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Finance
Q:
An investor (the buyer) purchases a call option from a seller. On the expiration date of a call option:
A) the buyer has the obligation to buy the underlying asset and the seller has the obligation to sell it.
B) the buyer has the right to buy the underlying asset and the seller has the obligation to sell it.
C) the buyer has the obligation to sell the underlying asset and the seller has the right to buy it.
D) the buyer has the right to sell the underlying asset and the seller has the right to buy it.
Q:
A small soybean farmer wants to hedge the price risk of his next crop, but he is financially constrained. He can't raise capital by either borrowing money or selling his current assets. Instead, he sells call options on his soybean crop with a strike price of $14 per bushel at a premium of $0.50 a bushel. Using the proceeds from selling the call options, he buys put options on his soybean crop with a strike price of $11.00 per bushel at a premium of $0.35 per bushel. Assume the risk-free interest rate is 0 percent. By taking these derivative positions, the farmer has guaranteed that he will earn somewhere between $14.15 and $11.15 per bushel.A) TrueB) False
Q:
Harmostrax Co. has a defined-benefit pension plan for its employees. To fund the plan, the company makes periodic contributions to a stock investment fund. If the stock market declines significantly, the company would have to make additional contributions to make up for lost revenue. The company could hedge its risk of a market downturn by periodically purchasing put options on the stock market.
A) True
B) False
Q:
Hedging is the process of using financial instruments such as options, forwards, futures, and swaps to reduce the financial risks faced by a firm.
A) True
B) False
Q:
Suppose the current spot price of corn is $20 a bushel. A corn farmer expects to produce 2,000 bushels at the end of the season, and she wants to ensure that she gets at least $18 per bushel. Call options on 1,000 bushels of corn with a strike price of $15 and an expiration date at the end of the season are selling for $3,000. By selling call options on her corn crop, the farmer can guarantee that she gets at least $18 per bushel.
A) True
B) False
Q:
Suppose the current spot price of wheat is $25 a bushel. A wheat farmer expects to produce 1,000 bushels at the end of the season, and she wants to ensure that she gets at least $19 a bushel. If a put option on 1,000 bushels of wheat with a strike price of $20 and an expiration date at the end of the season is selling for $1,000, the farmer can purchase the put option to guarantee she gets $19 a bushel.
A) True
B) False
Q:
Financial options can be used to hedge risks such as interest rates and foreign exchange rates.
A) True
B) False
Q:
By designing compensation plans with performance bonuses, stock-based compensation, and stock options, corporate boards are attempting to make the payoff function for managers look similar to the payoff function for stockholders.
A) True
B) False
Q:
Consider a company that is likely to go bankrupt in the next year. Stockholders may wish to pursue negative-NPV projects, even if there is no additional value to the project from real options.
A) True
B) False
Q:
Consider a company that is likely to go bankrupt in the next year. The bondholders may encourage the company to pursue risky negative-NPV projects in hopes that the firm will avoid financial distress.
A) True
B) False
Q:
Consider a firm with a single loan. There are no interest payments on the loan, but the principal and interest are all due in two years. It is uncertain whether the cash flow the company will produce will be enough to pay off the debt. The payoff to stockholders in this company resembles a call option.
A) True
B) False
Q:
Ecofren Thermostats Co. sells equipment to residential and commercial customers. It is considering whether or not to develop a new line of smart thermostats. The discounted cash flows from smart thermostat sales are not likely to cover the development costs. However, the company has decided to pursue the project anyway. If the commercial technology is successful, it might be applied to a new line of very profitable residential thermostats. This is an example of the option to make follow-on investments.
A) True
B) False
Q:
The option to abandon a project can decrease its value.
A) True
B) False
Q:
A company is negotiating for the option to develop a platinum mine. Under the terms of the option contract, the company would be able to purchase the development rights to the mine one year from now for an exercise price specified today. If, during the negotiations over the option contract, the volatility of the price of platinum increases, the company should expect to pay a higher price for the development option.
A) True
B) False
Q:
After taking into account the value of real options, it is possible that some projects with a negative NPV should be pursued.
A) True
B) False
Q:
The management's ability to choose to terminate a project is like a put option.
A) True
B) False
Q:
The option to defer investment can be characterized as the flexibility to wait and learn more information about a project before committing resources to the project.
A) True
B) False
Q:
If a project has a positive NPV, then the real options that affect the project are not important to estimating the value of the project.
A) True
B) False
Q:
If a firm adds financial options to its debt securities, it will increase the interest expense to the firm.
A) True
B) False
Q:
A portfolio consisting of one put option and one call option, both with the same exercise price is a good investment strategy for investors who don't know whether an asset's value is likely to go up or down, but think that the volatility of the asset will increase.
A) True
B) False
Q:
Suppose you have sold a put option on a stock with a strike price of $25 and assume the current price of the stock is $25. If the stock price at expiration is $30, your payoff will be "$5.
A) True
B) False
Q:
Consider a put option on a stock with a strike price of $60. If the stock price at expiration is $50, the payoff from the put option is $10.
A) True
B) False
Q:
Consider a call option on a stock with a strike price of $60. If the stock price at expiration is $50, the payoff from the call option is $10.
A) True
B) False
Q:
When using the binomial pricing model to price an option, the volatility of the value of the underlying asset is represented by the difference between the two possible future values of the underlying asset.
A) True
B) False
Q:
To price an option using the binomial pricing model, it is important that we know the probability that the asset will increase in value.
A) True
B) False
Q:
In the binomial pricing model, an option is priced using a replicating portfolio that typically consists of a risk-free bond and the asset underlying the option.
A) True
B) False
Q:
If the risk-free rate of interest increases, all else being equal, we would expect the value of a call option to increase.
A) True
B) False
Q:
The current price of an asset is $75. A put option on the asset with a strike price of $100 expires one year from now. It is possible, without arbitrage, for this put option to be priced at $24 today.
A) True
B) False
Q:
Neither a call nor a put option can have a negative price.
A) True
B) False
Q:
A call option can sometimes be priced higher than the underlying asset.
A) True
B) False
Q:
A stock is selling for $50 today. A call option on the stock with a strike price of $50 is set to expire next month. If the price of the stock goes down tomorrow we would expect the price of the call option to go down as well.
A) True
B) False
Q:
A put option with a strike price of $20 is expiring today. The stock is currently selling at $25. Based on this information, the put option should not be exercised.
A) True
B) False
Q:
Which of the following is NOT an input in financial planning models?
A) Financial statements
B) Pro forma financial statements
C) Investment decisions
D) Financing decisions
Q:
The inputs used in building financial planning models include
A) financial statements, sales forecasts, and a firm's investment and financial policy decisions.
B) pro forma statements, sales forecasts, and macroeconomic variables.
C) pro forma statements, sales forecasts, and financing decisions.
D) None of these
Q:
Which of the following statements is NOT true?
A) Sales forecasts models are typically very basic and use no complicated analysis.
B) Sales forecasts are generated within a firm.
C) Sales forecasts utilize economic variables as input.
D) All of these
Q:
The sales forecasts used in financial planning
A) are developed using a variety of techniques.
B) are generated within the firm.
C) utilize macroeconomic variables as input.
D) All of these
Q:
Financial planning models
A) help management make investment decisions.
B) help management make financing decisions.
C) make the analysis faster and accurate.
D) All of these
Q:
The financial planning model focuses on
A) the inventory accounting method decision and the accounts payables decision.
B) the current assets decision and the current liabilities decision.
C) the investment decision and the financing decision.
D) None of these
Q:
A financial plan includes
A) the strategic plan, financing plan, and options plan.
B) the strategic plan, investment plan, and financing plan.
C) the financing plan, investment plan, and options plan.
D) None of these
Q:
Which of the following is a part of a financing plan?
A) The dollar amount of funds that has to be raised externally and the sources of funds available to a firm
B) The desired capital structure for a firm
C) A firm's dividend policy
D) All of these
Q:
The financing plan of a firm will indicate
A) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's dividend policy.
B) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm's working capital policy.
C) the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm's dividend policy, and the firm's working capital policy.
D) the firm's dividend policy, the desired capital structure for the firm, and the firm's working capital policy.
Q:
Which of the following is true of capital expenditures?
A) It is part of a firm's investment plan.
B) Once a capital investment is made, it is almost always impossible to be reversed.
C) Capital expenditures can be one-time investments or routine investments that allow a firm to continue its operations.
D) All of these
Q:
The strategic plan does NOT identify
A) major areas of investment in productive assets.
B) future mergers, alliances, and divestitures.
C) working capital strategies.
D) the lines of business a firm will compete.
Q:
The strategic plan identifies
A) the lines of business in which a firm will compete.
B) major areas of investment in productive assets.
C) capital expenditures, acquisitions, and new lines of business.
D) All of these
Q:
Which of the following issues is NOT addressed in a firm's financial plan?
A) What is the growth rate for the firm's main competitor?
B) Where is the firm headed?
C) What capital resources does the management need to get there?
D) How is the firm going to pay for the resources needed?
Q:
Which of the following issues is addressed in a financial plan?
A) Where is the company headed?
B) What capital resources does the management need to get there?
C) How is the firm going to pay for the resources needed?
D) All of these
Q:
Which of the following components make up a financial plan?
A) The strategic plan
B) The investment plan
C) The financing plan
D) All of these
Q:
The lower a firm's ROE, the lower is the firm's sustainable growth rate.
A) True
B) False
Q:
The higher a firm's plowback ratio, the higher is its sustainable growth rate.
A) True
B) False
Q:
The higher a firm's dividend payout ratio, the higher is the firm's internal growth rate.
A) True
B) False
Q:
The sustainable growth rate is the rate of growth that a firm can sustain without selling additional equity while maintaining the same capital structure.
A) True
B) False
Q:
The sustainable growth rate is the rate of growth that a firm can sustain without selling additional debt.
A) True
B) False
Q:
Holding the growth rate constant, the higher a firm's dividend payout ratio, the larger the amount of external debt or equity financing needed.
A) True
B) False
Q:
When a firm maintains a constant dividend policy, the firm's growth rate has no bearing on the external financing needed.
A) True
B) False
Q:
In cases where fixed assets are added as large discrete units, and much of a firm's capacity may not be utilized for some period of time. These types of assets are called lumpy assets.
A) True
B) False
Q:
Firms that are not highly capital intensive tend to be more risky than similar firms that use less fixed assets.
A) True
B) False
Q:
Fixed assets vary directly with sales when firms are operating at less than full capacity.
A) True
B) False
Q:
The capital intensity ratio measures the dollar amount of sales per dollar invested in assets.
A) True
B) False
Q:
In the percent of sales model, all income statement and balance sheet accounts vary directly with sales.
A) True
B) False
Q:
The percent of sales model is a complex financial planning model.
A) True
B) False
Q:
Sales are often correlated to the regional or national economy, so it is not necessary to incorporate economic forecasts into the model.
A) True
B) False
Q:
Projected or pro forma statements can be used to analyze the investment alternatives but not to estimate the amounts of external funding needed.
A) True
B) False
Q:
Pro forma financial statements that result from financial planning models are always perfectly balanced.
A) True
B) False
Q:
The outputs of the financial planning model are a series of pro forma financial statements and financial ratios based on these statements.
A) True
B) False
Q:
Investment and financing policy decisions are not considered inputs in financial planning models.
A) True
B) False
Q:
Financial statements and sales forecasts are considered major inputs in developing financial planning models.
A) True
B) False
Q:
Sales are often correlated to the regional or national economy, and hence economic forecasts are incorporated into the financial planning model.
A) True
B) False
Q:
Financial models provide management with the ability to prepare projected financial statements.
A) True
B) False
Q:
Financial planning models are not considered an integral part of financial planning.
A) True
B) False
Q:
Financial planning helps management to establish financial and operating goals for a firm and to communicate those goals throughout the firm.
A) True
B) False
Q:
The cash budget identifying the time line for cash inflows and outflows included in divisional business plans is a part of the financial plan.
A) True
B) False
Q:
The financial plan focuses only on strategic planning and investment planning.
A) True
B) False
Q:
In the financing plan of a firm, management states that the firm will seek to raise funds externally even if sufficient internally generated funds are available to fund projects.
A) True
B) False
Q:
Once capital investments are made, they are almost impossible to be reversed.
A) True
B) False
Q:
Capital expenditures can be one-time investments or routine investments that allow a firm to continue its operations.
A) True
B) False
Q:
The strategic plan of a firm addresses the issue of what capital resources the management needs to achieve its goals.
A) True
B) False
Q:
The strategic plan identifies major areas for investments in productive assets, and also identifies mergers, alliances, and divestitures to strengthen a firm's business portfolio.
A) True
B) False
Q:
The financing plan documents a firm's long-term goals, the strategies that management will use to achieve the goals, and the capabilities that the firm needs to sustain its competitive position.
A) True
B) False
Q:
The financing plan deals with how a firm is going to secure the funds needed to pay for the capital resources required.
A) True
B) False
Q:
The investment plan of a firm addresses the issue of what capital resources the management needs to get to achieve its goals.
A) True
B) False