Question 1

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.

Question 2

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 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 3

The CFO of NuValue was granted 1,000,000 options.The stock price at the time of the granting of the options was $20 and the options are at the money.The risk free rate was 4% and the options expire in 5 years.The variance on the stock is .05.What is the value of her options contract? If she had negotiated a larger salary and only 10,000 options, what would be the value of the options contract?

Accepted Answer

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

Question 4

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.

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

Question 6

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 7

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

Accepted Answer

A) there is a constant variability. 
B) any new information impacting prices is similar period to period. 
C) interest or discount rates are constant. 
D) Both A and C. 
E) Both A and B. 
A) there is a constant variability. 
B) any new information impacting prices is similar period to period. 
C) interest or discount rates are constant. 
D) Both A and C. 
E) Both A and B.

Question 8

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

Accepted Answer

A) increasing the value as volatility increases. 
B) increasing the value as volatility decreases. 
C) decreasing the value as volatility increases. 
D) interest rate volatility does not affect value. 
E) None of the above. 
A) increasing the value as volatility increases. 
B) increasing the value as volatility decreases. 
C) decreasing the value as volatility increases. 
D) interest rate volatility does not affect value. 
E) None of the above.

Question 9

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 10

By rewarding executives with large option positions, corporations:

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. 
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 stock to fall because the options are theft. 
D) are really valueless because most options are never exercised. 
E) None of the above.

Question 11

The CEO of NuValue was granted 1,000,000 options.The stock 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 stock 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 + (.50 * 0.04)(5)]/

Question 12

The executive janitor of NuValue was granted 1,000,000 options.The stock 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 stock is .04.What is the value of the options contract?

Accepted Answer

d₁ = [.03 + (.50 *.04)(3)]/@#LAT-DLM& d

Question 13

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 14

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%.
-If Mr.Maxim earned $500,000 in regular annual salary 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 h

Question 15

Why is straight NPV analysis flawed as compared to models that include option pricing in the NPV analysis?

Accepted Answer

Straight NPV analysis is flawed in that

Question 16

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 d1?

Accepted Answer

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

Question 17

The NPV approach must be:

Accepted Answer

A) augmented by added analysis if there are a few embedded options. 
B) augmented by added analysis if a decision has significant embedded options. 
C) jettisoned if there are any embedded options. 
D) computed carefully to identify the options. 
E) None of the above. 
A) augmented by added analysis if there are a few embedded options. 
B) augmented by added analysis if a decision has significant embedded options. 
C) jettisoned if there are any embedded options. 
D) computed carefully to identify the options. 
E) None of the above.

Question 18

If real options were not included in calculations of value, would the valuation be under or over valued and why?

Accepted Answer

An option is the right, but not the requ

Question 19

In what instances is the binomial option pricing model superior to the Black Scholes option pricing model?

Accepted Answer

The binomial option pricing model is ame

Question 20

The Nu-Tech Company has a new project available to it at a cost of $6,000,000.If the project is accepted, the company will be able to 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 years 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 * 172) A<su

Exam 23: Options and Corporate Finance: Extensions and Applications

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

Executives can not exercise their options for a fixed period of time.This is the:

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

The option to abandon is:

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

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

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

By rewarding executives with large option positions, corporations:

The executive janitor of NuValue was granted 1,000,000 options.The stock 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 stock is .04.What is the value of the options contract?

If a project has optionality:

Why is straight NPV analysis flawed as compared to models that include option pricing in the NPV analysis?

The NPV approach must be:

If real options were not included in calculations of value, would the valuation be under or over valued and why?

In what instances is the binomial option pricing model superior to the Black Scholes option pricing model?

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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