Fin 534 week 6 quiz 5 (30 questions with answers) 99.99% scored

FIN 534 Week 6 Quiz 5 (30 questions with
answers) 99.99% scored

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Finance 534 Week 6 Quiz 5 (30 questions with answers) 99.99% scored

Question 1

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

Question 2

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

Question 3

Which of the following statements is CORRECT?

Question 4


Question 5

An investor who writes standard call options against stock held in his or her
portfolio is said to be selling what type of options?

Question 6

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

Question 7

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?

Question 8

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?

Question 9


Question 10

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?

Question 11


Question 12

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?

Question 13

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?

Question 14


Question 15

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?

Question 16


Question 17

Which of the following statements is CORRECT? Assume that the firm is a
publicly-owned corporation and is seeking to maximize shareholder wealth.

Question 18

When working with the CAPM, which of the following

factors can be determined with the most precision?

Question 19

For a company whose target capital structure calls for 50% debt and 50%
common equity, which of the following statements

is CORRECT?

Question 20

2 out of 2 points


Question 21

Safeco Company and RiscoInc 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?

Question 22


Question 23


Question 24

Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence,
the firm has no retained earnings. This same situation is expected to persist in
the future. The company uses the CAPM to calculate its cost of equity, and its
target capital structure consists of common stock, preferred stock, and debt.
Which of the following events would REDUCE its WACC?

Question 25


Question 26

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.

Question 27


Question 28

The MacMillen Company has equal amounts of low-risk, average-risk, and high-
risk projects. The firm's overall WACC is 12%. 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.
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. If the CEO’s
position is accepted, what is likely to happen over time?

Question 29


Question 30

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

Fin 534 week 6 quiz 5 (30 questions with answers) 99.99% scored

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Fin 534 week 6 quiz 5 (30 questions with answers) 99.99% scored