Ch 24 Calculations

98. The price of Time Squared Corp. stock will be either $80 or $95 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent and the current price of Time Squared Corp. stock is $85. What is the value of a call option if the exercise price is $75 per share? A. $14.25 B. $15.06 C. $18.78 D. $24.25 E. $25.06

A. $14.25

99. The price of Dimension, Inc. stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. Suppose the current price of Dimension stock is $70. What is the value of the call option if the exercise price is $70 per share? A. $6.07 B. $8.48 C. $11.58 D. $15.39 E. $17.62

A. $6.07

85. 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 14 shares of stock. What is the conversion price? A. $71.43 B. $72.00 C. $72.67 D. $73.86 E. $74.33

A. $71.43

88. 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 semi-annually, 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 B. $781.82 C. $827.74 D. $832.09 E. $843.47

A. $782.57

80. You are considering a project that has been assigned a discount rate of 14 percent. If you start the project today, you will incur an initial cost of $8,500 and will receive cash inflows of $5,550 a year for two years. If you wait one year to start the project, the initial cost will rise to $9,200 and the cash flows will increase to $5,800 a year for two years. What is the value of the option to wait? A. -$331.40 B. -$194.46 C. $228.51 D. $230.49 E. $334.68

A. -$331.40

82. Western Industrial Products is considering a project with a four-year life and an initial cost of $212,000. The discount rate for the project is 16 percent. The firm expects to sell 9,600 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 at the end of year one (after year one's sales) at which time the project's assets could be sold for an estimated $125,000. The firm should abandon the project at the end of year one if the expected level of annual sales, starting with year 2, falls to _____ units or less. Ignore taxes. A. 1,113 units B. 1,267 units C. 1,922 units D. 2,034 unit

A. 1,113 units

105. We are examining a new project. We expect to sell 9,000 units per year at $45 net cash flow apiece for the next 20 years. In other words, the annual operating cash flow is projected to be $45 × 9,000 = $405,000. The relevant discount rate is 14 percent, and the initial investment required is $1,730,000. After the first year, the project can be dismantled and sold for $1,350,000. 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. 4,580 units B. 4,620 units C. 4,750 units D. 4,810 units E. 5,020 units

A. 4,580 units

in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,200,000. The cost of the machine will decline by $120,000 per year until it reaches $720,000, where it will remain. Your required return is 8 percent. In which year should you purchase the machine? A. Year 0 B. Year 1 C. Year 2 D. Year 3 E. Year 4

A. Year 0

106. We are examining a new project. We expect to sell 8,000 units per year at $80 net cash flow apiece for the next 15 years. In other words, the annual operating cash flow is projected to be $80 × 8,000 = $640,000. The relevant discount rate is 16 percent, and the initial investment required is $2,740,000. The project can be dismantled after the first year and sold for $2,130,000. Suppose you think it is likely that expected sales will be revised upward to 9,600 units if the first year is a success and revised downward to 3,000 units if the first year is not a success. Suppose the scale of the project can be doubled in one year in the sense that twice as many units can be produced and sold. Naturally, expansion would be desirable only if the project is a success. This implies that if the project is a success, projected sales after expansion will be 19,200. Assume that success and failure are equally likely. Note that abandonment is still an option if the project is a failure. What is the value of the option to expand? A. $1,774,328 B. $1,809,941 C. $1,828,406 D. $1,848,920 E. $1,872,312

B. $1,809,941

75. The common stock of Westover Foods is currently priced at $27.90 a share. One year from now, the stock price is expected to be either $25 or $30 a share. The risk-free rate of return is 4.2 percent. What is the current value of one call option on this stock if the exercise price is $27.50? A. $0 B. $1.95 C. $2.00 D. $3.80 E. $4.00

B. $1.95

77. The assets of Uptown Stores are currently worth $136,400. These assets are expected to be worth either $120,000 or $150,000 one year from now. The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year. The risk-free rate is 4.3 percent. What is the value of the equity in this firm? A. $11,920 B. $14,232 C. $19,507 D. $21,347 E. $26,408

B. $14,232

59. You purchased six call option contracts on ABC stock with a strike price of $32.50 when the option was quoted at $1.80. 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? A. $0 B. $180 C. $210 D. $840 E. $1,260

B. $180

63. The market price of Southern Press 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 $45 and an option price of $2.20. You also purchase a two-month European put option on the stock with a strike price of $45 and an option price of $0.30. What will be your net profit or loss on these option positions if the stock price is $48 on the day the options expire? Ignore trading costs and taxes. A. -$30 B. $50 C. $80 D. $270 E. $330

B. $50

101. 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 $1,200. Jim Tressell, the CEO, believes that the assets in the firm will be worth either $600 or $1,700 in a year. The going rate on one-year T-bills is 6 percent. What is the current value of the firm's debt? A. $601.18 B. $796.57 C. $844.24 D. $878.78 E. $911.03

B. $796.57

89. Kurt owns a convertible bond that matures in three years. The bond has a 7.5 percent coupon and pays interest semi-annually. The face value of the bond is $1,000 and the conversion price is $25. Similar bonds have a market return of 9.25 percent. The current price of the stock is $26.50 per share. What is the straight bond value? A. $948.20 B. $955.05 C. $972.80 D. $987.78 E. $991.15

B. $955.05

67. You sold ten put contracts on Cross Town Bank stock at an option price per share of $0.85. The options have an exercise price of $37.50 per share. The options were exercised today when the stock price was $34 a share. What is your net profit or loss on this investment assuming that you closed out your positions at a stock price of $34? Ignore transaction costs and taxes. A. -$3,500 B. -$2,650 C. $1,800 D. $850 E. $3,500

B. -$2,650

61. 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 $36.70 on the option expiration date? A. -$510 B. -$90 C. $90 D. $510 E. $930

B. -$90

84. Patience is reviewing a project with projected sales of 4,200 units a year, a cash flow of $28 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 $247,000. The relevant discount rate is 13 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 $110,000. At what level of annual sales, starting in year 3, should she be willing to abandon this project? A. 2,119 units B. 2,355 units C. 2,367 units D. 2,516 units E. 2,667 units

B. 2,355 units

69. You recently purchased three put option contracts on Guillepsi stock with an exercise price of $42.50. What is the total intrinsic value of these contracts if the stock is currently selling for $43.70 a share? A. -$360 B. -$120 C. $0 D. $120 E. $360

C. $0

70. Last week, you purchased a call option on Edgewater stock with a strike price of $40. The stock price was $39.80 and the option price was $0.45 at that time. What is the intrinsic value per share if the stock is currently priced at $39.10? A. -$90 B. -$70 C. $0 D. $70 E. $90

C. $0

100. Rackin Pinion Corporation's assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200. What is the current value of the firm's debt? A. $60.00 B. $114.14 C. $1,142.86 D. $1,263.19 E. $1,504.20

C. $1,142.86

87. A convertible bond has a face value of $5,000 and a conversion price of $80. The bond has a 6 percent coupon, pays interest semi-annually, and matures in 12 years. Similar bonds are yielding 7.5 percent. The current price of the stock is $41.20 per share. What is the conversion value of this bond? A. $1,680 B. $2,415 C. $2,575 D. $4,651 E. $5,000

C. $2,575

73. You currently own a one-year call option on Rail Company, Inc., stock. The current stock price is $51.80 and the risk-free rate of return is 4.25 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? A. $1.20 B. $2.59 C. $3.84 D. $5.13 E. $7.27

C. $3.84

62. You wrote eight call option contracts with a strike price of $42.50 at a call price of $1.35 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? A. -$2,840 B. -$1,760 C. -$1,080 D. $1,080 E. $1,760

D. $1,080

102. A $1,000 convertible debenture has a conversion price for common stock of $85 per share. The common stock is selling at $92 a share. What is the conversion value of this bond? A. $920.00 B. $923.91 C. $1,000.00 D. $1,082.35 E. $1,092.00

D. $1,082.35

71. Three weeks ago, you purchased a June $30 put option on Leeper Metals stock at an option price of $1.80. The market price of the stock three weeks ago was $30.60. Today, the stock is selling at $29.80 a share. What is the intrinsic value of your put contract? A. -$100 B. -$20 C. $0 D. $20 E. $60

D. $20

97. T-bills currently yield 6.3 percent. Stock in Pinta Manufacturing is currently selling for $46 per share. There is no possibility that the stock will be worth less than $39 per share in one year. What is the value of a call option on this stock if the exercise price is $22 per share? A. $21.40 B. $22.00 C. $24.00 D. $25.30 E. $25.70

D. $25.30

65. Three months ago, Central Supply stock was selling for $51.40 a share. At that time, you purchased five put options on the stock with a strike price of $50 per share and an option price of $0.60 per share. The option expires today when the value of the stock is $42.70 per share. What is your net profit or loss on this investment? Ignore trading costs and taxes. A. -$1,300 B. -$1,000 C. -$300 D. $3,350 E. $3,650

D. $3,350

72. This morning, you purchased a call option on Schoolhouse Supply Co. stock that expires in one year. The exercise price is $40. The current price of the stock is $43.40 and the risk-free rate of return is 3.6 percent. Assume the option will finish in the money. What is the current value of the call option? A. $0 B. $1.49 C. $3.97 D. $4.79 E. $5.46

D. $4.79

79. The Glass House has total assets currently valued at $17,200. These assets are expected to increase in value to either $18,000 or $21,000 by next year. The company has a pure discount bond outstanding with a face value of $20,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.4 percent. What is the value of the equity in this firm? A. -$3,000.00 B. -$908.00 C. $0 D. $40.73 E. $122.20

D. $40.73

64. Several rumors concerning Value Rite 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 $0.60 and the put price per share is $2.10. What will be your net profit or loss on these option positions if the stock price is $18 on the day the options expire? Ignore trading costs and taxes. A. -$210 B. -$150 C. -$60 D. $430 E. $490

D. $430

58. What is the intrinsic value of the November $25 call on Dove stock? A. -$0.98 B. $0 C. $0.15 D. $6.12 E. $7.10

D. $6.12

90. Lucinda owns a convertible bond that matures in six years. The bond has a 9 percent coupon and pays interest annually. The face value of the bond is $1,000 and the conversion price is $22. Similar bonds have a market return of 8.75 percent. The current price of the stock is $21.60 per share. What is the conversion value of this bond? A. $835.60 B. $848.40 C. $942.11 D. $981.82 E. $1,000.00

D. $981.82

86. You own nine convertible bonds. These bonds have a 7 percent coupon, a $1,000 face value, and mature in 6 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? A. 285 B. 300 C. 350 D. 360 E. 400

D. 360

76. You own one call option with an exercise price of $40 on S'more Good stock. The stock is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in one year. The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent. What is the current call option price if the option expires one year from now? A. $0.55 B. $0.69 C. $1.37 D. $2.43 E. $2.75

E. $2.75

103. A bond with 10 detachable warrants has just been offered for sale at $1,000. The bond matures in 15 years and has an annual coupon of $80. 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 11 percent. What is the value of one warrant? A. $7.00 B. $13.58 C. $14.00 D. $16.67 E. $21.57

E. $21.57

66. You wrote two put options on Xylo stock with an exercise price of $30 per share and an option price of $1.05 per share. Today, the contracts expire and the stock is selling for $31.15 a share. What is your net profit or loss on this investment? Ignore trading costs and taxes. A. -$115 B. -$105 C. $20 D. $105 E. $210

E. $210

78. Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year. The risk-free rate of return is 3.8 percent. The assets of the business are expected to be worth either $23,000 or $35,000 in one year. Currently, these assets are worth $27,500. What is the current value of the bond? A. $17,746 B. $19,207 C. $20,222 D. $22,549 E. $23,048

E. $23,048

57. What is the value of five August $25 call contracts on Dove stock? A. $34 B. $68 C. $340 D. $680 E. $3,400

E. $3,400

56. What is the cost of two November $25 put option contracts on Dove stock given the following price quotes? A. $0.15 B. $0.30 C. $1.50 D. $15.00 E. $30.00

E. $30.00

74. The common stock of Hazelton Refiners is selling for $72.30 a share. U.S. Treasury bills are currently yielding 4.8 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? A. $0 B. $1.20 C. $3.00 D. $4.20 E. $5.51

E. $5.51

60. You sold one call option contract with a strike price of $55 when the option was quoted at $0.80. The option expires today when the value of the underlying stock is $53.70. Ignoring trading costs and taxes, what is the net profit or loss on this investment? A. -$250 B. -$80 C. $0 D. $50 E. $80

E. $80

68. You own eight call option contracts on Swift Water Tours stock with a strike price of $15. When you purchased the shares the option price was $0.30 and the stock price was $15.25. What is the total intrinsic value of these options if the stock is currently selling for $16.08 a share? A. -$83 B. -$1.08 C. $0 D. $108 E. $864

E. $864