Chapter 20 What is the value of a call option with a strike price of

Fundamentals of Corporate Finance 3e Test Bank

82.

Assume that the stock of XYZ, Inc., is currently trading for $18 and will either rise to

$24 or fall to $13 in one year. The risk-free rate for one year is 11 percent. What is the

value of a call option with a strike price of $26?

A)

$0

B)

$5.23

C)

$7.72

D)

$2.00

Ans:

A

83.

The standard deviation of the return on a stock is 25% per year. Compute the standard

deviation over two years. (Round your intermediate answer to 3 decimal places.)

A)

30.35%

B)

35.35%

C)

12.25%

D)

25.00%

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

84.

Phocuscorp’s stock is currently worth $60. The replicating portfolio consists of one-half

share and $24.50 risk-free loan. Compute the value of call option.

A)

$5.5

B)

$4.5

C)

$5.0

D)

$6.0

Ans:

A

85.

Assume that the stock of Unmix, Inc., is currently trading for $22 and will either rise to

$31 or fall to $18 in one year. Assume the risk-free rate for one year is 0 percent. What

is the value of a put option with a strike price of $25? (Round the final answer to two

decimal places.)

A)

$0

B)

$1.85

C)

$3.00

D)

$4.85

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

86.

Assume that the stock of AllSiete, Inc., is currently trading for $44 and will either rise

to $50 or fall to $29 in one year. The risk-free rate for one year is 4 percent. What is the

value of a put option with a strike price of $40? (Round the final answer to two decimal

places.)

A)

$0

B)

$2.20

C)

$3.14

D)

$5.54

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

87.

Assume that the stock of Phoneeffect, Inc., is currently trading for $16 and will either

rise to $23.50 or fall to $9 in one year. The risk-free rate for one year is 3 percent. What

is the value of a put option with a strike price of $18 that expires in three months? (Do

not round intermediate computations. Round final answer to two decimal places.)

A)

$0

B)

$2.75

C)

$4.23

D)

$5.73

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

88.

Assume that the stock of TuneSeis, Inc., is currently trading for $29 and will either rise

to $32 or fall to $5 in one year. The risk-free rate for one year is 2 percent. What is the

value of a put option with a strike price of $30? (Do not round intermediate

computations. Round final answer to two decimal places.)

A)

$0

B)

$0.41

C)

$1.78

D)

$2.20

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

89.

Assume that the stock of Mixtoss, Inc., is currently trading for $18 and will either rise

to $30 or fall to $12 in one year. Assume the risk-free rate for one year is 0 percent.

What is the value of a put option with a strike price of $15? (Do not round intermediate

computations.)

A)

$0

B)

$2

C)

$5

D)

$6

Ans:

B

90.

If the value of the underlying asset is well above the exercise price of put option then:

A)

it is likely that the option will be exercised by the buyer.

B)

the exercise price remains constant irrespective of the change in the value of the

underlying asset.

C)

the value of the option is directly proportional to the value of the underlying asset.

D)

the seller of the option will most likely make a profit.

Ans: D

Fundamentals of Corporate Finance 3e Test Bank

91.

Assume that the stock of Statrec, Inc., is currently trading for $2.60 and will either rise

to $10 or fall to $0 in one year. The risk-free rate for one year is 1 percent. What is the

value of a put option with a strike price of $5? (Do not round intermediate

computations. Round final answer to two decimal places.)

A)

$0

B)

$2.35

C)

$3.65

D)

$3.80

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

92.

You own a share of common stock in Vibrapower, Inc., which is currently trading for

$18 and will either rise to $30 or fall to $12 in one year. Assume the risk-free rate for

one year is 0 percent. You also own an American put option on the stock with a strike

price of $20, which expires in one year. What is the value of the put option, and what

would be the net payoff from exercising the option now? (Do not round intermediate

computations. Round final answer to two decimal places.)

A)

Option value: $3.33, Net payoff $2

B)

Option value: $3.33, Net payoff $6

C)

Option value: $5.33, Net payoff $2

D)

Option value: $5.33, Net payoff $6

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

93.

You are fortunate enough to own a put option with a strike price of $40 on the stock of

Osmerc, Inc. The current stock price is $3. When the option expires, you expect the

stock price to be either $2 or $5. Assume the risk-free rate of interest is zero. What is

the value of your option?

A)

$0

B)

$35

C)

$37

D)

$46

Ans:

C

The payoff from the put option is $35 if the stock price rises and $38 if the stock price

falls. When the put option pays off in either state, the value of the option is strike price

minus the current stock price.

94.

Assume that the stock of EffeUn, Inc., is currently trading for $16 and will either rise to

$18 or fall to $12 in one year. The risk-free rate for one year is 1 percent. What is the

value of a put option with a strike price of $10?

A)

$0

B)

$2.00

C)

$2.33

D)

$5.00

The payoff from the put option is $0 if the stock price rises and $0 if the stock price

Fundamentals of Corporate Finance 3e Test Bank

95.

Assume that the stock of ABC, Inc., is currently trading for $21 and will either rise to

$30 or fall to $18 in one year. Assume the risk-free rate for one year is 0 percent. You

own a portfolio that consists of one call option and one put option. Both options have a

strike price of $25, and both expire in one year. What is the value of your portfolio?

(Do not round intermediate computations. Round final answer to one decimal place.)

A)

$4.5

B)

$25.0

C)

$6.0

D)

$6.5

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

96.

Assume that the stock of DiezEight, Inc., is currently trading for $16 and will either rise

to $50 or fall to $2 in one year. The risk-free rate for one year is 8 percent. You own a

portfolio that consists of one call option and one put option. Both options have a strike

price of $15, and both expire in one year. What is the value of your portfolio? (Do not

round intermediate computations. Round final answer to two decimal places.)

A)

$0

B)

$15.64

C)

$21.40

D)

$18.52

Ans:

D