Question 1

The common stock of Delta Securities is selling for $62.60 a share. Treasury bills are currently yielding 5.2 percent. What is the current value of a one-year call option on Delta stock if the exercise price is $55 and you assume the option will finish in the money?

Accepted Answer

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Question 2

Suppose a firm has a current market value of $900 and outstanding debt with a face value of $850. The risk-free rate of interest is 6%. If the firm will have a value of either $650 or $900 next period, what is the value of the equity in the firm?

Accepted Answer

The equity value can be calculated using the risk-neutral valuation approach. The expected payoff to equity holders is the difference between the firm's value and the debt, only if the firm's value exceeds the debt. The risk-neutral probability of the firm being worth $900 is calculated using the risk-free rate. The expected payoff is then discounted back at the risk-free rate to find the present value of equity.

Question 3

Shares of a stock are currently priced at $61. The future price is estimated at either $52 or $62. The risk-free rate of return is 4%. What is the value of a twelve-month call option with a strike price of $55?

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Question 4

A $1,000 semi-annual convertible bond has a 4% coupon rate, a conversion ratio of 20, and five years to maturity. The common stock has a market price of $45. The relevant discount rate is 7%. What is the floor value of the convertible bond?

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Question 5

Suppose you are evaluating a bond that can be exchanged for shares of the issuing company's stock at a conversion price of $5 per share. The bond has a $50 annual coupon, five years to maturity, and straight debt of the same risk is priced to yield 8%. The current share price for the issuing firm is $4.50. What is the minimum value for which the bond should sell?

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Question 6

A $1,000 bond has a conversion value of $80 a share. The common stock is currently selling for $64.90 a share. What is the current conversion value of the bond?

Accepted Answer

The current conversion value of the bond is calculated by taking the current stock price and multiplying it by the number of shares the bond can be converted into. Since the bond has a conversion value of $80 a share, and the stock is currently $64.90 a share, we first need to find out how many shares the bond converts into: $1,000 / $80 = 12.5 shares. Then, we multiply the number of shares by the current stock price: 12.5 shares * $64.90 = $811.25.

Question 7

Several rumors concerning Wyslow, Inc. stock have started circulating. These rumors are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month put and a call option on this stock with an exercise price of $15. You purchased the call at a quoted price of $.20 and the put at a price of $2.10. What will be your total profit or loss on these option positions if the stock price is $4 on the day the options expire?

Accepted Answer

The call option will expire worthless since the stock price ($4) is below the exercise price ($15). The put option will be exercised, allowing you to sell the stock at $15, resulting in a profit of $11 per share ($15 - $4). The total profit from the put is $11 - $2.10 (cost of the put) = $8.90 per share. Since the call cost $0.20, the total cost of both options is $2.30 per share. Therefore, the total profit is $8.90 - $2.30 = $6.60 per share. Assuming 100 shares per option, the total profit is $6.60 * 100 = $660. However, the correct calculation should be $11 (profit from put) * 100 shares - $230 (total cost of options) = $870.

Question 8

Underlying stock price: 25  What is the market value per share of the March call?

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Question 9

You purchased eight LJK call option contracts with a strike price of $42.50 when the option was quoted at $.65. The option expires today when the value of LJK stock is $43.16. Ignoring trading costs and taxes, what is the total profit or loss on your investment?

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Question 10

The market price of Simpson Structures 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 $32.50 and an option price of $1.80. You also purchase a two-month European put option on the stock with a strike price of $32.50 and an option price of $.60. What will your net profit or loss on these option positions be if the stock price is $34.20 on the day the options expire? Ignore trading costs and taxes.

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Question 11

The bonds of VDM, Inc. are convertible into shares of the firm's common stock at $50 per share. The current price of the common stock is $45 per share. The bonds have a $1,000 par value and currently sell for $950 apiece. When the bonds were issued, the market price of the common stock was $40. What is the conversion value of these bonds?

Accepted Answer

The conversion value of a bond is the number of shares of common stock that can be obtained by converting the bond. In this case, each bond can be converted into 20 shares of common stock ($1,000 par value / $50 conversion price). The conversion value is therefore 20 * $45 = $900.

Question 12

You currently own a one-year call option on Way-One, Inc. stock. The current stock price is $26.50 and the risk-free rate of return is 4 percent. Your option has a strike price of $20 and you assume that it will finish in the money. What is the current value of your call option?

Accepted Answer

The current value of the call option can be approximated using the Black-Scholes model or a similar option pricing model. However, without applying a specific model and given the information, a basic approach to estimate the intrinsic value (the difference between the stock price and the strike price, for an in-the-money call option) can be used. The intrinsic value is $26.50 - $20 = $6.50. However, since the option is expected to finish in the money and there's a positive risk-free rate, its value must also include the time value, which accounts for the potential additional gain due to the risk-free rate of return. Therefore, the correct answer must be higher than the intrinsic value of $6.50, making E) $7.27 the best choice among the given options. This choice accounts for both the intrinsic value and the time value, considering the risk-free rate of return.

Question 13

Six months ago, you purchased a put option on ACC stock with a strike price of $50 and an option price of $.70. The option expires today when the value of ACC stock is $54.70. Ignoring trading costs and taxes, what is the total profit or loss on this investment?

Accepted Answer

Since the stock price at expiration ($54.70) is above the strike price ($50), the put option will expire worthless. The total loss is the initial cost of the option, which is $0.70 per share. Assuming standard option contracts of 100 shares, the total loss is 100 * $0.70 = $70.

Question 14

You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an option price of $1.10. Today, the option expires and the underlying stock is selling for $34.30 a share. Ignoring trading costs and taxes, what is your total profit or loss on this investment?

Accepted Answer

When you sell a put option, you receive the option price (premium) upfront. In this case, you sold 10 contracts at $1.10 per contract, so you received $1,100 ($1.10 x 100 x 10). 
If the option expires out of the money (i.e., the stock price is above the exercise price), you get to keep the premium and don't have to buy the stock. 
In this case, the stock price is $34.30, which is above the exercise price of $32.50, so the option expires out of the money. 
Your profit is just the premium received, which is $1,100.

Question 15

The current market value of the assets of Ditto Inc. is $63.26 million. The market value of the equity is $42.18 million. What is the market value of the firm's debt?

Accepted Answer

The market value of the firm's debt can be calculated by subtracting the market value of equity from the total market value of the assets. Therefore, $63.26 million - $42.18 million = $21.08 million.

Question 16

A firm has stock outstanding with a current price of $35 per share. The price in one period is expected to be either $40 or $48. A call option on ONE share is available with an exercise price of $30. If the risk-free rate of interest is 6%, what would you pay for the call option?

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Question 17

Suppose a firm has a total market value of $900 and outstanding debt with a face value of $850. The risk-free rate of interest is 6%. If the firm will have a value of either $650 or $900 next period, what is the value of the debt in the firm?

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Question 18

You sold five put option contracts on QLN stock with an exercise price of $45 and an option price of $2.20. Today, the option expires and the underlying stock is selling for $38.65 a share. Ignoring trading costs and taxes, what is the total profit or loss on this investment?

Accepted Answer

The total profit or loss can be calculated by considering both the premium received from selling the put options and the loss from the exercise of the options. Since the stock price at expiration ($38.65) is below the exercise price ($45), the options will be exercised. For each contract, the loss is the difference between the exercise price and the stock price, multiplied by the number of shares per contract (usually 100 shares per contract). The total loss from the exercise is (45 - 38.65) * 100 * 5 = $3,175. However, you initially received a premium of $2.20 per share, or $2.20 * 100 * 5 = $1,100. The net loss is $3,175 - $1,100 = $2,075.

Question 19

The common stock of Mercury Motors is selling for $43.90 a share. Treasury bills are currently yielding 4.5 percent. What is the current value of a one-year call option on Mercury Motors stock if the exercise price is $37.50 and you assume the option will finish in the money?

Accepted Answer

The answer of The common stock of Mercury Motors is...

Question 20

Big Ed's Electrical has a pure discount bond that comes due in one year and has a face value of $1,000. The risk-free rate of return is 4 percent. The assets of Big Ed's are expected to be worth either $800 or $1,300 in one year. Currently, these assets are worth $1,140. What is the current value of the debt of Big Ed's Electrical?

Accepted Answer

The answer of Big Ed's Electrical has a pure discount...

Quiz 25: Options and Corporate Securities