Question 1

You own nine convertible bonds.These bonds have a 7 percent coupon,a $1,000 face value,and mature in 6 years.The bonds are convertible into shares of common stock at a conversion price of $25.How many shares of stock will you receive if you convert all of your bonds?

Accepted Answer

A)   285
B)   300
C)   350
D)   360
E)   400F) B) and E)
G) A) and B)

Question 2

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:

Accepted Answer

A)   striking the asset.
B)   expiring the option.
C)   exercising the option.
D)   putting the collar.
E)   the collar option.F) None of the above
G) B) and C)

Question 3

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

Accepted Answer

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 menuF) A) and D)
G) None of the above

Question 4

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?

Accepted Answer

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

Question 5

-Your company is deciding when to invest in a new machine.The new machine will increase cash flow by $240,000 per year.You believe the technology used in the machine has a 10-year life;in other words,no matter when you purchase the machine,it will be obsolete 10 years from today.The machine is currently priced at $1,200,000.The cost of the machine will decline by $120,000 per year until it reaches $720,000,where it will remain.Your required return is 8 percent.In which year should you purchase the machine?

Accepted Answer

A)   Year 0
B)   Year 1
C)   Year 2
D)   Year 3
E)   Year 4F) C) and E)
G) B) and E)

Question 6

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

Accepted Answer

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.F) A) and E)
G) A) and B)

Question 7

Rackin Pinion Corporation's assets are currently worth $1,260.In one year,they will be worth either $1,200 of $1,610.The risk-free interest rate is 5 percent.Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200.What is the current value of the firm's debt?

Accepted Answer

A)   $60.00
B)   $114.14
C)   $1,142.86
D)   $1,263.19
E)   $1,504.20F) A) and D)
G) A) and C)

Question 8

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

Accepted Answer

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.F) A) and E)
G) All of the above

Question 9

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

Accepted Answer

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

Question 10

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 _____.

Accepted Answer

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

Question 11

-Kurt owns a convertible bond that matures in three years.The bond has an 8 percent coupon and pays interest semi-annually.The face value of the bond is $1,000 and the conversion price is $25.Similar bonds have a market return of 9.25 percent.The current price of the stock is $26.50 per share.What is the straight bond value?

Accepted Answer

A)   $948.20
B)   $967.89
C)   $972.80
D)   $987.78
E)   $991.15F) A) and C)
G) C) and D)

Question 12

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

Accepted Answer

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 IVF) A) and D)
G) A) and E)

Question 13

T-bills currently yield 6.3 percent.Stock in Pinta Manufacturing is currently selling for $46 per share.There is no possibility that the stock will be worth less than $39 per share in one year.What is the value of a call option on this stock if the exercise price is $24 per share?

Accepted Answer

A)   $21.40
B)   $22.00
C)   $23.00
D)   $23.42
E)   $25.70F) A) and B)
G) B) and D)

Question 14

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

Accepted Answer

A)   right to sell
B)   right to buy
C)   obligation to sell
D)   obligation to buy
E)   obligation to tradeF) A) and B)
G) A) and C)

Question 15

-Southern Shores is considering a project that has an initial cost today of $13,000.The project has a two-year life with cash inflows of $7,500 a year.Should the firm opt to wait one year to commence this project,the initial cost will increase by 5 percent and the cash inflows will increase to $8,500 a year.What is the value of the option to wait if the applicable discount rate is 12 percent?

Accepted Answer

A)   $614.52
B)   $721.56
C)   $963.40
D)   $982.67
E)   $1,021.66F) A) and E)
G) None of the above

Question 16

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?

Accepted Answer

A)   conversion premium
B)   straight bond value
C)   conversion value
D)   inverted value
E)   prescribed valueF) A) and D)
G) B) and D)

Question 17

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?

Accepted Answer

A)   -$510
B)   -$90
C)   $90
D)   $510
E)   $930F) A) and B)
G) None of the above

Question 18

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.

Accepted Answer

A)   -$30
B)   $70
C)   $80
D)   $270
E)   $330F) All of the above
G) A) and B)

Question 19

A convertible bond has a face value of $5,000 and a conversion price of $80.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 7.5 percent.The current price of the stock is $42 per share.What is the conversion value of this bond?

Accepted Answer

A)   $1,680
B)   $2,575
C)   $2,625
D)   $4,651
E)   $5,000F) B) and E)
G) A) and C)

Question 20

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

Accepted Answer

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 IVF) A) and B)
G) None of the above

Exam 24: Options and Corporate Finance

T-bills currently yield 6.3 percent.Stock in Pinta Manufacturing is currently selling for $46 per share.There is no possibility that the stock will be worth less than $39 per share in one year.What is the value of a call option on this stock if the exercise price is $24 per share?

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

Correct Answer
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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:

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

Correct Answer
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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?

Correct Answer
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A convertible bond has a face value of $5,000 and a conversion price of $80.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 7.5 percent.The current price of the stock is $42 per share.What is the conversion value of this bond?

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

Correct Answer
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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?

Correct Answer
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Correct Answer
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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

Correct Answer
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Correct Answer
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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

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

Correct Answer
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The owner of a put option has the _____ an asset at a fixed price during a stated period of time.

Correct Answer
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Rackin Pinion Corporation's assets are currently worth $1,260.In one year,they will be worth either $1,200 of $1,610.The risk-free interest rate is 5 percent.Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200.What is the current value of the firm's debt?

Correct Answer
verified

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?

Correct Answer
verified

You own nine convertible bonds.These bonds have a 7 percent coupon,a $1,000 face value,and mature in 6 years.The bonds are convertible into shares of common stock at a conversion price of $25.How many shares of stock will you receive if you convert all of your bonds?

Correct Answer
verified

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 _.

Correct Answer
verified

Exam 24: Options and Corporate Finance

T-bills currently yield 6.3 percent.Stock in Pinta Manufacturing is currently selling for $46 per share.There is no possibility that the stock will be worth less than $39 per share in one year.What is the value of a call option on this stock if the exercise price is $24 per share?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

A convertible bond has a face value of $5,000 and a conversion price of $80.The bond has a 6 percent coupon,pays interest semi-annually,and matures in 12 years.Similar bonds are yielding 7.5 percent.The current price of the stock is $42 per share.What is the conversion value of this bond?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Rackin Pinion Corporation's assets are currently worth $1,260.In one year,they will be worth either $1,200 of $1,610.The risk-free interest rate is 5 percent.Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200.What is the current value of the firm's debt?

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

You own nine convertible bonds.These bonds have a 7 percent coupon,a $1,000 face value,and mature in 6 years.The bonds are convertible into shares of common stock at a conversion price of $25.How many shares of stock will you receive if you convert all of your bonds?

Correct AnswerverifiedShow Answer

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 _____.

Correct AnswerverifiedShow Answer

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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 _.

Correct Answer
verified