Financial Management - Chapter 24 Options and Corporate Finance

Chapter 24 Options and Corporate Finance

 

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 Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Option

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:    A.  striking the asset. B.  expiring the option. C.  exercising the option. D.  putting the collar. E.  the collar option. Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Exercising the option

3.	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. Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Strike price

4.	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 Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Expiration date

5.	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 Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: American option

6.	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 Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: European option

7.	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 Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Call option

8.	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 Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Put option

9.	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 Refer to section 24.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Intrinsic value

10.

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 Refer to section 24.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-03 The basics of employee stock options and their benefits and disadvantages. Section: 24.4 Topic: Employee stock option

11.	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 Refer to section 24.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Real options

12.

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. Refer to section 24.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Investment timing decision

13.

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. Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Managerial options

14.	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 Refer to section 24.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Contingency planning

15.

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 Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Strategic options

16.

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 Refer to section 24.7

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Warrants

17.	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 Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Convertible bonds

18.	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. Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Conversion price

19.	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 Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Conversion ratio

20.	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. Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Conversion premium

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 Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Straight bond value

22.	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 Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Conversion value

23.

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. Refer to section 24.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: European option

24.	Julie opted to exercise her August option on June 20th 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 Refer to section 24.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: American option

25.	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 Refer to section 24.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: American option

26.

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 Refer to section 24.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: European option

27.

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. Refer to section 24.1

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: European option

28.	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 Refer to section 24.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Call value

29.	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 Refer to section 24.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Put value

30.	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 Refer to section 24.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Call upper bound

31.

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 Refer to section 24.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Call lower bound

32.

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. Refer to section 24.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Call intrinsic value

33.

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 Refer to section 24.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.2 Topic: Put intrinsic value

34.

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. Refer to section 24.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Factors affecting option values

35.

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 Refer to section 24.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Factors affecting option values

36.

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 Refer to section 24.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Factors affecting option values

37.

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. Refer to section 24.2

AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Option value

38.

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. Refer to section 24.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-02 The factors that affect option values and how to price call and put options using no arbitrage conditions. Section: 24.2 Topic: Option value

39.

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. Refer to section 24.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-03 The basics of employee stock options and their benefits and disadvantages. Section: 24.4 Topic: Employee stock option

40.

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 Refer to section 24.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-03 The basics of employee stock options and their benefits and disadvantages. Section: 24.4 Topic: Employee stock option

41.

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. Refer to section 24.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-03 The basics of employee stock options and their benefits and disadvantages. Section: 24.4 Topic: Employee stock option

42.	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 Refer to section 24.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-03 The basics of employee stock options and their benefits and disadvantages. Section: 24.4 Topic: ESO backdating

43.

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. Refer to section 24.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-04 How to value a firm's equity as an option on the firm's assets. Section: 24.5 Topic: Equity as a call option

44.

Jack and Jill are house hunting. They find House A situated on a hill. They really like the house but want to continue searching the market for one more week before making their final decision to buy the house. To avoid having someone else purchase House A while they continue their house hunting, they decide to place a $2,500 deposit on House A. This deposit will apply to the purchase price if they buy House A. If they do not buy House A, they will forfeit the $2,500. Essentially, Jack and Jill have a _____ on House A.    A.  financial put B.  financial call C.  warrant D.  real put E.  real call Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Real options

45.

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 Refer to section 24.6

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Option to wait

46.

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 Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Managerial options

47.

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 Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Strategic options

48.

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 Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Option to expand

49.

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 Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Option to abandon

50.

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 Refer to section 24.6

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 24-05 How option valuation can be used to evaluate capital budgeting projects; including timing options; the option to expand; the option to abandon; and the option to contract. Section: 24.6 Topic: Managerial options

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. Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Warrants

52.

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 Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Warrants

53.	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. Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Warrants

54.

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 Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Convertible bonds

55.

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) Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Convertible bonds

56.

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. Refer to section 24.7

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 24-06 The basics of convertible bonds and warrants and how to value them. Section: 24.7 Topic: Convertible bonds

57.	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 Cost = 2 × 100 × $0.15 = $30

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Option quotes

58.	What is the value of five August $25 call contracts on Dove stock?        A.  $34 B.  $68 C.  $340 D.  $690 E.  $3,450 Contract value = 5 × 100 × $6.90 = $3,450

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Option quotes

59.	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 Intrinsic value = $31.12 - $25 = $6.12

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Option quotes

60.

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 Total profit = ($34.60 - $32.50 - $1.65) × 100 × 6 = $270

AACSB: Analytic Blooms: Apply Difficulty: 1 Easy Learning Objective: 24-01 The basics of call and put options and how to calculate their payoffs and profits. Section: 24.1 Topic: Call payoff