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Exam 24: Options and Corporate Finance

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Question 41

Multiple Choice

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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.

F) None of the above
G) All of the above

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Question 42

Multiple Choice

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You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share.Today,the contracts expire and the stock is selling for $31.15 a share.What is your net profit or loss on this investment? Ignore trading costs and taxes.

A) -$115
B) -$105
C) $20
D) $105
E) $210

F) D) and E)
G) B) and D)

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Question 43

Multiple Choice

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Three weeks ago,you purchased a June $30 put option on Leeper Metals stock at an option price of $1.80.The market price of the stock three weeks ago was $30.60.Today,the stock is selling at $27.50 a share.What is the intrinsic value of your put contract?

We are examining a new project.We expect to sell 8,000 units per year at $80 net cash flow apiece for the next 15 years.In other words,the annual operating cash flow is projected to be $80 × 8,000 = $640,000.The relevant discount rate is 16 percent,and the initial investment required is $2,740,000.The project can be dismantled after the first year and sold for $2,130,000.Suppose you think it is likely that expected sales will be revised upward to 9,600 units if the first year is a success and revised downward to 3,000 units if the first year is not a success.Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold.Naturally,expansion would be desirable only if the project is a success.This implies that if the project is a success,projected sales after expansion will be 19,200.Assume that success and failure are equally likely.Note that abandonment is still an option if the project is a failure.What is the value of the option to expand?

What are the upper and lower bounds for an American call option? Explain what would happen in each case if the bound was violated.

The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within how many days of the grant?

A bond with 10 detachable warrants has just been offered for sale at $1,000.The bond matures in 12 years and has an annual coupon of $80.Each warrant gives the owner the right to purchase two shares of stock in the company at $14 per share.Ordinary bonds (with no warrants) of similar quality are priced to yield 11 percent.What is the value of one warrant?

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

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.

Brad purchased an option that he can only exercise on the final day of the option period.Which type of option did he purchase?

Which one of the following describes the intrinsic value of a put option?

The common stock of Hazelton Refiners is selling for $72.30 a share.U.S.Treasury bills are currently yielding 4.8 percent.What is the current value of a one-year call option on this stock if the exercise price is $70 and you assume the option will finish in the money?

Employee stock options:

Last week,you purchased a call option on Edgewater stock with a strike price of $40.The stock price was $39.80 and the option price was $0.45 at that time.What is the intrinsic value per share if the stock is currently priced at $39.10?

Which one of the following statements is correct?

Which one of the following terms applies to the value of an option on its expiration date?

This morning,you purchased a call option on Schoolhouse Supply Co.stock that expires in one year.The exercise price is $40.The current price of the stock is $43.40 and the risk-free rate of return is 3.6 percent.Assume the option will finish in the money.What is the current value of the call option?

Which one of the following describes the maximum value of a call option?

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?

-Dressler Technologies is considering a project with a 3-year life and an initial cost of $87,000.The discount rate for the project is 14.5 percent.The firm expects to sell 1,300 units on the last day of each year.The cash flow per unit is $32.The firm will have the option to abandon this project at the end two years (after year 2 sales) at which time the project's assets could be sold for an estimated $30,000.The firm's managers are interested in knowing how the project will perform if the sales forecast for year 3 of the project is revised such that there is a 50/50 chance that the sales will be either 1,000 or 1,400 units a year.What is the net present value of this project at time zero given the current sales forecasts?