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.
		The potential loss on a call option increases as the underlying stock sells at higher and higher prices because the profit margin gets bigger.
		Issuing options provides companies with a low-cost method of raising capital
		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
		$18,100,000
		$53,750,000
		$93,150,000
		$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
		when the profitability index is equal to the WACC
		when the NPV is equal to zero
		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
		ex-dividend date
		date of record
		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
		$0.30
		$3.76
		$3.38
		$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.