Question 1

The value of the risky debt of a firm is equal to the value of:

Accepted Answer

A) a call option plus the value of a risk-free bond. 
B) a risk-free bond plus a put option. 
C) the equity of the firm minus a put. 
D) the equity of the firm plus a call option. 
E) a risk-free bond minus a put option. 
A) a call option plus the value of a risk-free bond. 
B) a risk-free bond plus a put option. 
C) the equity of the firm minus a put. 
D) the equity of the firm plus a call option. 
E) a risk-free bond minus a put option.

Question 2

A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Accepted Answer

A) -0.01506 
B) 0.05271 
C) 0.05740 
D) 0.06420 
E) 0.06752 
A) -0.01506 
B) 0.05271 
C) 0.05740 
D) 0.06420 
E) 0.06752

Question 3

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Accepted Answer

Equity is equal to asset minus liabiliti

Question 4

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Accepted Answer

A) theta 
B) vega 
C) rho 
D) delta 
E) gamma 
A) theta 
B) vega 
C) rho 
D) delta 
E) gamma

Question 5

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

Accepted Answer

A) option premium on a call with a specified exercise price. 
B) rate of return on the underlying asset. 
C) volatility of the risk-free rate of return. 
D) rate of return on a risk-free asset. 
E) option premium on a put with a specified exercise price. 
A) option premium on a call with a specified exercise price. 
B) rate of return on the underlying asset. 
C) volatility of the risk-free rate of return. 
D) rate of return on a risk-free asset. 
E) option premium on a put with a specified exercise price.

Question 6

A purely financial merger:

Accepted Answer

A) increases the risk that the merged firm will default on its debt obligations. 
B) has no effect on the risk level of the firm's debt. 
C) reduces the value of the option to go bankrupt. 
D) has no effect on the equity value of a firm. 
E) reduces the risk level of the firm and increases the value of the firm's equity. 
A) increases the risk that the merged firm will default on its debt obligations. 
B) has no effect on the risk level of the firm's debt. 
C) reduces the value of the option to go bankrupt. 
D) has no effect on the equity value of a firm. 
E) reduces the risk level of the firm and increases the value of the firm's equity.

Question 7

What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A) $3.38 
B) $3.42 
C) $3.68 
D) $4.27 
E) $5.39 
A) $3.38 
B) $3.42 
C) $3.68 
D) $4.27 
E) $5.39

Question 8

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Accepted Answer

Because equity can be viewed as a call o

Question 9

The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Accepted Answer

A) $8.50 million 
B) $9.98 million 
C) $12.00 million 
D) $19.42 million 
E) $23.84 million 
A) $8.50 million 
B) $9.98 million 
C) $12.00 million 
D) $19.42 million 
E) $23.84 million

Question 10

Given the (1)exercise price E,(2)time to maturity T,and (3)European put-call parity,the present value of E plus the value of the call option is equal to the:

Accepted Answer

A) current market value of the stock. 
B) present value of the stock minus the value of the put. 
C) value of the put minus the market value of the stock. 
D) value of a risk-free asset. 
E) stock value plus the put value. 
A) current market value of the stock. 
B) present value of the stock minus the value of the put. 
C) value of the put minus the market value of the stock. 
D) value of a risk-free asset. 
E) stock value plus the put value.

Question 11

J&N,Inc.stock has a current market price of $46 a share.The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24.What is the risk-free rate of return?

Accepted Answer

A) 1.49 percent 
B) 1.82 percent 
C) 3.10 percent 
D) 3.64 percent 
E) 4.21 percent 
A) 1.49 percent 
B) 1.82 percent 
C) 3.10 percent 
D) 3.64 percent 
E) 4.21 percent

Question 12

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Accepted Answer

A) sale of a European call option 
B) sale of an American put option 
C) purchase of a protective put 
D) purchase of a protective call 
E) either the sale or purchase of a put 
A) sale of a European call option 
B) sale of an American put option 
C) purchase of a protective put 
D) purchase of a protective call 
E) either the sale or purchase of a put

Question 13

Give an example of a protective put and explain how this strategy reduces investor risk.

Accepted Answer

Students should give an example that inc

Question 14

You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

Accepted Answer

A) $6,728 
B) $7,569 
C) $8,311 
D) $8,422 
E) $8,791 
A) $6,728 
B) $7,569 
C) $8,311 
D) $8,422 
E) $8,791

Question 15

The value of an option is equal to the:

Accepted Answer

A) intrinsic value minus the time premium. 
B) time premium plus the intrinsic value. 
C) implied standard deviation plus the intrinsic value. 
D) summation of the intrinsic value, the time premium, and the implied standard deviation. 
E) summation of delta, theta, vega, and rho. 
A) intrinsic value minus the time premium. 
B) time premium plus the intrinsic value. 
C) implied standard deviation plus the intrinsic value. 
D) summation of the intrinsic value, the time premium, and the implied standard deviation. 
E) summation of delta, theta, vega, and rho.

Question 16

The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Accepted Answer

A) 4.43 percent 
B) 4.50 percent 
C) 4.68 percent 
D) 5.00 percent 
E) 5.23 percent 
A) 4.43 percent 
B) 4.50 percent 
C) 4.68 percent 
D) 5.00 percent 
E) 5.23 percent

Question 17

Grocery Express stock is selling for $22 a share.A 3-month,$20 call on this stock is priced at $2.85.Risk-free assets are currently returning 0.2 percent per month.What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Accepted Answer

A) $0.37 
B) $0.73 
C) $0.87 
D) $1.10 
E) $1.18 
A) $0.37 
B) $0.73 
C) $0.87 
D) $1.10 
E) $1.18

Question 18

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Accepted Answer

A) theta. 
B) vega. 
C) rho. 
D) delta. 
E) gamma. 
A) theta. 
B) vega. 
C) rho. 
D) delta. 
E) gamma.

Question 19

Assume the price of the underlying stock decreases.How will the values of the options respond to this change?
I.call value decreases
II.call value increases
III.put value decreases
IV.put value increases

Accepted Answer

A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) I only 
A) I and III only 
B) I and IV only 
C) II and III only 
D) II and IV only 
E) I only

Question 20

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Accepted Answer

A) American call 
B) European call 
C) American put 
D) European put 
E) either an American or a European put 
A) American call 
B) European call 
C) American put 
D) European put 
E) either an American or a European put

Exam 25: Option Valuation

The value of the risky debt of a firm is equal to the value of:

A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

A purely financial merger:

What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Given the (1)exercise price E,(2)time to maturity T,and (3)European put-call parity,the present value of E plus the value of the call option is equal to the:

J&N,Inc.stock has a current market price of $46 a share.The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24.What is the risk-free rate of return?

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Give an example of a protective put and explain how this strategy reduces investor risk.

You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

The value of an option is equal to the:

The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Grocery Express stock is selling for $22 a share.A 3-month,$20 call on this stock is priced at $2.85.Risk-free assets are currently returning 0.2 percent per month.What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Assume the price of the underlying stock decreases.How will the values of the options respond to this change? I.call value decreases II.call value increases III.put value decreases IV.put value increases

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

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

Leasing

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