FIN 534 Week 6 Quiz 5
Cazden Motors stock is trading at $30 a share. Call options on the companys 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?
Which of the following statements is most correct, holding other things constant, for XYZ Corporations traded call options?
Braddock Construction Co.s 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?
Which of the following statements is CORRECT?
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 binomial model, what is the options value? (Hint: Use daily compounding.)
BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant?
Suppose you believe that Basso Inc.s stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $3.10 you can buy a 5-month call option giving you the right to buy 1 share at a price of $25 per share. If you buy this option for $3.10 and Bassos stock price actually rises to $45, what would your pre-tax net profit be?
Suppose you believe that Florio Companys stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share. If you bought this option for $5.10 and Florios stock price actually dropped to $60, what would your pre-tax net profit be?
An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
An option that gives the holder the right to sell a stock at a specified price at some future time is
Other things held constant, the value of an option depends on the stocks price, the risk-free rate, and the
Which of the following statements is CORRECT?
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?
Which of the following statements is CORRECT?
Which of the following statements is CORRECT?
Burnham Brothers Inc. has no retained earnings since it has always paid out all of its earnings as dividends. 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?
Adams Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firms cost of common from reinvested earnings based on the CAPM?
Which of the following statements is CORRECT?
To help them estimate the companys cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings?
Which of the following statements is CORRECT?
Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the companys cost of preferred stock for use in calculating the WACC?
As a consultant to Basso Inc., you have been provided with the following data: D1 = $0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach?
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
You have been hired as a consultant by Feludi Inc.s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested earnings?
With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?
Which of the following statements is CORRECT?
A companys perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firms cost of preferred stock?
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.
Which of the following statements is CORRECT?
Which of the following statements is CORRECT?