Question 1

When warrants are exercised, the:

Accepted Answer

A)  earnings per share decrease. 
B)  earnings per share remain constant. 
C)  total equity in the firm remains constant. 
D)  total equity in a firm decreases. 
E)  number of bonds outstanding increases. 
A)  earnings per share decrease. 
B)  earnings per share remain constant. 
C)  total equity in the firm remains constant. 
D)  total equity in a firm decreases. 
E)  number of bonds outstanding increases.

Question 2

Latetia owns a convertible bond. Which one of the following terms would describe the value of this bond if it were not convertible?

Accepted Answer

A)  Conversion premium 
B)  Straight bond value 
C)  Conversion value 
D)  Inverted value 
E)  Market value 
A)  Conversion premium 
B)  Straight bond value 
C)  Conversion value 
D)  Inverted value 
E)  Market value

Question 3

Brad owns a convertible bond. Which one of the following terms would apply to the value of this bond if he were to convert it into shares of stock today?

Accepted Answer

A)  Conversion premium 
B)  Straight bond value 
C)  Conversion value 
D)  Inverted value 
E)  Prescribed value 
A)  Conversion premium 
B)  Straight bond value 
C)  Conversion value 
D)  Inverted value 
E)  Prescribed value

Question 4

Which one of the following terms applies to the value of an option on its expiration date?

Accepted Answer

A)  Strike price 
B)  Upper limit 
C)  Deadline price 
D)  Time value 
E)  Intrinsic value 
A)  Strike price 
B)  Upper limit 
C)  Deadline price 
D)  Time value 
E)  Intrinsic value

Question 5

You own five call option contracts on Swift Water Tours stock with a strike price of $25 per share and an option premium of $.45 per share. What is the total intrinsic value of these options today if the stock is currently selling for $25.20 a share?

Accepted Answer

A)  $20 
B)  $45 
C)  $0 
D)  $450 
E)  $100 
A)  $20 
B)  $45 
C)  $0 
D)  $450 
E)  $100

Question 6

When underwater employee stock options are exchanged, the option holder generally receives:

Accepted Answer

A)  a smaller number of new options with a lower exercise price. 
B)  a cash payment equal to the value of the options when they were originally issued. 
C)  twice the number of options with an exercise price equal to half of the original exercise price. 
D)  a larger number of new options with a higher exercise price. 
E)  the same number of options but with a higher exercise price. 
A)  a smaller number of new options with a lower exercise price. 
B)  a cash payment equal to the value of the options when they were originally issued. 
C)  twice the number of options with an exercise price equal to half of the original exercise price. 
D)  a larger number of new options with a higher exercise price. 
E)  the same number of options but with a higher exercise price.

Question 7

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

Accepted Answer

A)  The call's upper bound value 
B)  The call's lower bound value 
C)  Market price of the underlying security 
D)  Zero, if the call is in-the-money 
E)  The strike price 
A)  The call's upper bound value 
B)  The call's lower bound value 
C)  Market price of the underlying security 
D)  Zero, if the call is in-the-money 
E)  The strike price

Question 8

Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB Limited stock. Which one of the following terms refers to these 20 shares?

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 9

This morning, you purchased a call option on School house Supply Co. stock that expires in one year. The exercise price is $37.50. The current price of the stock is $37.60 and the risk-free rate of return is 3.1 percent. Assume the option will finish in the money. What is the current value of the call option?

Accepted Answer

A)  $0 
B)  $.95 
C)  $.10 
D)  $1.23 
E)  $1.09 
A)  $0 
B)  $.95 
C)  $.10 
D)  $1.23 
E)  $1.09

Question 10

Strategic options are:

Accepted Answer

A)  valued the same as financial call options. 
B)  difficult to value. 
C)  valued based on their first year's net income. 
D)  considered useless as they generally have negative NPVs. 
E)  increasingly easy to evaluate and value. 
A)  valued the same as financial call options. 
B)  difficult to value. 
C)  valued based on their first year's net income. 
D)  considered useless as they generally have negative NPVs. 
E)  increasingly easy to evaluate and value.

Question 11

The conversion value of a convertible bond is equal to which one of the following?

Accepted Answer

A)  Conversion ratio(Stock price) 
B)  Conversion ratio(Conversion price) 
C)  Face value/Conversion premium 
D)  Face value(1 + Conversion premium) 
E)  Stock price(1 + Conversion ratio) 
A)  Conversion ratio(Stock price) 
B)  Conversion ratio(Conversion price) 
C)  Face value/Conversion premium 
D)  Face value(1 + Conversion premium) 
E)  Stock price(1 + Conversion ratio)

Question 12

Ignoring each of the following may cause the NPV of a project to be underestimated except for the option to:

Accepted Answer

A)  abandon. 
B)  expand. 
C)  wait. 
D)  contract. 
E)  commence immediately. 
A)  abandon. 
B)  expand. 
C)  wait. 
D)  contract. 
E)  commence immediately.

Question 13

A new project is expected to produce sales of 4,800 units per year with a net cash flow of $53 each for the next 20 years. The discount rate is 16 percent and the initial investment is $1,625,000. After the first year, the project can be dismantled and sold for $1,475,000. After the first year, the project should be abandoned if annual sales are expected to be less than which number of units?

Accepted Answer

A)  4,735 units 
B)  4,160 units 
C)  4,800 units 
D)  4,210 units 
E)  4,440 units 
A)  4,735 units 
B)  4,160 units 
C)  4,800 units 
D)  4,210 units 
E)  4,440 units

Question 14

Western Industrial Products is considering a project with a life of four years, a discount rate of 14.7 percent, and an initial cost of $268,000. The project is expected to produce sales of 2,100 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon the project after one year at which time the project's assets could be sold for an estimated $225,000. The firm should abandon the project immediately following the sales on the last day of the first year if the expected level of annual sales, starting with Year 2, falls to ________ units or less. Ignore taxes.

Accepted Answer

A)  1,961 units 
B)  1,667 units 
C)  1,922 units 
D)  2,034 units 
E)  2,100 units 
A)  1,961 units 
B)  1,667 units 
C)  1,922 units 
D)  2,034 units 
E)  2,100 units

Question 15

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

Accepted Answer

A)  Worthless 
B)  Unfunded 
C)  Expired 
D)  In-the-money 
E)  Out-of-the-money 
A)  Worthless 
B)  Unfunded 
C)  Expired 
D)  In-the-money 
E)  Out-of-the-money

Question 16

Western Shores is considering a project that has an initial cost today of $12,500. The project has a two-year life with cash inflows of $7,400 a year. Should the firm opt to wait one year to commence this project, the initial cost will increase by 4 percent and the cash inflows will increase to $7,900 a year. What is the value of the option to wait if the applicable discount rate is 9.5 percent?

Accepted Answer

A)  $373.63 
B)  $421.56 
C)  $303.93 
D)  $182.67 
E)  $521.66 
A)  $373.63 
B)  $421.56 
C)  $303.93 
D)  $182.67 
E)  $521.66

Question 17

The common stock of Westover Foods is currently priced at $18.70 a share. One year from now, the stock price is expected to be either $16 or $22 a share. The risk-free rate of return is 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $20?

Accepted Answer

A)  $0 
B)  $1.08 
C)  $2.58 
D)  $.76 
E)  $1.93 
A)  $0 
B)  $1.08 
C)  $2.58 
D)  $.76 
E)  $1.93

Question 18

Lucas Enterprises recently opened a new retail outlet. If the outlet outperforms the expectations, the company can opt to increase the store's size. If it underperforms, the company can close the store. These choices are called:

Accepted Answer

A)  call options. 
B)  put options. 
C)  straddles. 
D)  managerial options. 
E)  executive options. 
A)  call options. 
B)  put options. 
C)  straddles. 
D)  managerial options. 
E)  executive options.

Question 19

The primary difference between an American call option and a European call option is the fact that the American call:

Accepted Answer

A)  has a fixed strike price while the European strike price varies over time. 
B)  is a right to buy while a European call is an obligation to buy. 
C)  has an expiration date while the European call does not. 
D)  is written on 100 shares of the underlying security while the European call covers 10 shares. 
E)  can be exercised at any time prior to expiration while the European call can only be exercised on the expiration date. 
A)  has a fixed strike price while the European strike price varies over time. 
B)  is a right to buy while a European call is an obligation to buy. 
C)  has an expiration date while the European call does not. 
D)  is written on 100 shares of the underlying security while the European call covers 10 shares. 
E)  can be exercised at any time prior to expiration while the European call can only be exercised on the expiration date.

Question 20

Travis owns both a September $30 call and a September $30 put. If the call finishes at-the-money, then the put will:

Accepted Answer

A)  finish in-the-money. 
B)  finish at-the-money. 
C)  finish out-of-the-money. 
D)  either finish at-the-money or in-the-money. 
E)  either finish at-the-money or out-of-the-money. 
A)  finish in-the-money. 
B)  finish at-the-money. 
C)  finish out-of-the-money. 
D)  either finish at-the-money or in-the-money. 
E)  either finish at-the-money or out-of-the-money.

Exam 24: Options and Corporate Finance

When warrants are exercised, the:

Latetia owns a convertible bond. Which one of the following terms would describe the value of this bond if it were not convertible?

Brad owns a convertible bond. Which one of the following terms would apply to the value of this bond if he were to convert it into shares of stock today?

Which one of the following terms applies to the value of an option on its expiration date?

You own five call option contracts on Swift Water Tours stock with a strike price of $25 per share and an option premium of $.45 per share. What is the total intrinsic value of these options today if the stock is currently selling for $25.20 a share?

When underwater employee stock options are exchanged, the option holder generally receives:

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

Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB Limited stock. Which one of the following terms refers to these 20 shares?

Strategic options are:

The conversion value of a convertible bond is equal to which one of the following?

Ignoring each of the following may cause the NPV of a project to be underestimated except for the option to:

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

The common stock of Westover Foods is currently priced at $18.70 a share. One year from now, the stock price is expected to be either $16 or $22 a share. The risk-free rate of return is 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $20?

Lucas Enterprises recently opened a new retail outlet. If the outlet outperforms the expectations, the company can opt to increase the store's size. If it underperforms, the company can close the store. These choices are called:

The primary difference between an American call option and a European call option is the fact that the American call:

Travis owns both a September $30 call and a September $30 put. If the call finishes at-the-money, then the put will:

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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