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Exam 24: Options and Corporate Finance

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Question 31

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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.

F) A) and D)
G) All of the above

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Question 32

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Which of the following statements 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

F) A) and D)
G) B) and C)

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Question 33

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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 Glass House has total assets currently valued at $17,200. These assets are expected to increase in value to either $18,000 or $21,000 by next year. The company has a pure discount bond outstanding with a face value of $20,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.4 percent. What is the value of the equity in this firm?

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:

The investment timing decision is the:

Marti owns an option that allows him to purchase ABC stock at $50 a share. The $50 price is referred to as the:

Felicia purchased an option which she can exercise anytime within the next six months. Which type of option did she purchase?

Travis owns both a September $30 call and a September $30 put. If the call finishes at-the-money, then the put will:

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?

What is the primary difference between an American call option and a European call option?

Explain the rationale behind the idea that equity is a call option on a firm's assets. When would a shareholder allow this call to expire?

You recently purchased three put option contracts on Guillepsi stock with an exercise price of $42.50. What is the total intrinsic value of these contracts if the stock is currently selling for $43.70 a share?

Dressler Technologies is considering a project with a 3-year life and an initial cost of $85,000. The discount rate for the project is 14.5 percent. The firm expects to sell 1,200 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?

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 $22 per share?

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?

Several rumors concerning Value Rite stock are causing the market price of the stock to be quite volatile. Given this situation, you decide to buy both a one-month European $25 put and a one-month European $25 call on this stock. The call price per share is $0.60 and the put price per share is $2.10. What will be your net profit or loss on these option positions if the stock price is $18 on the day the options expire? Ignore trading costs and taxes.

You currently own a one-year call option on Rail Company, Inc., stock. The current stock price is $51.80 and the risk-free rate of return is 4.25 percent. Your option has a strike price of $50 and you assume the option will finish in the money. What is the current value of your call option?

The difference between the conversion price and the current stock price, divided by the current stock price, is called the:

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 _____.