Exam 23: Options and Corporate Finance: Basic Concepts

Tele-Tech Com has announced a large loss in their on-line services division causing the price of Tele-Tech Com stock to drop but the price volatility of the stock is not expected to drop. Which of the following correctly identifies the impact of these changes on the call option of Tele-Tech Com?

Which of the following statements is true?

A call gives the owner the right:

You can realize the same value as that derived from stock ownership if you:

Options can be used to explain how the choice of a project can determine investor value. Options are also useful in evaluating alternatives open within a project choice, such as investing now or delaying. Give an example of how options can be used in investment timing.

The lowest value a call option can have is:

Tele-Tech Com announces a major expansion into internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock. Which of the following correctly identifies the impact of these changes on the put option of Tele-Tech Com?

An option that grants the right, but not the obligation, to sell shares of the underlying asset on a particular date at a specified price is called:

If a firm with risky debt outstanding pays a large cash distribution, the value of the bonds:

The higher the exercise price:

The two state OPM is so named because:

Put-Call Parity can be used to show:

Which one of the following will cause the value of a call to decrease?

An in-the-money put option is one that:

In relating stockholder value in terms of put options, the stockholders own the firm, they owe promised payments to the bondholders, and they have bought a put on the firm's assets with an exercise price equal to the promised payment to the bondholders. If the firm's cash flow is greater than these promised payments:

Suppose a stock can be purchased for $8, a put option on the stock can be purchased for $1.50, and a call option on the stock can be written (i.e., sold) for $1.00. If holding these positions in combination can guarantee a payoff of $10 at the end of the year, then what must be the risk-free rate if no arbitrage opportunities exist?

The intrinsic value of a put is equal to the:

What is the cost of five November 25 call option contracts on KNJ stock given the following price quotes? KNJ (KNJ) Underlying stock price: 30.86

The put option allows:

Explain the rationale behind the statement that equity is a call option on the firm's assets. When would a shareholder allow the call to expire?