Question 1

A ﬁnancial manager who does not follow the general constraints of the NPV rule may:

Accepted Answer

A) accept a negative project for fear of losing an investment opportunity. 
B) accept a marginally acceptable NPV project limiting the corporation's ability to choose a
Competing project. 
C) option the project to another ﬁrm. 
D) not take a positive NPV project even if the NPV is adequate reward to forego the option. 
E) None of the above. 
A) accept a negative project for fear of losing an investment opportunity. 
B) accept a marginally acceptable NPV project limiting the corporation's ability to choose a
Competing project. 
C) option the project to another ﬁrm. 
D) not take a positive NPV project even if the NPV is adequate reward to forego the option. 
E) None of the above. B

Question 2

The option to abandon is:

Accepted Answer

A) a real option. 
B) usually of little value because of the cost associated with abandonment. 
C) irrelevant in capital budgeting analysis. 
D) nearly always less relevant the option to expand. 
E) All of the above. 
A) a real option. 
B) usually of little value because of the cost associated with abandonment. 
C) irrelevant in capital budgeting analysis. 
D) nearly always less relevant the option to expand. 
E) All of the above. A

Question 3

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The equity is currently trading at £22 a share and the options are at the money.The volatility of the
Equity has been about .20 on an annual basis over the last several years.The option mature in 3
Years and the risk free rate is 4%.
What is the value of a call option?

Accepted Answer

A) £4.14 
B) £4.86 
C) £7.57 
D) £5.62 
E) £6.16 
A) £4.14 
B) £4.86 
C) £7.57 
D) £5.62 
E) £6.16 C

Question 4

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The equity is currently trading at £22 a share and the options are at the money.The volatility of the
Equity has been about .20 on an annual basis over the last several years.The option mature in 3
Years and the risk free rate is 4%.
What is d2?

Accepted Answer

A) .0121 
B) .0252 
C) -.2324 
D) .0452 
E) .0525 
A) .0121 
B) .0252 
C) -.2324 
D) .0452 
E) .0525

Question 5

A branching tree for the binomial model:

Accepted Answer

A) Should captures all possible futures paths for the asset. 
B) Has a move down followed by a move up on a subsequent branch to end at the same
Value as the reverse path. 
C) Has a move down followed by a move up on a subsequent branch to end at a lower
Value than a move up then a move down. 
D) Both A and C. 
E) Both A and B. 
A) Should captures all possible futures paths for the asset. 
B) Has a move down followed by a move up on a subsequent branch to end at the same
Value as the reverse path. 
C) Has a move down followed by a move up on a subsequent branch to end at a lower
Value than a move up then a move down. 
D) Both A and C. 
E) Both A and B.

Question 6

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The equity is currently trading at £22 a share and the options are at the money.The volatility of the
Equity has been about .20 on an annual basis over the last several years.The option mature in 3
Years and the risk free rate is 4%.
What is e-rt ?

Accepted Answer

A) .6087 
B) .7087 
C) .7952 
D) .8476 
E) .8869 
A) .6087 
B) .7087 
C) .7952 
D) .8476 
E) .8869

Question 7

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The equity is currently trading at £22 a share and the options are at the money.The volatility of the
Equity has been about .20 on an annual basis over the last several years.The option mature in 3
Years and the risk free rate is 4%.
Calculate N(d2).

Accepted Answer

A) .4081 
B) .5578 
C) .6085 
D) .7085 
E) .7142 
A) .4081 
B) .5578 
C) .6085 
D) .7085 
E) .7142

Question 8

Which of the following is not part of the Black Scholes option pricing model?

Accepted Answer

A) Standard deviation 
B) Time to maturity 
C) Exercise price 
D) Par value of the company's equity 
E) Interest rate 
A) Standard deviation 
B) Time to maturity 
C) Exercise price 
D) Par value of the company's equity 
E) Interest rate

Question 9

Walter Maxim, the CEO of Digital Storage Devices has been granted options on 300,000 shares. The equity is currently trading at £27 a share and the options are at the money.The volatility of the equity has been about .15 on an annual basis over the last several years.The option mature in 5 years, become exercisable in 3 years, and the risk free rate is 4%. If Mr.Maxim earned £500,000 in regular annual salary why might he prefer to have £1,500,000 in straight salary versus salary and options?

Accepted Answer

Mr.Maxim likely has a large portion of h

Question 10

Managers come in all shapes and sizes.You own a company, and are worried about whether its management is active and ﬂexible enough.Explain your worries, using real option valuation.

Accepted Answer

From a real option valuation point of vi

Question 11

The CFO of NuValue was granted 1,000,000 options.The equity price at the time of the granting of
the options was £20 and the options are at the money.The risk free rate was 4% and the options
expire in 5 years.The variance on the equity is .05.What is the value of her options contract? If she
had negotiated a larger salary and only 10,000 options, what would be the value of the options
contract?

Accepted Answer

d1 = [.04 + (.50x.05)(5)]/ √(.05)5
d1 =

Question 12

If a project has optionality,:

Accepted Answer

A) the shorter the available life of the project, the less valuable the project is. 
B) the longer the available life of the project, the less valuable the project is. 
C) the shorter the available life of the project, the more valuable the project is. 
D) available project life does not change. 
E) None of the above. 
A) the shorter the available life of the project, the less valuable the project is. 
B) the longer the available life of the project, the less valuable the project is. 
C) the shorter the available life of the project, the more valuable the project is. 
D) available project life does not change. 
E) None of the above.

Question 13

Investing in a negative NPV project today is a feasible choice if:

Accepted Answer

A) There are future option alternatives. 
B) Investing is sequentially limited. 
C) The discount rate is low. 
D) Both A and B. 
E) Both A and C. 
A) There are future option alternatives. 
B) Investing is sequentially limited. 
C) The discount rate is low. 
D) Both A and B. 
E) Both A and C.

Question 14

Executive options do not always have the intended effects.Consider the following two statements: (i) The recent shift from executive share options to restricted stock units suggest that in practice, the
Effective minimum value of executive share options is not zero.
(ii) When options are a large portion of an executive's net worth, the total value of the option
Position to the executive is less than market value.

Accepted Answer

A) (i) is correct, (ii) is incorrect. 
B) (i) is incorrect, (ii) is correct. 
C) Both (i) and (ii) are correct. 
D) Both (i) and (ii) are incorrect. 
E) only (i) is correct, but only if zero is replaced with "negative". 
A) (i) is correct, (ii) is incorrect. 
B) (i) is incorrect, (ii) is correct. 
C) Both (i) and (ii) are correct. 
D) Both (i) and (ii) are incorrect. 
E) only (i) is correct, but only if zero is replaced with "negative".

Question 15

Executive stock options are one way of rewarding executives.Restricted stock units are another way.Cash payments are yet another way.Consider the following two statements:
(i) Restricted stock units become more attractive compared to stock options as stock price volatility
Increases.
(ii) Cash payments become more attractive compared to restricted stock units as stock price
Volatility increases.

Accepted Answer

A) (i) is correct, (ii) is incorrect. 
B) (i) is incorrect, (ii) is correct. 
C) Both (i) and (ii) are correct. 
D) Both (i) and (ii) are incorrect. 
E) only (i) is correct, if we replace "more" with "less". 
A) (i) is correct, (ii) is incorrect. 
B) (i) is incorrect, (ii) is correct. 
C) Both (i) and (ii) are correct. 
D) Both (i) and (ii) are incorrect. 
E) only (i) is correct, if we replace "more" with "less".

Question 16

The opportunity to defer investing to a later date may have value because:

Accepted Answer

A) the cost of capital may decline in the near future. 
B) certainty may be reduced in the future. 
C) investment costs ﬂuctuate in time. 
D) opportunity to defer investing to a later date does not have value. 
E) None of the above. 
A) the cost of capital may decline in the near future. 
B) certainty may be reduced in the future. 
C) investment costs ﬂuctuate in time. 
D) opportunity to defer investing to a later date does not have value. 
E) None of the above.

Question 17

Corporations by rewarding executives with large option positions:

Accepted Answer

A) cause the executives to hold highly undiversiﬁed portfolios. 
B) put the ﬁrm in a risky position to pay off the options. 
C) cause the value of the equity to fall because the options are theft. 
D) are really valueless because most options are never exercised. 
E) None of the above. 
A) cause the executives to hold highly undiversiﬁed portfolios. 
B) put the ﬁrm in a risky position to pay off the options. 
C) cause the value of the equity to fall because the options are theft. 
D) are really valueless because most options are never exercised. 
E) None of the above.

Question 18

The volatility of interest rates affect the value of the project by:

Accepted Answer

A) increasing the value as volatility increase. 
B) increasing the value as volatility decrease. 
C) decreasing the value as volatility increase. 
D) interest rate volatility does not affect value. 
E) None of the above. 
A) increasing the value as volatility increase. 
B) increasing the value as volatility decrease. 
C) decreasing the value as volatility increase. 
D) interest rate volatility does not affect value. 
E) None of the above.

Question 19

Executive options have a number of advantages, including:

Accepted Answer

A) Aligning shareholders interests to that of executives. 
B) Increasing executives' base pay. 
C) Increasing the volatility of executives' pay as a function of the performance of the ﬁrm. 
D) Both A and C are correct. 
E) None of the above. 
A) Aligning shareholders interests to that of executives. 
B) Increasing executives' base pay. 
C) Increasing the volatility of executives' pay as a function of the performance of the ﬁrm. 
D) Both A and C are correct. 
E) None of the above.

Question 20

The most correct method to determine the current value of future payoffs would be to:

Accepted Answer

A) take the discounted expected value at the risk-free rate. 
B) take the expected value using the probabilities. 
C) take the discounted expected value using the risk-neutral probabilities and the risk free
Rate. 
D) sum the payoffs discounted at the risk free rate. 
E) None of the above. 
A) take the discounted expected value at the risk-free rate. 
B) take the expected value using the probabilities. 
C) take the discounted expected value using the risk-neutral probabilities and the risk free
Rate. 
D) sum the payoffs discounted at the risk free rate. 
E) None of the above.

Exam 23: Options and Corporate Finance: Extensions and Applications

A ﬁnancial manager who does not follow the general constraints of the NPV rule may:

The option to abandon is:

A branching tree for the binomial model:

Which of the following is not part of the Black Scholes option pricing model?

Managers come in all shapes and sizes.You own a company, and are worried about whether its management is active and ﬂexible enough.Explain your worries, using real option valuation.

If a project has optionality,:

Investing in a negative NPV project today is a feasible choice if:

The opportunity to defer investing to a later date may have value because:

Corporations by rewarding executives with large option positions:

The volatility of interest rates affect the value of the project by:

Executive options have a number of advantages, including:

The most correct method to determine the current value of future payoffs would be to:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Factor Models and the Arbitrage Pricing Theory

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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