Question

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 statements is not correct?

Group of answer choices

Being short a call requires the obligation to sell a stock at a certain price.

Buying a put gives you the right to sell a stock at a certain price.

Options can never be worth less than zero.

Selling a put gives you the right to buy a stock at a certain price.

Being long a call gives you the right to buy a stock at the exercise price.

Assuming that you have non-reproducible projects with different lives, which of the following statement is the most correct?

Group of answer choices

Choose the project with the highest IRR.

Choose the project with the highest NPV.

Choose the project with the highest uniform annual series.

Choose the project with the highest replacement chain value.

C or D will give you same answer.

If the calculated NPV is positive, which of the following statements is true?

Group of answer choices

the discount rate used is greater than the PI

the discount rate used is too low

the discount rate used is equal to the IRR

the discount rate used is less than the IRR

Applying the Efficient Market Hypothesis (EMH) to capital budgeting, which of the following statements is correct?   

Group of answer choices

In an efficient market the NPV for projects should on average be positive.

Existing large firms can be considered evidence that the EMH is true.

Existing large firms may exist because they may not have played the game long enough meaning they may still go insolvent.

Firms can be considered to be a collection of projects; and existing firms a collection of negative
NPV projects.

If firms produce new information or technology, this could never be a reason for a firm to produce a NPV.

the discount rate used is greater than the IRR

Answer 1

Q1) E) The black Scholes model only estimates the intrinsic value of call option.

Explanation: The black Scholes model is used to estimate the intrinsic value of both call and put option and not only call option.

Q2) D) Selling a put gives you the right to buy a stock at a certain price.

Explanation: Selling a put gives you the obligation to buy the stock and not the right to buy the stock.

Q3) E) Both C and D will give you same answer

Explanation: Replacement chain method and uniform annual series (Equivalent annuity approach) are the two methods to compare the project with unequal lives.

Q4) D) Discount rate is less than Irr

Explanation: If the discount rate will be same as the Irr , then the Npv of the project will be equal to 0. So inorder to have positive Npv we will need to a discount rate lower than IRR.