Question 1

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

Accepted Answer

A)  worthless
B)  unfunded
C)  expired
D)  in-the-money
E)  out-of-the-moneyF) A) and B)
G) A) and C)

Question 2

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 menuF) A) and B)
G) B) and D)

Question 3

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

Accepted Answer

A)  $34
B)  $68
C)  $340
D)  $680
E)  $3,400F) C) and E)
G) B) and E)

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)  400F) C) and E)
G) C) and D)

Question 5

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)  $5.51F) A) and E)
G) D) and E)

Question 6

Southern Shores is considering a project that has an initial cost today of $12,500. The project has a two-year life with cash inflows of $7,500 a year. Should the firm opt to wait one year to commence this project, the initial cost will increase by 5 percent and the cash inflows will increase to $8,500 a year. What is the value of the option to wait if the applicable discount rate is 14 percent?

Accepted Answer

A)  $614.52
B)  $721.56
C)  $914.62
D)  $982.67
E)  $1,021.66F) D) and E)
G) A) and D)

Question 7

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.

Accepted Answer

A)  I and III only
B)  I, II, and IV only
C)  I, II, and III only
D)  I, III, and IV only
E)  II, III, and IV onlyF) All of the above
G) A) and B)

Question 8

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?

Accepted Answer

A)  -$90
B)  -$70
C)  $0
D)  $70
E)  $90F) D) and E)
G) A) and B)

Question 9

Western Industrial Products is considering a project with a four-year life and an initial cost of $212,000. The discount rate for the project is 16 percent. The firm expects to sell 9,600 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon this project at the end of year one (after year one's sales)  at which time the project's assets could be sold for an estimated $125,000. The firm should abandon the project at the end of year one if the expected level of annual sales, starting with year 2, falls to _____ units or less. Ignore taxes.

Accepted Answer

A)  1,113 units
B)  1,267 units
C)  1,922 units
D)  2,034 units
E)  2,108 unitsF) All of the above
G) A) and B)

Question 10

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)  putF) B) and C)
G) B) and D)

Question 11

The conversion value of a convertible bond is equal to which one of the following?

Accepted Answer

A)  Conversion ratio * Stock price
B)  Conversion ratio* Conversion price
C)  Face value of the bond/Conversion premium
D)  Face value of the bond * (1 + Conversion premium) 
E)  Stock price * (1 + Conversion ratio) F) A) and B)
G) A) and C)

Question 12

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

Accepted Answer

A)  strike price minus the initial cost of the option
B)  exercise price plus the price of the underlying stock
C)  strike price
D)  market price of the underlying stock
E)  purchase priceF) A) and B)
G) None of the above

Question 13

When warrants are exercised, the:

Accepted Answer

A)  earnings per share decrease.
B)  earnings per share remain constant.
C)  total equity in a firm remains constant.
D)  total equity in a firm decreases.
E)  number of bonds outstanding increases.F) B) and E)
G) D) and E)

Question 14

You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?

Accepted Answer

A)  -$2,840
B)  -$1,760
C)  -$1,080
D)  $1,080
E)  $1,760F) None of the above
G) C) and D)

Question 15

What is the intrinsic value of the November $25 call on Dove stock?

Accepted Answer

A)  -$0.98
B)  $0
C)  $0.15
D)  $6.12
E)  $7.10F) A) and B)
G) B) and E)

Question 16

Ignoring which of the following will cause the NPV of a project to be underestimated?
I. option to abandon
II. option to expand
III. option to wait
IV. option to contract

Accepted Answer

A)  I and III only
B)  II, III, and IV only
C)  I, II, and III only
D)  I, III, and IV only
E)  I, II, III, and IVF) All of the above
G) None of the above

Question 17

You sold three $35 call option contracts at a quoted price of $1.40. What is your net profit or loss on this investment if the price of the underlying asset is $36.70 on the option expiration date?

Accepted Answer

A)  -$510
B)  -$90
C)  $90
D)  $510
E)  $930F) A) and C)
G) B) and C)

Question 18

The option to wait:
I. may be of minimal value if a project is dependent upon rapidly changing technology.
II. is partially dependent upon the discount rate applied to the project being evaluated.
III. is defined as temporarily shutting down a project for a period of time.
IV. has a value equal to the NPV of a project if it is started at a later date minus the NPV if the project is started today.

Accepted Answer

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

Question 19

A convertible bond has a face value of $1,000 and a conversion price of $12.50. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 9 percent. The current price of the stock is $13.40 per share. What is the straight bond value?

Accepted Answer

A)  $782.57
B)  $781.82
C)  $827.74
D)  $832.09
E)  $843.47F) None of the above
G) D) and E)

Question 20

Rackin Pinion Corporation's assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200. What is the current value of the firm's debt?

Accepted Answer

A)  $60.00
B)  $114.14
C)  $1,142.86
D)  $1,263.19
E)  $1,504.20F) C) and D)
G) All of the above

Exam 24: Options and Corporate Finance

You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?

Correct Answer
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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?

Correct Answer
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Correct Answer
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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?

Correct Answer
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Correct Answer
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The conversion value of a convertible bond is equal to which one of the following?

Correct Answer
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Correct Answer
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Rackin Pinion Corporation's assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200. What is the current value of the firm's debt?

Correct Answer
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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?

Correct Answer
verified

A convertible bond has a face value of $1,000 and a conversion price of $12.50. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 9 percent. The current price of the stock is $13.40 per share. What is the straight bond value?

Correct Answer
verified

Ignoring which of the following will cause the NPV of a project to be underestimated? I. option to abandon II. option to expand III. option to wait IV. option to contract

Correct Answer
verified

You sold three $35 call option contracts at a quoted price of $1.40. What is your net profit or loss on this investment if the price of the underlying asset is $36.70 on the option expiration date?

Correct Answer
verified

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

Correct Answer
verified

When warrants are exercised, the:

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

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?

Correct Answer
verified

Correct Answer
verified

What is the intrinsic value of the November $25 call on Dove stock?

Correct Answer
verified

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

Correct Answer
verified

Exam 24: Options and Corporate Finance

You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The conversion value of a convertible bond is equal to which one of the following?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Rackin Pinion Corporation's assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200. What is the current value of the firm's debt?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A convertible bond has a face value of $1,000 and a conversion price of $12.50. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 9 percent. The current price of the stock is $13.40 per share. What is the straight bond value?

Correct AnswerverifiedShow Answer

Ignoring which of the following will cause the NPV of a project to be underestimated? I. option to abandon II. option to expand III. option to wait IV. option to contract

Correct AnswerverifiedShow Answer

You sold three $35 call option contracts at a quoted price of $1.40. What is your net profit or loss on this investment if the price of the underlying asset is $36.70 on the option expiration date?

Correct AnswerverifiedShow Answer

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

Correct AnswerverifiedShow Answer

When warrants are exercised, the:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the intrinsic value of the November $25 call on Dove stock?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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