chapter 24 finance

25. Josh opted to exercise his January option at the end of December and paid $3,250 at that time to acquire 100 shares of stock. Which one of the following did Josh own?

A. American call

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

A. Conversion ratio × Stock price

6. 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

36. Which of the following will decrease the value of a call option? I. a decrease in the exercise price II. a decrease in the value of the underlying security III. an increase in the risk-free rate IV. an increase in the time to expiration

A. II only

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

A. conversion premium.

53. When warrants are exercised, the:

A. earnings per share decrease.

10. Suzie is the controller of The Price Rite Company. She has been granted to 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

47. 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

1. 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. option

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

A. right to sell

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

B. 2 business days

7. Which of the following grants its owner the right to purchase an asset at a stated price? I. American call II. European call III. American put IV. European put

B. I and II only

54. Which of the following statements are correct concerning convertible bonds? I. New shares of stock are issued when a convertible bond is converted. II. A convertible bond is similar to a bond with a call option. III. A convertible bond should always be worth less than a comparable straight bond. IV. A convertible bond can be described as having upside potential with downside protection.

B. I, II, and IV only

34. Which one of the following statements is correct?

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

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

B. contingency planning

48. 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

38. 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.

31. 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

21. 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

15. 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

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

B. the call's lower bound value

16. 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

24. 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

39. 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.

23. 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.

49. 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?

C. abandonment

22. 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

2. 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.

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

C. influence the actions and priorities of employees

3. 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.

26. Steve owns an option which 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

52. 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.

D. II and IV only

43. 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.

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

D. expiration date

33. 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

29. 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

13. 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.

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

D. market price of the underlying stock

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

D. real option

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

E. American

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

E. An American call an be exercised at any time up to the expiration date while the European call can only be exercised on the expiration date.

35. An increase in which of the following will increase the value of a call? I. time to expiration II. underlying stock price III. risk-free rate of return IV. price volatility of the underlying stock

E. I, II, III, and IV

46. Ignoring which of the following will cause the NPV of a project to be underestimated? I. option to abandon II. option to expand III. option to wait IV. option to contract

E. I, II, III, and IV

45. The option to wait: I. may be of minimal value if a project is dependent upon rapidly changing technology. II. is partially dependent upon the discount rate applied to the project being evaluated. III. is defined as temporarily shutting down a project for a period of time. IV. has a value equal to the NPV of a project if it is started at a later date minus the NPV if the project is started today.

E. I, II, and IV only

37. 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.

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

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

41. Employee stock options:

E. are generally issued with a zero intrinsic value.

19. 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

12. The investment timing decision is the:

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

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

E. intrinsic value

28. 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

56. The maximum value of a convertible bond is theoretically:

E. unlimited.

50. Which of the following are managerial options once a project is commenced? I. modifying the production process II. re-pricing the product III. revising the marketing plan IV. modifying the product's color and shape

all

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

conversion price

17. 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 2 years. What type of bond does Jeff own?

convertible

44. 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.

real call