Finance 534 week 6 Quiz5\t\u00a0\tQuestion 1\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Call options on XYZ Corporation’s common stock trade in the market.\u00a0 Which of the following statements is most correct, holding other things constant?\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 2\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 3\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 4\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 5\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 6\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 An option that gives the holder the right to sell a stock at a specified price at some future time is\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 7\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 The current price of a stock is $22, and at the end of one year its price will be either $27 or $17.\u00a0 The annual risk-free rate is 6.0%, based on daily compounding.\u00a0 A 1-year call option on the stock, with an exercise price of $22, is available.\u00a0 Based on the binominal model, what is the option’s value?\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 8\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 The current price of a stock is $50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of $55 sells for $7.20.\u00a0 What is the value of a put option, assuming the same strike price and expiration date as for the call option?\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 9\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 10\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Deeble Construction Co.’s stock is trading at $30 a share.\u00a0 Call options on the company’s stock are also available, some with a strike price of $25 and some with a strike price of $35.\u00a0 Both options expire in three months.\u00a0 Which of the following best describes the value of these options?\t\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 11\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0 \ufffd \ufffd\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 12\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Warner Motors’ stock is trading at $20 a share.\u00a0 Call options that expire in three months with a strike price of $20 sell for $1.50.\u00a0 Which of the following will occur if the stock price increases 10%, to $22 a share?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 13\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Suppose you believe that Johnson Company’s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.\u00a0 For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share.\u00a0 If you buy this option for $310.25 and Johnson’s stock price actually rises to $45, what would your pre-tax net profit be?\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 14\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0Question 15\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Suppose you believe that Delva Corporation’s stock price is going to decline from its current level of $82.50 sometime during the next 5 months.\u00a0 For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share.\u00a0 If you bought this option for $510.25 and Delva’s stock price actually dropped to $60, what would your pre-tax net profit be?\t\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 16\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 17\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\u00a0 Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 18\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 When working with the CAPM, which of the following\tfactors can be determined with the most precision?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 19\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements\tis CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 20\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 21\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Safeco Company and RiscoInc are identical in size and capital structure.\u00a0 However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of 10% and Risco a WACC of 12%.\u00a0 Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project.\u00a0 Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project.\tNow assume that the two companies merge and form a new company, Safeco\/Risco Inc.\u00a0 Moreover, the new company’s market risk is an average of the pre-merger companies’ market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y.\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t \ufffd \ufffd\u00a0\t\u00a0Question 22\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 23\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 24\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings.\u00a0 This same situation is expected to persist in the future.\u00a0 The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt.\u00a0 Which of the following events would REDUCE its WACC?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 25\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 26\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 For a typical firm, which of the following sequences is CORRECT?\u00a0 All rates are after taxes, and assume that the firm operates\tat its target capital structure.\tAnswer \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 27\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 28\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects.\u00a0 The firm’s overall WACC is 12%.\u00a0 The CFO believes that this is the correct WACC for the company’s average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.\u00a0 The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.\u00a0 If the CEO’s position is accepted, what is likely to happen over time?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\tCorrect Answer: \ufffd\u00a0\u00a0\u00a0\u00a0\tThe company will take on too many high-risk projects and reject too many low-risk projects.\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t\u00a0Question 29\t2 out of 2 points\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following statements is CORRECT?\t \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd \ufffd\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0\t\u00a0\t \ufffd \ufffd \ufffd \ufffd\u00a0\u00a0\u00a0 \ufffd \ufffd\u00a0\t\u00a0Question 30\t\u00a0\t \ufffd \ufffd\u00a0\t \ufffd \ufffd\u00a0 Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?<\/p>\n","protected":false},"excerpt":{"rendered":"
Finance 534 week 6 Quiz5 \u00a0 Question 1 \u00a0 \ufffd \ufffd\u00a0 \ufffd \ufffd\u00a0 Call options on XYZ Corporation’s common stock trade in the market.\u00a0 Which of the following statements is most correct, holding other things constant? \u00a0 \ufffd \ufffd \ufffd Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-216874","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/216874","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=216874"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/216874\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=216874"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=216874"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=216874"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}