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Lucas Enterprises recently opened a new retail outlet. If the outlet outperforms the expectations, the company can opt to increase the store's size. If it underperforms, the company can close the store. These choices are called:


A) call options.
B) put options.
C) straddles.
D) managerial options.
E) executive options.

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

Correct Answer

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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/Conversion premium
D) Face value(1 + Conversion premium)
E) Stock price(1 + Conversion ratio)

F) A) and E)
G) A) and C)

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Ignoring each of the following may cause the NPV of a project to be underestimated except for the option to:


A) abandon.
B) expand.
C) wait.
D) contract.
E) commence immediately.

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

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This morning, you purchased a call option on School house Supply Co. stock that expires in one year. The exercise price is $37.50. The current price of the stock is $37.60 and the risk-free rate of return is 3.1 percent. Assume the option will finish in the money. What is the current value of the call option?


A) $0
B) $.95
C) $.10
D) $1.23
E) $1.09

F) B) and E)
G) A) and C)

Correct Answer

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You own five call option contracts on Swift Water Tours stock with a strike price of $25 per share and an option premium of $.45 per share. What is the total intrinsic value of these options today if the stock is currently selling for $25.20 a share?


A) $20
B) $45
C) $0
D) $450
E) $100

F) A) and E)
G) A) and C)

Correct Answer

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Western Industrial Products is considering a project with a life of four years, a discount rate of 14.7 percent, and an initial cost of $268,000. The project is expected to produce sales of 2,100 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon the project after one year at which time the project's assets could be sold for an estimated $225,000. The firm should abandon the project immediately following the sales on the last day of the first year if the expected level of annual sales, starting with Year 2, falls to ________ units or less. Ignore taxes.


A) 1,961 units
B) 1,667 units
C) 1,922 units
D) 2,034 units
E) 2,100 units

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

Correct Answer

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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

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

Correct Answer

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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

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

Correct Answer

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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

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

Correct Answer

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When underwater employee stock options are exchanged, the option holder generally receives:


A) a smaller number of new options with a lower exercise price.
B) a cash payment equal to the value of the options when they were originally issued.
C) twice the number of options with an exercise price equal to half of the original exercise price.
D) a larger number of new options with a higher exercise price.
E) the same number of options but with a higher exercise price.

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

Correct Answer

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Strategic options are:


A) valued the same as financial call options.
B) difficult to value.
C) valued based on their first year's net income.
D) considered useless as they generally have negative NPVs.
E) increasingly easy to evaluate and value.

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

Correct Answer

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The common stock of Westover Foods is currently priced at $18.70 a share. One year from now, the stock price is expected to be either $16 or $22 a share. The risk-free rate of return is 3.4 percent. What is the current value of a one-year call option on this stock if the exercise price is $20?


A) $0
B) $1.08
C) $2.58
D) $.76
E) $1.93

F) C) and D)
G) A) and E)

Correct Answer

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A new project is expected to produce sales of 4,800 units per year with a net cash flow of $53 each for the next 20 years. The discount rate is 16 percent and the initial investment is $1,625,000. After the first year, the project can be dismantled and sold for $1,475,000. After the first year, the project should be abandoned if annual sales are expected to be less than which number of units?


A) 4,735 units
B) 4,160 units
C) 4,800 units
D) 4,210 units
E) 4,440 units

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

Correct Answer

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When warrants are exercised, the:


A) earnings per share decrease.
B) earnings per share remain constant.
C) total equity in the firm remains constant.
D) total equity in a firm decreases.
E) number of bonds outstanding increases.

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

Correct Answer

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The primary difference between an American call option and a European call option is the fact that the American call:


A) has a fixed strike price while the European strike price varies over time.
B) is a right to buy while a European call is an obligation to buy.
C) has an expiration date while the European call does not.
D) is written on 100 shares of the underlying security while the European call covers 10 shares.
E) can be exercised at any time prior to expiration while the European call can only be exercised on the expiration date.

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

Correct Answer

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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

F) D) and E)
G) None of the above

Correct Answer

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Western Shores is considering a project that has an initial cost today of $12,500. The project has a two-year life with cash inflows of $7,400 a year. Should the firm opt to wait one year to commence this project, the initial cost will increase by 4 percent and the cash inflows will increase to $7,900 a year. What is the value of the option to wait if the applicable discount rate is 9.5 percent?


A) $373.63
B) $421.56
C) $303.93
D) $182.67
E) $521.66

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

Correct Answer

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


A) 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.

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

Correct Answer

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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

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

Correct Answer

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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) The strike price

F) A) and E)
G) None of the above

Correct Answer

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