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You sold three $35 call option contracts at a quoted price of $1.40. What is your net profit or loss on this investment if the price of the underlying asset is $38.10 on the option expiration date?

A. -$510

Western Industrial Products is considering a project with a four-year life and an initial cost of $268,000. The discount rate for the project is 14.5 percent. The firm expects to sell 2,200 units on the last day of each year. The cash flow per unit is $50. The firm will have the option to abandon this 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 sale 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. 1,955 units

A new project is expected to produce sales of 7,800 units per year at $52 net cash flow apiece for the next 20 years. In other words, the annual operating cash flow is projected to be $52 7,800 = $405,600. The relevant discount rate is 15 percent and the initial investment is $1,625,000. After the first year, the project can be dismantled and sold for $1,250,000. If expected sales are revised based on the first year's performance, it would make sense to abandon the investment if the sales are less than which of the following number of units?

A. 3,878 units

Which one of the following will decrease the value of an American call option?

A. A decrease in the value of the underlying security.

When you purchase insurance you are in essence:

A. Buying a put option.

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

You sold five put contracts on CTB stock at an option price per share of $1.90. The options have an exercise price of $45 per share. The options were exercised today when the market price was $39 a share. What is your net profit or loss on this investment? Ignore transaction costs and taxes.

B. -$2,050

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

B. 2 business days

Latetia owns a convertible bond. Which one of the following terms would describe the value of this bond if it were not convertible?

B. Straight bond value

Employee stock options:

E. Are generally issued with a zero intrinsic value.

The price of Dimension stock will be either $65 or $87 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 3.6 percent. Suppose the current price of Dimension stock is $70. What is the value of the call option if the exercise price is $60 per share?

A. $12.08

You own a convertible bond with a face value of $1,000 and a market value of $1,034. The bond can be converted into 32 shares of stock. What is the conversion price?

A. $31.25

The price of Time Squared Corp. stock will be either $87 or $94 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent and the current price of Time Squared Corp. stock is $86. What is the value of a call option if the exercise price is $85 per share?

A. $4.27

You are considering a project that has been assigned a discount rate of 12.5 percent. If you start the project today, you will incur an initial cost of $7,600 and will receive cash inflows of $5,700 a year for two years. If you wait one year to start the project, the initial cost will rise to $7,800 and the cash flows will increase to $6,000 a year for two years. What is the value of the option to wait?

A. $51.03

A convertible bond has a face value of $1,000 and a conversion price of $12.50. The bond has a 6 percent coupon, pays interest semiannually, and matures in 12 years. Similar bonds are yielding 9 percent. The current price of the stock is $13.40 per share. What is the straight bond value?

A. $782.57

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

A. A smaller number of new options with a lower exercise price.

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. American option

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

A. Conversion premium.

Which one of the following statements concerning convertible bonds is false?

B. A convertible bond should always be worth less than a comparable straight bond.

Employee stock options are primarily designed to do which one of the following?

C. Influence the actions and priorities of employees.

What is the final day on which an option can be exercised called?

D. Expiration date

The maximum value of a convertible bond is theoretically:

E. Unlimited.

Once a project commences, management can select all of the following options except the option to:

E. Wait.

The conversion value of a convertible bond is equal to which one of the following?

A. Conversion ratio Stock price

When warrants are exercised, the:

A. Earnings per share decrease.

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

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.

The owner of an American put option has the _____ an asset at a fixed price during a stated period of time.

A. Right to sell

The common stock of Westover Foods is currently priced at $29.10 a share. One year from now, the stock price is expected to be either $27 or $33 a share. The risk-free rate of return is 2.8 percent. What is the current value of one call option on this stock if the exercise price is $30?

B. $1.42

The assets of Uptown Stores are currently worth $284,000. These assets are expected to be worth either $275,000 or $300,000 one year from now. The company has a pure discount bond outstanding with a $280,000 face value and a maturity date of one year. The risk-free rate is 4.1 percent. What is the value of the equity in this firm?

B. $15,865

Which one of the following considers all of the options implicit in a project?

B. Contingency planning

Which one of the following statements correctly describes your situation as the holder of a European call option?

C. You have a right to buy but only on the expiration date.

Which one of the following statements concerning warrants is correct?

D. When a warrant is exercised, the number of outstanding shares increases.

All of the following will increase the value of an American call except:

E. A decrease in the risk-free rate of return.

Which one of the following statements is correct?

B. The value of a call increases as the exercise price decreases.

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?

C. American put

A bond with five detachable warrants has just been offered for sale at $1,000. The bond matures in nine years and has an annual coupon of $75. 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 8 percent. What is the value of one warrant?

E. $6.25

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

E. American

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

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.

The option to wait:

E. Has a value equal to the NPV of a project today versus its NPV at a later date.

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?

B. $270

Rackin Pinion Corporation's assets are currently worth $1,487. In one year, they will be worth either $1,400 or $1,600. The risk-free interest rate is 3.5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,300. What is the current value of the firm's debt?

C. $1,256.04

Lucinda owns a convertible bond that matures in six years. The bond has a coupon rate of 5.5 percent and pays interest annually. The face value of the bond is $1,000 and the conversion price is $15. Similar bonds have a market return of 5.75 percent. The current price of the stock is $17.90 per share. What is the conversion value of this bond?

D. $1,193.33

This morning, you purchased a call option on Schoolhouse Supply Co. stock that expires in one year. The exercise price is $35. The current price of the stock is $35.10 and the risk-free rate of return is 2.7 percent. Assume the option will finish in the money. What is the current value of the call option?

D. $1.02

Three weeks ago, you purchased a June $50 put option on Hi-Tech Metals stock at an option price of $.60. The market price of the stock three weeks ago was $51.20. Today, the stock is selling at $48.50 a share. What is the intrinsic value of your put contract?

D. $150

Mountain Top Inn has total assets currently valued at $889,600. These assets are expected to be worth either $860,000 or $920,000 in one year. The company has a pure discount bond outstanding with a face value of $900,000 that matures in one year. Currently, U.S. Treasury bills are yielding 5.4 percent. What is the value of the equity in this firm?

D. $24,553.57

T-bills currently yield 4.2 percent. Stock in MTM is currently selling for $38 a share. There is no possibility that the stock will be worth less than $36 per share in one year. What is the value of a call option on this stock if the exercise price is $35 per share?

D. $4.41

A $1,000 convertible debenture has a conversion price for common stock of $70 per share. The common stock is selling at $68 a share. What is the conversion value of this bond?

D. $971.43

You wrote eight call option contracts with a strike price of $37.50 at a call price of $1.10 per share. What is your net gain or loss on this investment if the price of the underlying stock is $40.30 per share on the option expiration date?

D. -$1,360

Several rumors concerning a 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 $.70 and the put price per share is $1.80. What will be your net profit or loss on these option positions if the stock price is $23 on the day the options expire? Ignore trading costs and taxes.

D. -$50

The dollar amount of a bond's par value that is exchangeable for one share of stock is called the:

D. Conversion price.

Steve owns an option that 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?

D. European call

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

D. Greater of the strike price minus the stock price or zero.

You wrote two put options on EZ stock with an exercise price of $25 per share and an option price of $1.15 per share. Today, the contracts expire and the stock is selling for $26.15 a share. What is your net profit or loss on this investment? Ignore trading costs and taxes.

E. $230

Electronic Importers has a pure discount bond with a face value of $30,000 that matures in one year. The risk-free rate of return is 3.6 percent. The assets of the business are expected to be worth either $29,000 or $35,000 in one year. Currently, these assets are worth $28,300. What is the current value of the bond?

E. $28,043.56

The investment timing decision is the:

E. Evaluation of the optimal time to begin a project.

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?

E. Out-of-the-money

Which one of the following statements related to warrants is correct?

E. Warrants are generally added as an incentive to a private debt issue.

The market price of Northern Mills stock has been relatively volatile and you think this volatility will continue for a couple more months. Thus, you decide to purchase a two-month European call option on this stock with a strike price of $30 and an option price of $1.60. You also purchase a two-month European put option on the stock with a strike price of $30 and an option price of $.20. What will be your net profit or loss on these option positions if the stock price is $36 on the day the options expire? Ignore trading costs and taxes.

B. $420

Kurt owns a convertible bond that matures in 11 years. The bond has a coupon rate of 6 percent and pays interest semiannually. The face value of the bond is $1,000 and the conversion price is $25. Similar bonds have a market return of 7.25 percent. The current price of the stock is $26.50 per share. What is the straight bond value?

B. $906.35

Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye's assets is currently $1,290. Jim Tressell, the CEO, believes that the assets in the firm will be worth either $800 or $1,400 in a year. The going rate on one-year T-bills is 3.8 percent. What is the current value of the firm's debt?

B. $943.81

Patience is reviewing a project with projected sales of 4,500 units a year, a cash flow of $26 a unit, and a four-year project life. Assume all operating cash flows occur on the last day of each year. The initial cost of the project is $236,000. The relevant discount rate is 12 percent. Patience has the option to abandon the project after two years at which time she feels she could sell the project's assets for $150,000. Below what level of annual sales, starting in year 3, should she be willing to abandon this project?

B. 3,414 units

A stock currently sells for $32 a share. This stock is expected to increase in value over the next six months to at least $36 a share. Assume there are 6-month options on this stock with an exercise price of $35. Which of these options should have the most value today?

B. American call

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?

B. Expansion

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

B. Finish at-the-money.

Which one of the following describes the lower bound of a call's value?

B. Stock price minus the exercise price or zero, whichever is greater

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?

B. Strategic

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

B. The call's lower bound value.

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?

B. Warrant

Last week, you purchased a call option on a stock with a strike price of $40. The stock price was $39.80 and the option price was $.35 at that time. What is the current intrinsic value per share if the stock is now selling at $39.10 a share?

C. $0

You recently purchased three put option contracts on a stock with an exercise price of $42.50. What is the total intrinsic value of these contracts if the stock is currently selling for $45 a share and you paid an option premium of $1.10 per share?

C. $0

A convertible bond has a face value of $5,000 and a conversion price of $75. The bond has a 6 percent coupon, pays interest semiannually, and matures in 12 years. Similar bonds are yielding 7.5 percent. The current price of the stock is $38 per share. What is the conversion value of this bond?

C. $2,533

You currently own a one-year call option on RCI stock. The current stock price is $51.28 and the risk-free rate of return is 2.75 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?

C. $2.62

Dressler Technologies is considering a project with a three-year life and an initial cost of $90,000. The discount rate for the project is 16 percent. The firm expects to sell 1,400 units on the last day of each year. The cash flow per unit is $35. The firm will have the option to abandon this project following the sales on the last day of year 2 at which time the project's assets could be sold for an estimated $45,000. 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 1,200 or 1,600 units a year. What is the net present value of this project at Time 0 given the current sales forecasts?

C. $23,316

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?

C. $303.94

Three months ago, Toy Town introduced a new toy for preschool 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?

C. Abandonment

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?

C. Conversion value

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 two years. What type of bond does Jeff own?

C. Convertible

Which one of the following statements regarding employee stock options (ESOs) is correct?

C. Employees may forfeit their ESOs if they terminate their employment with the issuing firm.

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:

C. Exercising the option.

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

C. Strike price.

A November $45 call has a premium of $1.10 a share. The underlying stock is priced at $44.15. What is the intrinsic value of the November $45 call?

D. $0

Three months ago, CSG stock was selling for $42.80 a share. At that time, you purchased four put options on the stock with a strike price of $45 per share and an option price of $2.60 per share. The option expires today when the value of the stock is $41.40 per share. What is your net profit or loss on this investment? Ignore trading costs and taxes.

D. $400

You own five convertible bonds that currently sell for $1,125 each. These bonds have a coupon rate of 7 percent, a $1,000 face value, pay interest annually, and mature in six years. The bonds are convertible into shares of common stock at a conversion price of $25. How many shares of stock will you receive if you convert all of your bonds?

D. 200

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 _____.

D. Call; $180,000

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?

D. In-the-money

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:

D. Managerial options.

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

D. Market price of the underlying stock.

Which one of the following terms applies to an option that has an office building as its underlying asset?

D. Real option

You own six call option contracts on Swift Water Tours stock with a strike price of $17.50 per share and an option premium of $.35 per share. What is the total intrinsic value of these options today if the stock is currently selling for $16.79 a share?

E. $0

What is the value of four August $25 call contracts on a stock if the option premium quote is $3.20 a share and the stock is selling for $27.60 a share?

E. $1,280

You own one call option with an exercise price of $27.50 on World Wide Stores stock. The stock is currently selling for $28 a share but is expected to sell for either $26 or $30 a share in one year. The risk-free rate of return is 3.65 percent and the inflation rate is 3.2 percent. What is the current call option price if the option expires one year from now?

E. $1.82

You sold two call option contracts with a strike price of $30 when the option was quoted at $.70. The option expires today when the value of the underlying stock is $28.80. Ignoring trading costs and taxes, what is the net profit or loss on this investment?

E. $140

The common stock of Hazelton Refiners is selling for $71.80 a share. U.S. Treasury bills are currently yielding 3.2 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?

E. $3.97

A stock is currently selling for $31.28 a share. The September 25 call is quoted at $6.60 a share while the September 25 put is priced at $.15 a share. The December 25 quote for the call is $7.15 a share compared to $.20 a share for the put. What is the cost of two December $25 put option contracts on this stock?

E. $40.00

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?

E. Conversion ratio

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.

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.

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

E. Intrinsic value

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

E. Option to commence immediately.

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.

E. Real call