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Question
Cazden Motors' 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?
a. The options with the $25 strike price will sell for less than the options with the $35 strike price.
b. The options with the $25 strike price have an exercise value greater than $5.
c. The options with the $35 strike price have an exercise value greater than $0.
d. If Cazden's stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.
e. The options with the $25 strike price will sell for $5.
Answer
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Related questions
Q:
Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock, provided the strike prices for the put and call are the same.
a. True
b. False
Q:
Suppose you believe that Florio Company's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of $85 per share. If you bought this option for $5.10 and Florio's stock price actually dropped to $60, what would your pre-tax net profit be?
a. −$5.10
b. $19.90
c. $20.90
d. $22.50
e. $27.60
Q:
Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
a. The higher the strike price on XYZ's options, the higher the option's price will be.
b. Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
c. If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.
d. If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
e. The price of these call options is likely to rise if XYZ's stock price rises.
Q:
The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.
a. True
b. False
Q:
Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
a. 1 U.S. dollar = 0.6235 Canadian dollars
b. 1 U.S. dollar = 0.6265 Canadian dollars
c. 1 U.S. dollar = 1.0000 Canadian dollars
d. 1 U.S. dollar = 1.5961 Canadian dollars
e. 1 U.S. dollar = 1.6039 Canadian dollars
Q:
Suppose Stackpool Inc. had inventory in Britain valued at 240,000 pounds one year ago. The exchange rate for dollars to pounds was 1 = 2 U.S. dollars. This year the exchange rate is 1 = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates?
a. −$240,000
b. −$43,200
c. $0
d. $43,200
e. $47,473
Q:
Due to advanced communications technology and the standardization of general procedures, working capital management for multinational firms is no more complex than it is for large domestic firms.
a. True
b. False
Q:
Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.
a. True
b. False
Q:
Which of the following is NOT a reason why companies move into international operations?
a. To develop new markets for the firm's products.
b. To better serve their primary customers.
c. Because important raw materials are located abroad.
d. To increase their inventory levels.
e. To take advantage of lower production costs in regions where labor costs are relatively low.
Q:
Suppose it takes 1.82 U.S. dollars today to purchase one British pound in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days. How many dollars will a pound buy in 30 days?
a. 1.12
b. 1.63
c. 1.82
d. 2.04
e. 3.64
Q:
Individuals and corporations can buy or sell forward currencies to hedge their exchange rate exposure. Essentially, the process involves simultaneously selling the currency expected to appreciate in value and buying the currency expected to depreciate.
a. True
b. False
Q:
Suppose one U.S. dollar can purchase 144 yen today in the foreign exchange market. If the yen depreciates by 8.0% tomorrow, how many yen could one U.S. dollar buy tomorrow?
a. 155.5 yen
b. 144.0 yen
c. 133.5 yen
d. 78.0 yen
e. 72.0 yen
Q:
A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.
a. True
b. False
Q:
The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.
a. True
b. False
Q:
On average, a firm collects checks totaling $250,000 per day. It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm. Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes. The lockbox system would be a good buy if it costs $25,000 annually.
a. True
b. False
Q:
One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant.
a. True
b. False
Q:
As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.
a. True
b. False
Q:
Because money has time value, a cash sale is always more profitable than a credit sale.
a. True
b. False
Q:
A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.
a. True
b. False
Q:
Changes in a firm's collection policy can affect sales, working capital, and profits.
a. True
b. False
Q:
Which of the following statements is CORRECT?
a. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
b. Well-diversified stockholders do not need to consider market risk when determining required rates of return.
c. Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
d. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
e. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
Q:
The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
a. True
b. False
Q:
A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
a. Increase the estimated NPV of the project to reflect its greater risk.
b. Reject the project, since its acceptance would increase the firm's risk.
c. Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
d. Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.
e. Increase the estimated IRR of the project to reflect its greater risk.
Q:
Wansley Enterprises is considering a new project. The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?
a. The proposed new project would increase the firm's corporate risk.
b. The proposed new project would increase the firm's market risk.
c. The proposed new project would not affect the firm's risk at all.
d. The proposed new project would have less stand-alone risk than the firm's typical project.
e. The proposed new project would have more stand-alone risk than the firm's typical project.
Q:
Tallant Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:
Project X Project Y
Expected NPV $500,000 $500,000
Standard deviation (σNPV) $200,000 $250,000
Project beta (vs. market) 1.4 0.8
Correlation of the project cash flows with cash flows from currently existing projects. Cash flows are not correlated with the cash flows from existing projects. Cash flows are highly correlated with the cash flows from existing projects.
Which of the following statements is CORRECT?
a. Project X has more corporate (or within-firm) risk than Project Y.
b. Project X has more market risk than Project Y.
c. Project X has the same level of corporate risk as Project Y.
d. Project X has less market risk than Project Y.
e. Project X has more stand-alone risk than Project Y.
Q:
Garden-Grow Products is considering a new investment whose data are shown below. The equipment would be depreciated on a straight-line basis over the project's 3-year life, would have a zero salvage value, and would require some additional working capital that would be recovered at the end of the project's life. Revenues and other operating costs are expected to be constant over the project's life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3.)
Project cost of capital (r) 10.0%
Net investment in fixed assets (basis) $75,000
Required new working capital $15,000
Straight-line deprec. rate 33.333%
Sales revenues, each year $75,000
Operating costs (excl. deprec.), each year $25,000
Tax rate 25.0%
a. $30,069
b. $31,573
c. $33,152
d. $34,809
e. $36,550
Q:
Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other Weston's products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)
Cost of capital 10.0%
Pre-tax cash flow reduction for other products (cannibalization) $5,000
Investment cost (depreciable basis) $80,000
Straight-line deprec. rate 33.333%
Sales revenues, each year for 3 years $67,500
Annual operating costs (excl. deprec.) $25,000
Tax rate 25.0%
a. $6,196
b. $6,522
c. $6,848
d. $7,190
e. $7,550
Q:
Opportunity costs include those cash inflows that could be generated from assets the firm already owns if those assets are not used for the project being evaluated.
a. True
b. False
Q:
Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
a. True
b. False
Q:
Which of the following procedures does the text say is used most frequently by businesses when they do capital budgeting analyses?
a. Differential project risk cannot be accounted for by using "risk-adjusted discount rates" because it is highly subjective and difficult to justify. It is better to not risk adjust at all.
b. Other things held constant, if returns on a project are thought to be positively correlated with the returns on other firms in the economy, then the project's NPV will be found using a lower discount rate than would be appropriate if the project's returns were negatively correlated.
c. Monte Carlo simulation uses a computer to generate random sets of inputs, those inputs are then used to determine a trial NPV, and a number of trial NPVs are averaged to find the project's expected NPV. Sensitivity and scenario analyses, on the other hand, require much more information regarding the input variables, including probability distributions and correlations among those variables. This makes it easier to implement a simulation analysis than a scenario or a sensitivity analysis, hence simulation is the most frequently used procedure.
d. DCF techniques were originally developed to value passive investments (stocks and bonds). However, capital budgeting projects are not passive investments⎯managers can often take positive actions after the investment has been made that alter the cash flow stream. Opportunities for such actions are called real options. Real options are valuable, but this value is not captured by conventional NPV analysis. Therefore, a project's real options must be considered separately.
e. The firm's corporate, or overall, WACC is used to discount all project cash flows to find the projects' NPVs. Then, depending on how risky different projects are judged to be, the calculated NPVs are scaled up or down to adjust for differential risk.