Question 1

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Accepted Answer

A) True 
 B)False

Question 2

The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.

Accepted Answer

A) True 
 B)False

Question 3

Which term refers to an option that gives the holder the right to sell a stock at a specified price at some future time?

Accepted Answer

A)   a call option
B)   a put option
C)   a naked option
D)   a covered optionE) C) and D)
F) A) and B)

Question 4

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?

Accepted Answer

A)   -$510.25
B)   $1,989.75
C)   $2,089.24
D)   $2,193.70E) None of the above
F) A) and D)

Question 5

If we define the "premium" on an option to be the difference between the price at which an option sells and the exercise value (or the difference between the stock's current market price and the strike price), then we would expect the premium to increase as the stock price increases, other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

The strike price is the price that must be paid for a common share when it is bought by exercising a warrant.

Accepted Answer

A) True 
 B)False

Question 7

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Accepted Answer

A) True 
 B)False

Question 8

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. What will happen if the stock price increases 10%, to $22 a share?

Accepted Answer

A)   The price of the call option will increase by $2.
B)   The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%.
C)   The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
D)   The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.E) C) and D)
F) B) and D)

Exam 19: Financial Options and Applications in Corporate Finance

The strike price is the price that must be paid for a common share when it is bought by exercising a warrant.

Correct Answer
verified

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. What will happen if the stock price increases 10%, to $22 a share?

Correct Answer
verified

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Correct Answer
verified

The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.

Correct Answer
verified

Correct Answer
verified

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Correct Answer
verified

Which term refers to an option that gives the holder the right to sell a stock at a specified price at some future time?

Correct Answer
verified

Correct Answer
verified

Exam 19: Financial Options and Applications in Corporate Finance

The strike price is the price that must be paid for a common share when it is bought by exercising a warrant.

Correct AnswerverifiedShow Answer

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. What will happen if the stock price increases 10%, to $22 a share?

Correct AnswerverifiedShow Answer

If a company announces a change in its dividend policy from a zero target payout ratio to a 100% payout policy, this action could be expected to increase the value of long-term options (say 5-year options) on the firm's stock.

Correct AnswerverifiedShow Answer

The exercise value of a call option is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

Correct AnswerverifiedShow Answer

Which term refers to an option that gives the holder the right to sell a stock at a specified price at some future time?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified