Question 1

What is d1?

Accepted Answer

A)  .1842 
B)  .4102 
C)  .4583 
D)  .4909 
E)  .5412 
A)  .1842 
B)  .4102 
C)  .4583 
D)  .4909 
E)  .5412 D

Question 2

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

Accepted Answer

A)  investing period. 
B)  freeze-out period. 
C)  valuation period. 
D)  guaranteed growth period. 
E)  strike period 
A)  investing period. 
B)  freeze-out period. 
C)  valuation period. 
D)  guaranteed growth period. 
E)  strike period B

Question 3

The Alger Co. operates a bauxite mine. The mine can produce 800,000 tons a year. The mine is currently closed and will cost $12 million to open it. When should the mine be opened?

Accepted Answer

A)  At a net bauxite price after extraction/production costs equal to $15.00 per ton before discounting and valuing extended options. 
B)  At a net bauxite price after extraction/production costs greater than $15.00 per ton before discounting and valuing extended options. 
C)  If the mineable bauxite is available then the mine should be open because the cash breakeven is less than $15.00 per ton. 
D)  If mineable bauxite exists at any price close to $15.00 per ton if bauxite prices are high volatile. 
A)  At a net bauxite price after extraction/production costs equal to $15.00 per ton before discounting and valuing extended options. 
B)  At a net bauxite price after extraction/production costs greater than $15.00 per ton before discounting and valuing extended options. 
C)  If the mineable bauxite is available then the mine should be open because the cash breakeven is less than $15.00 per ton. 
D)  If mineable bauxite exists at any price close to $15.00 per ton if bauxite prices are high volatile. A

Question 4

What is d2?

Accepted Answer

A)  .0121 
B)  .0252 
C)  .0326 
D)  .0452 
E)  .0525 
A)  .0121 
B)  .0252 
C)  .0326 
D)  .0452 
E)  .0525

Question 5

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 stock 
A)  Standard deviation 
B)  Time to maturity 
C)  Exercise price 
D)  Par value of the company's stock

Question 6

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. 
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.

Question 7

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. 
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.

Question 8

Calculate N(d2).

Accepted Answer

A)  .5130 
B)  .5578 
C)  .6085 
D)  .7085 
E)  .7142 
A)  .5130 
B)  .5578 
C)  .6085 
D)  .7085 
E)  .7142

Question 9

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 10

Options are granted to top corporate executives because:

Accepted Answer

A)  executives will make better business decision in line with benefiting the shareholders. 
B)  Executive pay is at risk and linked to firm performance. 
C)  options are tax-efficient and taxed only when they are exercised. 
D)  all of the above. 
A)  executives will make better business decision in line with benefiting the shareholders. 
B)  Executive pay is at risk and linked to firm performance. 
C)  options are tax-efficient and taxed only when they are exercised. 
D)  all of the above.

Question 11

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. 
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.

Question 12

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. 
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.

Question 13

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 14

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

Accepted Answer

There are several benefits to paying exe

Question 15

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 stock to fall because the options are theft. 
D)  are really valueless because most options are never exercised. 
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 stock to fall because the options are theft. 
D)  are really valueless because most options are never exercised.

Question 16

The NPV approach must be:

Accepted Answer

A)  augmented by added analysis if there are a few imbedded options. 
B)  augmented by added analysis if a decision has significant imbedded options. 
C)  jettisoned if there are any embedded options. 
D)  computed carefully to identify the options. 
A)  augmented by added analysis if there are a few imbedded options. 
B)  augmented by added analysis if a decision has significant imbedded options. 
C)  jettisoned if there are any embedded options. 
D)  computed carefully to identify the options.

Question 17

Walter Maxim, the CEO of Digital Storage Devices has been granted options on 300,000 shares. The stock is currently trading at $27 a share and the options are at the money. The volatility of the stock 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 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

Question 18

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

Accepted Answer

A)  more valuable because of the extra dividend payment. 
B)  equal in value because cash dividends are paid on stock only. 
C)  less valuable because cash dividends are paid on stock only. 
D)  less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money. 
A)  more valuable because of the extra dividend payment. 
B)  equal in value because cash dividends are paid on stock only. 
C)  less valuable because cash dividends are paid on stock only. 
D)  less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money.

Question 19

The Nu-Tech Company has a new project available to it at a cost of $6 million. 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 1.0 million at what price would it make sense to abandon the project?

Accepted Answer

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

Question 20

Walter Maxim, the CEO of Digital Storage Devices has been granted options on 300,000 shares. The stock is currently trading at $27 a share and the options are at the money. The volatility of the stock 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?

Accepted Answer

Using B-S OPM, one C

Exam 24: Options and Corporate Finance: Extensions and Applications

What is d1?

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

The Alger Co. operates a bauxite mine. The mine can produce 800,000 tons a year. The mine is currently closed and will cost $12 million to open it. When should the mine be opened?

What is d2?

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

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

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

Calculate N(d2).

Calculate N(d1).

Options are granted to top corporate executives because:

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

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

What is the value of a call option?

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

Corporations by rewarding executives with large option positions:

The NPV approach must be:

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

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Return, 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

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

What is d₁?

What is d₂?

Calculate N(d₂).

Calculate N(d₁).