Question 1

T-bills currently yield 6.3 percent.Stock in Pinta Manufacturing is currently selling for $46 per share.There is no possibility that the stock will be worth less than $39 per share in one year.What is the value of a call option on this stock if the exercise price is $24 per share?

Accepted Answer

A)  $21.40
B)  $22.00
C)  $23.00
D)  $23.42
E)  $25.70F) A) and E)
G) A) and D)

Question 2

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 $38.10 on the option expiration date?

Accepted Answer

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

Question 3

You own a convertible bond with a face value of $1,000 and a market value of $1,034.The bond can be converted into 16 shares of stock.What is the conversion price?

Accepted Answer

A)  $62.50
B)  $64.63
C)  $71.43
D)  $73.86
E)  $74.33F) None of the above
G) A) and B)

Question 4

Which one of the following statements correctly describes your situation as the holder of a European call option?

Accepted Answer

A)  You are obligated to buy if the option is exercised.
B)  You have a right to sell.
C)  You have a right to buy but only on the expiration date.
D)  You are obligated to sell if the option is exercised.
E)  You have a right to buy at any time before the option expires.F) A) and C)
G) C) and E)

Question 5

What is the cost of two November $25 put option contracts on Dove stock given the following price quotes?

Accepted Answer

A)  $0.15
B)  $0.30
C)  $1.50
D)  $15.00
E)  $30.00F) B) and D)
G) B) and E)

Question 6

You own one call option with an exercise price of $40 on S'more Good stock.The stock is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in one year.The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent.What is the current call option price if the option expires one year from now?

Accepted Answer

A)  $0.55
B)  $0.69
C)  $1.37
D)  $2.43
E)  $2.75F) A) and D)
G) B) and E)

Question 7

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

Accepted Answer

A)  $34
B)  $68
C)  $340
D)  $690
E)  $3,450F) A) and B)
G) A) and C)

Question 8

Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

Accepted Answer

A)  option
B)  forward contract
C)  futures contract
D)  swap
E)  intrinsic contractF) B) and E)
G) B) and C)

Question 9

The assets of Uptown Stores are currently worth $138,000.These assets are expected to be worth either $120,000 or $150,000 one year from now.The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year.The risk-free rate is 4.3 percent.What is the value of the equity in this firm?

Accepted Answer

A)  $11,920
B)  $15,298
C)  $19,507
D)  $21,347
E)  $26,408F) A) and B)
G) A) and C)

Question 10

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Accepted Answer

A)  right to sell
B)  right to buy
C)  obligation to sell
D)  obligation to buy
E)  obligation to tradeF) B) and E)
G) C) and E)

Question 11

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) A) and B)
G) A) and C)

Question 12

Employee stock options are primarily designed to do which one of the following?

Accepted Answer

A)  provide employees with put options on their shares of company stock
B)  provide an immediately vested benefit to key employees
C)  influence the actions and priorities of employees
D)  distribute excess cash to key employees to avoid corporate taxation
E)  provide an immediate capital gain to certain employeesF) A) and E)
G) All of the above

Question 13

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) A) and C)
G) C) and D)

Question 14

You sold ten put contracts on Cross Town Bank stock at an option price per share of $0.85.The options have an exercise price of $39 per share.The options were exercised today when the stock price was $34 a share.What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $34? Ignore transaction costs and taxes.

Accepted Answer

A)  -$4,500
B)  -$4,150
C)  $1,800
D)  $850
E)  $3,500F) A) and B)
G) A) and E)

Question 15

Lucas Enterprises recently opted to open a new retail outlet.If the outlet outperforms the expectations,the manager can opt to increase the store's size.If it underperforms,the manager can opt to close the store.These choices that the manager has been given are called:

Accepted Answer

A)  call options.
B)  put options.
C)  straddles.
D)  managerial options.
E)  executive options.F) B) and D)
G) B) and E)

Question 16

Kurt owns a convertible bond that matures in three years.The bond has an 8 percent coupon and pays interest semi-annually.The face value of the bond is $1,000 and the conversion price is $25.Similar bonds have a market return of 9.25 percent.The current price of the stock is $26.50 per share.What is the straight bond value?

Accepted Answer

A)  $948.20
B)  $967.89
C)  $972.80
D)  $987.78
E)  $991.15F) A) and D)
G) A) and E)

Question 17

Which of the following grants its owner the right to purchase an asset at a stated price?
I.American call
II.European call
III.American put
IV.European put

Accepted Answer

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

Question 18

This morning,you purchased a call option on Schoolhouse Supply Co.stock that expires in one year.The exercise price is $40.The current price of the stock is $43.40 and the risk-free rate of return is 3.6 percent.Assume the option will finish in the money.What is the current value of the call option?

Accepted Answer

A)  $0
B)  $1.49
C)  $3.97
D)  $4.79
E)  $5.46F) A) and D)
G) B) and E)

Question 19

Southern Shores is considering a project that has an initial cost today of $13,000.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 12 percent?

Accepted Answer

A)  $614.52
B)  $721.56
C)  $963.40
D)  $982.67
E)  $1,021.66F) C) and E)
G) B) and E)

Question 20

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) C) and E)
G) B) and E)

Exam 24: Options and Corporate Finance

This morning,you purchased a call option on Schoolhouse Supply Co.stock that expires in one year.The exercise price is $40.The current price of the stock is $43.40 and the risk-free rate of return is 3.6 percent.Assume the option will finish in the money.What is the current value of the call option?

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

Correct Answer
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Which of the following grants its owner the right to purchase an asset at a stated price? I.American call II.European call III.American put IV.European put

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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Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

Correct Answer
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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
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You own a convertible bond with a face value of $1,000 and a market value of $1,034.The bond can be converted into 16 shares of stock.What is the conversion price?

Correct Answer
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Lucas Enterprises recently opted to open a new retail outlet.If the outlet outperforms the expectations,the manager can opt to increase the store's size.If it underperforms,the manager can opt to close the store.These choices that the manager has been given are called:

Correct Answer
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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 $38.10 on the option expiration date?

Correct Answer
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Which one of the following statements correctly describes your situation as the holder of a European call option?

Correct Answer
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T-bills currently yield 6.3 percent.Stock in Pinta Manufacturing is currently selling for $46 per share.There is no possibility that the stock will be worth less than $39 per share in one year.What is the value of a call option on this stock if the exercise price is $24 per share?

Correct Answer
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Employee stock options are primarily designed to do which one of the following?

Correct Answer
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What is the cost of two November $25 put option contracts on Dove stock given the following price quotes?

Correct Answer
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The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

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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Exam 24: Options and Corporate Finance

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following grants its owner the right to purchase an asset at a stated price? I.American call II.European call III.American put IV.European put

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow 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 AnswerverifiedShow Answer

Which one of the following grants its owner the right to buy or to sell an asset at a prespecified price at any time during a stated period?

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

You own a convertible bond with a face value of $1,000 and a market value of $1,034.The bond can be converted into 16 shares of stock.What is the conversion price?

Correct AnswerverifiedShow Answer

Lucas Enterprises recently opted to open a new retail outlet.If the outlet outperforms the expectations,the manager can opt to increase the store's size.If it underperforms,the manager can opt to close the store.These choices that the manager has been given are called:

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 $38.10 on the option expiration date?

Correct AnswerverifiedShow Answer

Which one of the following statements correctly describes your situation as the holder of a European call option?

Correct AnswerverifiedShow Answer

T-bills currently yield 6.3 percent.Stock in Pinta Manufacturing is currently selling for $46 per share.There is no possibility that the stock will be worth less than $39 per share in one year.What is the value of a call option on this stock if the exercise price is $24 per share?

Correct AnswerverifiedShow Answer

Employee stock options are primarily designed to do which one of the following?

Correct AnswerverifiedShow Answer

What is the cost of two November $25 put option contracts on Dove stock given the following price quotes?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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