Question 1

The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Accepted Answer

A)  $8.50 million
B)  $9.98 million
C)  $12.00 million
D)  $19.42 million
E)  $23.84 millionF) A) and E)
G) A) and D)

Question 2

You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

Accepted Answer

A)  $6,728
B)  $7,569
C)  $8,311
D)  $8,422
E)  $8,791F) D) and E)
G) C) and D)

Question 3

Assume the price of the underlying stock decreases.How will the values of the options respond to this change?
I.call value decreases
II.call value increases
III.put value decreases
IV.put value increases

Accepted Answer

A)  I and III only
B)  I and IV only
C)  II and III only
D)  II and IV only
E)  I onlyF) A) and E)
G) None of the above

Question 4

What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Accepted Answer

A)  $3.38
B)  $3.42
C)  $3.68
D)  $4.27
E)  $5.39F) C) and E)
G) A) and B)

Question 5

The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Accepted Answer

A)  4.43 percent
B)  4.50 percent
C)  4.68 percent
D)  5.00 percent
E)  5.23 percentF) D) and E)
G) C) and D)

Question 6

J&N,Inc.stock has a current market price of $46 a share.The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24.What is the risk-free rate of return?

Accepted Answer

A)  1.49 percent
B)  1.82 percent
C)  3.10 percent
D)  3.64 percent
E)  4.21 percentF) A) and E)
G) D) and E)

Question 7

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Accepted Answer

A)  sale of a European call option
B)  sale of an American put option
C)  purchase of a protective put
D)  purchase of a protective call
E)  either the sale or purchase of a putF) A) and D)
G) A) and C)

Question 8

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Accepted Answer

Equity is equal to asset minus liabiliti...

Question 9

Grocery Express stock is selling for $22 a share.A 3-month,$20 call on this stock is priced at $2.85.Risk-free assets are currently returning 0.2 percent per month.What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Accepted Answer

A)  $0.37
B)  $0.73
C)  $0.87
D)  $1.10
E)  $1.18F) D) and E)
G) A) and B)

Question 10

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Accepted Answer

A)  theta
B)  vega
C)  rho
D)  delta
E)  gammaF) None of the above
G) A) and C)

Question 11

Give an example of a protective put and explain how this strategy reduces investor risk.

Accepted Answer

Students should give an example that inc...

Question 12

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

Accepted Answer

A)  option premium on a call with a specified exercise price.
B)  rate of return on the underlying asset.
C)  volatility of the risk-free rate of return.
D)  rate of return on a risk-free asset.
E)  option premium on a put with a specified exercise price.F) A) and C)
G) A) and B)

Question 13

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Accepted Answer

A)  theta.
B)  vega.
C)  rho.
D)  delta.
E)  gamma.F) C) and E)
G) A) and D)

Question 14

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Accepted Answer

Because equity can be viewed as a call o...

Question 15

The value of the risky debt of a firm is equal to the value of:

Accepted Answer

A)  a call option plus the value of a risk-free bond.
B)  a risk-free bond plus a put option.
C)  the equity of the firm minus a put.
D)  the equity of the firm plus a call option.
E)  a risk-free bond minus a put option.F) A) and B)
G) C) and D)

Question 16

A purely financial merger:

Accepted Answer

A)  increases the risk that the merged firm will default on its debt obligations.
B)  has no effect on the risk level of the firm's debt.
C)  reduces the value of the option to go bankrupt.
D)  has no effect on the equity value of a firm.
E)  reduces the risk level of the firm and increases the value of the firm's equity.F) B) and E)
G) B) and D)

Question 17

The value of an option is equal to the:

Accepted Answer

A)  intrinsic value minus the time premium.
B)  time premium plus the intrinsic value.
C)  implied standard deviation plus the intrinsic value.
D)  summation of the intrinsic value, the time premium, and the implied standard deviation.
E)  summation of delta, theta, vega, and rho.F) None of the above
G) B) and E)

Question 18

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

Accepted Answer

A)  American call
B)  European call
C)  American put
D)  European put
E)  either an American or a European putF) A) and B)
G) B) and E)

Question 19

A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Accepted Answer

A)  -0.01506
B)  0.05271
C)  0.05740
D)  0.06420
E)  0.06752F) All of the above
G) D) and E)

Question 20

Given the (1) exercise price E,(2) time to maturity T,and (3) European put-call parity,the present value of E plus the value of the call option is equal to the:

Accepted Answer

A)  current market value of the stock.
B)  present value of the stock minus the value of the put.
C)  value of the put minus the market value of the stock.
D)  value of a risk-free asset.
E)  stock value plus the put value.F) A) and D)
G) None of the above

Exam 25: Option Valuation

Which one of the following acts like an insurance policy if the price of a stock you own suddenly decreases in value?

Correct AnswerverifiedShow Answer

Explain how option pricing theory can be used to argue that acquisitive firms pursuing conglomerate mergers are not acting in the shareholders' best interest.

Correct AnswerverifiedBecause equity can be viewed as a call o...View AnswerShow Answer

In the Black-Scholes model,the symbol "σ" is used to represent the standard deviation of the:

Correct AnswerverifiedShow Answer

Given the (1) exercise price E,(2) time to maturity T,and (3) European put-call parity,the present value of E plus the value of the call option is equal to the:

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The value of an option is equal to the:

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You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?

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What is the value of a 3-month call option with a strike price of $25 given the Black-Scholes option pricing model and the following information?

Correct AnswerverifiedShow Answer

J&N,Inc.stock has a current market price of $46 a share.The one-year call on this stock with a strike price of $55 is priced at $0.05 while the one-year put with a strike price of $55 is priced at $8.24.What is the risk-free rate of return?

Correct AnswerverifiedShow Answer

Assume the price of Westward Co.stock increases by one percent.Which one of the following measures the effect that this change in the stock price will have on the value of the Westward Co.options?

Correct AnswerverifiedShow Answer

Which one of the following provides the option of selling a stock anytime during the option period at a specified price even if the market price of the stock declines to zero?

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A purely financial merger:

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Assume the price of the underlying stock decreases.How will the values of the options respond to this change? I.call value decreases II.call value increases III.put value decreases IV.put value increases

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A stock is currently selling for $56 a share.The risk-free rate is 3 percent and the standard deviation is 18 percent.What is the value of d1 of a 9-month call option with a strike price of $57.50?

Correct AnswerverifiedShow Answer

Grocery Express stock is selling for $22 a share.A 3-month,$20 call on this stock is priced at $2.85.Risk-free assets are currently returning 0.2 percent per month.What is the price of a 3-month put on Grocery Express stock with a strike price of $20?

Correct AnswerverifiedShow Answer

Give an example of a protective put and explain how this strategy reduces investor risk.

Correct AnswerverifiedStudents should give an example that inc...View AnswerShow Answer

Explain why the equity ownership of a firm is equivalent to owning a call option on the firm's assets.

Correct AnswerverifiedEquity is equal to asset minus liabiliti...View AnswerShow Answer

The stock of Edwards Homes,Inc.has a current market value of $23 a share.The 3-month call with a strike price of $20 is selling for $3.80 while the 3-month put with a strike price of $20 is priced at $0.54.What is the continuously compounded risk-free rate of return?

Correct AnswerverifiedShow Answer

The value of the risky debt of a firm is equal to the value of:

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The current market value of the assets of Nano Tek is $19.5 million.The market value of the equity is $7.5 million.The risk-free rate is 4.5 percent and the outstanding debt matures in 5 years.What is the market value of the firm's debt?

Correct AnswerverifiedShow Answer

Assume the standard deviation of the returns on ABC stock increases.The effect of this change on the value of the call options on ABC stock is measured by which one of the following?

Correct AnswerverifiedShow Answer

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Students should give an example that inc...
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Equity is equal to asset minus liabiliti...
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