Question 1

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

Accepted Answer

Cost = 2 × 100 × $0.15 = $30

Question 2

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

Accepted Answer

The conversion value of a convertible bond is calculated by multiplying the conversion ratio (the number of shares a bond can be converted into) by the current stock price of the underlying shares.

Question 3

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.

Accepted Answer

Option to wait has minimal value if a project relies on rapidly changing technology (statement I). It is important to consider the discount rate when evaluating the option to wait, which is a part of statement II. Statement III is incorrect as the option to wait does not involve shutting down the project temporarily. Statement IV is correct as the value of the option to wait is equal to the NPV of the project if started at a later date minus the NPV if the project is started today. Therefore, the correct option is E.

Question 4

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

Accepted Answer

Ignoring options to abandon, expand, wait, or contract can cause the NPV of a project to be underestimated because these options can add value to the project.

Question 5

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?

Accepted Answer

Total profit = ($34.60 - $32.50 - $1.65) × 100 × 6 = $270

Question 6

The maximum value of a convertible bond is theoretically:

Accepted Answer

The maximum value of a convertible bond is theoretically unlimited because its value can increase indefinitely as the price of the underlying stock increases. The conversion feature allows the bondholder to convert the bond into a predetermined number of shares of the issuing company's stock, so if the stock price rises significantly, the value of the convertible bond can also rise significantly without a theoretical upper limit.

Question 7

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

Accepted Answer

All options (modifying the production process, re-pricing the product, revising the marketing plan, and modifying the product's color and shape) are managerial actions that can be taken after a project has started to ensure its success or to adapt to changing circumstances.

Question 8

Which one of the following is an example of a strategic option for a restaurant?

Accepted Answer

Opening a new restaurant with a different look and an entirely different menu is an example of a strategic option because it involves a significant change in the business model and requires careful analysis and planning to determine its feasibility and potential impact. The other options involve smaller operational decisions rather than strategic ones.

Question 9

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

Accepted Answer

The Sarbanes-Oxley Act of 2002 requires firms to report Employee Stock Option (ESO) grants within 2 business days of the grant date. This regulation was implemented to increase transparency in financial reporting and corporate governance.

Question 10

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

Accepted Answer

Contract value = 5 × 100 × $6.90 = $3,450

Question 11

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

Accepted Answer

The answer of Which one of the following statements related...

Question 12

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?

Accepted Answer

Total profit = $0.80 × 100 × 1 = $80. The call finished out-of-the-money.

Question 13

Three months ago,Toy Town introduced a new toy for pre-school children.The store expected this toy to be an instant success and a fast moving item.To their surprise,children have zero interest in this toy so sales have been abysmal.Which one of the following options should Toy Town consider in respect to this toy?

Accepted Answer

Abandonment is the best option, as the toy has had abysmal sales and children have shown zero interest in it. Continuing to stock it will only result in wasted inventory and further losses.

Question 14

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.

Accepted Answer

Warrants are similar to call options because they give the holder the right to buy a company's stock at a specific price until the expiration date. When a warrant is exercised, the issuer must issue new shares of stock, which differentiates them from trading existing shares as in the case of stock options.

Question 15

Employee stock options:

Accepted Answer

Employee stock options are generally issued with a zero intrinsic value, meaning the stock price is equal to the exercise price. The value of the option relies on the future growth and performance of the company's stock. Options with a positive intrinsic value when issued would mean the stock price is already above the exercise price, which is unlikely. Backdating options is illegal and can result in severe consequences. Options can be repriced, but it is not a frequent practice as it can lead to negative shareholder reaction. "Underwater" options refer to the exercise price being higher than the current stock price, which may occur after the option is issued.

Question 16

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?

Accepted Answer

Hill Side Markets should consider expanding the production and distribution of the board game to meet the strong demand from young children. This will enable the company to benefit from the long-term appeal of the game and generate higher profits. Options A, C, D, and E are not viable as they involve either stopping or reducing the production and distribution of the game, which contradicts the strong demand from consumers.

Question 17

Which of the following statements are correct concerning convertible bonds?
I.New shares of stock are issued when a convertible bond is converted.
II.A convertible bond is similar to a bond with a call option.
III.A convertible bond should always be worth less than a comparable straight bond.
IV.A convertible bond can be described as having upside potential with downside protection.

Accepted Answer

I. Correct – When a convertible bond is converted, new shares of stock are issued to the bondholder.
II. Correct – A convertible bond gives the holder the option to convert the bond into shares of stock, similar to a bond with a call option.
III. Incorrect – A convertible bond may be worth more than a comparable straight bond, depending on market conditions and the conversion price.
IV. Correct – A convertible bond offers the potential for gain if the stock price increases, while also providing some downside protection in the form of the bond’s fixed income yield.

Question 18

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 _____.

Accepted Answer

The shareholders have a call option on the assets of the firm because the value of the assets ($265,000) is greater than the face value of the loan ($180,000). The strike price is the face value of the loan ($180,000). Therefore, the correct answer is (D) call; $180,000.

Question 19

When warrants are exercised,the:

Accepted Answer

When warrants are exercised, new shares are issued which increases the number of shares outstanding. This dilutes the ownership of existing shareholders and reduces their proportionate share in the earnings, leading to a decrease in earnings per share.

Question 20

What is the intrinsic value of the November $25 call on Dove stock? $$\text { Dove (DUV) Underlying stock price: } \mathbf { 3 1 . 1 2 }$$

Accepted Answer

Intrinsic value = $31.12 - $25 = $6.12

Quiz 24: Options and Corporate Finance

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

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

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

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?

The maximum value of a convertible bond is theoretically:

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

Which one of the following is an example of a strategic option for a restaurant?

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

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

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

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?

Employee stock options:

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:

Quiz 24: Options and Corporate Finance

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

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

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

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?

The maximum value of a convertible bond is theoretically:

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

Which one of the following is an example of a strategic option for a restaurant?

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

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

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

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?

Employee stock options:

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:

What is the intrinsic value of the November $25 call on Dove stock? Dove (DUV) Underlying stock price: 31.12\text { Dove (DUV) Underlying stock price: } \mathbf { 3 1 . 1 2 } Dove (DUV) Underlying stock price: 31.12

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 _.