Exam 24: Options and Corporate Finance

Which of the following are managerial options once a project is commenced? I.modifying the production process II.re-pricing the product III.revising the marketing plan IV.modifying the product's color and shape

Circle Stores stock is priced at $28 a share.A $40 call on this stock has five months until expiration and a call price of $0.15.Why would an investor purchase a call that is so far out of the money?

Jeff owns a $1,000 face value bond.He can exchange that bond for 25 shares of KNJ stock at any time within the next 2 years.What type of bond does Jeff own?

The assets of Uptown Stores are currently worth $138,000.These assets are expected to be worth either $120,000 or $150,000 one year from now.The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year.The risk-free rate is 4.3 percent.What is the value of the equity in this firm?

Explain the rationale behind the idea that equity is a call option on a firm's assets.When would a shareholder allow this call to expire?

KT Enterprises has expanded its operations into a new field,which is the production of everyday dinnerware.If this project goes well,the firm has the option to expand its production into fine china.What type of option is this?

The common stock of Westover Foods is currently priced at $28.80 a share.One year from now,the stock price is expected to be either $25 or $30 a share.The risk-free rate of return is 4.2 percent.What is the current value of one call option on this stock if the exercise price is $27.50?

You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

Which one of the following statements regarding employee stock options (ESOs)is correct?

What is the primary difference between an American call option and a European call option?

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

What is the final day on which an option can be exercised called?

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Which of the following statements are correct concerning convertible bonds? I.New shares of stock are issued when a convertible bond is converted. II.A convertible bond is similar to a bond with a call option. III.A convertible bond should always be worth less than a comparable straight bond. IV.A convertible bond can be described as having upside potential with downside protection.

Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

Last week,you purchased a call option on Edgewater stock with a strike price of $40.The stock price was $39.80 and the option price was $0.45 at that time.What is the intrinsic value per share if the stock is currently priced at $39.10?

The price of Dimension,Inc.stock will be either $65 or $87 at the end of the year.Call options are available with one year to expiration.T-bills currently yield 5 percent.Suppose the current price of Dimension stock is $70.What is the value of the call option if the exercise price is $70 per share?

Your company is deciding when to invest in a new machine.The new machine will increase cash flow by $240,000 per year.You believe the technology used in the machine has a 10-year life; in other words,no matter when you purchase the machine,it will be obsolete 10 years from today.The machine is currently priced at $1,200,000.The cost of the machine will decline by $120,000 per year until it reaches $720,000,where it will remain.Your required return is 8 percent.In which year should you purchase the machine?

What is the value of five August $25 call contracts on Dove stock?

Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year.The risk-free rate of return is 3.8 percent.The assets of the business are expected to be worth either $23,000 or $35,000 in one year.Currently,these assets are worth $27,500.What is the current value of the bond?