Question

**QUESTION 10**

Which of the following statements is most correct?

An option’s value is determined by its exercise value, which is the market price of the stock less its strike price. Thus, an option can’t sell for more than its exercise value. |
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The potential loss on a call option increases as the underlying stock sells at higher and higher prices because the profit margin gets bigger. |
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Issuing options provides companies with a low-cost method of raising capital |
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The market value of an option depends in part on the option’s time to maturity and on the variability of the underlying stock’s price. |

**QUESTION 11**

Jamie's Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class C motor homes, and 4,000 pop-up trailers each year. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1,500 of them. However, if the new camper is added, Jamie expects that her Class A sales will decline to 950 units while the Class C campers decline to 2,200. The sales of pop-ups will not be affected. Class A motor homes sell for an average of $125,000 each. Class C homes are priced at $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell for $47,900. How much revenue from existing camper sales would be lost if the mid-range camper is added?

$6,250,000 |
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$18,100,000 |
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$53,750,000 |
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$93,150,000 |
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$118,789,500 |

**QUESTION 12**

Under which of the following conditions will the IRR of a project be equal to the WACC?

when the payback is equal to the MIRR |
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when the profitability index is equal to the WACC |
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when the NPV is equal to zero |
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when the payback is equal to the IRR |

**QUESTION 13**

The _____ designates the date on which the corporation lists the shareholders who are entitled to receive a dividend payment.

declaration date |
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ex-dividend date |
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date of record |
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payment date |

**QUESTION 14**

An analyst is interested in using the Black-Scholes model to value call options on the stock of QU, Inc. The analyst has accumulated the following information:

Stock price |
$40 |

Strike price |
$40 |

Time until maturity |
6 months |

Standard deviation of the stock |
12% |

Risk free rate of return |
16% |

Using the Black-Scholes model, what is the value of the call option?

$1.94 |
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$0.30 |
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$3.76 |
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$3.38 |
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$2.12 |

Answer #1

Q.10). Option D is the most appropriate option. As the market value of an option is contingent to the variablity in market price and time to maturity of option.

Q.11). Option C is correct.

Q.12). Option C, i.e When NPV = 0 then IRR = WACC. THis is pretty much clear from the formulas of NPV and IRR.

Q.13). Option B. The ex-dividend date is the date by which whosoever is present in company's books as the shareholder would be entitled for the dividend.

Q.14). Option D is correct using BS pricing formula for call options.

Jamie's Motor Home Sales currently sells 1,000 Class A motor
homes, 2,500 Class C motor homes, and 4,000 pop-up trailers each
year. Jamie is considering adding a mid- range camper and expects
that if she does so she can sell 1,500 of them. However, if the new
camper is added, Jamie expects that her Class A sales will decline
to 950 units while the Class C campers decline to 2,200. The sales
of pop-ups will not be affected. Class A...

Which of following statements about
options contracts is correct?
The holder of a European call option has the right to buy the
underlying asset at the exercise price on or before the expiration
date.
The holder of an American put option has the right to sell the
underlying asset at the exercise price on or before the expiration
date.
The holder of a European put option has the obligation to sell
the underlying asset at the exercise price on the...

Which of the following statements is
correct concerning options?
Group of answer choices
In order for an option to have value, there should be very
little price movement in the underlying asset.
The shorter the maturity, the greater the value in the
option.
The higher the strike price, the greater the value for a
put.
The higher the strike price, the greater the value for a
call.
The lower the underlying value in the asset, the greater the
value of...

Which of the following statements is true?
If the strike price increases, the value of the put option
decreases.
If a stock price increases, the value of the call option on the
stock increases.
If a stock pays dividends, the value of the call option on the
stock increases.
If a stock price increases, the value of the put option on the
stock increases.

10. Which of the following statements regarding factors that
affect call option prices is CORRECT?
a.
The longer the time until the call option expires the smaller
its value and the smaller its premium.
b.
An option on an extremely volatile stock is worth less than one
on a very stable stock.
c.
The price of a call option increases as the risk-free rate
increases.
d.
Two call options on the same stock will have the same value even
if...

You are interested in a trading strategy with option
combinations: straddle or strangle. Both strategies involve buying
the equal amount of call and put options underlying the same
stock.
Consider a straddle using a call with a strike price of $100
and a put with the same strike price and expiration date. The call
costs $5 and the put costs $4. For what range of stock prices would
the straddle lead to a loss?
Now consider a strangle using the...

Which of the following statements is
not correct?
Group of answer choices
The binomial option pricing model when taken to the limit
becomes the Black-Scholes option pricing model.
The Black-Scholes model uses a continuous time discount
factor.
The binomial option pricing model use a ratio of the range
values as the hedge ratio.
The Black-Scholes model is related to a heat transfer equation
and Brownian molecular motion.
The Black Scholes model only estimates the intrinsic value of
the call option....

Which of the following option is false? Select the most suitable
answer. Select one:
a. The European put price plus the stock price must equal the
European call price plus the present value of the strike price.
b. For American options, put-call parity provides an upper and a
lower bound for the difference between call and put prices.
c. For American options without dividend payment, the difference
between call and put prices should be higher than or equal to the...

Which of the following is correct about options?
The buyer of a call option will break even (profit=0) when the
price of the stock equals strike price.
European options can only be exercised on the expiration date
but can be sold to another investor on any trading day.
The time value of a call option can be negative
The buyer of a call option has the right to any dividends paid
after the option was purchased

Answer the following 10 True or False questions by filling in
your answers in the table provided at the end of this section. Each
correct answer will be awarded 2 marks.
A stock is trading at $100. A call option on the stock with
a maturity of three months is trading at $6.60 and has a delta of
0.7. If the stock price increases to 101, the new call price will
be exactly $6.20.
In Black-Scholes option pricing model, the...

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