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Finance 534 week 6 Quiz5
Question 1
Call options on XYZ
Corporation’s common stock trade in the market.
Which of the following statements is most correct, holding other things
constant?
Question 2
Other things held constant,
the value of an option depends on the stock's price, the risk-free rate, and
the
Question 3
Which of the following
statements is CORRECT?
Question 4
Which of the following
statements is CORRECT?
Question 5
An investor who writes
standard call options against stock held in his or her portfolio is said to be
selling what type of options?
Question 6
An option that gives the
holder the right to sell a stock at a specified price at some future time is
Question 7
2 out of 2 points
The current price of a stock
is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on
daily compounding. A 1-year call option
on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the
option's value?
Question 8
2 out of 2 points
The current price of a stock
is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike
price of $55 sells for $7.20. What is
the value of a put option, assuming the same strike price and expiration date
as for the call option?
Question 9
Which of the following
statements is CORRECT?
Question 10
Deeble Construction Co.’s
stock is trading at $30 a share. Call
options on the company’s stock are also available, some with a strike price of
$25 and some with a strike price of $35.
Both options expire in three months.
Which of the following best describes the value of these options?
Question 11
2 out of 2 points
Which of the following
statements is CORRECT?
Question 12
Warner Motors’ stock is
trading at $20 a share. Call options
that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the
stock price increases 10%, to $22 a share?
Question 13
2 out of 2 points
Suppose you believe that
Johnson Company's stock price is going to increase from its current level of
$22.50 sometime during the next 5 months.
For $310.25 you can buy a 5-month call option giving you the right to buy
100 shares at a price of $25 per share.
If you buy this option for $310.25 and Johnson's stock price actually
rises to $45, what would your pre-tax net profit be?
Question 14
2 out of 2 points
Which of the following
statements is CORRECT?
Question 15
Suppose you believe that
Delva Corporation's stock price is going to decline from its current level of
$82.50 sometime during the next 5 months.
For $510.25 you could buy a 5-month put option giving you the right to
sell 100 shares at a price of $85 per share.
If you bought this option for $510.25 and Delva's stock price actually
dropped to $60, what would your pre-tax net profit be?
Question 16
Which of the following
statements is CORRECT?
Question 17
Which of the following
statements is CORRECT? Assume that the
firm is a publicly-owned corporation and is seeking to maximize shareholder
wealth.
Question 18
When working with the CAPM,
which of the following
factors can be determined with the most precision?
Question 19
For a company whose target
capital structure calls for 50% debt and 50% common equity, which of the
following statements
is CORRECT?
Question 20
2 out of 2 points
Which of the following
statements is CORRECT?
Question 21
Safeco Company and RiscoInc
are identical in size and capital structure.
However, the riskiness of their assets and cash flows are somewhat
different, resulting in Safeco having a WACC of 10% and Risco a WACC of 12%. Safeco is considering Project X, which has an
IRR of 10.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an
IRR of 11.5% and is of the same risk as a typical Risco project.
Now assume that the two companies merge and form a new company, Safeco/Risco
Inc. Moreover, the new company's market
risk is an average of the pre-merger companies' market risks, and the merger
has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is CORRECT?
Question 22
Which of the following
statements is CORRECT?
Question 23
Which of the following
statements is CORRECT?
Question 24
Schalheim Sisters Inc. has
always paid out all of its earnings as dividends; hence, the firm has no
retained earnings. This same situation
is expected to persist in the future.
The company uses the CAPM to calculate its cost of equity, and its
target capital structure consists of common stock, preferred stock, and
debt. Which of the following events
would REDUCE its WACC?
Question 25
Which of the following
statements is CORRECT?
Question 26
2 out of 2 points
For a typical firm, which of
the following sequences is CORRECT? All
rates are after taxes, and assume that the firm operates
at its target capital structure.
Answer
Question 27
Which of the following
statements is CORRECT?
Question 28
The MacMillen Company has
equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 12%. The CFO believes that this is the correct
WACC for the company’s average-risk projects, but that a lower rate should be
used for lower-risk projects and a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even
though projects have different risks, the WACC used to evaluate each project
should be the same because the company obtains capital for all projects from
the same sources. If the CEO’s position
is accepted, what is likely to happen over time?
Correct Answer:
The company will take on too many high-risk projects and reject too many
low-risk projects.
Question 29
2 out of 2 points
Which of the following
statements is CORRECT?
Question 30
Which of the following is
NOT a capital component when calculating the weighted average cost of capital
(WACC) for use in capital budgeting?
