Question 1

What are the basic similarities and basic differences between warrants and call options?

Accepted Answer

Both warrants and call options grant the

Question 2

Suzie is the controller of The Price Rite Company.She has been granted the right to buy 1,000 shares of her employer's stock at $25 a share anytime within the next three years.Which one of the following has Suzie been granted?

Accepted Answer

A) employee stock option 
B) company bonus option 
C) employee grant 
D) employee exercise option 
E) company benefits option 
A) employee stock option 
B) company bonus option 
C) employee grant 
D) employee exercise option 
E) company benefits option

Question 3

Lucinda owns a convertible bond that matures in six years.The bond has a 9 percent coupon and pays interest annually.The face value of the bond is $1,000 and the conversion price is $22.Similar bonds have a market return of 8.75 percent.The current price of the stock is $21.60 per share.What is the conversion value of this bond?

Accepted Answer

A) $835.60 
B) $848.40 
C) $942.11 
D) $981.82 
E) $1,000.00 
A) $835.60 
B) $848.40 
C) $942.11 
D) $981.82 
E) $1,000.00

Question 4

You own nine convertible bonds.These bonds have a 7 percent coupon,a $1,000 face value,and mature in 6 years.The bonds are convertible into shares of common stock at a conversion price of $25.How many shares of stock will you receive if you convert all of your bonds?

Accepted Answer

A) 285 
B) 300 
C) 350 
D) 360 
E) 400 
A) 285 
B) 300 
C) 350 
D) 360 
E) 400

Question 5

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 6

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

Question 7

What are the upper and lower bounds for an American call option?
 Explain what would happen in each case if the bound was violated.

Accepted Answer

The upper bound on a call is the stock p

Question 8

Amy is a current shareholder of DJ Industries.She has been given the right to purchase an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right within the next 12 months.What is this security called that Amy has been given?

Accepted Answer

A) convertible bond 
B) warrant 
C) straddle 
D) spread 
E) put 
A) convertible bond 
B) warrant 
C) straddle 
D) spread 
E) put

Question 9

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 10

We are examining a new project.We expect to sell 8,000 units per year at $80 net cash flow apiece for the next 15 years.In other words,the annual operating cash flow is projected to be $80 × 8,000 = $640,000.The relevant discount rate is 16 percent,and the initial investment required is $2,740,000.The project can be dismantled after the first year and sold for $2,130,000.Suppose you think it is likely that expected sales will be revised upward to 9,600 units if the first year is a success and revised downward to 3,000 units if the first year is not a success.Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold.Naturally,expansion would be desirable only if the project is a success.This implies that if the project is a success,projected sales after expansion will be 19,200.Assume that success and failure are equally likely.Note that abandonment is still an option if the project is a failure.What is the value of the option to expand?

Accepted Answer

A) $1,774,328 
B) $1,809,941 
C) $1,828,406 
D) $1,848,920 
E) $1,872,312 
A) $1,774,328 
B) $1,809,941 
C) $1,828,406 
D) $1,848,920 
E) $1,872,312

Question 11

An increase in which of the following will increase the value of a call?
I.time to expiration
II.underlying stock price
III.risk-free rate of return
IV.price volatility of the underlying stock

Accepted Answer

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

Question 12

Which one of the following considers all of the options implicit in a project?

Accepted Answer

A) expansion planning 
B) contingency planning 
C) asset management review 
D) prospective evaluation 
E) strategic evaluation 
A) expansion planning 
B) contingency planning 
C) asset management review 
D) prospective evaluation 
E) strategic evaluation

Question 13

The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?

Accepted Answer

A) $0 
B) $1.20 
C) $3.00 
D) $4.20 
E) $5.51 
A) $0 
B) $1.20 
C) $3.00 
D) $4.20 
E) $5.51

Question 14

Which one of the following is an example of a strategic option for a restaurant?

Accepted Answer

A) opening a new restaurant with a different look and an entirely different menu to see if that type of restaurant appeals to the public 
B) deciding to close one hour earlier during the winter months due to slow sales 
C) abandoning a menu item based on customer complaints 
D) deciding to open only two new locations next year instead of the five that were originally scheduled 
E) deciding to create separate lunch and dinner menus rather than have them combined on one menu 
A) opening a new restaurant with a different look and an entirely different menu to see if that type of restaurant appeals to the public 
B) deciding to close one hour earlier during the winter months due to slow sales 
C) abandoning a menu item based on customer complaints 
D) deciding to open only two new locations next year instead of the five that were originally scheduled 
E) deciding to create separate lunch and dinner menus rather than have them combined on one menu

Question 15

You are considering a project that has been assigned a discount rate of 14 percent.If you start the project today,you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years.If you wait one year to start the project,the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years.What is the value of the option to wait?

Accepted Answer

A) -$331.40 
B) -$194.46 
C) $228.51 
D) $230.49 
E) $334.68 
A) -$331.40 
B) -$194.46 
C) $228.51 
D) $230.49 
E) $334.68

Question 16

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 17

Marti owns an option that allows him to purchase ABC stock at $50 a share.The $50 price is referred to as the:

Accepted Answer

A) opening price. 
B) intrinsic value. 
C) strike price. 
D) market price. 
E) time value. 
A) opening price. 
B) intrinsic value. 
C) strike price. 
D) market price. 
E) time value.

Question 18

The price of Time Squared Corp.stock will be either $80 or $95 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 6 percent and the current price of Time Squared Corp.stock is $85.What is the value of a call option if the exercise price is $75 per share?

Accepted Answer

A) $14.25 
B) $15.06 
C) $18.78 
D) $24.25 
E) $25.06 
A) $14.25 
B) $15.06 
C) $18.78 
D) $24.25 
E) $25.06

Question 19

Patience is reviewing a project with projected sales of 4,200 units a year,a cash flow of $28 a unit,and a four-year project life.Assume all operating cash flows occur on the last day of each year.The initial cost of the project is $247,000.The relevant discount rate is 13 percent.Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $110,000.At what level of annual sales,starting in year 3,should she be willing to abandon this project?

Accepted Answer

A) 2,119 units 
B) 2,355 units 
C) 2,367 units 
D) 2,516 units 
E) 2,667 units 
A) 2,119 units 
B) 2,355 units 
C) 2,367 units 
D) 2,516 units 
E) 2,667 units

Question 20

Which one of the following terms applies to an option that has an office building as its underlying asset?

Accepted Answer

A) financial option 
B) liquid option 
C) fixed option 
D) real option 
E) concrete option 
A) financial option 
B) liquid option 
C) fixed option 
D) real option 
E) concrete option

Exam 24: Options and Corporate Finance

What are the basic similarities and basic differences between warrants and call options?

Suzie is the controller of The Price Rite Company.She has been granted the right to buy 1,000 shares of her employer's stock at $25 a share anytime within the next three years.Which one of the following has Suzie been granted?

You own nine convertible bonds.These bonds have a 7 percent coupon,a $1,000 face value,and mature in 6 years.The bonds are convertible into shares of common stock at a conversion price of $25.How many shares of stock will you receive if you convert all of your bonds?

Which one of the following statements is correct?

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

What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.

Amy is a current shareholder of DJ Industries.She has been given the right to purchase an additional 25 shares of DJ Industries stock at a price of $32 a share if she exercises that right within the next 12 months.What is this security called that Amy has been given?

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

An increase in which of the following will increase the value of a call? I.time to expiration II.underlying stock price III.risk-free rate of return IV.price volatility of the underlying stock

Which one of the following considers all of the options implicit in a project?

The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?

Which one of the following is an example of a strategic option for a restaurant?

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

Marti owns an option that allows him to purchase ABC stock at $50 a share.The $50 price is referred to as the:

Which one of the following terms applies to an option that has an office building as its underlying asset?

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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