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Exam 24: Options and Corporate Finance

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Question 51

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Explain how the floor and the ceiling prices for a convertible bond are determined.

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The floor,or minimum,value of ...

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Question 52

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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?

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

F) A) and C)
G) None of the above

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Question 53

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Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year.The value of Buckeye's assets is currently $1,350.Jim Tressell,the CEO,believes that the assets in the firm will be worth either $600 or $1,700 in a year.The going rate on one-year T-bills is 6 percent.What is the current value of the firm's debt?

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?

Delta Importers has a pure discount loan with a face value of $180,000 due in one year.The assets of the firm are currently worth $265,000.The shareholders in this firm basically own a _____ option on the assets of the firm with a strike price of _____.

When warrants are exercised,the:

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?

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?

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?

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

Several rumors concerning Value Rite stock are causing the market price of the stock to be quite volatile.Given this situation,you decide to buy both a one-month European $25 put and a one-month European $25 call on this stock.The call price per share is $0.60 and the put price per share is $2.10.What will be your net profit or loss on these option positions if the stock price is $18 on the day the options expire? Ignore trading costs and taxes.

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

Which of the following statements is (are) correct concerning warrants? I.Warrants are similar to put options. II.Warrants are similar to call options. III.When a warrant is exercised,the issuer is not involved in the transaction. IV.When a warrant is exercised,the issuer must issue new shares of stock.

Brad owns a convertible bond.Which one of the following terms would apply to the value of this bond if he were to convert it into shares of stock today?

Call options are frequently attached to bonds,making them callable at the option of the issuer.Consider a firm that just issued two sets of bonds: One is callable,has a 7 percent coupon rate,15 years to maturity,and cannot be called during the first three years; the second is noncallable,has a 7 percent coupon rate,15 years to maturity,and is identical to the first bond in every way except for the call option.Suppose the noncallable bonds are sold for $1,000 each.Will the callable bonds sell for more or less than $1,000? Who "purchases" the option in this case and who "sells" it?

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?

Which of the following will decrease the value of a call option? I.a decrease in the exercise price II.a decrease in the value of the underlying security III.an increase in the risk-free rate IV.an increase in the time to expiration

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.

Dressler Technologies is considering a project with a 3-year life and an initial cost of $87,000.The discount rate for the project is 14.5 percent.The firm expects to sell 1,300 units on the last day of each year.The cash flow per unit is $32.The firm will have the option to abandon this project at the end two years (after year 2 sales) at which time the project's assets could be sold for an estimated $30,000.The firm's managers are interested in knowing how the project will perform if the sales forecast for year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,000 or 1,400 units a year.What is the net present value of this project at time zero given the current sales forecasts?