Exam 8: Financial Options and Applications in Corporate Finance

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Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

(True/False)

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Question 21

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

(True/False)

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Question 22

Suppose you believe that Basso Inc.'s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share.If you buy this option for $3.10 and Basso's stock price actually rises to $45,what would your pre-tax net profit be?

(Multiple Choice)

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Question 23

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

(True/False)

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Question 24

Which of the following statements is CORRECT?

(Multiple Choice)

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Question 25

The current price of a stock is $22,and at the end of one year its price will be either $27 or $17.The annual risk-free rate is 6.0%,based on daily compounding.A 1-year call option on the stock,with an exercise price of $22,is available.Based on the binomial model,what is the option's value? (Hint: Use daily compounding. )

(Multiple Choice)

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Question 26

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

(Multiple Choice)

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Question 27

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

(Multiple Choice)

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Question 28

Showing 21 - 28 of 28

Since investors tend to dislike risk and like certainty,the more volatile a stock,the less valuable will be an option to purchase the stock,other things held constant.

Because of the time value of money,the longer before an option expires,the less valuable the option will be,other things held constant.

The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.

Which of the following statements is CORRECT?

The current price of a stock is $50,the annual risk-free rate is 6%,and a 1-year call option with a strike price of $55 sells for $7.20.What is the value of a put option,assuming the same strike price and expiration date as for the call option?

Braddock Construction Co.'s stock is trading at $20 a share.Call options that expire in three months with a strike price of $20 sell for $1.50.Which of the following will occur if the stock price increases 10%,to $22 a share?

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Financial Planning and Applications to Corporate Valuation

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Supply Chains and Working Capital Management

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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