Question 1

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A) $0.57 
B) $0.63 
C) $0.91 
D) $1.36 
E) $1.54 
A) $0.57 
B) $0.63 
C) $0.91 
D) $1.36 
E) $1.54 C

Question 2

Today,you are buying a one-year call on one share of Webster United stock with a strike price of $40 per share and a one-year risk-free asset that pays 4 percent interest.The cost of the call is $1.85 per share and the amount invested in the risk-free asset is $38.46.What is the most you can lose on these purchases over the next year?

Accepted Answer

A) -$1.85 
B) -$0.31 
C) $0 
D) $0.42 
E) $1.54 
A) -$1.85 
B) -$0.31 
C) $0 
D) $0.42 
E) $1.54 B

Question 3

Pure financial mergers:

Accepted Answer

A) are beneficial to stockholders. 
B) are beneficial to both stockholders and bondholders. 
C) are detrimental to stockholders. 
D) add value to both the total assets and the total equity of a firm. 
E) reduce both the total assets and the total equity of a firm. 
A) are beneficial to stockholders. 
B) are beneficial to both stockholders and bondholders. 
C) are detrimental to stockholders. 
D) add value to both the total assets and the total equity of a firm. 
E) reduce both the total assets and the total equity of a firm. C

Question 4

A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d1 of a 9-month call option with a strike price of $40?

Accepted Answer

A) -0.21872 
B) -0.21179 
C) -0.21047 
D) -0.20950 
E) -0.20356 
A) -0.21872 
B) -0.21179 
C) -0.21047 
D) -0.20950 
E) -0.20356

Question 5

A.K.Scott's stock is selling for $37 a share.A 3-month call on this stock with a strike price of $35 is priced at $3.40.Risk-free assets are currently returning 0.18 percent per month.What is the price of a 3-month put on this stock with a strike price of $35?

Accepted Answer

A) $1.71 
B) $2.49 
C) $2.99 
D) $3.85 
E) $4.20 
A) $1.71 
B) $2.49 
C) $2.99 
D) $3.85 
E) $4.20

Question 6

This morning,Krystal purchased shares of Global Markets stock at a cost of $39.40 per share.She simultaneously purchased puts on Global Markets stock at a cost of $1.50 per share and a strike price of $40 per share.The put expires in one year.How much profit will she earn per share on these transactions if the stock is worth $38 a share one year from now?

Accepted Answer

A) -$2.65 
B) -$1.25 
C) -$0.90 
D) $0.60 
E) $1.25 
A) -$2.65 
B) -$1.25 
C) -$0.90 
D) $0.60 
E) $1.25

Question 7

What is the value of d2 given the following information on a stock?

Accepted Answer

A) 0.1218 
B) 0.1225 
C) 0.1313 
D) 0.1335 
E) 0.1340 
A) 0.1218 
B) 0.1225 
C) 0.1313 
D) 0.1335 
E) 0.1340

Question 8

The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:

Accepted Answer

A) $141,765. 
B) $180,219. 
C) $211,481. 
D) $264,909. 
E) $268,226. 
A) $141,765. 
B) $180,219. 
C) $211,481. 
D) $264,909. 
E) $268,226.

Question 9

Today,you are buying a one-year call on Piper Sons stock with a strike price of $27.50 per share and a one-year risk-free asset which pays 4 percent interest.The cost of the call is $1.40 per share and the amount invested in the risk-free asset is $26.57.How much total profit will you earn on these purchases if the stock has a market price of $29 one year from now?

Accepted Answer

A) $0.10 
B) $0.85 
C) $1.16 
D) $1.20 
E) $1.27 
A) $0.10 
B) $0.85 
C) $1.16 
D) $1.20 
E) $1.27

Question 10

Theta measures an option's:

Accepted Answer

A) intrinsic value. 
B) volatility. 
C) rate of time decay. 
D) sensitivity to changes in the value of the underlying asset. 
E) sensitivity to risk-free rate changes. 
A) intrinsic value. 
B) volatility. 
C) rate of time decay. 
D) sensitivity to changes in the value of the underlying asset. 
E) sensitivity to risk-free rate changes.

Question 11

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today.The annual percentage rate applicable to her investment is 6.8 percent.Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Accepted Answer

A) annual 
B) daily 
C) quarterly 
D) monthly 
E) continuous 
A) annual 
B) daily 
C) quarterly 
D) monthly 
E) continuous

Question 12

Which one of the following statements is correct?

Accepted Answer

A) The price of an American put is equal to the stock price minus the exercise price. 
B) The value of a European call is greater than the value of a comparable American call. 
C) The value of a put is equal to one minus the value of an equivalent call. 
D) The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price. 
E) The value of an American put will equal or exceed the value of a comparable European put. 
A) The price of an American put is equal to the stock price minus the exercise price. 
B) The value of a European call is greater than the value of a comparable American call. 
C) The value of a put is equal to one minus the value of an equivalent call. 
D) The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price. 
E) The value of an American put will equal or exceed the value of a comparable European put.

Question 13

Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?

Accepted Answer

A) -$4,715 
B) -$4,685 
C) -$4,015 
D) -$215 
E) -$0 
A) -$4,715 
B) -$4,685 
C) -$4,015 
D) -$215 
E) -$0

Question 14

A firm has assets of $21.8 million and a 3-year,zero-coupon,risky bonds with a total face value of $8.5 million.The bonds have a total current market value of $8.1 million.How can the shareholders of this firm change these risky bonds into risk-free bonds?

Accepted Answer

A) purchase a call option with a 1-year life and a $8.1 million face value 
B) purchase a call option with a 5-year life and a $8.5 million face value 
C) purchase a put option with a 1-year life and a $21.8 million face value 
D) purchase a put option with a 3-year life and a $8.1 million face value 
E) purchase a put option with a 3-year life and an $8.5 million face value 
A) purchase a call option with a 1-year life and a $8.1 million face value 
B) purchase a call option with a 5-year life and a $8.5 million face value 
C) purchase a put option with a 1-year life and a $21.8 million face value 
D) purchase a put option with a 3-year life and a $8.1 million face value 
E) purchase a put option with a 3-year life and an $8.5 million face value

Question 15

Paying off a firm's debt is comparable to _____ on the assets of the firm.

Accepted Answer

A) purchasing a put option 
B) purchasing a call option 
C) exercising an in-the-money put option 
D) exercising an in-the-money call option 
E) selling a call option 
A) purchasing a put option 
B) purchasing a call option 
C) exercising an in-the-money put option 
D) exercising an in-the-money call option 
E) selling a call option

Question 16

The current market value of the assets of Cristopherson Supply is $46.5 million.The market value of the equity is $28.7 million.The risk-free rate is 4.75 percent and the outstanding debt matures in 4 years.What is the market value of the firm's debt?

Accepted Answer

A) $17.80 million 
B) $19.80 million 
C) $20.23 million 
D) $22.66 million 
E) $23.01 million 
A) $17.80 million 
B) $19.80 million 
C) $20.23 million 
D) $22.66 million 
E) $23.01 million

Question 17

Wesleyville Markets stock is selling for $36 a share.The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63.What is the continuously compounded risk-free rate of return?

Accepted Answer

A) 0.87 percent 
B) 1.11 percent 
C) 1.38 percent 
D) 1.56 percent 
E) 2.02 percent 
A) 0.87 percent 
B) 1.11 percent 
C) 1.38 percent 
D) 1.56 percent 
E) 2.02 percent

Question 18

A stock is selling for $60 per share.A call option with an exercise price of $65 sells for $3.31 and expires in 4 months.The risk-free rate of interest is 2.8 percent per year,compounded continuously.What is the price of a put option with the same exercise price and expiration date?

Accepted Answer

A) $5.99 
B) $6.23 
C) $6.47 
D) $7.21 
E) $8.94 
A) $5.99 
B) $6.23 
C) $6.47 
D) $7.21 
E) $8.94

Question 19

The current market value of the assets of Smethwell,Inc.is $54 million,with a standard deviation of 16 percent per year.The firm has zero-coupon bonds outstanding with a total face value of $40 million.These bonds mature in 2 years.The risk-free rate is 4 percent per year compounded continuously.What is the value of d1?

Accepted Answer

A) 1.32 
B) 1.48 
C) 1.67 
D) 1.79 
E) 2.06 
A) 1.32 
B) 1.48 
C) 1.67 
D) 1.79 
E) 2.06

Question 20

In the Black-Scholes option pricing formula,N(d1)is the probability that a standardized,normally distributed random variable is:

Accepted Answer

A) less than or equal to N(d2). 
B) less than one. 
C) equal to one. 
D) equal to d1. 
E) less than or equal to d1. 
A) less than or equal to N(d2). 
B) less than one. 
C) equal to one. 
D) equal to d1. 
E) less than or equal to d1.

Exam 25: Option Valuation

What is the value of a 3-month put with a strike price of $45 given the Black-Scholes option pricing model and the following information?

Pure financial mergers:

A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d1 of a 9-month call option with a strike price of $40?

A.K.Scott's stock is selling for $37 a share.A 3-month call on this stock with a strike price of $35 is priced at $3.40.Risk-free assets are currently returning 0.18 percent per month.What is the price of a 3-month put on this stock with a strike price of $35?

What is the value of d2 given the following information on a stock?

The delta of a call option on a firm's assets is 0.727.This means that a $195,000 project will increase the value of equity by:

Theta measures an option's:

Traci wants to have $16,000 six years from now and wants to deposit just one lump sum amount today.The annual percentage rate applicable to her investment is 6.8 percent.Which one of the following methods of compounding interest will allow her to deposit the least amount possible today?

Which one of the following statements is correct?

Today,you purchased 100 shares of Lazy Z stock at a market price of $47 per share.You also bought a one year,$45 put option on Lazy Z stock at a cost of $0.15 per share.What is the maximum total amount you can lose on these purchases?

A firm has assets of $21.8 million and a 3-year,zero-coupon,risky bonds with a total face value of $8.5 million.The bonds have a total current market value of $8.1 million.How can the shareholders of this firm change these risky bonds into risk-free bonds?

Paying off a firm's debt is comparable to _____ on the assets of the firm.

The current market value of the assets of Cristopherson Supply is $46.5 million.The market value of the equity is $28.7 million.The risk-free rate is 4.75 percent and the outstanding debt matures in 4 years.What is the market value of the firm's debt?

Wesleyville Markets stock is selling for $36 a share.The 9-month $40 call on this stock is selling for $2.23 while the 9-month $40 put is priced at $5.63.What is the continuously compounded risk-free rate of return?

A stock is selling for $60 per share.A call option with an exercise price of $65 sells for $3.31 and expires in 4 months.The risk-free rate of interest is 2.8 percent per year,compounded continuously.What is the price of a put option with the same exercise price and expiration date?

In the Black-Scholes option pricing formula,N(d1)is the probability that a standardized,normally distributed random variable is:

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

Options and Corporate Finance

Mergers and Acquisitions

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A stock is currently selling for $36 a share.The risk-free rate is 3.8 percent and the standard deviation is 27 percent.What is the value of d₁ of a 9-month call option with a strike price of $40?

What is the value of d₂ given the following information on a stock?

In the Black-Scholes option pricing formula,N(d₁)is the probability that a standardized,normally distributed random variable is: