Exam 23: Options and Corporate Finance: Extensions and Applications

The equal rate of price change from each subsequent up state and fixed rate price change from each subsequent down state are reasonable, if:

Executives cannot exercise their options for a fixed period of time, this is the:

Increasing the number of intervals in the binomial model causes the price shift parameters to change.New estimates are related to:

The risk-neutral probabilities for an asset, with a current value equal to the present value of future payoffs are:

The executive janitor of NuValue was granted 1,000,000 options.The equity price at the time of the granting of the options was £25 and the options are at the money.The risk free rate was 3% and the options expire in 3 years.The variance on the equity is .04.What is the value of the options contract?

A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value.This value can be primarily attributed to:

Real option valuation requires a thorough knowledge of financial option valuation.Consider the following two statements: (i) Most real option problems require a European style option valuation technique. (ii) The most important difference between real and financial options is the fact that real options are Never exercised.

Why would the company pay the executive in options as opposed to salary?

The CEO of NuValue was granted 1,000,000 options.The equity price at the time of the granting of the options was £45 and the options are at the money.The risk free rate was 5% and the options expire in 5 years.The variance on the equity is .04.What is the value of the options contract? If he had negotiated a larger salary and only 10,000 options, what would be the value of the options contract?

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(d1).

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%. What is the value of Mr.Maxim's options?

Rejecting an investment today forever may not be a good choice because:

An example of a special option is:

The value of the options awarded to the executives is much less than the face value to the executives because:

The call option on a dividend paying equity compared to a non-dividend paying equity is:

The Nu-Tech Company has a new project available to it at a cost of £6,000,000.The project that they can sell 13,000 personal organizers at £172 in net cash flow for each of the next five years.Nu- Tech's discount rate is 15%.What is the NPV of the investment? The executives of Nu-Tech are concerned about the potential of future competition and a subsequent drop in sales and price.If after two year you can dispose of the asset for £1,000,000 at what price would it make sense to abandon the project?

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 d1?

Which of the following statements is true?

The NPV approach must be:

Executive options are different from standard options in a number of ways.Consider the following two statements: (i) A freeze-out period lowers the value of a standard option compared to an executive option. (ii) The Black-Scholes formula cannot be used to value executive options, if the volatility of equity Changes randomly over time.