Question 1

An option granting the right to sell a stock at $10 when that stock currently has a market price $8 is "in the money."

Accepted Answer

An option is considered "in the money" when its strike price is lower/higher than the current market price for a put/call option, respectively. In this scenario, the put option gives the right to sell the stock at $10, which is higher than the current market price of $8, making it "in the money."

Question 2

For preferred noncumulative stock,all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

Accepted Answer

For noncumulative preferred stock, if dividends are not declared in a given year, they do not accumulate, and shareholders are not entitled to receive missed payments in the future before common stock dividends can be paid.

Question 3

As the underlying stock price increases in value,a put option to sell it becomes more valuable.

Accepted Answer

As the underlying stock price increases in value, a put option to sell it becomes less valuable because the chance of the stock price falling below the strike price of the put option decreases.

Question 4

A European-Style Option may only be exercised on a specific date.

Accepted Answer

A European-Style Option can only be exercised on its expiration date, whereas an American-Style Option can be exercised at any time before its expiration date.

Question 5

A call option is the obligation to purchase a specific asset at a pre-determined price.

Accepted Answer

A call option is the right, but not the obligation, to purchase a specific asset at a pre-determined price.

Question 6

A warrant is a type of call option.

Accepted Answer

A warrant is a type of financial instrument that gives the holder the right, but not the obligation, to buy a specific number of shares of stock at a certain price before a specified date. This is similar to a call option, which gives the holder the right to buy shares of stock at a certain price before a specified date. Therefore, a warrant is considered a type of call option.

Question 7

Options generally have no effect on the value of a venture capital investment.

Accepted Answer

Options can have an effect on the value of a venture capital investment as they provide the right but not the obligation to purchase additional shares at a predetermined price. If the price of the company's shares goes up, the value of the options also increases and may result in dilution of the venture capital investor's ownership stake. Therefore, options are an important consideration in valuing a startup and can have an impact on the return potential for venture capital investors.

Question 8

If a share of preferred stock has a $10 par value,and the stock has a 2:1 conversion ratio,then the conversion price would be $5.

Accepted Answer

The conversion ratio is the number of shares of common stock that can be obtained by converting one share of preferred stock. In this case, the ratio is 2:1, meaning that for every one share of preferred stock, the holder can convert it into two shares of common stock. The conversion price is calculated by dividing the par value of the preferred stock by the conversion ratio. So, in this case, the conversion price would be $10/2 = $5.

Question 9

Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date.

Accepted Answer

Convertible preferred stockholders have the right to convert their shares into a specified number of common shares, but this can typically be done at any time after the conversion feature becomes effective, not necessarily after an expiration date.

Question 10

A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time.

Accepted Answer

The answer of A warrant is a call option issued...

Question 11

Convertible debt is debt that converts into preferred stock.

Accepted Answer

Convertible debt typically converts into common stock, not preferred stock, upon certain conditions being met.

Question 12

An option not currently worth exercising is said to be an out of the money option.

Accepted Answer

An out of the money option means that the current price of the underlying asset is not favorable for exercising the option, making it not worth exercising. Therefore, the option is considered to be out of the money.

Question 13

For American and Bermudan embedded options,the exercise price can change over time as specified in the security agreement.

Accepted Answer

Both American and Bermudan embedded options can have the exercise price that changes over time as stated in the security agreement. This feature provides the holder of the option with greater flexibility and control over their investment.

Question 14

An option is a right to buy or sell additional shares of stock.

Accepted Answer

An option is a contractual agreement between two parties that grants the buyer the right, but not the obligation, to buy or sell an underlying asset (such as shares of stock) at a predetermined price within a specified time period. A call option gives the buyer the right to buy shares, while a put option gives the buyer the right to sell shares. Therefore, options are a way to control additional shares of stock without actually owning them outright.

Question 15

The value of a warrant can be directly derived from the value of a call option.

Accepted Answer

A warrant is essentially a long-term call option issued by a company, but with some differences in terms of expiration date, exercise price, and underlying asset. Therefore, the value of a warrant is closely related to the value of a call option with similar characteristics, and can be calculated using options pricing models like Black-Scholes or binomial models.

Question 16

An American-style option is an option that can be exercised only at the expiration date

Accepted Answer

An American-style option can be exercised at any time before the expiration date, while a European-style option can only be exercised on the expiration date.

Question 17

Preferred stock is the equity claim senior to common stock providing preference on dividends but not liquidation proceeds.

Accepted Answer

The answer of Preferred stock is the equity claim senior...

Question 18

By issuing preferred stock,and thus forfeiting bankruptcy rights from the use of debt,the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

Accepted Answer

By issuing preferred stock, the venture and its investors do forfeit bankruptcy rights from the use of debt, but they can still benefit by committing to an internal reorganization as opposed to seeking a bankruptcy reorganization.

Question 19

If a call option can be bought for $12 and the stock's market value is $12,it's said to be "at the money".

Accepted Answer

"At the money" means that the strike price of the option is equal to the market value of the underlying stock, which is the case in this scenario where both the call option price and stock market value are $12.

Question 20

A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

Accepted Answer

A preemptive right grants existing owners the first opportunity to purchase additional shares in order to maintain their current percentage of ownership in a company. This right can be written into a company's bylaws or charter.

Quiz 13: Security Structures and Determining Enterprise Values