Question 1

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. D

Question 2

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

Accepted Answer

A) the standard deviation of the underlying asset. 
B) the up state multiplier equals the standard deviation divided by root n. 
C) the number of intervals in a year. 
D) All of the above. 
E) None of the above. 
A) the standard deviation of the underlying asset. 
B) the up state multiplier equals the standard deviation divided by root n. 
C) the number of intervals in a year. 
D) All of the above. 
E) None of the above. D

Question 3

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options 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 C

Question 4

What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38?

Accepted Answer

A) 1.1159; .8961 
B) .0317; 31.5789 
C) .0317; .9683 
D) .2193; .7807 
E) None of the above 
A) 1.1159; .8961 
B) .0317; 31.5789 
C) .0317; .9683 
D) .2193; .7807 
E) None of the above

Question 5

On the notion of embedded options, which of the following is/are true?

Accepted Answer

A) If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation. 
B) There are at least two possible outcomes for virtually every business idea. 
C) Virtually every business has both the option to abandon and the option to expand. 
D) All of the above. 
E) Both B and C. 
A) If virtually all projects have embedded options, ignoring options is likely to lead to serious undervaluation. 
B) There are at least two possible outcomes for virtually every business idea. 
C) Virtually every business has both the option to abandon and the option to expand. 
D) All of the above. 
E) Both B and C.

Question 6

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:

Accepted Answer

A) the potential sale of the company. 
B) the low exercise price held by the shareholders. 
C) the option to open the facility when prices rise dramatically. 
D) All of the above. 
E) None of the above. 
A) the potential sale of the company. 
B) the low exercise price held by the shareholders. 
C) the option to open the facility when prices rise dramatically. 
D) All of the above. 
E) None of the above.

Question 7

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 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 8

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) All of the above. 
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) All of the above. 
E) None of the above.

Question 9

Options are granted to top corporate executives because:

Accepted Answer

A) executives will make better business decisions 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. 
E) None of the above. 
A) executives will make better business decisions 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. 
E) None of the above.

Question 10

An example of a special option is:

Accepted Answer

A) an executive stock option. 
B) the embedded option in a start-up company. 
C) the option in simple business contracts. 
D) the option to shut down and reopen a project. 
E) All of the above. 
A) an executive stock option. 
B) the embedded option in a start-up company. 
C) the option in simple business contracts. 
D) the option to shut down and reopen a project. 
E) All of the above.

Question 11

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

Accepted Answer

A) the value to the executive depends on the stock price being greater than the exercise price. 
B) the options must be held beyond the freeze-out period. 
C) a highly undiversified portfolio can have a large drop in value with high variance stocks. 
D) All of the above. 
E) None of the above. 
A) the value to the executive depends on the stock price being greater than the exercise price. 
B) the options must be held beyond the freeze-out period. 
C) a highly undiversified portfolio can have a large drop in value with high variance stocks. 
D) All of the above. 
E) None of the above.

Question 12

A branching tree for the binomial model:

Accepted Answer

A) should capture 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 capture 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 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

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

Accepted Answer

There are several benefits to paying exe

Question 15

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

Accepted Answer

A) accept a negative NPV 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) not consider all options available in a capital budgeting decision. 
D) not take a positive NPV project even if the NPV is adequate reward to forego the option. 
E) All of the above. 
A) accept a negative NPV 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) not consider all options available in a capital budgeting decision. 
D) not take a positive NPV project even if the NPV is adequate reward to forego the option. 
E) All of the above.

Question 16

Which of the following statements is true?

Accepted Answer

A) The Black Scholes model is the simplest to use and best used for complex situations. 
B) The binomial model does not handle options with dividend payments prior to expiration date. 
C) The Black Scholes model adequately handles the valuation of an American put. 
D) The binomal model is better for complex situations and is the simplest tool to use. 
E) The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool. 
A) The Black Scholes model is the simplest to use and best used for complex situations. 
B) The binomial model does not handle options with dividend payments prior to expiration date. 
C) The Black Scholes model adequately handles the valuation of an American put. 
D) The binomal model is better for complex situations and is the simplest tool to use. 
E) The Black Scholes model is simpler to use, but for complex situations, the binomial model is the necessary tool.

Question 17

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options 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 18

Ima Greedy, the CFO of Financial Saving Techniques has been granted options on 200,000 shares. The stock is currently trading at $22 a share and the options are at the money. The variance of the stock has been about .07 on an annual basis over the last several years. The options mature in 3 years and the risk free rate is 4%.
-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 19

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. 
E) None of the above. 
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. 
E) None of the above.

Question 20

Walter Maxim. the CWO of digitl storage Devices has been granted option 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 options 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 Black Scholes option pri

Exam 23: Options and Corporate Finance: Extensions and Applications

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

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

What are the u, the up state multiplier, and d, the down state multiplier, if there are monthly intervals and the standard deviation is .38?

On the notion of embedded options, which of the following is/are true?

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:

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

Options are granted to top corporate executives because:

An example of a special option is:

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

A branching tree for the binomial model:

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

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

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

Which of the following statements is true?

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Long-Term Planning

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model

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

Risk, Cost of Capital, and Capital Budgeting

Efficient Capital Markets and Behavioral Challenges

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 Securities to the Public

Leasing

Options and Corporate Finance

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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