GCC Corporation is planning to issue options to its key employees

GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant?

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Selected Answer:

Question 2

2 out of 2 points

Other things held constant, the value of an option depends on the stock’s price, the risk-free rate, and the

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Question 3

2 out of 2 points

Which of the following statements is CORRECT?

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Selected Answer:

Question 4

2 out of 2 points

Deeble Construction Co.’s stock is trading at $30 a share. 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. Both options expire in three months. Which of the following best describes the value of these options?

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Question 5

2 out of 2 points

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. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

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Question 6

2 out of 2 points

Warner Motors’ stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share?

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Question 7

2 out of 2 points

Which of the following statements is CORRECT?

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Question 8

2 out of 2 points

An option that gives the holder the right to sell a stock at a specified price at some future time is

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.

Question 9

2 out of 2 points

Which of the following statements is CORRECT?

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Question 10

2 out of 2 points

Which of the following statements is CORRECT?

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Question 11

2 out of 2 points

Call options on XYZ Corporation’s common stock trade in the market. Which of the following statements is most correct, holding other things constant?

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Question 12

2 out of 2 points

Which of the following statements is CORRECT?

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Question 13

2 out of 2 points

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. 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. 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?

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Question 14

2 out of 2 points

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. 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. 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?

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Question 15

2 out of 2 points

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option’s value?

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Question 16

2 out of 2 points

Which of the following statements is CORRECT?

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Question 17

2 out of 2 points

Firm M’s earnings and stock price tend to move up and down with other firms in the S&P 500, while Firm W’s earnings and stock price move counter cyclically with M and other S&P companies. Both M and W estimate their costs of equity using the CAPM, they have identical market values, their standard deviations of returns are identical, and they both finance only with

common equity. Which of the following statements is CORRECT?

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Question 18

2 out of 2 points

Safeco Company and Risco Inc are identical in size and capital structure. 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%. Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project. Now assume that the two companies merge and form a new company, Safeco/Risco Inc. 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. Which of the following statements is CORRECT?

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Question 19

2 out of 2 points

If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

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Question 20

2 out of 2 points

Which of the following statements is CORRECT?

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Question 21

2 out of 2 points

Which of the following statements is CORRECT?

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Question 22

2 out of 2 points

Which of the following statements is CORRECT?

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Question 23

2 out of 2 points

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

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Question 24

2 out of 2 points

Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A’s cost of capital is 10.0%, Division B’s cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A’s projects are equally risky, as are all of Division B’s projects. However, the projects of Division A are less risky than those of Division B. Which of the following projects should the firm accept?

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Question 25

2 out of 2 points

Which of the following statements is CORRECT?

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Question 26

2 out of 2 points

For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure.

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Question 27

2 out of 2 points

Which of the following statements is CORRECT?

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.

Question 28

2 out of 2 points

Which of the following statements is CORRECT?

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Question 29

2 out of 2 points

Which of the following statements is CORRECT?

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Question 30

2 out of 2 points

Which of the following statements is CORRECT?