

Vince sold two $45 call option contracts at a quoted price of $1.15 per share. What is the net profit on this investment if the price of the underlying asset is $48.10 on the option expiration date? Ignore trading costs and taxes.

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Enterprise Risk Management

Option Valuation

Mergers and Acquisitions

Leasing

Filters

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 $215,000. The shareholders in this firm basically own a option on the assets of the firm with a strike price of .