Question 1

The investment timing decision refers to the:

Accepted Answer

A)  determination of when an option should be exercised. 
B)  decision of when to purchase an option on an underlying asset. 
C)  analysis of determining when an asset should be sold. 
D)  determination of when a project should be abandoned. 
E)  evaluation of the optimal time to commence a project. 
A)  determination of when an option should be exercised. 
B)  decision of when to purchase an option on an underlying asset. 
C)  analysis of determining when an asset should be sold. 
D)  determination of when a project should be abandoned. 
E)  evaluation of the optimal time to commence a project.

Question 2

What is the maximum amount you can lose if you purchase one call option contract on ABC stock that is currently selling for $16 a share?

Accepted Answer

A)  The market price of the stock multiplied by 100 
B)  The strike price multiplied by 100 
C)  The strike price per share 
D)  The option premium per share multiplied by 100 
E)  The option premium per share 
A)  The market price of the stock multiplied by 100 
B)  The strike price multiplied by 100 
C)  The strike price per share 
D)  The option premium per share multiplied by 100 
E)  The option premium per share

Question 3

You currently own a one-year call option on RCI stock. The current stock price is $51.20 and the risk-free rate of return is 3.36 percent. Your option has a strike price of $50 and you assume the option will finish in the money. What is the current value of your call option?

Accepted Answer

A)  $1.16 
B)  $1.24 
C)  $2.83 
D)  $3.13 
E)  $2.28 
A)  $1.16 
B)  $1.24 
C)  $2.83 
D)  $3.13 
E)  $2.28

Question 4

Brad purchased an option that he can only exercise on the final day of the option period. Which type of option did he purchase?

Accepted Answer

A)  European 
B)  American 
C)  Inflexible 
D)  Dated 
E)  Pointed 
A)  European 
B)  American 
C)  Inflexible 
D)  Dated 
E)  Pointed

Question 5

Jeff owns a $1,000 face value bond. He can exchange that bond for 25 shares of KNJ stock at any time within the next two years. What type of bond does Jeff own?

Accepted Answer

A)  Secured 
B)  Warranted 
C)  Convertible 
D)  Junk 
E)  Callable 
A)  Secured 
B)  Warranted 
C)  Convertible 
D)  Junk 
E)  Callable

Question 6

The maximum value of a call option can never exceed the:

Accepted Answer

A)  underlying stock price. 
B)  exercise price plus the stock price. 
C)  strike price. 
D)  premium price. 
E)  intrinsic value. 
A)  underlying stock price. 
B)  exercise price plus the stock price. 
C)  strike price. 
D)  premium price. 
E)  intrinsic value.

Question 7

A bond with five detachable warrants has just been offered for sale for $1,000. The bond matures in eight years and has an annual coupon of $60. Each warrant grants its owner the right to purchase two shares of stock in the company at $15 per share. Ordinary bonds (with no warrants) of similar quality are priced to yield 6.4 percent. What is the value of one warrant?

Accepted Answer

A)  $2.45 
B)  $5.67 
C)  $12.25 
D)  $24.45 
E)  $4.89 
A)  $2.45 
B)  $5.67 
C)  $12.25 
D)  $24.45 
E)  $4.89

Question 8

Which one of the following statements is correct?

Accepted Answer

A)  The value of a call decreases as the price of the underlying stock increases. 
B)  The value of a call increases as the exercise price decreases. 
C)  The value of a put increases as the price of the underlying stock increases. 
D)  The value of a put decreases as the exercise price increases. 
E)  The intrinsic value of a put must be zero on the expiration date. 
A)  The value of a call decreases as the price of the underlying stock increases. 
B)  The value of a call increases as the exercise price decreases. 
C)  The value of a put increases as the price of the underlying stock increases. 
D)  The value of a put decreases as the exercise price increases. 
E)  The intrinsic value of a put must be zero on the expiration date.

Question 9

Valuing the option to wait:

Accepted Answer

A)  can result in a negative option value. 
B)  assumes the NPV of a project commenced today is negative. 
C)  is unaffected by a project's discount rate. 
D)  is dependent upon a wait time of three years or less. 
E)  requires at least two NPV calculations as of Time 0. 
A)  can result in a negative option value. 
B)  assumes the NPV of a project commenced today is negative. 
C)  is unaffected by a project's discount rate. 
D)  is dependent upon a wait time of three years or less. 
E)  requires at least two NPV calculations as of Time 0.

Question 10

Once a project commences, management can select all of the following options except the option to:

Accepted Answer

A)  abandon. 
B)  suspend. 
C)  contract. 
D)  expand. 
E)  wait. 
A)  abandon. 
B)  suspend. 
C)  contract. 
D)  expand. 
E)  wait.

Question 11

Which one of the following statements concerning convertible bonds is false?

Accepted Answer

A)  A convertible bond is similar to a bond with a call option. 
B)  A convertible bond should always be worth less than a comparable straight bond. 
C)  New shares of stock are issued when a convertible bond is converted. 
D)  A convertible bond can be redeemed just like a straight bond at maturity. 
E)  A convertible bond can be described as having upside potential with downside protection. 
A)  A convertible bond is similar to a bond with a call option. 
B)  A convertible bond should always be worth less than a comparable straight bond. 
C)  New shares of stock are issued when a convertible bond is converted. 
D)  A convertible bond can be redeemed just like a straight bond at maturity. 
E)  A convertible bond can be described as having upside potential with downside protection.

Question 12

Last month, Fun Time introduced a new board game. Consumer demand has been overwhelming and it appears that strong demand will exist over the long term as all ages absolutely love the game. Given this, which one of the following options should the company consider in respect to this game?

Accepted Answer

A)  Suspension 
B)  Expansion 
C)  Abandonment 
D)  Contraction 
E)  Withdrawal 
A)  Suspension 
B)  Expansion 
C)  Abandonment 
D)  Contraction 
E)  Withdrawal

Question 13

Dressler Tech is considering a 3-year project with a discount rate of 15 percent, an initial cost of $95,000, projected sales of 1,300 units on the last day of each year, and a cash flow per unit of $38. The project can be abandoned following the sales on the last day of Year 2 at which time the project's assets could be sold for an estimated $40,000. What is the net present value of this project at Time 0 if the sales forecast for Year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,100 or 1,500 units a year?

Accepted Answer

A)  −$13,474 
B)  −$2,526 
C)  $19,172 
D)  $8,192 
E)  $18,887 
A)  −$13,474 
B)  −$2,526 
C)  $19,172 
D)  $8,192 
E)  $18,887

Question 14

The difference between the conversion price and the current stock price, divided by the current stock price, is called the:

Accepted Answer

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

Question 15

A $20 put option on Wildwood stock expires today. The current price of the stock is $18.50. Which one of the following best describes this option?

Accepted Answer

A)  Funded 
B)  Unfunded 
C)  At-the-money 
D)  In-the-money 
E)  Out-of-the-money 
A)  Funded 
B)  Unfunded 
C)  At-the-money 
D)  In-the-money 
E)  Out-of-the-money

Question 16

Which one of the following describes the lower bound of a call's value?

Accepted Answer

A)  Strike price or zero, whichever is greater 
B)  Stock price minus the exercise price or zero, whichever is greater 
C)  Strike price or the stock price, whichever is lower 
D)  Strike price or zero, whichever is lower 
E)  Stock price minus the exercise price or zero, whichever is lower 
A)  Strike price or zero, whichever is greater 
B)  Stock price minus the exercise price or zero, whichever is greater 
C)  Strike price or the stock price, whichever is lower 
D)  Strike price or zero, whichever is lower 
E)  Stock price minus the exercise price or zero, whichever is lower

Question 17

Three weeks ago, you purchased a June $47.50 put option on Hi-Tech Metals stock at an option price of $.60 per share. The market price of the stock three weeks ago was $47.20. Today, the stock is selling at $48.10 a share. What is the intrinsic value of your put contract?

Accepted Answer

A)  −$240 
B)  $60 
C)  −$60 
D)  $0 
E)  $240 
A)  −$240 
B)  $60 
C)  −$60 
D)  $0 
E)  $240

Question 18

RPC's assets are currently worth $2,700. In one year, they will be worth either $2,000 or $3,500. The risk-free interest rate is 3.5 percent. Suppose the firm has an outstanding debt issue with a face value of $2,500. What is the current value of the firm's debt?

Accepted Answer

A)  $2,377 
B)  $2,114 
C)  $2,188 
D)  $2,263 
E)  $2,425 
A)  $2,377 
B)  $2,114 
C)  $2,188 
D)  $2,263 
E)  $2,425

Question 19

What is the value of five September $40 call contracts on PTL stock if the option premium quote is $1.35 a share and the stock is selling for $41.30 a share?

Accepted Answer

A)  $25.00 
B)  $650 
C)  $6.75 
D)  $1.35 
E)  $675 
A)  $25.00 
B)  $650 
C)  $6.75 
D)  $1.35 
E)  $675

Question 20

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

Accepted Answer

A)  Lesser of the strike price or the stock price 
B)  Lesser of the stock price minus the exercise price or zero 
C)  Lesser of the stock price or zero 
D)  Greater of the strike price minus the stock price or zero 
E)  Greater of the stock price minus the exercise price or zero 
A)  Lesser of the strike price or the stock price 
B)  Lesser of the stock price minus the exercise price or zero 
C)  Lesser of the stock price or zero 
D)  Greater of the strike price minus the stock price or zero 
E)  Greater of the stock price minus the exercise price or zero

Exam 24: Options and Corporate Finance

The investment timing decision refers to the:

What is the maximum amount you can lose if you purchase one call option contract on ABC stock that is currently selling for $16 a share?

You currently own a one-year call option on RCI stock. The current stock price is $51.20 and the risk-free rate of return is 3.36 percent. Your option has a strike price of $50 and you assume the option will finish in the money. What is the current value of your call option?

Brad purchased an option that he can only exercise on the final day of the option period. Which type of option did he purchase?

Jeff owns a $1,000 face value bond. He can exchange that bond for 25 shares of KNJ stock at any time within the next two years. What type of bond does Jeff own?

The maximum value of a call option can never exceed the:

Which one of the following statements is correct?

Valuing the option to wait:

Once a project commences, management can select all of the following options except the option to:

Which one of the following statements concerning convertible bonds is false?

Last month, Fun Time introduced a new board game. Consumer demand has been overwhelming and it appears that strong demand will exist over the long term as all ages absolutely love the game. Given this, which one of the following options should the company consider in respect to this game?

The difference between the conversion price and the current stock price, divided by the current stock price, is called the:

A $20 put option on Wildwood stock expires today. The current price of the stock is $18.50. Which one of the following best describes this option?

Which one of the following describes the lower bound of a call's value?

Three weeks ago, you purchased a June $47.50 put option on Hi-Tech Metals stock at an option price of $.60 per share. The market price of the stock three weeks ago was $47.20. Today, the stock is selling at $48.10 a share. What is the intrinsic value of your put contract?

RPC's assets are currently worth $2,700. In one year, they will be worth either $2,000 or $3,500. The risk-free interest rate is 3.5 percent. Suppose the firm has an outstanding debt issue with a face value of $2,500. What is the current value of the firm's debt?

What is the value of five September $40 call contracts on PTL stock if the option premium quote is $1.35 a share and the stock is selling for $41.30 a share?

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

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

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