FIN 3120 Final Exam - 2

The price that the writer of a put option receives for the underlying asset if the option is exercised is called the

None of these is correct The price that the writer of a put option receives for the underlying asset if the option is exercised depends on the market price at the time.

Binary Options

Options are based on two possible outcomes—yes or no, may make a payoff of a fixed amount if a specified event happens, and may make a payoff of a fixed amount if a specified event does not happen.

stock dividends

Pay additional shares of stock instead of cash Increases the number of outstanding shares

Disadvantages of leasing include all of the following except a. leasing usually decreases a firm's liquidity b. leasing is often more expensive than purchasing c. loss of the asset's salvage value d. lessee may have difficulty getting approval to make property improvements on leased real estate

a. leasing usually decreases a firm's liquidity

In the net advantage to leasing calculation, after-tax salvage value is discounted at the firm's a. weighted (marginal) cost of capital b. cost if internal equity capital c. cost of external equity capital d. after-tax marginal cost of borrowing

a. weighted (marginal) cost of capital

if you own 100 shares and the company declares a 10% stock dividend, what would you receive

an additional 10 shares

An American put option can be exercised

any time on or before the expiration date.

Leasing accounts for more than ____ percent of all business investment in equipment. a. 10 b. 25 c. 50 d. 90

b. 25

All of the following are first determined by the lessee before a direct lease EXCEPT: a. Equipment that will be leased b. What taxes will be paid based on the lease c. Options, warranties service agreements that will have to be made d. What price will be paid for the asset

b. What taxes will be paid based on the lease

Lease-buy analysis assumes that the alternative to leasing as the source of financing is a. buying for cash b. borrowing to buy c. buying with all equity funds d. buying with before-tax dollars

b. borrowing to buy

In a lease arrangement, the owner of the property is called the a. lessee b. lessor c. equity trustee d. lender

b. lessor

Normally, when a firm operates under the protection of a bankruptcy court, lease payments ____. a. may be suspended b. must continue to be paid by lessors c. must be paid to lessors if assets are secured d. may be suspended if they are "true" leases

b. must continue to be paid by lessors

The sale and leaseback is advantageous to the lessee because a. the lessee cannot continue using the asset b. the lessee receives cash from the sale of the asset c. the lessee receives title to property at the termination of the lease d. the lessee is never required to pay taxes and insurance

b. the lessee receives cash from the sale of the asset

what do cash dividends and stock repurchases have in common?

both return cash from the firm to the stockholders

An American call option allows the buyer to

buy the underlying asset at the exercise price on or before the expiration date and sell the option in the open market prior to expiration.

An operating lease is often referred to as: I. service lease II. maintenance lease a. I only b. II only c. Both I and II d. Neither I nor II

c. Both I and II

The type of lease that is a three-sided agreement among the lessee, the lessor and the lenders is: a. Leaseback agreement b. Direct lease c. Leveraged lease d. Operating lease

c. Leveraged lease

Which of the following leases is not likely to be viewed as a lease from the perspective of the Internal Revenue Service? a. a 20 year lease for an asset having an economic life estimated to be 40 years b. a lease offering a renewal option based on the asset's remaining value at the time of the renewal c. a lease providing for a purchase option at the end of the lease period for a nominal sum d. a leveraged lease in which the lessor contributes 40 percent equity

c. a lease providing for a purchase option at the end of the lease period for a nominal sum

Leasing offers a number of potential advantages. All of the following are advantages except a. flexibility b. effective depreciation of land c. generally lower costs d. may be the only source of financing available to the marginally profitable firm

c. generally lower costs

A sale and leaseback agreement a. is usually an operating lease b. is rarely used in today's leasing agreements c. is a method of providing liquidity for the lessee d. frequently is used for machinery financing, but rarely used in real estate

c. is a method of providing liquidity for the lessee

In a(n) ____, the lessor receives the entire accelerated depreciation tax shield while making a relatively small equity investment. a. operating lease b. capital lease c. leveraged lease d. term lease

c. leveraged lease

A primary difference between leveraged leases and other financial leases is that a. leveraged leases must be capitalized and shown on the lessee's balance sheet b. the lessor in a leveraged lease is invariably the manufacturer of the leased asset c. leveraged leases involve the use of non-recourse debt d. unleveraged leases are usually tax motivated

c. leveraged leases involve the use of non-recourse debt

Lessees with ____ are most likely to use leveraged leases for large transactions. a. low profit levels b. large amounts of tax exempt income c. low profits and high amounts of tax-exempt income d. outlays of less than $300,000

c. low profits and high amounts of tax-exempt income

All of the following have been cited as advantages of leasing by small businesses except: a. less cash required up front b. fewer restrictive covenants from lessor than lenders c. lower effective interest costs relative to borrowing d. quicker approvals from lessors than from lenders

c. lower effective interest costs relative to borrowing

A capital lease is considered a(n) _________________________agreement. a. negotiable b. cancelable c. noncancelable d. short-term

c. noncancelable

All of the following are disadvantages of leasing except a. difficulty in making property improvements b. financial leases are non-cancelable c. normally higher maintenance charges d. generally higher cost than ownership

c. normally higher maintenance charges

In a direct lease, the user-lessee first determines all of the following EXCEPT: a. which manufacturer will supply the equipment b. what equipment will be leased c. the terms of the lease d. what price will be paid for the asset

c. the terms of the lease

regular cash dividend

cash payments made directly to stockholders, usually each quarter

open market stock repurchase

company buys its own common stock in the open market

stakeholders (tender offer) stock repurchase

company states a purchase price and desired number of shares

Call options on IBM listed stock options are

created by investors and traded on various exchanges.

All of the following are types of "true leases" EXCEPT: a. Operating lease b. Capital lease c. Financial lease d. Maturity lease

d. Maturity lease

In considering the advantages of leasing, which of the statements is/are correct? a. Leasing provides approximately 50% of the necessary financing. b. Leasing can decrease the firm's liquidity. c. Both a and b are correct. d. Neither a nor b is correct.

d. Neither a nor b is correct.

In the net advantage to leasing calculation, all cash flows (except salvage value) are discounted at the firm's a. weighted (marginal) cost of capital b. cost of internal equity capital c. pretax marginal cost of borrowing d. after-tax marginal cost of borrowing

d. after-tax marginal cost of borrowing

All of the following are true of financial leases except a. non-cancelable b. lessee is normally responsible for maintenance and insurance c. lease payments are normally sufficient to amortize the original cost of the asset d. all financial leases are also leveraged leases

d. all financial leases are also leveraged leases

record date

date that "shareholders of record" will be identified

declaration date

date that board meets to determine and declare the dividend for next period

Barrier Options have payoffs that

depend both on the asset's price at expiration and on whether the underlying asset's price has crossed through some barrier.

Lookback options have payoffs that

depend in part on the minimum or maximum price of the underlying asset during the life of the option.

what evidence points to dividend policies being irrelevant?

dividend policy does not alter the total returns received by an investor and it merely affects the form of the return-dividends or capital gain

Currency-Translated Options have

either asset or exercise prices denoted in a foreign currency.

All else equal, call option values are lower

for high dividend payout policies.

All else equal, call option values are higher

for low dividend payout policies.

ex-dividend date

investors who owned the stock prior to this date (2 days prior to record date) have claim on the dividend; owners as of or after the ex-dividend date do not

The current market price of a share of CAT stock is $76. If a call option on this stock has a strike price of $76, the call

is at the money Striking price on a call option = market price --> the option is at the money.

The current market price of a share of MOT stock is $15. If a put option on this stock has a strike price of $20, the put

is in the money and can be exercised profitably.

The current market price of a share of AT&T stock is $50. If a call option on this stock has a strike price of $45, the call

is in the money and sells for a higher price than if the market price of AT&T stock is $40.

The current market price of a share of Boeing stock is $75. If a call option on this stock has a strike price of $70, the call

is in the money and sells for a higher price than if the market price of Boeing stock is $70.

The current market price of a share of CSCO stock is $22. If a call option on this stock has a strike price of $20, the call

is in the money and sells for a higher price than if the market price of CSCO stock is $21 If the striking price on a call option < market price option is in the money and sells for more than a less in the money option.

The current market price of a share of JNJ stock is $60. If a put option on this stock has a strike price of $55, the put

is out of the money and sells for a lower price than if the market price of JNJ stock is $50.

The current market price of a share of a stock is $80. If a put option on this stock has a strike price of $75, the put

is out of the money and sells for a lower price than if the market price of the stock is $75.

The current market price of a share of a stock is $20. If a put option on this stock has a strike price of $18, the put

is out of the money.

. The current market price of a share of Disney stock is $30. If a call option on this stock has a strike price of $35, the call

is out of the money. Striking price on a call option > market price -->option is out of the money and cannot be exercised profitably.

The lower bound on the market price of a convertible bond is

its straight bond value and its conversion value.

if an investor bought 1000 on the ex-dividend date receive the dividend?

no

is repurchasing stock always good?

no because too many repurchases will leave the company with no cash reserves for uncertainty

what are the assumptions associated with the MM model?

no taxes no transaction costs no issuance costs firm has a fixed investment policy

do firms always follow the residual theory of dividends

no; ex: amazon pays zero dividends even with excess cash; GM paid more dividends in 2008 than the excess cash they had

should external equity be used for project funding?

no; internal equity should be used because external equity requires issuance costs

A European call option can be exercised

only on the expiration date.

A European put option can be exercised

only on the expiration date.

The price that the buyer of a call option pays to acquire the option is called the

premium

The price that the buyer of a put option pays to acquire the option is called the

premium

The price that the writer of a call option receives to sell the option is called the

premium

The price that the writer of a put option receives to sell the option is called the

premium

why do corporations choose to pay stock dividends instead of cash dividends?

saves taxes - company does not have to pay the marginal tax on stock dividends creates good-standing with investors who experience high marginal tax rate because the cash dividend tax rate can be very high

A European call option allows the buyer to

sell the option in the open market prior to expiration and buy the underlying asset at the exercise price on the expiration date.

An American put option allows the holder to

sell the underlying asset at the striking price on or before the expiration date.

A European put option allows the holder to

sell the underlying asset at the striking price on the expiration date.

what type of signal do stock repurchases send?

sends a positive signal that management believes the current price is low

special cash dividend

similar to extra dividend, but definitely will not be repeated

The price that the buyer of a call option pays for the underlying asset if she executes her option is called the

strike price or exercise price

The price that the buyer of a put option receives for the underlying asset if she executes her option is called the

strike price or exercise price

The price that the writer of a call option receives for the underlying asset if the buyer executes her option is called the

strike price or exercise price

what did Miller and Modigliani (MM) argue about dividend policy?

that dividend policy does not affect a firms value; instead the firms value is only determined by its investment decisions

Before expiration, the time value of a call option is equal to

the actual call price minus the intrinsic value of the call.

The maximum loss a buyer of a stock call option can suffer is equal to

the call premium.

According to the put-call parity theorem, the value of a European put option on a non-dividend paying stock is equal to:

the call value plus the present value of the exercise price minus the stock price.

A call option on a stock is said to be at the money if

the exercise price is equal to the stock price.

A put option on a stock is said to be at the money if

the exercise price is equal to the stock price.

A call option on a stock is said to be out of the money if

the exercise price is higher than the stock price.

A put option on a stock is said to be in the money if

the exercise price is higher than the stock price.

A call option on a stock is said to be in the money if

the exercise price is less than the stock price.

A put option on a stock is said to be out of the money if

the exercise price is less than the stock price.

To adjust for stock splits

the exercise price of the option is reduced by the factor of the split and the number of options held is increased by that factor.

What doesn't affect the price of the stock option?

the expected rate of return on the stock.

what determines retained earnings

the optimal capital structure that maximizes the firm's value

A covered call position is

the purchase of a share of stock with a simultaneous sale of a call on that stock.

The maximum loss a buyer of a stock put option can suffer is equal to

the put premium.

Which of the following factors affect the price of a stock option

the risk-free rate, the riskiness of the stock, and the time to expiration.

stock repurchases may be more desirable than dividends given what?

the tax structure

The value of a stock put option is positively related to the following factors

the time to expiration the striking price.

is the effect of dividends on ex-dividend stock price

theoretically will decrease by the amount of the dividend on the ex date (in practice price generally drops less than dividend amount)

what is the residual theory of dividends

theory that firms simply use excess cash to pay dividends (not widely used)

The potential loss for a writer of a naked call option on a stock is

unlimited

stock repurchase

when a company buys back its own shares of stock

All of the following are advantages of leasing except a. generally lower cost than ownership b. leasing smoothes out expenses c. leasing may increase a firm's liquidity d. it provides 100% financing

a. generally lower cost than ownership

All of the following are attributes of operating leases except a. lease period normally equals the economic life of the asset b. lease payments under the initial lease contract are insufficient to recover the full cost of the asset for the lessor c. cancelable d. maintenance and insurance normally are responsibility of lessor

a. lease period normally equals the economic life of the asset

A protective put strategy is

a long put plus a long position in the underlying asset.

The contract period of an operating lease tends to a. be somewhat less than the economic life of an asset b. be equal to the economic life of the asset c. be somewhat greater than the economic life of the asset d. recover the full cost of the asset

a. be somewhat less than the economic life of an asset