Question 1

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.

Question 2

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 3

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

Accepted Answer

A) the size of the firm will decline. 
B) there are always errors in the estimation of NPVs. 
C) the option value is negative. 
D) the company's foregoing the future rights or option to the investment. 
E) None of the above. 
A) the size of the firm will decline. 
B) there are always errors in the estimation of NPVs. 
C) the option value is negative. 
D) the company's foregoing the future rights or option to the investment. 
E) None of the above.

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%. Calculate N(d1).

Accepted Answer

A) .5054 
B) .6508 
C) .6882 
D) .7047 
E) .8096 
A) .5054 
B) .6508 
C) .6882 
D) .7047 
E) .8096

Question 5

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?

Accepted Answer

d₁ = [.05 + (.50x.04)(5)]/ @#LAT-DLM&(.04)5 d₁ = .35

Question 6

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?

Accepted Answer

NPV = £-6,000,000 + (£13,000 x 172)A_.15,5 = £

Question 7

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 optionality. 
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 optionality. 
E) None of the above.

Question 8

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 9

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) £5.13 
D) £5.62 
E) £6.16 
A) £4.14 
B) £4.86 
C) £5.13 
D) £5.62 
E) £6.16

Question 10

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

Accepted Answer

A) given by the probability of each state occurring. 
B) given by the value of the underlying asset under good news and the risk free rate. 
C) given by the value of the underlying asset under good news and bad news. 
D) given by the value of the underlying asset under good news,bad news,and the risk free rate. 
E) None of the above. 
A) given by the probability of each state occurring. 
B) given by the value of the underlying asset under good news and the risk free rate. 
C) given by the value of the underlying asset under good news and bad news. 
D) given by the value of the underlying asset under good news,bad news,and the risk free rate. 
E) None of the above.

Question 11

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

Accepted Answer

There are several benefits to paying exe

Question 12

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.

The option to abandon is:

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

If a project has optionality:

Corporations by rewarding executives with large option positions:

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

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

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

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

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

Return and Risk: The Capital Asset Pricing Model Capm

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

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

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

Exam 23: Options and Corporate Finance: Extensions and Applications

The option to abandon is:

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

If a project has optionality:

Corporations by rewarding executives with large option positions:

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

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

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

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

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

Return and Risk: The Capital Asset Pricing Model Capm

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

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

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters