Question 1

The value of an option if it were to immediately expire,that is,its lower pricing bound,is called an option's _____ value.

Accepted Answer

A)  strike 
B)  market 
C)  volatility 
D)  time 
E)  intrinsic 
A)  strike 
B)  market 
C)  volatility 
D)  time 
E)  intrinsic

Question 2

Which of the following statements is true?

Accepted Answer

A)  At expiration the maximum price of a call is the greater of (Stock Price - Exercise) or 0. 
B)  At expiration the maximum price of a call is the greater of (Exercise - Stock Price) or 0. 
C)  At expiration the maximum price of a put is the greater of (Stock Price - Exercise) or 0. 
D)  At expiration the maximum price of a put is the greater of (Exercise - Stock Price) or 0. 
E)  Both At expiration the maximum price of a call is the greater of (Stock Price - Exercise) or 0; and At expiration the maximum price of a put is the greater of (Exercise - Stock Price) or 0. 
A)  At expiration the maximum price of a call is the greater of (Stock Price - Exercise) or 0. 
B)  At expiration the maximum price of a call is the greater of (Exercise - Stock Price) or 0. 
C)  At expiration the maximum price of a put is the greater of (Stock Price - Exercise) or 0. 
D)  At expiration the maximum price of a put is the greater of (Exercise - Stock Price) or 0. 
E)  Both At expiration the maximum price of a call is the greater of (Stock Price - Exercise) or 0; and At expiration the maximum price of a put is the greater of (Exercise - Stock Price) or 0.

Question 3

How do options apply to capital budgeting?
 Explain and give an example.

Accepted Answer

There are many ways options apply in cap

Question 4

You currently own a one-year call option on Way-One,Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4%. Your option has a strike price of $20 and you assume that it will finish in the money. What is the current value of your call option?

Accepted Answer

A)  $6.25 
B)  $6.50 
C)  $6.76 
D)  $7.13 
E)  $7.27 
A)  $6.25 
B)  $6.50 
C)  $6.76 
D)  $7.13 
E)  $7.27

Question 5

What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?
Stock price $48
Exercise price $45
Time to expiration .75
Risk-free rate .05
N(d1) .718891
N(d2) .641713

Accepted Answer

A)  $2.03 
B)  $4.86 
C)  $6.69 
D)  $8.81 
E)  $9.27 
A)  $2.03 
B)  $4.86 
C)  $6.69 
D)  $8.81 
E)  $9.27

Question 6

The current market value of the assets of ABC,Inc. is $86 million. The market value of the equity is $43.28 million. What is the market value of the firm's debt?

Accepted Answer

A)  Cannot be determined from the information given. 
B)  $21.36 million 
C)  $42.72 million 
D)  $64.08 million 
E)  $129.28 million 
A)  Cannot be determined from the information given. 
B)  $21.36 million 
C)  $42.72 million 
D)  $64.08 million 
E)  $129.28 million

Question 7

A trading opportunity that offers a riskless profit is called a(n):

Accepted Answer

A)  put option. 
B)  call option. 
C)  market equilibrium. 
D)  arbitrage. 
E)  cross-hedgE. 
A)  put option. 
B)  call option. 
C)  market equilibrium. 
D)  arbitrage. 
E)  cross-hedgE.

Question 8

Last week,you purchased a call option on Denver,Inc. stock at an option price of $1.05. The stock price last week was $28.10. The strike price is $27.50. What is the intrinsic value per share if Denver,Inc. stock is currently priced at $29.03?

Accepted Answer

A)  -$1.05 
B)  $0 
C)  $.48 
D)  $.93 
E)  $1.53 
A)  -$1.05 
B)  $0 
C)  $.48 
D)  $.93 
E)  $1.53

Question 9

Tru-U stock is selling for $36 a share. A 3-month call on Tru-U stock with a strike price of $40 is priced at $1. Risk-free assets are currently returning 0.25% per month. What is the price of a 3-month put on Tru-U stock with a strike price of $40?

Accepted Answer

A)  $2.98 
B)  $3.00 
C)  $4.03 
D)  $4.70 
E)  $4.90 
A)  $2.98 
B)  $3.00 
C)  $4.03 
D)  $4.70 
E)  $4.90

Question 10

The market price of ABC stock has been very volatile and you think this volatility will continue for a few weeks. Thus,you decide to purchase a one-month call option contract on ABC stock with a strike price of $25 and an option price of $1.30. You also purchase a one-month put option on ABC stock with a strike price of $25 and an option price of $.50. What will be your total profit or loss on these option positions if the stock price is $24.60 on the day the options expire?

Accepted Answer

A)  -$180 
B)  -$140 
C)  -$100 
D)  $0 
E)  $180 
A)  -$180 
B)  -$140 
C)  -$100 
D)  $0 
E)  $180

Question 11

The owner of a call option has the:

Accepted Answer

A)  right but not the obligation to buy a stock at a specified price on a specified date. 
B)  right but not the obligation to buy a stock at a specified price during a specified period of time. 
C)  obligation to buy a stock on a specified date but only at the specified price. 
D)  obligation to buy a stock sometime during a specified period of time at the specified price. 
E)  obligation to buy a stock at the lower of the exercise price or the market price on the expiration datE. 
A)  right but not the obligation to buy a stock at a specified price on a specified date. 
B)  right but not the obligation to buy a stock at a specified price during a specified period of time. 
C)  obligation to buy a stock on a specified date but only at the specified price. 
D)  obligation to buy a stock sometime during a specified period of time at the specified price. 
E)  obligation to buy a stock at the lower of the exercise price or the market price on the expiration datE.

Question 12

You sold a put contract on EDF stock at an option price of $.40. The option had an exercise price of $20. The option was exercised. Today,EDF stock is selling for $19 a share. What is your total profit or loss on all of your transactions related to EDF stock assuming that you close out your positions in this stock today? Ignore transaction costs and taxes.

Accepted Answer

A)  -$140 
B)  -$60 
C)  $40 
D)  $60 
E)  $140 
A)  -$140 
B)  -$60 
C)  $40 
D)  $60 
E)  $140

Question 13

A financial contract that gives its owner the right,but not the obligation,to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract.

Accepted Answer

A)  option 
B)  futures 
C)  forward 
D)  swap 
E)  straddle 
A)  option 
B)  futures 
C)  forward 
D)  swap 
E)  straddle

Question 14

The assets of Blue Light Specials are currently worth $2,100. These assets are expected to be worth either $1,800 or $2,300 one year from now. The company has a pure discount bond outstanding with a $2,000 face value and a maturity date of one year. The risk-free rate is 5%. What is the value of the equity in this firm?

Accepted Answer

A)  $166.67 
B)  $231.42 
C)  $385.71 
D)  $405.00 
E)  $714.29 
A)  $166.67 
B)  $231.42 
C)  $385.71 
D)  $405.00 
E)  $714.29

Question 15

Three weeks ago,you purchased a July 45 put option on RPJ stock at an option price of $3.20. The market price of RPJ stock three weeks ago was $42.70. Today,RPJ stock is selling at $44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value of your put contract?

Accepted Answer

A)  -$295 
B)  -$210 
C)  $0 
D)  $25 
E)  $110 
A)  -$295 
B)  -$210 
C)  $0 
D)  $25 
E)  $110

Question 16

For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if the delta of the call option on the firm's assets is:

Accepted Answer

A)  equal to one. 
B)  between zero and one. 
C)  equal to zero. 
D)  between zero and minus one. 
E)  equal to minus onE. 
A)  equal to one. 
B)  between zero and one. 
C)  equal to zero. 
D)  between zero and minus one. 
E)  equal to minus onE.

Question 17

A _____ is a derivative security that gives the owner the right,but not the obligation,to sell an asset at a fixed price for a specified period of time.

Accepted Answer

A)  futures contract 
B)  call option 
C)  put option 
D)  swap 
E)  forward contract 
A)  futures contract 
B)  call option 
C)  put option 
D)  swap 
E)  forward contract

Question 18

You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30. The option expires today when the value of TJH stock is $41.90. Ignoring trading costs and taxes,what is your total profit or loss on your investment?

Accepted Answer

A)  $60 
B)  $320 
C)  $360 
D)  $420 
E)  $540 
A)  $60 
B)  $320 
C)  $360 
D)  $420 
E)  $540

Question 19

Three months ago,you purchased a put option on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and taxes,what is your total profit or loss on your investment?

Accepted Answer

A)  -$310 
B)  -$60 
C)  $0 
D)  $60 
E)  $190 
A)  -$310 
B)  -$60 
C)  $0 
D)  $60 
E)  $190

Question 20

Martha B's has total assets of $1,750. These assets are expected to increase in value to either $1,800 or $2,400 by next year. The company has a pure discount bond outstanding with a face value of $2,000.This bond matures in one year. Currently,U.S. Treasury bills are yielding 6%. What is the value of the equity in this firm?

Accepted Answer

A)  $16.98 
B)  $34.59 
C)  $36.67 
D)  $37.08 
E)  $51.89 
A)  $16.98 
B)  $34.59 
C)  $36.67 
D)  $37.08 
E)  $51.89

Exam 22: Options and Corporate Finance

The value of an option if it were to immediately expire,that is,its lower pricing bound,is called an option's _____ value.

Which of the following statements is true?

How do options apply to capital budgeting? Explain and give an example.

You currently own a one-year call option on Way-One,Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4%. Your option has a strike price of $20 and you assume that it will finish in the money. What is the current value of your call option?

What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information? Stock price $48 Exercise price $45 Time to expiration .75 Risk-free rate .05 N(d1) .718891 N(d2) .641713

The current market value of the assets of ABC,Inc. is $86 million. The market value of the equity is $43.28 million. What is the market value of the firm's debt?

A trading opportunity that offers a riskless profit is called a(n):

Last week,you purchased a call option on Denver,Inc. stock at an option price of $1.05. The stock price last week was $28.10. The strike price is $27.50. What is the intrinsic value per share if Denver,Inc. stock is currently priced at $29.03?

Tru-U stock is selling for $36 a share. A 3-month call on Tru-U stock with a strike price of $40 is priced at $1. Risk-free assets are currently returning 0.25% per month. What is the price of a 3-month put on Tru-U stock with a strike price of $40?

The owner of a call option has the:

A financial contract that gives its owner the right,but not the obligation,to buy or sell a specified asset at an agreed-upon price on or before a given future date is called a(n) _____ contract.

Three weeks ago,you purchased a July 45 put option on RPJ stock at an option price of $3.20. The market price of RPJ stock three weeks ago was $42.70. Today,RPJ stock is selling at $44.75 a share and the July 45 put is priced at $.80. What is the intrinsic value of your put contract?

For every positive net present value project that a firm undertakes,the equity in the firm will increase the most if the delta of the call option on the firm's assets is:

A _____ is a derivative security that gives the owner the right,but not the obligation,to sell an asset at a fixed price for a specified period of time.

You purchased six TJH call option contracts with a strike price of $40 when the option was quoted at $1.30. The option expires today when the value of TJH stock is $41.90. Ignoring trading costs and taxes,what is your total profit or loss on your investment?

Three months ago,you purchased a put option on WXX stock with a strike price of $61 and an option price of $.60. The option expires today when the value of WXX stock is $63.50. Ignoring trading costs and taxes,what is your total profit or loss on your investment?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters

What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information? Stock price $48 Exercise price $45 Time to expiration .75 Risk-free rate .05 N(d₁) .718891 N(d₂) .641713