Question 1

In the binomial option pricing model the:

Accepted Answer

A) number of intervals required for convergence is quite large. 
B) interval time span decreases as time moves forward. 
C) result based on infinitesimally small intervals will differ significantly from the value developed by the Black-Scholes model. 
D) percentage increase in price in each interval can differ from the percentage decrease in price. 
E) value of u remains constant as the number of intervals increases. 
A) number of intervals required for convergence is quite large. 
B) interval time span decreases as time moves forward. 
C) result based on infinitesimally small intervals will differ significantly from the value developed by the Black-Scholes model. 
D) percentage increase in price in each interval can differ from the percentage decrease in price. 
E) value of u remains constant as the number of intervals increases.

Question 2

Investing in a negative NPV project today may be a feasible choice if:

Accepted Answer

A) the project has future option alternatives. 
B) all the project's future options were included in the NPV analysis. 
C) the current discount rate is low. 
D) all the project's future options will be ignored by decision makers. 
E) the discount rate is expected to increase over time. 
A) the project has future option alternatives. 
B) all the project's future options were included in the NPV analysis. 
C) the current discount rate is low. 
D) all the project's future options will be ignored by decision makers. 
E) the discount rate is expected to increase over time.

Question 3

Assume you are being granted at-the-money stock options today when the stock is trading at $32 a share.These options mature in one year,the continuously compounded risk-free rate is 4.2 percent,and the volatility of the stock's returns is 22 percent.What is the value of d2 as it is used in the Black-Scholes model?

Accepted Answer

A) .0927 
B) .0752 
C) .0809 
D) .0847 
E) .0936 
A) .0927 
B) .0752 
C) .0809 
D) .0847 
E) .0936

Question 4

Why is straight NPV analysis flawed as compared to models that include option pricing in the analysis?

Accepted Answer

Straight NPV analysis is flawed in that

Question 5

Katrina is analyzing an expansion project for a new business and has developed this input for a Black-Scholes model.Stock price = $4,186,300,exercise price = $7,250,000,time period = 4 years,standard deviation = 13.8 percent,and the continuously compounded interest rate = 3.84 percent.What is the value of d2 as it is used in the model?

Accepted Answer

A) .01338 
B) 1.2784 
C) 1.2953 
D) −1.5713 
E) −1.0293 
A) .01338 
B) 1.2784 
C) 1.2953 
D) −1.5713 
E) −1.0293

Question 6

Alpha stock is currently trading at $34.50 a share and the 6-month call options are at the money.The stock returns have a standard deviation of 21 percent and the risk-free rate is 4.21 percent.What is the price of the call option per share given that N(d1)is .585508 and N(d2) is .526913?

Accepted Answer

A) $1.07 
B) $2.79 
C) $1.38 
D) $2.40 
E) $1.64 
A) $1.07 
B) $2.79 
C) $1.38 
D) $2.40 
E) $1.64

Question 7

A ________ period prohibits executives from exercising their options for a stated period of time.

Accepted Answer

A) investing 
B) freeze-out 
C) valuation 
D) guaranteed 
E) strike 
A) investing 
B) freeze-out 
C) valuation 
D) guaranteed 
E) strike

Question 8

Executive stock options generally have all the following characteristics except:

Accepted Answer

A) aligning executive goals with shareholder goals. 
B) linking executive compensation to performance. 
C) providing tax efficiency. 
D) increasing executive base salaries. 
E) putting executive pay at risk. 
A) aligning executive goals with shareholder goals. 
B) linking executive compensation to performance. 
C) providing tax efficiency. 
D) increasing executive base salaries. 
E) putting executive pay at risk.

Question 9

The price of oil is currently at $24 but you expect it to either increase by 18 percent or decrease by 7 percent over the next 6 months.The 6-month risk-free rate of interest is 1.98 percent.What is the probability that the price will increase?

Accepted Answer

A) 32.47 percent 
B) 36.03 percent 
C) 38.06 percent 
D) 35.92 percent 
E) 37.94 percent 
A) 32.47 percent 
B) 36.03 percent 
C) 38.06 percent 
D) 35.92 percent 
E) 37.94 percent

Question 10

Which one of these statements is true?

Accepted Answer

A) The Black-Scholes model is most applicable to complex situations. 
B) The binomial model is limited to a two-period time sequence. 
C) The binomial model is limited to ten time intervals for any single analysis. 
D) The binomial model is basically equivalent to the Black-Scholes model when there is a single time interval. 
E) The Black-Scholes model is simpler to use,but for complex situations,the binomial model is preferred. 
A) The Black-Scholes model is most applicable to complex situations. 
B) The binomial model is limited to a two-period time sequence. 
C) The binomial model is limited to ten time intervals for any single analysis. 
D) The binomial model is basically equivalent to the Black-Scholes model when there is a single time interval. 
E) The Black-Scholes model is simpler to use,but for complex situations,the binomial model is preferred.

Question 11

When valuing a project using the Black-Scholes option pricing model,R is set equal to the:

Accepted Answer

A) historical real market rate of return. 
B) annually compounded risk-free rate. 
C) expected future real market rate of return. 
D) continuously compounded risk-free rate. 
E) project's CAPM rate of return. 
A) historical real market rate of return. 
B) annually compounded risk-free rate. 
C) expected future real market rate of return. 
D) continuously compounded risk-free rate. 
E) project's CAPM rate of return.

Question 12

The CFO of Financial Savings has just been granted at-the-money options on 200,000 shares.The options expire in three years.The firm's stock is currently trading at $22 a share,the volatility of the returns as measured by standard deviation is 19 percent,and the continuously compounded risk-free rate is 3.6 percent.What is the value of d1 as it is used in the Black-Scholes option pricing model?

Accepted Answer

A) .1842 
B) .4102 
C) .4583 
D) .4927 
E) .5412 
A) .1842 
B) .4102 
C) .4583 
D) .4927 
E) .5412

Question 13

Net present value analysis frequently ignores:

Accepted Answer

A) project risk. 
B) cash flows after the first three years. 
C) the time value of money. 
D) some or all of a project's options. 
E) start-up costs. 
A) project risk. 
B) cash flows after the first three years. 
C) the time value of money. 
D) some or all of a project's options. 
E) start-up costs.

Question 14

One of Modular Products (MP)customers would like to obtain a 6-month option to purchase 500,000 tables for $119 each.These tables currently sell for $110 each.Assume u equals 1.0994 and d equals .9096.What price should MP charge for this option if the annual risk-free rate is 3.2 percent? Round your answer to the nearest $100.

Accepted Answer

A) $338,400 
B) $421,900 
C) $598,100 
D) $479,900 
E) $533,600 
A) $338,400 
B) $421,900 
C) $598,100 
D) $479,900 
E) $533,600

Question 15

Which one of these is not a reason why executives place less value on employee stock options than their face value would indicate?

Accepted Answer

A) The option's value depends on the stock price exceeding the exercise price. 
B) Options must generally be held for a period of time. 
C) Options may create a highly undiversified portfolio for the executive. 
D) Options always create taxable income for the executive when granted. 
E) Options could be out of the money. 
A) The option's value depends on the stock price exceeding the exercise price. 
B) Options must generally be held for a period of time. 
C) Options may create a highly undiversified portfolio for the executive. 
D) Options always create taxable income for the executive when granted. 
E) Options could be out of the money.

Question 16

The value of an executive stock option will be lowered if:

Accepted Answer

A) the volatility of the firm's stock returns increases. 
B) the executive improves firm performance causing the stock price to rise. 
C) a freeze-out period is required. 
D) the firm extends the option expiration date. 
E) the strike price is lowered. 
A) the volatility of the firm's stock returns increases. 
B) the executive improves firm performance causing the stock price to rise. 
C) a freeze-out period is required. 
D) the firm extends the option expiration date. 
E) the strike price is lowered.

Question 17

With the binominal option pricing model,it is reasonable to assume:

Accepted Answer

A) there is a varying rate of price change from one time interval to the next time interval. 
B) any new information impacting prices is similar from one interval to another interval. 
C) the discount rate increases with each time interval. 
D) the call price will only be usable if the time interval is extremely small. 
E) that each project is limited to two outcomes over its life. 
A) there is a varying rate of price change from one time interval to the next time interval. 
B) any new information impacting prices is similar from one interval to another interval. 
C) the discount rate increases with each time interval. 
D) the call price will only be usable if the time interval is extremely small. 
E) that each project is limited to two outcomes over its life.

Question 18

In what instances is the binomial option pricing model superior to the Black-Scholes option pricing model?

Accepted Answer

The binomial option pricing model is ame

Question 19

A branching tree depicting the binomial model of a projected investment:

Accepted Answer

A) should capture all possible future paths the investment could take. 
B) will have more up-branches than down-branches if there are two or more time intervals. 
C) can only have one final point that has an option value of zero. 
D) only depicts paths that will lead to acceptable project decisions. 
E) should lead to the same result if you take an up-branch followed by a down-branch or a down-branch followed by an up-branch. 
A) should capture all possible future paths the investment could take. 
B) will have more up-branches than down-branches if there are two or more time intervals. 
C) can only have one final point that has an option value of zero. 
D) only depicts paths that will lead to acceptable project decisions. 
E) should lead to the same result if you take an up-branch followed by a down-branch or a down-branch followed by an up-branch.

Question 20

If an infinite number of intervals is applied to the binomial option pricing model,then the value of a call is equal to:

Accepted Answer

A) the risk-free rate of return. 
B) zero. 
C) the exercise price. 
D) the Black-Scholes model's call value. 
E) the stock price. 
A) the risk-free rate of return. 
B) zero. 
C) the exercise price. 
D) the Black-Scholes model's call value. 
E) the stock price.

Exam 23: Options and Corporate Finance: Extensions and Applications

In the binomial option pricing model the:

Investing in a negative NPV project today may be a feasible choice if:

Why is straight NPV analysis flawed as compared to models that include option pricing in the analysis?

Alpha stock is currently trading at $34.50 a share and the 6-month call options are at the money.The stock returns have a standard deviation of 21 percent and the risk-free rate is 4.21 percent.What is the price of the call option per share given that N(d1)is .585508 and N(d2) is .526913?

A ________ period prohibits executives from exercising their options for a stated period of time.

Executive stock options generally have all the following characteristics except:

The price of oil is currently at $24 but you expect it to either increase by 18 percent or decrease by 7 percent over the next 6 months.The 6-month risk-free rate of interest is 1.98 percent.What is the probability that the price will increase?

Which one of these statements is true?

When valuing a project using the Black-Scholes option pricing model,R is set equal to the:

Net present value analysis frequently ignores:

Which one of these is not a reason why executives place less value on employee stock options than their face value would indicate?

The value of an executive stock option will be lowered if:

With the binominal option pricing model,it is reasonable to assume:

In what instances is the binomial option pricing model superior to the Black-Scholes option pricing model?

A branching tree depicting the binomial model of a projected investment:

If an infinite number of intervals is applied to the binomial option pricing model,then the value of a call is equal to:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

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

Lessons From Market History

Return, risk, and 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

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

Alpha stock is currently trading at $34.50 a share and the 6-month call options are at the money.The stock returns have a standard deviation of 21 percent and the risk-free rate is 4.21 percent.What is the price of the call option per share given that N(d₁)is .585508 and N(d₂₎ is .526913?