Deck 24: Options and Corporate Finance

Question 1

What is another name for an option's strike price?

A) Opening price
B) Intrinsic value
C) Exercise price
D) Market price
E) Time value

Answer 1

Exercise price

Question 2

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

A) Strike price or zero, whichever is greater
B) Stock price minus the exercise price or zero, whichever is greater
C) Strike price or the stock price, whichever is lower
D) Strike price or zero, whichever is lower
E) Stock price minus the exercise price or zero, whichever is lower

Answer 2

Stock price minus the exercise price or zero, whichever is greater

Question 3

Brad purchased an option that he can only exercise on the final day of the option period. Which type of option did he purchase?

A) European
B) American
C) Inflexible
D) Dated
E) Pointed

Answer 3

European

Question 4

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?

A) Funded
B) Unfunded
C) At-the-money
D) In-the-money
E) Out-of-the-money

Question 5

Mark owns both a March $20 put and a March $20 call on Alpha stock. Which one of the following statements correctly relates to Mark's position? Ignore taxes and transaction costs.

A) A price decrease in Alpha stock will increase the value of Mark's call option.
B) A March $30 call is worth more than Mark's $20 call.
C) The time premium on an April $20 put is less than the time premium on Mark's put. (Assume both puts expire in the same calendar year.)
D) A price increase in Alpha stock from $26 to $28 will increase the value of Mark's put.
E) If the intrinsic value of Mark's put increases by $1 then the intrinsic value of his call must either decrease by $1 or equal zero.

Question 6

What is the maximum amount you can lose if you purchase one call option contract on ABC stock that is currently selling for $16 a share?

A) The market price of the stock multiplied by 100
B) The strike price multiplied by 100
C) The strike price per share
D) The option premium per share multiplied by 100
E) The option premium per share

Question 7

Which term applies to the final day on which an option can be exercised?

A) Payment date
B) Ex-option date
C) Opening date
D) Expiration date
E) Intrinsic date

Question 8

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

A) American option
B) Forward contract
C) Futures contract
D) Swap
E) European option

Question 9

Jen is the holder of a European call option. Given this, she:

A) is obligated to buy if the option is exercised.
B) has the right to sell if she chooses to do so.
C) has a right to buy but only on the expiration date.
D) is obligated to sell if the option is exercised.
E) has a right to buy at any time before the option expires.

Question 10

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

A) Worthless
B) Unfunded
C) Expired
D) In-the-money
E) Out-of-the-money

Question 11

Julie opted to exercise her August option on June 20th and as a result received $2,500 for the sale of her shares. Which one of the following did Julie own?

A) Warrant
B) American call
C) American put
D) European call
E) European put

Question 12

A stock currently sells for $34 a share but is expected to increase in value over the next six months to at least $36 a share. Assume there are 6-month options available on this stock with an exercise price of $35. Which of these options should have the most value today?

A) European put
B) American call
C) American and European calls equally
D) European call
E) American put

Question 13

Which one of the following describes the intrinsic value of a call option?

A) The call's upper bound value
B) The call's lower bound value
C) Market price of the underlying security
D) Zero, if the call is in-the-money
E) The strike price

Question 14

Which one of the following statements is correct?

A) The value of a call decreases as the price of the underlying stock increases.
B) The value of a call increases as the exercise price decreases.
C) The value of a put increases as the price of the underlying stock increases.
D) The value of a put decreases as the exercise price increases.
E) The intrinsic value of a put must be zero on the expiration date.

Question 15

Which one of the following describes the intrinsic value of a put option?

A) Lesser of the strike price or the stock price
B) Lesser of the stock price minus the exercise price or zero
C) Lesser of the stock price or zero
D) Greater of the strike price minus the stock price or zero
E) Greater of the stock price minus the exercise price or zero

Question 16

Steve owns an option that grants him the right to purchase shares of LK Tool stock at $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?

A) Straight bond
B) American call
C) American put
D) European call
E) European put

Question 17

The maximum value of a call option can never exceed the:

A) underlying stock price.
B) exercise price plus the stock price.
C) strike price.
D) premium price.
E) intrinsic value.

Question 18

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

A) striking the asset.
B) expiring the option.
C) exercising the option.
D) placing the collar.
E) the collar option.

Question 19

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

A) right to sell
B) right to buy
C) obligation to sell
D) obligation to buy
E) obligation to trade

Question 20

The primary difference between an American call option and a European call option is the fact that the American call:

A) has a fixed strike price while the European strike price varies over time.
B) is a right to buy while a European call is an obligation to buy.
C) has an expiration date while the European call does not.
D) is written on 100 shares of the underlying security while the European call covers 10 shares.
E) can be exercised at any time prior to expiration while the European call can only be exercised on the expiration date.

Question 21

Last month, Fun Time introduced a new board game. Consumer demand has been overwhelming and it appears that strong demand will exist over the long term as all ages absolutely love the game. Given this, which one of the following options should the company consider in respect to this game?

A) Suspension
B) Expansion
C) Abandonment
D) Contraction
E) Withdrawal

Question 22

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 $215,000. The shareholders in this firm basically own a ________ option on the assets of the firm with a strike price of ________.

A) put; $180,000
B) put; $265,000
C) warrant; $265,000
D) call; $180,000
E) call; $265,000

Question 23

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

A) Opening a new restaurant with a different look and an entirely different menu to see if that restaurant appeals to the public
B) Deciding to close one hour earlier during the winter months due to slow sales
C) Abandoning a menu item based on customer complaints
D) Deciding to open only two new locations next year instead of the five that were originally scheduled
E) Deciding to create separate lunch and dinner menus rather than have them combined on one menu

Question 24

Employee stock options:

A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.

Question 25

Which one of the following terms applies to an option that has an office building as its underlying asset?

A) Financial option
B) Implicit option
C) Fixed option
D) Real option
E) Concrete option

Question 26

Which one of the following will decrease the value of an American call option?

A) A decrease in the price volatility of the underlying asset
B) An increase in time to expiration
C) An increase in the underlying stock price
D) A decrease in the exercise price
E) An increase in the risk-free rate of return

Question 27

When underwater employee stock options are exchanged, the option holder generally receives:

A) a smaller number of new options with a lower exercise price.
B) a cash payment equal to the value of the options when they were originally issued.
C) twice the number of options with an exercise price equal to half of the original exercise price.
D) a larger number of new options with a higher exercise price.
E) the same number of options but with a higher exercise price.

Question 28

Three months ago, Toy Town introduced a new toy for preschool 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?

A) Suspension
B) Expansion
C) Abandonment
D) Contraction
E) Re-introduction

Question 29

Suzie is the controller of The Price Rite Company. She has been granted the right to buy 1,000 shares of her employer's stock at $25 a share anytime within the next three years. Which one of the following has Suzie been granted?

A) Employee stock options
B) Company bonus options
C) Employee grants
D) Employee exercise options
E) Company benefits options

Question 30

Which one of the following will decrease the value of an American call option?

A) A decrease in the value of the underlying security
B) An increase in the risk-free rate
C) A decrease in the exercise price
D) An increase in the price volatility of the underlying asset
E) An increase in the time to expiration

Question 31

Which one of the following statements regarding employee stock options (ESOs) is correct?

A) ESOs grant an employee the right to buy a fixed number of shares of company stock at the market price.
B) Employees must exercise their ESOs prior to those ESOs becoming vested.
C) Employees may forfeit their ESOs if they terminate their employment with the issuing firm.
D) If a firm issues ESOs it must make them available to all employees.
E) Employees can sell their ESOs if they do not want to personally exercise them.

Question 32

The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within ________ days of the grant.

A) 2 calendar
B) 2 business
C) 7 calendar
D) 30 business
E) 45 calendar

Question 33

Valuing the option to wait:

A) can result in a negative option value.
B) assumes the NPV of a project commenced today is negative.
C) is unaffected by a project's discount rate.
D) is dependent upon a wait time of three years or less.
E) requires at least two NPV calculations as of Time 0.

Question 34

Which one of the following terms applies to the value of an option on its expiration date?

A) Strike price
B) Upper limit
C) Deadline price
D) Time value
E) Intrinsic value

Question 35

Travis owns both a September $30 call and a September $30 put. If the call finishes at-the-money, then the put will:

A) finish in-the-money.
B) finish at-the-money.
C) finish out-of-the-money.
D) either finish at-the-money or in-the-money.
E) either finish at-the-money or out-of-the-money.

Question 36

Once a project commences, management can select all of the following options except the option to:

A) abandon.
B) suspend.
C) contract.
D) expand.
E) wait.

Question 37

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

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 employees

Question 38

Ignoring each of the following may cause the NPV of a project to be underestimated except for the option to:

A) abandon.
B) expand.
C) wait.
D) contract.
E) commence immediately.

Question 39

The investment timing decision refers to the:

A) determination of when an option should be exercised.
B) decision of when to purchase an option on an underlying asset.
C) analysis of determining when an asset should be sold.
D) determination of when a project should be abandoned.
E) evaluation of the optimal time to commence a project.

Question 40

Jack and Jill are house hunting and find a house (House A) they really like but want to continue searching the market for one more week before making the final decision to buy House A. To avoid having someone else purchase House A while they continue their house hunting, they decide to place a $2,500 deposit on House A. This deposit will apply to the purchase price if they buy House A. If they do not buy House A, they will forfeit the $2,500. Essentially, Jack and Jill have a ________ on House A.

A) financial put option
B) financial call option
C) warrant
D) real put option
E) real call option

Question 41

When warrants are exercised, the:

A) earnings per share decrease.
B) earnings per share remain constant.
C) total equity in the firm remains constant.
D) total equity in a firm decreases.
E) number of bonds outstanding increases.

Question 42

Which one of the following statements concerning convertible bonds is false?

A) A convertible bond is similar to a bond with a call option.
B) A convertible bond should always be worth less than a comparable straight bond.
C) New shares of stock are issued when a convertible bond is converted.
D) A convertible bond can be redeemed just like a straight bond at maturity.
E) A convertible bond can be described as having upside potential with downside protection.

Question 43

When you purchase insurance you are in essence:

A) buying a put option.
B) selling a put option.
C) buying a warrant.
D) buying a call option.
E) selling a call option.

Question 44

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?

A) Convertible bond
B) Warrant
C) Straddle
D) Spread
E) Put

Question 45

Which one of the following considers all of the options implicit in a project?

A) Expansion planning
B) Contingency planning
C) Asset management review
D) Prospective evaluation
E) Strategic evaluation

Question 46

Latetia owns a convertible bond. Which one of the following terms would describe the value of this bond if it were not convertible?

A) Conversion premium
B) Straight bond value
C) Conversion value
D) Inverted value
E) Market value

Question 47

Which one of the following statements concerning warrants is correct?

A) Warrants are similar to put options.
B) Warrants generally have very short maturity periods.
C) Owning a warrant is the same as selling a call option.
D) When a warrant is exercised, the number of outstanding shares increases.
E) Shares are transferred from one shareholder to another when a warrant is exercised.

Question 48

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?

A) Conversion premium
B) Straight bond value
C) Conversion value
D) Inverted value
E) Prescribed value

Question 49

Alicia owns a $1,000 face value bond that can be converted into 20 shares of AB Limited stock. Which one of the following terms refers to these 20 shares?

A) Conversion premium
B) Straight bond value
C) Conversion value
D) Conversion price
E) Conversion ratio

Question 50

The maximum value of a convertible bond is theoretically:

A) equal to the conversion value minus the straight bond value.
B) equal to the face value of the bond multiplied by (1 + Conversion price).
C) limited to the maximum straight bond value.
D) limited by the face value of the bond.
E) unlimited.

Question 51

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

A) conversion premium.
B) straight bond value.
C) conversion value.
D) conversion price.
E) conversion ratio.

Question 52

The value of a convertible bond issued by a firm whose stock price exceeds the bond's conversion price will:

A) be equal to the conversion value minus the straight bond value.
B) be equal to the face value of the bond multiplied by (1 + Conversion ratio).
C) be limited to the maximum straight bond value.
D) be equal to the bond's floor value.
E) generally exceed both the bond's floor value and its conversion value.

Question 53

Jeff owns a $1,000 face value bond. He can exchange that bond for 25 shares of KNJ stock at any time within the next two years. What type of bond does Jeff own?

A) Secured
B) Warranted
C) Convertible
D) Junk
E) Callable

Question 54

Strategic options are:

A) valued the same as financial call options.
B) difficult to value.
C) valued based on their first year's net income.
D) considered useless as they generally have negative NPVs.
E) increasingly easy to evaluate and value.

Question 55

QLM stock is currently selling for $28.60 a share. The December 25 call is quoted at $1.15 a share compared to $.05 a share for the December 25 put. What is the cost of two December $25 put option contracts on this stock?

A) $.20
B) $.10
C) $5.00
D) $15.00
E) $10.00

Question 56

What is the value of five September $40 call contracts on PTL stock if the option premium quote is $1.35 a share and the stock is selling for $41.30 a share?

A) $25.00
B) $650
C) $6.75
D) $1.35
E) $675

Question 57

Warrants are:

A) generally issued as an attachment to publicly issued bonds.
B) excluded from trading on an organized exchange.
C) structured as long-term put options.
D) issued by individual investors.
E) often added as an incentive to a private debt issue.

Question 58

Lucas Enterprises recently opened a new retail outlet. If the outlet outperforms the expectations, the company can opt to increase the store's size. If it underperforms, the company can close the store. These choices are called:

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

Question 59

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

A) conversion premium.
B) par value.
C) conversion value.
D) conversion price.
E) conversion ratio.

Question 60

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

A) Conversion ratio(Stock price)
B) Conversion ratio(Conversion price)
C) Face value/Conversion premium
D) Face value(1 + Conversion premium)
E) Stock price(1 + Conversion ratio)

Question 61

You currently own a one-year call option on RCI stock. The current stock price is $51.20 and the risk-free rate of return is 3.36 percent. Your option has a strike price of $50 and you assume the option will finish in the money. What is the current value of your call option?

A) $1.16
B) $1.24
C) $2.83
D) $3.13
E) $2.28

Question 62

Stu purchased six put options on XY stock with a strike price of $45 and an option price of $2.60 per share. The option expires today when the value of the stock is $41.40 per share. What is the net profit on this investment? Ignore trading costs and taxes.

A) −$260
B) −$100
C) $100
D) $600
E) $260

Question 63

Theresa sold ten call option contracts with a strike price of $25 when the option was quoted at $.55 per share. The options expire today when the value of the underlying stock is $24.10. Ignoring trading costs and taxes, what is the net profit on this investment?

A) −$35
B) −$350
C) $0
D) $55
E) $550

Question 64

The price of TSC stock will be either $42 or $46 at the end of the year. Currently, T-bills yield 4.1 percent and TSC sells for $43 a share. What is the per share value of a one-year TSC call option if the exercise price is $45 per share?

A) $.66
B) $.72
C) $0
D) $.81
E) $1.03

Question 65

Suppose the current share price of Dimension stock is $46. One year from now, this stock will sell for either $38 or $52 a share. T-bills currently yield 3.3 percent. What is the per share value of a Dimension call option if the exercise price is $40 per share and the expiration is one year from now?

A) $7.90
B) $8.48
C) $12.00
D) $10.39
E) $13.62

Question 66

Vince sold two $45 call option contracts at a quoted price of $1.15 per share. What is the net profit on this investment if the price of the underlying asset is $48.10 on the option expiration date? Ignore trading costs and taxes.

A) −$390
B) −$195
C) $0
D) $115
E) $230

Question 67

You own five call option contracts on Swift Water Tours stock with a strike price of $25 per share and an option premium of $.45 per share. What is the total intrinsic value of these options today if the stock is currently selling for $25.20 a share?

A) $20
B) $45
C) $0
D) $450
E) $100

Question 68

Last week, you purchased a call option on a stock with a strike price of $35. The stock price was $33.30 and the option price was $.35 at that time. What is the current intrinsic value per share if the stock is now selling at $36.60 a share?

A) $1.25
B) $1.95
C) $1.60
D) −$3.30
E) $0

Question 69

The common stock of Hazelton Refiners is selling for $56.10 a share. U.S. Treasury bills are currently yielding 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $55 and you assume the option will finish in the money?

A) $0
B) $3.74
C) $2.57
D) $3.18
E) $2.91

Question 70

Three weeks ago, you purchased a June $47.50 put option on Hi-Tech Metals stock at an option price of $.60 per share. The market price of the stock three weeks ago was $47.20. Today, the stock is selling at $48.10 a share. What is the intrinsic value of your put contract?

A) −$240
B) $60
C) −$60
D) $0
E) $240

Question 71

Su Lee wrote three call option contracts with a strike price of $22.50 and an option price of $.55 per share. What is the net profit on this investment if the price of the underlying stock is $22.95 per share on the option expiration date? Ignore trading costs and taxes.

A) $10
B) $.30
C) $.10
D) $30
E) $0

Question 72

Les sold a one-month European $25 call and a one-month European $25 put on ABC stock. The call price per share is $.70 and the put price per share is $1.80. What will be the net profit on these option positions if the stock price is $23 on the day the options expire? Ignore trading costs and taxes.

A) $110
B) −$50
C) −$110
D) $50
E) $20

Question 73

The market price of NM stock has been volatile recently. Since you think the volatility will continue, you purchase a two-month European NM call option with a strike price of $30 and an option price of $.60. You also purchase a two-month European NM put option with a strike price of $30 and an option price of $1.20. What will be your net profit on these option positions if the stock price is $28 on the day the options expire? Ignore trading costs and taxes.

A) −$60
B) $20
C) $0
D) −$20
E) $60

Question 74

You sold two $42.50 put contracts on CTB stock at an option price per share of $1.90. The options were exercised today when the market price was $38.60 a share. What is your net profit on this investment? Ignore transaction costs and taxes.

A) −$510
B) −$400
C) $300
D) $850
E) $1,160

Question 75

Cara wrote a put option contract on EZ stock with an exercise price of $40 per share and an option price of $.65 per share. Today, the contracts expire and the stock is selling for $34.30 a share. What is the net profit on this investment? Ignore trading costs and taxes.

A) −$635.00
B) $50.50
C) $635.00
D) $63.50
E) −$505.00

Question 76

You recently purchased six put option contracts on a stock with an exercise price of $45 and an option premium of $.65. What is the total intrinsic value of these contracts if the stock is currently selling for $46.20 a share?

A) −$360
B) −$120
C) $0
D) $420
E) $750

Question 77

Currently, T-bills yield 3.8 percent and MTM stock sells for $38 a share. There is no possibility that the stock will be worth less than $36 per share in one year. What is the value of a call option on this stock if the exercise price is $35 per share?

A) $.32
B) $3.45
C) $2.89
D) $4.28
E) $.96

Question 78

A November $40 call has a premium of $4.60 a share while the underlying stock is priced at $44.15. What is the intrinsic value of this call?

A) $0
B) $1.45
C) $.45
D) $4.15
E) $4.60

Question 79

Rosa purchased three call option contracts on ABC stock with a strike price of $27.50 when the option was quoted at $1.10 per share. The option expires today when the value of ABC stock is $29.30. Ignoring trading costs and taxes, what is the net profit on this investment?

A) $0
B) $210
C) $330
D) $140
E) $70

Question 80

This morning, you purchased a call option on School house Supply Co. stock that expires in one year. The exercise price is $37.50. The current price of the stock is $37.60 and the risk-free rate of return is 3.1 percent. Assume the option will finish in the money. What is the current value of the call option?

A) $0
B) $.95
C) $.10
D) $1.23
E) $1.09