Question 1

If you consider the equity of a firm to be an option on the firm's assets then the act of paying off 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 2

The current market value of the assets of ABCD is $86.28 million.The call option value on the firm's assets is $53.09 million.What is the market value of the firm's debt?

Accepted Answer

A) $74.49 million 
B) $31.36 million 
C) $33.19 million 
D) $44.08 million 
E) $139.37 million 
A) $74.49 million 
B) $31.36 million 
C) $33.19 million 
D) $44.08 million 
E) $139.37 million

Question 3

Three months ago,you purchased three put option contracts on WXX stock with a strike price of $60 and an option price of $.60.The option expires today when the value of WXX stock is $48.10.Ignoring trading costs and taxes,what is your total profit on your investment?

Accepted Answer

A) $180 
B) $3,390 
C) $60 
D) $1,130 
E) $1,090 
A) $180 
B) $3,390 
C) $60 
D) $1,130 
E) $1,090

Question 4

Hi-Tech announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of call options on this stock?

Accepted Answer

A) Both reactions will decrease the value. 
B) Both reactions increase the value. 
C) Neither reaction will affect the value. 
D) The reactions will have offsetting effects on the value. 
E) The change in volatility will have no effect while the increased stock price will increase the value. 
A) Both reactions will decrease the value. 
B) Both reactions increase the value. 
C) Neither reaction will affect the value. 
D) The reactions will have offsetting effects on the value. 
E) The change in volatility will have no effect while the increased stock price will increase the value.

Question 5

Which one of the following will cause the value of a call to decrease?

Accepted Answer

A) Lowering the exercise price 
B) Increasing the time to expiration 
C) Increasing the risk-free rate 
D) Lowering the risk level of the underlying security 
E) Increasing the stock price 
A) Lowering the exercise price 
B) Increasing the time to expiration 
C) Increasing the risk-free rate 
D) Lowering the risk level of the underlying security 
E) Increasing the stock price

Question 6

Jillian owns a call option on WAN stock with a strike price of $20 a share.Currently,WAN is selling for $24.50 a share.Jillian would like to profit on this option but is not permitted to exercise the option for another two weeks.She believes the stock will decline in value before the two weeks is up.What should she do?

Accepted Answer

A) Sell her option today 
B) Place an order to exercise her option on its expiration date 
C) Purchase an additional call option on WAN today with a strike price of $20 
D) Place an order to exercise her option as soon as she is permitted to do so 
E) Convert her American option into a European option 
A) Sell her option today 
B) Place an order to exercise her option on its expiration date 
C) Purchase an additional call option on WAN today with a strike price of $20 
D) Place an order to exercise her option as soon as she is permitted to do so 
E) Convert her American option into a European option

Question 7

You purchased two WXO 15 call option contracts at a quoted price of $.08.What is your total profit on this investment if the price of WXO is $14.80 on the option expiration date?

Accepted Answer

A) −$20 
B) −$16 
C) $12 
D) $16 
E) $20 
A) −$20 
B) −$16 
C) $12 
D) $16 
E) $20

Question 8

What is the value of a call given the Black-Scholes model and the following information? Stock price = $44,Exercise price = $40,Time to expiration = .75,Risk-free rate = 4.5%,Standard deviation = 25%,N(d1)= .759395,and N(d2)= .687172.

Accepted Answer

A) $2.03 
B) $4.86 
C) $6.84 
D) $8.81 
E) $9.27 
A) $2.03 
B) $4.86 
C) $6.84 
D) $8.81 
E) $9.27

Question 9

The last day on which an owner of an option can elect to exercise that option is referred to as the ________ date.

Accepted Answer

A) ex-payment 
B) ex-option 
C) opening 
D) expiration 
E) intrinsic 
A) ex-payment 
B) ex-option 
C) opening 
D) expiration 
E) intrinsic

Question 10

Which of these will decrease the value of a put option? I.An increase in the market value of the underlying asset
II.An increase in the option's strike price
III.A decrease in the market value of the underlying asset
IV.A decrease in the option's strike price

Accepted Answer

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

Question 11

The intrinsic value of a call equals the:

Accepted Answer

A) exercise price minus the stock price. 
B) upper bound of the call's value. 
C) market price of the call option. 
D) lower bound of the call's value. 
E) premium paid to purchase the call. 
A) exercise price minus the stock price. 
B) upper bound of the call's value. 
C) market price of the call option. 
D) lower bound of the call's value. 
E) premium paid to purchase the call.

Question 12

An out-of-the-money call option is best defined as an option that:

Accepted Answer

A) has an exercise price below the current market price of the underlying security. 
B) should not be exercised at this time. 
C) has an exercise price equal to the current market price of the underlying security. 
D) has expired. 
E) qualifies as an American option. 
A) has an exercise price below the current market price of the underlying security. 
B) should not be exercised at this time. 
C) has an exercise price equal to the current market price of the underlying security. 
D) has expired. 
E) qualifies as an American option.

Question 13

Eric has an option position on Langdon stock that results in a zero dollar payoff when the stock price is equal to or greater than the option strike price.What did he do to obtain this position?

Accepted Answer

A) Purchased a call option 
B) Purchased a put option 
C) Wrote a call option 
D) Wrote a put option 
E) No option position would have this result. 
A) Purchased a call option 
B) Purchased a put option 
C) Wrote a call option 
D) Wrote a put option 
E) No option position would have this result.

Question 14

The relationship between the prices of the underlying stock,a call option,a put option,and a riskless asset is referred to as the ________ relationship.

Accepted Answer

A) put-call parity 
B) covered call 
C) protective put 
D) straddle 
E) strangle 
A) put-call parity 
B) covered call 
C) protective put 
D) straddle 
E) strangle

Question 15

The delta of a call measures the:

Accepted Answer

A) time remaining to expiration compared to the option's original maturity. 
B) change between an option's original value and its current value. 
C) swing in the price of the call relative to the swing in the underlying stock price. 
D) ratio of the change in the option price to the change in the time to expiration. 
E) volatility of the underlying security. 
A) time remaining to expiration compared to the option's original maturity. 
B) change between an option's original value and its current value. 
C) swing in the price of the call relative to the swing in the underlying stock price. 
D) ratio of the change in the option price to the change in the time to expiration. 
E) volatility of the underlying security.

Question 16

A ________ is a derivative security that gives the owner the right,but not the obligation,to buy an asset at a fixed price for a specified period of time.

Accepted Answer

A) futures contract 
B) call option 
C) put option 
D) swap 
E) forward contract 
A) futures contract 
B) call option 
C) put option 
D) swap 
E) forward contract

Question 17

An increase in which one of the following will decrease the value of a call option?

Accepted Answer

A) Interest rate 
B) Exercise price 
C) Time to expiration 
D) Stock volatility 
E) Underlying asset price 
A) Interest rate 
B) Exercise price 
C) Time to expiration 
D) Stock volatility 
E) Underlying asset price

Question 18

Big Ed's Electrical has a pure discount bond that comes due in one year and has a face value of $1,000.The risk-free rate of return is 4 percent.The assets of Big Ed's are expected to be worth either $800 or $1,300 in one year.Currently,these assets are worth $1,140.What is the current value of the debt of Big Ed's Electrical?

Accepted Answer

A) $222.46 
B) $370.77 
C) $514.28 
D) $769.23 
E) $917.54 
A) $222.46 
B) $370.77 
C) $514.28 
D) $769.23 
E) $917.54

Question 19

Several rumors concerning Wyslow stock have started circulating.These rumors are causing the market price of the stock to become increasingly volatile.Given this situation,you decide to buy both a one-month put and a one-month call option on this stock with an exercise price of $15.You purchased the call at a quoted price of $.20 and the put at a price of $2.10.What will be your total profit on these option positions if the stock price is $6 on the day the options expire?

Accepted Answer

A) $30 
B) $670 
C) $690 
D) $710 
E) $1,110 
A) $30 
B) $670 
C) $690 
D) $710 
E) $1,110

Question 20

New Tek announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of put options on this stock?

Accepted Answer

A) Both reactions will decrease the value. 
B) Both reactions will increase the value. 
C) Neither reaction will affect put option values. 
D) The reactions will have offsetting effects on the value. 
E) The change in volatility will have no effect while the increased stock price will decrease the value. 
A) Both reactions will decrease the value. 
B) Both reactions will increase the value. 
C) Neither reaction will affect put option values. 
D) The reactions will have offsetting effects on the value. 
E) The change in volatility will have no effect while the increased stock price will decrease the value.

Exam 22: Options and Corporate Finance

If you consider the equity of a firm to be an option on the firm's assets then the act of paying off debt is comparable to ________ on the assets of the firm.

The current market value of the assets of ABCD is $86.28 million.The call option value on the firm's assets is $53.09 million.What is the market value of the firm's debt?

Three months ago,you purchased three put option contracts on WXX stock with a strike price of $60 and an option price of $.60.The option expires today when the value of WXX stock is $48.10.Ignoring trading costs and taxes,what is your total profit on your investment?

Hi-Tech announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of call options on this stock?

Which one of the following will cause the value of a call to decrease?

You purchased two WXO 15 call option contracts at a quoted price of $.08.What is your total profit on this investment if the price of WXO is $14.80 on the option expiration date?

What is the value of a call given the Black-Scholes model and the following information? Stock price = $44,Exercise price = $40,Time to expiration = .75,Risk-free rate = 4.5%,Standard deviation = 25%,N(d1)= .759395,and N(d2)= .687172.

The last day on which an owner of an option can elect to exercise that option is referred to as the ________ date.

Which of these will decrease the value of a put option? I.An increase in the market value of the underlying asset II.An increase in the option's strike price III.A decrease in the market value of the underlying asset IV.A decrease in the option's strike price

The intrinsic value of a call equals the:

An out-of-the-money call option is best defined as an option that:

Eric has an option position on Langdon stock that results in a zero dollar payoff when the stock price is equal to or greater than the option strike price.What did he do to obtain this position?

The relationship between the prices of the underlying stock,a call option,a put option,and a riskless asset is referred to as the ________ relationship.

The delta of a call measures the:

A ________ is a derivative security that gives the owner the right,but not the obligation,to buy an asset at a fixed price for a specified period of time.

An increase in which one of the following will decrease the value of a call option?

New Tek announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of put options on this stock?

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: Extensions and Applications

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

What is the value of a call given the Black-Scholes model and the following information? Stock price = $44,Exercise price = $40,Time to expiration = .75,Risk-free rate = 4.5%,Standard deviation = 25%,N(d₁)= .759395,and N(d₂)= .687172.