FIN 536 Week 6 Quiz 5

FIN 536 Week 6 Quiz 5

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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?