Deck 24: Options and Corporate Finance

Question 1

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

A)option
B)forward contract
C)futures contract
D)swap
E)intrinsic contract

Answer 1

option

Question 2

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 option
B)company bonus option
C)employee grant
D)employee exercise option
E)company benefits option

Answer 2

employee stock option

Question 3

KT Enterprises has expanded its operations into a new field,which is the production of everyday dinnerware.If this project goes well,the firm has the option to expand its production into fine china.What type of option is this?

A)financial
B)strategic
C)put
D)intangible
E)call

Answer 3

strategic

Question 4

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 2 years.What type of bond does Jeff own?

A)secured
B)warranted
C)convertible
D)junk
E)callable

Question 5

The owner of a 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 6

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 7

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 8

The investment timing decision is 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 begin a project.

Question 9

Felicia purchased an option which she can exercise anytime within the next six months.Which type of option did she purchase?

A)market-ready
B)portable
C)daily
D)European
E)American

Question 10

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:

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

Question 11

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 12

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 13

Marti owns an option that allows him to purchase ABC stock at $50 a share.The $50 price is referred to as the:

A)opening price.
B)intrinsic value.
C)strike price.
D)market price.
E)time value.

Question 14

Lucas Enterprises recently opted to open a new retail outlet.If the outlet outperforms the expectations,the manager can opt to increase the store's size.If it underperforms,the manager can opt to close the store.These choices that the manager has been given are called:

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

Question 15

What is the final day on which an option can be exercised called?

A)payment date
B)ex-option date
C)opening date
D)expiration date
E)intrinsic date

Question 16

Which of the following grants its owner the right to purchase an asset at a stated price?
I.American call
II.European call
III.American put
IV.European put

A)I only
B)I and II only
C)I and III only
D)II and IV only
E)III and IV only

Question 17

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

A)financial option
B)liquid option
C)fixed option
D)real option
E)concrete option

Question 18

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 19

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

Question 20

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 21

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 22

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 23

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 24

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

A)also 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 25

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 26

An increase in which of the following will increase the value of a call?
I.time to expiration
II.underlying stock price
III.risk-free rate of return
IV.price volatility of the underlying stock

A)I and III only
B)II, III, and IV only
C)I, III, and IV only
D)I, II, and III only
E)I, II, III, and IV

Question 27

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?

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

Question 28

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 29

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 30

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?

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

Question 31

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

A)You are obligated to buy if the option is exercised.
B)You have a right to sell.
C)You have a right to buy but only on the expiration date.
D)You are obligated to sell if the option is exercised.
E)You have a right to buy at any time before the option expires.

Question 32

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

A)strike price minus the initial cost of the option
B)exercise price plus the price of the underlying stock
C)strike price
D)market price of the underlying stock
E)purchase price

Question 33

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 34

What is the primary difference between an American call option and a European call option?

A)The American call has a fixed strike price while the European strike price varies over time.
B)An American call is a right to buy while a European call is an obligation to buy.
C)An American call has an expiration date while the European call does not.
D)An American call is written on 100 shares of the underlying security while the European call covers 1,000 shares.
E)An American call can be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.

Question 35

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)negative amount, if the call is out-of-the-money.

Question 36

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 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

Julie opted to exercise her August option on June 20^th 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 39

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

Question 40

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

A)II only
B)I and II only
C)III and IV only
D)I, II, and IV only
E)I, II, and III only

Question 41

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

A)$0.15
B)$0.30
C)$1.50
D)$15.00
E)$30.00

Question 42

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 of the bond/Conversion premium
D)Face value of the bond × (1 + Conversion premium)
E)Stock price × (1 + Conversion ratio)

Question 43

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.

A)I and III only
B)II and IV only
C)I and II only
D)II, III, and IV only
E)I, II, and IV only

Question 44

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

A)I and III only
B)II, III, and IV only
C)I, II, and III only
D)I, III, and IV only
E)I, II, III, and IV

Question 45

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?

A)$0
B)$270
C)$310
D)$840
E)$1,260

Question 46

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 47

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

A)I and II only
B)III and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Question 48

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

A)opening a new restaurant with a different look and an entirely different menu to see if that type of 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 49

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

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

Question 50

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

A)$34
B)$68
C)$340
D)$690
E)$3,450

Question 51

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

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

Question 52

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?

A)-$250
B)-$80
C)$0
D)$50
E)$80

Question 53

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?

A)suspension
B)expansion
C)abandonment
D)contraction
E)re-introduction

Question 54

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.

A)I only
B)II only
C)I and III only
D)II and IV only
E)I and IV only

Question 55

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 56

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?

A)suspension
B)expansion
C)abandonment
D)contraction
E)withdrawal

Question 57

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.

A)I and III only
B)I, II, and IV only
C)I, II, and III only
D)I, III, and IV only
E)II, III, and IV only

Question 58

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 _____.

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

Question 59

When warrants are exercised,the:

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

Question 60

What is the intrinsic value of the November $25 call on Dove stock?

A)-$0.98
B)$0
C)$0.15
D)$6.12
E)$7.10

Question 61

The assets of Uptown Stores are currently worth $138,000.These assets are expected to be worth either $120,000 or $150,000 one year from now.The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year.The risk-free rate is 4.3 percent.What is the value of the equity in this firm?

A)$11,920
B)$15,298
C)$19,507
D)$21,347
E)$26,408

Question 62

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.

A)-$1,300
B)-$1,000
C)-$300
D)$4,350
E)$4,650

Question 63

You are considering a project that has been assigned a discount rate of 14 percent.If you start the project today,you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years.If you wait one year to start the project,the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years.What is the value of the option to wait?

A)-$331.40
B)-$194.46
C)$228.51
D)$230.49
E)$334.68

Question 64

You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

A)-$115
B)-$105
C)$20
D)$105
E)$210

Question 65

Last week,you purchased a call option on Edgewater stock with a strike price of $40.The stock price was $39.80 and the option price was $0.45 at that time.What is the intrinsic value per share if the stock is currently priced at $39.10?

A)-$90
B)-$70
C)$0
D)$70
E)$90

Question 66

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)-$4,500
B)-$4,150
C)$1,800
D)$850
E)$3,500

Question 67

You recently purchased three put option contracts on Guillepsi stock with an exercise price of $42.50.What is the total intrinsic value of these contracts if the stock is currently selling for $45 a share?

A)-$360
B)-$120
C)$0
D)$120
E)$360

Question 68

The common stock of Westover Foods is currently priced at $28.80 a share.One year from now,the stock price is expected to be either $25 or $30 a share.The risk-free rate of return is 4.2 percent.What is the current value of one call option on this stock if the exercise price is $27.50?

A)$0
B)$2.40
C)$3.00
D)$3.80
E)$4.00

Question 69

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

Question 70

The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?

A)$0
B)$1.20
C)$3.00
D)$4.20
E)$5.51

Question 71

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.

A)-$30
B)$70
C)$80
D)$270
E)$330

Question 72

You own eight call option contracts on Swift Water Tours stock with a strike price of $15.When you purchased the shares the option price was $0.30 and the stock price was $15.25.What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share?

A)-$83
B)-$1.08
C)$0
D)$108
E)$864

Question 73

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?

A)-$2,840
B)-$1,760
C)-$1,080
D)$1,080
E)$1,760

Question 74

You currently own a one-year call option on Rail Company,Inc.,stock.The current stock price is $52.75 and the risk-free rate of return is 4.25 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)$1.20
B)$2.59
C)$4.79
D)$5.13
E)$7.27

Question 75

Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year.The risk-free rate of return is 3.8 percent.The assets of the business are expected to be worth either $23,000 or $35,000 in one year.Currently,these assets are worth $27,500.What is the current value of the bond?

A)$17,746
B)$19,207
C)$20,222
D)$22,549
E)$23,048

Question 76

You own one call option with an exercise price of $40 on S'more Good stock.The stock is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in one year.The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent.What is the current call option price if the option expires one year from now?

A)$0.55
B)$0.69
C)$1.37
D)$2.43
E)$2.75

Question 77

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.

A)-$210
B)-$150
C)-$60
D)$430
E)$490

Question 78

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

Question 79

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?

A)-$510
B)-$90
C)$90
D)$510
E)$930

Question 80

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?

A)-$3,000.00
B)-$908.00
C)$0
D)$74.07
E)$122.20