Exhibit 13-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Rick Thompson is considering the following alternatives for investing in Davis Industries, which is now selling for $44 per share: 1) Buy 500 shares, and
2) Buy six month call options with an exercise price of 45 for $ \$ 3.25 $ premium.
-Refer to Exhibit 13-4. Assuming no commissions or taxes, what is the annualized percentage gain if the stock is at $30 in four months and the stock was purchased?
A) 9.54% loss
B) 95.45% loss
C) 0.9545% gain
D) 95.45% gain
E) 9.54% gain

Question

Quizplus · Accepted Answer

If the stock is at $30 in four months and Rick Thompson had purchased the stock directly, he would have experienced a significant loss. The stock was initially bought at $44 per share, and if it drops to $30, this represents a decrease of $14 per share. For 500 shares, this is a total loss of $7,000 ($14 loss per share * 500 shares). Given that the initial investment was $22,000 ($44 per share * 500 shares), a $7,000 loss on a $22,000 investment represents a 31.82% loss (not annualized). However, the question seems to have a mistake in its formulation or in the provided choices, as none of the choices accurately reflect the correct calculation based on the given scenario. The correct calculation for the annualized percentage gain or loss was not provided in the choices, and the choice that mentions a 95.45% loss does not correspond to the scenario described for purchasing the stock directly.

Exhibit 13-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $3.25 \$ 3.25 $3.25

Exhibit 13-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\$ 3.25$