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77) The common stock of Hazelton Refiners is selling for $56.10 a share. U.S. Treasury bills are
currently yielding 3.4 percent. What is the current value of a one-year call option on this stock if
the exercise price is $55 and you assume the option will finish in the money?
A) $0
B) $3.74
C) $2.57
D) $3.18
E) $2.91
78) Currently, T-bills yield 3.8 percent and MTM stock sells for $38 a share. There is no
possibility that the stock will be worth less than $36 per share in one year. What is the value of a
call option on this stock if the exercise price is $35 per share?
A) $.32
B) $3.45
C) $2.89
D) $4.28
E) $.96
79) The price of TSC stock will be either $42 or $46 at the end of the year. Currently, T-bills
yield 4.1 percent and TSC sells for $43 a share. What is the per share value of a one-year TSC
call option if the exercise price is $45 per share?
A) $.66
B) $.72
C) $0
D) $.81
E) $1.03
80) Suppose the current share price of Dimension stock is $46. One year from now, this stock
will sell for either $38 or $52 a share. T-bills currently yield 3.3 percent. What is the per share
value of a Dimension call option if the exercise price is $40 per share and the expiration is one
year from now?
A) $7.90
B) $8.48
C) $12.00
D) $10.39
E) $13.62
81) The common stock of Westover Foods is currently priced at $18.70 a share. One year from
now, the stock price is expected to be either $16 or $22 a share. The risk-free rate of return is 3.4
percent. What is the current value of a one-year call option on this stock if the exercise price is
$20?
A) $0
B) $1.08
C) $2.58
D) $.76
E) $1.93
82) You own one call option with an exercise price of $27.50 on World Wide Stores stock. The
stock is currently selling for $28 a share but is expected to sell for either $26 or $30 a share in
one year. The risk-free rate of return is 3.65 percent and the inflation rate is 3.2 percent. What is
the current call option price if the option expires one year from now?
A) $1.55
B) $1.75
C) $1.37
D) $1.46
E) $1.82
83) The assets of Uptown Stores are currently worth $346,000. These assets are expected to be
worth either $320,000 or $365,000 one year from now. The company has a pure discount bond
outstanding with a $350,000 face value and a maturity date of one year. The risk-free rate is 3.9
percent. What is the value of the equity in this firm?
A) $9,915
B) $12,671
C) $9,507
D) $11,347
E) $10,015
84) Electronic Importers has a pure discount bond with a face value of $30,000 that matures in
one year. The risk-free rate of return is 3.8 percent. The assets of the business are expected to be
worth either $29,000 or $35,000 in one year. Currently, these assets are worth $28,600. What is
the current value of the bond?
A) $28,146
B) $29,207
C) $28,222
D) $29,547
E) $28,049
85) Mountain Top Inn has total assets currently valued at $478,500. These assets are expected to
be worth either $440,000 or $490,000 in one year. The company has a pure discount bond
outstanding with a face value of $475,000 that matures in one year. Currently, U.S. Treasury
bills are yielding 3.4 percent. What is the value of the equity in this firm?
A) $13,660
B) $18,975
C) $0
D) $15,890
E) $16,822
86) RPC's assets are currently worth $2,700. In one year, they will be worth either $2,000 or
$3,500. The risk-free interest rate is 3.5 percent. Suppose the firm has an outstanding debt issue
with a face value of $2,500. What is the current value of the firm's debt?
A) $2,377
B) $2,114
C) $2,188
D) $2,263
E) $2,425
87) Buckeye Industries has a bond issue with a face value of $20,000 that is coming due in one
year. The current value of the firm's assets is $22,200 but these assets are expected to be worth
either $18,000 or $26,000 one year from now. The going rate on one-year T-bills is 3.6 percent.
What is the current value of the firm's debt?
A) $16,601
B) $18,581
C) $19,407
D) $3,619
E) $2,793
88) You are considering a project that has been assigned a discount rate of 14.3 percent. If you
start the project today, you will incur an initial cost of $11,400 and will receive cash inflows of
$6,800 a year for two years. If you wait one year to start the project, the initial cost will rise to
$12,100 and the cash flows will increase to $7,200 a year for two years. What is the value of the
option to wait?
A) −$7.63
B) −$9.46
C) −$28.51
D) −$30.49
E) −$33.02
89) Western Shores is considering a project that has an initial cost today of $12,500. The project
has a two-year life with cash inflows of $7,400 a year. Should the firm opt to wait one year to
commence this project, the initial cost will increase by 4 percent and the cash inflows will
increase to $7,900 a year. What is the value of the option to wait if the applicable discount rate is
9.5 percent?
A) $373.63
B) $421.56
C) $303.93
D) $182.67
E) $521.66
90) Western Industrial Products is considering a project with a life of four years, a discount rate
of 14.7 percent, and an initial cost of $268,000. The project is expected to produce sales of 2,100
units on the last day of each year. The cash flow per unit is $50. The firm will have the option to
abandon the project after one year at which time the project's assets could be sold for an
estimated $225,000. The firm should abandon the project immediately following the sales on the
last day of the first year if the expected level of annual sales, starting with Year 2, falls to
________ units or less. Ignore taxes.
A) 1,961 units
B) 1,667 units
C) 1,922 units
D) 2,034 units
E) 2,100 units
91) Dressler Tech is considering a 3-year project with a discount rate of 15 percent, an initial
cost of $95,000, projected sales of 1,300 units on the last day of each year, and a cash flow per
unit of $38. The project can be abandoned following the sales on the last day of Year 2 at which
time the project's assets could be sold for an estimated $40,000. What is the net present value of
this project at Time 0 if the sales forecast for Year 3 of the project is revised such that there is a
50/50 chance that the sales will be either 1,100 or 1,500 units a year?
A) −$13,474
B) −$2,526
C) $19,172
D) $8,192
E) $18,887
92) A proposed 4-year project has an initial cost of $236,000, projected sales of 4,500 units a
year, a cash flow of $32 a unit, and a discount rate of 11 percent. Assume all operating cash
flows occur on the last day of each year. If the project is abandoned after two years, the project's
assets can be sold for $150,000. Below what level of annual sales, starting in Year 3, should the
project be abandoned?
A) 3,119 units
B) 2,737 units
C) 4,067 units
D) 3,516 units
E) 3,067 units
93) A new project is expected to produce sales of 4,800 units per year with a net cash flow of
$53 each for the next 20 years. The discount rate is 16 percent and the initial investment is
$1,625,000. After the first year, the project can be dismantled and sold for $1,475,000. After the
first year, the project should be abandoned if annual sales are expected to be less than which
number of units?
A) 4,735 units
B) 4,160 units
C) 4,800 units
D) 4,210 units
E) 4,440 units
94) A new 12-year project has estimated sales of 7,500 units per year, an end-of-year net cash
flow of $65 per unit, a discount rate of 15.5 percent, and an initial cost of $2.5 million. Sales will
be revised upward to 8,200 units if the first year is a success and revised downward to 5,000
units if the first year is not a success. Suppose the scale of the project can be doubled in one year
thereby increasing the sales projected to 16,800 units. Naturally, expansion would be desirable
only if the project is a success. The project could also be dismantled after the first year and sold
for $1,900,000. Assume that success and failure are equally likely. What is the current value of
the option to expand?
A) $1,074,328
B) $1,183,561
C) $828,406
D) $448,920
E) $1,272,312
95) A convertible bond has a face value of $1,000, a market value of $987 and can be converted
into 24 shares of stock. What is the conversion price?
A) $41.67
B) $44.63
C) $41.43
D) $41.13
E) $44.33
96) A convertible bond currently sells for $1,125, has a $1,000 face value, pays interest annually,
and matures in six years. The bond is convertible into shares of common stock at a conversion
price of $20. How many shares of stock will be received if five bonds are converted?
A) 225
B) 239
C) 200
D) 250
E) 281
97) A convertible bond has a face value of $5,000, a conversion price of $40, a coupon rate of 6
percent, semi-annual payments, and a maturity of 12 years. Similar bonds are currently yielding
7.5 percent. The current price of the related stock is $38 per share. What is the conversion value
of this bond?
A) $5,600
B) $5,000
C) $4,750
D) $4,930
E) $5,300
98) A convertible bond has a face value of $1,000 and a conversion price of $25. The bond has a
coupon rate of 6.5 percent, pays interest semi-annually, and matures in 13 years. Similar bonds
are currently yielding 6.8 percent. The current price of the related stock is $25.40 per share.
What is the straight bond value?
A) $974.38
B) $981.82
C) $1,032.50
D) $1,016.00
E) $1,000.00
99) Kurt owns a convertible bond that matures in 16 years. The bond has a coupon rate of 6
percent paid semi-annually, a face value of $1,000 and a conversion price of $25. Similar bonds
have a current market return of 5.85 percent. The current price of the related stock is $26.50 per
share. What is the straight bond value?
A) $1,060.00
B) $1,015.45
C) $972.80
D) $980.78
E) $1,030.00
100) Lucinda owns a $1,000 face value convertible bond that matures in six years, has a coupon
rate of 6.5 percent, paid annually, and a conversion price of $17.50. Similar bonds have a current
market return of 6.35 percent while the related stock is priced at $18.03 per share. What is the
conversion value of this bond?
A) $1,007.30
B) $1,028.45
C) $996.11
D) $1,030.29
E) $1,000.00
101) A $1,000 convertible debenture has a conversion price of $75 per share, an annual coupon
payment of $55, and a related stock price of $72.40 a share. What is the conversion value of this
bond?
A) $1,055.00
B) $1,052.40
C) $1,000.00
D) $965.33
E) $992.68
102) A bond with five detachable warrants has just been offered for sale for $1,000. The bond
matures in eight years and has an annual coupon of $60. Each warrant grants its owner the right
to purchase two shares of stock in the company at $15 per share. Ordinary bonds (with no
warrants) of similar quality are priced to yield 6.4 percent. What is the value of one warrant?
A) $2.45
B) $5.67
C) $12.25
D) $24.45
E) $4.89
