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Exam 24: Options and Corporate Finance

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Question 31

Multiple Choice

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Patience is reviewing a project with projected sales of 4,200 units a year,a cash flow of $28 a unit,and a four-year project life.Assume all operating cash flows occur on the last day of each year.The initial cost of the project is $247,000.The relevant discount rate is 13 percent.Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $110,000.At what level of annual sales,starting in year 3,should she be willing to abandon this project?

A) 2,119 units
B) 2,355 units
C) 2,367 units
D) 2,516 units
E) 2,667 units

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

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Question 32

Multiple Choice

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The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within how many days of the grant?

A) 2 calendar days
B) 2 business days
C) 7 calendar days
D) 30 business days
E) 45 calendar days

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

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Question 33

Multiple Choice

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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?

You purchased six call option contracts on ABC stock with a strike price of $32.50 when the option was quoted at $1.65.The option expires today when the value of ABC stock is $34.60.Ignoring trading costs and taxes,what is the net profit or loss on this investment?

Felicia purchased an option which she can exercise anytime within the next six months.Which type of option did she purchase?

The dollar amount of a bond's par value that is exchangeable for one share of stock is called the:

Josh opted to exercise his January option at the end of December and paid $3,250 at that time to acquire 100 shares of stock.Which one of the following did Josh own?

Last month,Hill Side Markets introduced a new board game.Consumer demand has been overwhelming and appears that strong demand will exist over the long-term as young children absolutely love the game.Given this,which one of the following options should Hill Side Markets consider in respect to this game?

You own eight call option contracts on Swift Water Tours stock with a strike price of $15.When you purchased the shares the option price was $0.30 and the stock price was $15.25.What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share?

The maximum value of a convertible bond is theoretically:

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?

Which one of the following statements related to warrants is correct?

You are considering a project that has been assigned a discount rate of 14 percent.If you start the project today,you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years.If you wait one year to start the project,the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years.What is the value of the option to wait?

You sold one call option contract with a strike price of $55 when the option was quoted at $0.80.The option expires today when the value of the underlying stock is $53.70.Ignoring trading costs and taxes,what is the net profit or loss on this investment?

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 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?

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

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?

Three months ago,Central Supply stock was selling for $51.40 a share.At that time,you purchased five put options on the stock with a strike price of $52 per share and an option price of $0.60 per share.The option expires today when the value of the stock is $42.70 per share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

The market price of Southern Press stock has been relatively volatile and you think this volatility will continue for a couple more months.Thus,you decide to purchase a two-month European call option on this stock with a strike price of $45 and an option price of $2.00.You also purchase a two-month European put option on the stock with a strike price of $45 and an option price of $0.30.What will be your net profit or loss on these option positions if the stock price is $48 on the day the options expire? Ignore trading costs and taxes.