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?

Answer

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?

Answer

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 Risco Inc 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.

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?

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?