FIN 480 FINAL QUESTIONS AND ANSWERS
An out-of-the-money call option is best defined as an option that: - Answers - Should not
be excersised
Hi-Tech announces a major expansion which causes the price of its stock to increase
and also causes an increase in the volatility of the stock price. How will these two
market reactions affect the value of put options on Hi-Tech stock? - Answers - The
reactions will have offsetting effects on put option prices.
A put option with a $35 exercise price on ABC stock expires today. The current price of
ABC stock is $36. The put is: - Answers - Out of the money
The intrinsic value of a put is equal to the: - Answers - greater of the strike price minus
the stock price or zero
If you consider stockholders to be the owners of a firm, then those stockholders: -
Answers - own a put option on the firm with an exercise price equal to the firm's total
debt
Hi-Tech announces a major expansion which causes the price of its stock to increase
and also causes an increase in the volatility of the stock price. How will these two
market reactions affect the value of call options on Hi-Tech stock? - Answers - Both
reactions increase the value of the call options.
The lower bound on a call's value is defined as the - Answers - greater of the stock price
minus the exercise price or zero.
Put-call parity can be used to show: - Answers - the precise relationship between put
and call prices given equal exercise prices and equal expiration dates.
If you consider bondholders to be the owners of a firm, then those bondholders: -
Answers - have written a call option on the firm with an exercise price equal to the firm's
total debt.
The intrinsic value of a call equals the: - Answers - lower bound of the call's value.
You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an
option price of $1.10. Today, the option expires when the underlying stock is selling for
$34.30 a share. Ignoring trading costs and taxes, what is your total profit on this
investment? - Answers - - $1,100
- Total profit = 10 ×100 ×$1.10 = $1,100;
- The option finished out of the money.
,At expiration, the maximum price of a ____ is the greater of the: - Answers - call; stock
price minus the exercise price, or 0.
Jamp;L stock has a current market price of $47.60 a share. The one-year call on
Jamp;L stock with a strike price of $45 is priced at $3.20 while the one-year put with a
strike price of $45 is priced at $.15. What is the risk-free rate of return? - Answers - -
1.01%
- Using put-call parity: S + P = C + PV(E) PV(E) = $45 / (1 + r) = $47.60 + .15 - 3.20 r =
.0101, or 1.01%
GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike price
of $30 is priced at $3.55. Risk-free assets are currently returning .3 percent per month.
What is the price of a 4-month put on GSX stock with a strike price of $35? - Answers - -
$5.73
- Using put-call parity: S + P = C + PV(E) P = $3.55 + ($.0034) - $32.40 = $5.73
You own stock in a firm that has a pure discount loan due in six months. The loan has a
face value of $50,000. The assets of the firm are currently worth $62,000. The
stockholders in this firm basically own a _____ option on the assets of the firm with a
strike price of ______ - Answers - call; $50,000.
A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option
premium of $3. What is the conversion value if the straight bond value is equal to the
bond's par value? A. $1,062.00 - Answers - - ANSC. $1,059.00
- Bond value = MAX[Straight bond value, Conversion value] + Option premium $1,062 =
MAX[$1,000, Conversion value] + $3 Conversion value = $1,059
A convertible bond is selling for $800, matures in 10 years, has a face value of $1,000,
and a coupon rate of 10 percent. Similar nonconvertible bonds are priced to yield 14
percent. The conversion price is $42.50. The stock currently sells for $31.30 a share.
What is the conversion premium? - Answers - - 35.78%
- Conversion premium = (Conversion price / Market price) - 1
- Conversion premium = $42.50 / $31.30 - 1
- Conversion premium = .3578, or 35.78%
A firm has experienced a significant increase in its share value. In retrospect, which one
of the following securities would generally have provided the most benefit to the firm
assuming the securities had been issued prior to the change in share value? - Answers
- ANSD. straight bonds
Transfer or expropriation of wealth from bondholders to stockholders is less likely to
occur when: - Answers - convertible debt is issued because the equity component will
reduce agency costs.
, Issuing convertible bonds or bonds with warrants is useful for a company of unknown
risk because: - Answers - the effects of risk are opposite on the two value components
and tend to cancel each other out.
A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a
current market price of $22 per share. What would the conversion price and conversion
ratio be if the bond's issuer declared a 3-for-1 stock split? - Answers - - $9.52; 105
- New conversion ratio = 35 x 3 New conversion ratio = 105 New conversion price =
$1, New conversion price = $9.52
The lower limit of a warrant's value is defined as: - Answers - MAX(0, Stock price -
Exercise price).
From the bondholder's point of view, the optimum time to convert a convertible bond is
when the bond's conversion value is: - Answers - greater than the both the call value
and straight bond value on the call date.
Based on empirical studies, firms tend to call convertible bonds when the conversion
value is: - Answers - greater than the call price.
Which one of the following would harm the financial position of a warrant holder? -
Answers - a large cash dividend
Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently
outstanding. A warrant holder can purchase one new share of stock in exchange for
four warrants plus $20. The stock is currently selling for $20.60 per share. What would
be the gain per new share from exercising the warrants, assuming all warrants are
exercised? - Answers - - $.51
- Gain per share = (New total value / New total shares) - Exercise price Gain per share
= {[(75,000 × $20.60) + (50,) × $20] / [75,000 + (50,)]} - $20 Gain per
share = $20.51 - 20 Gain per share = $.51
The upper limit of a warrant's value is best defined as the: - Answers - underlying stock
price.
Assuming market efficiency, which one of these is the least sensible explanation of why
convertibles and warrants are issued? - Answers - The firm is relatively large with a low
level of financial leverage.
Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised? - Answers - - 26.67
- Price = Total value / Total shares Price = (60,000 × $27 + 60,000 × $5) / [60,000 +
(60,)] Price = $26.67
An out-of-the-money call option is best defined as an option that: - Answers - Should not
be excersised
Hi-Tech announces a major expansion which causes the price of its stock to increase
and also causes an increase in the volatility of the stock price. How will these two
market reactions affect the value of put options on Hi-Tech stock? - Answers - The
reactions will have offsetting effects on put option prices.
A put option with a $35 exercise price on ABC stock expires today. The current price of
ABC stock is $36. The put is: - Answers - Out of the money
The intrinsic value of a put is equal to the: - Answers - greater of the strike price minus
the stock price or zero
If you consider stockholders to be the owners of a firm, then those stockholders: -
Answers - own a put option on the firm with an exercise price equal to the firm's total
debt
Hi-Tech announces a major expansion which causes the price of its stock to increase
and also causes an increase in the volatility of the stock price. How will these two
market reactions affect the value of call options on Hi-Tech stock? - Answers - Both
reactions increase the value of the call options.
The lower bound on a call's value is defined as the - Answers - greater of the stock price
minus the exercise price or zero.
Put-call parity can be used to show: - Answers - the precise relationship between put
and call prices given equal exercise prices and equal expiration dates.
If you consider bondholders to be the owners of a firm, then those bondholders: -
Answers - have written a call option on the firm with an exercise price equal to the firm's
total debt.
The intrinsic value of a call equals the: - Answers - lower bound of the call's value.
You sold ten put option contracts on PLT stock with an exercise price of $32.50 and an
option price of $1.10. Today, the option expires when the underlying stock is selling for
$34.30 a share. Ignoring trading costs and taxes, what is your total profit on this
investment? - Answers - - $1,100
- Total profit = 10 ×100 ×$1.10 = $1,100;
- The option finished out of the money.
,At expiration, the maximum price of a ____ is the greater of the: - Answers - call; stock
price minus the exercise price, or 0.
Jamp;L stock has a current market price of $47.60 a share. The one-year call on
Jamp;L stock with a strike price of $45 is priced at $3.20 while the one-year put with a
strike price of $45 is priced at $.15. What is the risk-free rate of return? - Answers - -
1.01%
- Using put-call parity: S + P = C + PV(E) PV(E) = $45 / (1 + r) = $47.60 + .15 - 3.20 r =
.0101, or 1.01%
GSX stock is selling for $32.40 a share. A 4-month call on GSX stock with a strike price
of $30 is priced at $3.55. Risk-free assets are currently returning .3 percent per month.
What is the price of a 4-month put on GSX stock with a strike price of $35? - Answers - -
$5.73
- Using put-call parity: S + P = C + PV(E) P = $3.55 + ($.0034) - $32.40 = $5.73
You own stock in a firm that has a pure discount loan due in six months. The loan has a
face value of $50,000. The assets of the firm are currently worth $62,000. The
stockholders in this firm basically own a _____ option on the assets of the firm with a
strike price of ______ - Answers - call; $50,000.
A convertible bond is valued at $1,062, has a conversion ratio of 25, and an option
premium of $3. What is the conversion value if the straight bond value is equal to the
bond's par value? A. $1,062.00 - Answers - - ANSC. $1,059.00
- Bond value = MAX[Straight bond value, Conversion value] + Option premium $1,062 =
MAX[$1,000, Conversion value] + $3 Conversion value = $1,059
A convertible bond is selling for $800, matures in 10 years, has a face value of $1,000,
and a coupon rate of 10 percent. Similar nonconvertible bonds are priced to yield 14
percent. The conversion price is $42.50. The stock currently sells for $31.30 a share.
What is the conversion premium? - Answers - - 35.78%
- Conversion premium = (Conversion price / Market price) - 1
- Conversion premium = $42.50 / $31.30 - 1
- Conversion premium = .3578, or 35.78%
A firm has experienced a significant increase in its share value. In retrospect, which one
of the following securities would generally have provided the most benefit to the firm
assuming the securities had been issued prior to the change in share value? - Answers
- ANSD. straight bonds
Transfer or expropriation of wealth from bondholders to stockholders is less likely to
occur when: - Answers - convertible debt is issued because the equity component will
reduce agency costs.
, Issuing convertible bonds or bonds with warrants is useful for a company of unknown
risk because: - Answers - the effects of risk are opposite on the two value components
and tend to cancel each other out.
A bond with a face value of $1,000 can be exchanged for 35 shares of stock with a
current market price of $22 per share. What would the conversion price and conversion
ratio be if the bond's issuer declared a 3-for-1 stock split? - Answers - - $9.52; 105
- New conversion ratio = 35 x 3 New conversion ratio = 105 New conversion price =
$1, New conversion price = $9.52
The lower limit of a warrant's value is defined as: - Answers - MAX(0, Stock price -
Exercise price).
From the bondholder's point of view, the optimum time to convert a convertible bond is
when the bond's conversion value is: - Answers - greater than the both the call value
and straight bond value on the call date.
Based on empirical studies, firms tend to call convertible bonds when the conversion
value is: - Answers - greater than the call price.
Which one of the following would harm the financial position of a warrant holder? -
Answers - a large cash dividend
Eastern Shore Merchants has 75,000 shares and 50,000 warrants currently
outstanding. A warrant holder can purchase one new share of stock in exchange for
four warrants plus $20. The stock is currently selling for $20.60 per share. What would
be the gain per new share from exercising the warrants, assuming all warrants are
exercised? - Answers - - $.51
- Gain per share = (New total value / New total shares) - Exercise price Gain per share
= {[(75,000 × $20.60) + (50,) × $20] / [75,000 + (50,)]} - $20 Gain per
share = $20.51 - 20 Gain per share = $.51
The upper limit of a warrant's value is best defined as the: - Answers - underlying stock
price.
Assuming market efficiency, which one of these is the least sensible explanation of why
convertibles and warrants are issued? - Answers - The firm is relatively large with a low
level of financial leverage.
Westover Industries has 60,000 shares outstanding. Each share has one attached
warrant. A warrant holder can purchase one new share of stock for five warrants plus $5
per warrant. The stock is currently selling for $27 per share. All else held constant, what
will the stock price be if all of the warrants are exercised? - Answers - - 26.67
- Price = Total value / Total shares Price = (60,000 × $27 + 60,000 × $5) / [60,000 +
(60,)] Price = $26.67
