Question 1

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Accepted Answer

A) True 
 B)False

Question 2

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

Accepted Answer

A) True 
 B)False

Question 3

Warner Motors' stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

Accepted Answer

A)   The price of the call option will increase by $2.
B)   The price of the call option will increase by more than $2.
C)   The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
D)   The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
E)   The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.F) C) and E)
G) A) and E)

Question 4

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?

Accepted Answer

A)   The price of these call options is likely to rise if XYZ's stock price rises.
B)   The higher the strike price on XYZ's options, the higher the option's price will be.
C)   Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
D)   If XYZ's stock price stabilizes (becomes less volatile) , then the price of its options will increase.
E)   If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.F) A) and D)
G) A) and B)

Question 5

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Accepted Answer

A)   $7.33
B)   $7.71
C)   $8.12
D)   $8.55
E)   $9.00F) A) and E)
G) A) and D)

Question 6

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant?

Accepted Answer

A)   GCC's stock price suddenly increases.
B)   The exercise price of the option is increased.
C)   The life of the option is increased, i.e., the time until it expires is lengthened.
D)   The Federal Reserve takes actions that increase the risk-free rate.
E)   GCC's stock price becomes more risky (higher variance) .F) A) and B)
G) C) and D)

Question 7

Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be?

Accepted Answer

A)   -$510.25
B)   $1,989.75
C)   $2,089.24
D)   $2,193.70
E)   $2,303.38F) All of the above
G) A) and D)

Question 8

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Accepted Answer

A)   In-the-money
B)   Put
C)   Naked
D)   Covered
E)   Out-of-the-moneyF) A) and B)
G) D) and E)

Exam 8: Financial Options and Applications in Corporate Finance

Warner Motors' stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct Answer
verified

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Correct Answer
verified

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

Correct Answer
verified

Correct Answer
verified

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?

Correct Answer
verified

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Correct Answer
verified

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant?

Correct Answer
verified

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Correct Answer
verified

Exam 8: Financial Options and Applications in Corporate Finance

Warner Motors' stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

Correct AnswerverifiedShow Answer

The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

Correct AnswerverifiedShow Answer

If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Call options on XYZ Corporation's common stock trade in the market. Which of the following statements is most correct, holding other things constant?

Correct AnswerverifiedShow Answer

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Correct AnswerverifiedShow Answer

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant?

Correct AnswerverifiedShow Answer

An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified