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Fundamentals of Corporate Finance, 12e (Ross)
Chapter 24 Options and Corporate Finance
1) Which one of the following grants its owner the right to buy or to sell an asset at a fixed price
at any time during a stated period?
A) American option
B) Forward contract
C) Futures contract
D) Swap
E) European option
2) Elizabeth owns a call option on 100 shares of Microsoft stock and she has just decided to
purchase those shares. This purchase is commonly referred to as:
A) striking the asset.
B) expiring the option.
C) exercising the option.
D) placing the collar.
E) the collar option.
3) What is another name for an option's strike price?
A) Opening price
B) Intrinsic value
C) Exercise price
D) Market price
E) Time value
4) Which term applies to the final day on which an option can be exercised?
A) Payment date
B) Ex-option date
C) Opening date
D) Expiration date
E) Intrinsic date
5) What is the maximum amount you can lose if you purchase one call option contract on ABC
stock that is currently selling for $16 a share?
A) The market price of the stock multiplied by 100
B) The strike price multiplied by 100
C) The strike price per share
D) The option premium per share multiplied by 100
E) The option premium per share
6) Brad purchased an option that he can only exercise on the final day of the option period.
Which type of option did he purchase?
A) European
B) American
C) Inflexible
D) Dated
E) Pointed
7) A stock currently sells for $34 a share but is expected to increase in value over the next six
months to at least $36 a share. Assume there are 6-month options available on this stock with an
exercise price of $35. Which of these options should have the most value today?
A) European put
B) American call
C) American and European calls equally
D) European call
E) American put
8) The owner of an American put option has the ________ an asset at a fixed price during a
stated period of time.
A) right to sell
B) right to buy
C) obligation to sell
D) obligation to buy
E) obligation to trade
9) Jen is the holder of a European call option. Given this, she:
A) is obligated to buy if the option is exercised.
B) has the right to sell if she chooses to do so.
C) has a right to buy but only on the expiration date.
D) is obligated to sell if the option is exercised.
E) has a right to buy at any time before the option expires.
10) Julie opted to exercise her August option on June 20th and as a result received $2,500 for the
sale of her shares. Which one of the following did Julie own?
A) Warrant
B) American call
C) American put
D) European call
E) European put
11) Steve owns an option that grants him the right to purchase shares of LK Tool stock at $45 a
share. Currently, the stock is selling for $52.40 a share. Steve would like to realize his profits but
is not permitted to exercise the option for another two weeks. Which one of the following does
Steve own?
A) Straight bond
B) American call
C) American put
D) European call
E) European put
12) The primary difference between an American call option and a European call option is the
fact that the American call:
A) has a fixed strike price while the European strike price varies over time.
B) is a right to buy while a European call is an obligation to buy.
C) has an expiration date while the European call does not.
D) is written on 100 shares of the underlying security while the European call covers 10 shares.
E) can be exercised at any time prior to expiration while the European call can only be exercised
on the expiration date.
13) You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero
intrinsic value. Which one of the following best describes this option?
A) Worthless
B) Unfunded
C) Expired
D) In-the-money
E) Out-of-the-money
14) A $20 put option on Wildwood stock expires today. The current price of the stock is $18.50.
Which one of the following best describes this option?
A) Funded
B) Unfunded
C) At-the-money
D) In-the-money
E) Out-of-the-money
15) The maximum value of a call option can never exceed the:
A) underlying stock price.
B) exercise price plus the stock price.
C) strike price.
D) premium price.
E) intrinsic value.
16) Which one of the following describes the lower bound of a call's value?
A) Strike price or zero, whichever is greater
B) Stock price minus the exercise price or zero, whichever is greater
C) Strike price or the stock price, whichever is lower
D) Strike price or zero, whichever is lower
E) Stock price minus the exercise price or zero, whichever is lower
17) Which one of the following describes the intrinsic value of a call option?
A) The call's upper bound value
B) The call's lower bound value
C) Market price of the underlying security
D) Zero, if the call is in-the-money
E) The strike price
18) Which one of the following describes the intrinsic value of a put option?
A) Lesser of the strike price or the stock price
B) Lesser of the stock price minus the exercise price or zero
C) Lesser of the stock price or zero
D) Greater of the strike price minus the stock price or zero
E) Greater of the stock price minus the exercise price or zero
19) Which one of the following statements is correct?
A) The value of a call decreases as the price of the underlying stock increases.
B) The value of a call increases as the exercise price decreases.
C) The value of a put increases as the price of the underlying stock increases.
D) The value of a put decreases as the exercise price increases.
E) The intrinsic value of a put must be zero on the expiration date.
20) Mark owns both a March $20 put and a March $20 call on Alpha stock. Which one of the
following statements correctly relates to Mark's position? Ignore taxes and transaction costs.
A) A price decrease in Alpha stock will increase the value of Mark's call option.
B) A March $30 call is worth more than Mark's $20 call.
C) The time premium on an April $20 put is less than the time premium on Mark's put. (Assume
both puts expire in the same calendar year.)
D) A price increase in Alpha stock from $26 to $28 will increase the value of Mark's put.
E) If the intrinsic value of Mark's put increases by $1 then the intrinsic value of his call must
either decrease by $1 or equal zero.
21) Travis owns both a September $30 call and a September $30 put. If the call finishes at-the-
money, then the put will:
A) finish in-the-money.
B) finish at-the-money.
C) finish out-of-the-money.
D) either finish at-the-money or in-the-money.
E) either finish at-the-money or out-of-the-money.
22) Which one of the following terms applies to the value of an option on its expiration date?
A) Strike price
B) Upper limit
C) Deadline price
D) Time value
E) Intrinsic value
23) Which one of the following will decrease the value of an American call option?
A) A decrease in the value of the underlying security
B) An increase in the risk-free rate
C) A decrease in the exercise price
D) An increase in the price volatility of the underlying asset
E) An increase in the time to expiration
24) Which one of the following will decrease the value of an American call option?
A) A decrease in the price volatility of the underlying asset
B) An increase in time to expiration
C) An increase in the underlying stock price
D) A decrease in the exercise price
E) An increase in the risk-free rate of return
25) Suzie is the controller of The Price Rite Company. She has been granted the right to buy
1,000 shares of her employer's stock at $25 a share anytime within the next three years. Which
one of the following has Suzie been granted?
A) Employee stock options
B) Company bonus options
C) Employee grants
D) Employee exercise options
E) Company benefits options
26) Which one of the following statements regarding employee stock options (ESOs) is correct?
A) ESOs grant an employee the right to buy a fixed number of shares of company stock at the
market price.
B) Employees must exercise their ESOs prior to those ESOs becoming vested.
C) Employees may forfeit their ESOs if they terminate their employment with the issuing firm.
D) If a firm issues ESOs it must make them available to all employees.
E) Employees can sell their ESOs if they do not want to personally exercise them.
27) Employee stock options are primarily designed to do which one of the following?
A) Provide employees with put options on their shares of company stock
B) Provide an immediately vested benefit to key employees
C) Influence the actions and priorities of employees
D) Distribute excess cash to key employees to avoid corporate taxation
E) Provide an immediate capital gain to certain employees
28) Employee stock options:
A) usually have a positive intrinsic value when issued.
B) must be backdated at least six months to comply with Sarbanes-Oxley.
C) are generally "underwater" when issued.
D) are frequently repriced if the options are in-the-money.
E) are generally issued with a zero intrinsic value.
29) The Sarbanes-Oxley Act of 2002 requires firms to report ESO grants within ________ days
of the grant.
A) 2 calendar
B) 2 business
C) 7 calendar
D) 30 business
E) 45 calendar
30) When underwater employee stock options are exchanged, the option holder generally
receives:
A) a smaller number of new options with a lower exercise price.
B) a cash payment equal to the value of the options when they were originally issued.
C) twice the number of options with an exercise price equal to half of the original exercise price.
D) a larger number of new options with a higher exercise price.
E) the same number of options but with a higher exercise price.
31) Delta Importers has a pure discount loan with a face value of $180,000 due in one year. The
assets of the firm are currently worth $215,000. The shareholders in this firm basically own a
________ option on the assets of the firm with a strike price of ________.
A) put; $180,000
B) put; $265,000
C) warrant; $265,000
D) call; $180,000
E) call; $265,000
32) Jack and Jill are house hunting and find a house (House A) they really like but want to
continue searching the market for one more week before making the final decision to buy House
A. To avoid having someone else purchase House A while they continue their house hunting,
they decide to place a $2,500 deposit on House A. This deposit will apply to the purchase price if
they buy House A. If they do not buy House A, they will forfeit the $2,500. Essentially, Jack and
Jill have a ________ on House A.
A) financial put option
B) financial call option
C) warrant
D) real put option
E) real call option
33) Valuing the option to wait:
A) can result in a negative option value.
B) assumes the NPV of a project commenced today is negative.
C) is unaffected by a project's discount rate.
D) is dependent upon a wait time of three years or less.
E) requires at least two NPV calculations as of Time 0.
34) Ignoring each of the following may cause the NPV of a project to be underestimated except
for the option to:
A) abandon.
B) expand.
C) wait.
D) contract.
E) commence immediately.
35) Which one of the following is an example of a strategic option for a current restaurant?
A) Opening a new restaurant with a different look and an entirely different menu to see if that
restaurant appeals to the public
B) Deciding to close one hour earlier during the winter months due to slow sales
C) Abandoning a menu item based on customer complaints
D) Deciding to open only two new locations next year instead of the five that were originally
scheduled
E) Deciding to create separate lunch and dinner menus rather than have them combined on one
menu
36) Last month, Fun Time introduced a new board game. Consumer demand has been
overwhelming and it appears that strong demand will exist over the long term as all ages
absolutely love the game. Given this, which one of the following options should the company
consider in respect to this game?
A) Suspension
B) Expansion
C) Abandonment
D) Contraction
E) Withdrawal
37) Three months ago, Toy Town introduced a new toy for preschool children. The store
expected this toy to be an instant success and a fast-moving item. To their surprise, children have
zero interest in this toy so sales have been abysmal. Which one of the following options should
Toy Town consider in respect to this toy?
A) Suspension
B) Expansion
C) Abandonment
D) Contraction
E) Re-introduction
38) Once a project commences, management can select all of the following options except the
option to:
A) abandon.
B) suspend.
C) contract.
D) expand.
E) wait.
39) Which one of the following terms applies to an option that has an office building as its
underlying asset?
A) Financial option
B) Implicit option
C) Fixed option
D) Real option
E) Concrete option
40) The investment timing decision refers to the:
A) determination of when an option should be exercised.
B) decision of when to purchase an option on an underlying asset.
C) analysis of determining when an asset should be sold.
D) determination of when a project should be abandoned.
E) evaluation of the optimal time to commence a project.
