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Exam 24: Options and Corporate Finance

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Question 21

Multiple Choice

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Three weeks ago,you purchased a June $30 put option on Leeper Metals stock at an option price of $1.80.The market price of the stock three weeks ago was $30.60.Today,the stock is selling at $27.50 a share.What is the intrinsic value of your put contract?

A) -$100
B) -$20
C) $0
D) $250
E) $360

F) A) and E)
G) B) and C)

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Question 22

Multiple Choice

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We are examining a new project.We expect to sell 9,500 units per year at $48 net cash flow apiece for the next 20 years.In other words,the annual operating cash flow is projected to be $45 × 9,000 = $405,000.The relevant discount rate is 14 percent,and the initial investment required is $1,730,000.After the first year,the project can be dismantled and sold for $1,350,000.If expected sales are revised based on the first year's performance,it would make sense to abandon the investment if the sales are less than which of the following number of units?

A) 4,294 units
B) 4,620 units
C) 4,750 units
D) 4,810 units
E) 5,020 units

F) B) and D)
G) D) and E)

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Question 23

Multiple Choice

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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?

Elizabeth owns a call option on 100 shares of Microsoft stock.She has decided to buy those shares.This purchase is commonly referred to as:

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.

The Glass House has total assets currently valued at $17,300.These assets are expected to increase in value to either $18,000 or $21,000 by next year.The company has a pure discount bond outstanding with a face value of $20,000.This bond matures in one year.Currently,U.S.Treasury bills are yielding 5.4 percent.What is the value of the equity in this firm?

Which one of the following describes the lower bound of a call's value?

A convertible bond has a face value of $5,000 and a conversion price of $80.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 7.5 percent.The current price of the stock is $42 per share.What is the conversion value of this bond?

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?

Steve owns an option which grants him the right to purchase shares of Lokier Tool stock at a price of $45 a share.Currently,the stock is selling for $52.40 a share.Steve would like to realize his profits but is not permitted to exercise the option for another two weeks.Which one of the following does Steve own?

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

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.

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

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.

A $20 put option on Wildwood stock expires today.The current price of the stock is $18.50.Which one of the following best describes this option?

The investment timing decision is the:

The difference between the conversion price and the current stock price,divided by the current stock price,is called the:

A $1,000 convertible debenture has a conversion price for common stock of $85 per share.The common stock is selling at $92 a share.What is the conversion value of this bond?

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.

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?