41) A purely financial merger:
A) increases the risk that the merged firm will default on its debt obligations.
B) has no effect on the risk level of the firm’s debt.
C) reduces the value of the option to go bankrupt.
D) has no effect on the equity value of a firm.
E) reduces the risk level of the firm thereby increasing the value of the firm’s equity.
42) Which one of the following statements is correct?
A) Mergers benefit shareholders but not creditors.
B) Positive NPV projects will automatically benefit both creditors and shareholders.
C) There may be conflicts between the interests of bondholders and shareholders.
D) Creditors prefer negative NPV projects while shareholders prefer positive NPV projects.
E) Mergers rarely affect bondholders.
43) If the risk-free rate is 6.5 percent compounded annually, what is the continuously
compounded risk-free rate equal to?
A) 1/ln1.065
B) 6.10%
C) ln1.065
D) 6.24%
E) e1.065 − 1
44) This morning, Kate put a European protective put strategy in place when the cost of ABC
stock was $29.15 per share and the 1-year $30 ABC put was priced at $1.05 per share. How
much profit per share will she earn from this strategy if the stock is worth $28 a share on the put
expiration date?
A) $7.80
B) −$1.05
C) −$.20
D) $8.85
E) $1.25
45) You need $15,400 in three years. How much do you need to deposit today to fund this need
if you can earn 5 percent per year, compounded continuously? Assume this is the only deposit
you make.
A) $13,506
B) $13,049
C) $14,179
D) $13,255
E) $12,916
46) A stock is selling for $62 per share. A call option with an exercise price of $65 sells for
$3.85 and expires in three months. The risk-free rate of interest is 2.8 percent per year,
compounded continuously. What is the price of a put option with the same exercise price and
expiration date?
A) $6.74
B) $6.23
C) $6.67
D) $6.40
E) $6.95
47) A put option that expires in eight months with an exercise price of $55 sells for $7.34. The
stock is currently priced at $52, and the risk-free rate is 3.1 percent per year, compounded
continuously. What is the price of a call option with the same exercise price and expiration date?
A) $5.67
B) $5.47
C) $5.34
D) $4.71
E) $4.92
48) Today, you purchased 300 shares of Lazy Z stock for $49.80 per share. You also bought
three 1-year, $50 put options on Lazy Z stock at a cost of $.55 per share. What is the maximum
total amount you can lose over the next year on these purchases?
A) −$15,105
B) −$11,050
C) −$160
D) −$105
E) $0
49) Today, Ted purchased 500 shares of ABC stock at a price of $42.20 per share. He also
purchased five put option contracts on ABC at a price of $.10 per share, an exercise price of $40
and a 1-year term. What is the maximum loss Ted can realize on his investments over the next
year?
A) −$1,105
B) −$1,050
C) −$1,115
D) −$1,150
E) $0
50) Webster United stock is priced at $35.79 per share. The 6-month $35 call options are priced
at $1.40 and the risk-free rate is 3.2 percent, compounded continuously. What is the per share
value of the 6-month put option?
A) $.15
B) $.05
C) $0
D) $.20
E) $.25
51) Day’s End stock is selling for $43 a share. The 6-month call with a strike price of $45 is
priced at $.30. Risk-free assets are currently returning 4.1 percent per year, compounded
continuously. What is the price of a 6-month put with a strike price of $45?
A) $1.39
B) $1.46
C) $1.28
D) $1.51
E) $1.32
52) The one-year call on TLM stock with a strike price of $65 is priced at $2.20 while the one-
year put with a strike price of $65 is priced at $11.18. The annual risk-free rate is 3.8 percent,
compounded continuously. What is the current price of TLM stock?
A) $53.60
B) $48.90
C) $56.70
D) $50.10
E) $47.65
53) Grocery Express stock is selling for $22 a share. A three-month, $20 call on this stock is
priced at $2.85. Risk-free assets are currently returning .2 percent per month. What is the price of
a three-month put on Grocery Express stock with a strike price of $20?
A) $.37
B) $.73
C) $.87
D) $1.10
E) $1.18
54) J&N stock has a current market price of $51.97 a share and the annual risk-free rate is 4.2
percent, compounded continuously. The 1-year call on this stock with a strike price of $55 is
priced at $2.30. What is the price of the one-year put with a strike price of $55?
A) $3.07
B) $2.86
C) $3.22
D) $2.94
E) $2.99
55) You invest $2,500 today at 5.5 percent, compounded continuously. How much will this
investment be worth 12 years from now?
A) $3,728
B) $4,837
C) $4,311
D) $3,422
E) $3,791
56) Todd invested $12,000 in an account today at 4.5 percent, compounded continuously. What
will this investment be worth in 15 years?
A) $26,203
B) $25,845
C) $24,287
D) $25,941
E) $23,568
57) WT Foods stock is selling for $38 a share. The 6-month $40 call on this stock is selling for
$2.01 while the 6-month $40 put is priced at $3.60. What is the continuously compounded risk-
free rate of return?
A) 2.7 percent
B) 2.4 percent
C) 1.8 percent
D) 1.5 percent
E) 2.1 percent
58) The stock of EHI has a current market value of $21.50 a share. The 3-month call with a
strike price of $20 is selling for $2.07 while the 3-month put with a strike price of $20 is priced
at $.41. What is the continuously compounded risk-free rate of return?
A) 2.9 percent
B) 3.0 percent
C) 4.1 percent
D) 3.7 percent
E) 3.2 percent
59) A call option with an exercise price of $25 and 9 months to expiration has a price of $4.92.
The stock is currently priced at $26.90, and the risk-free rate is 4.1 percent per year, compounded
continuously. What is the price of a put option with the same exercise price and expiration date?
A) $3.89
B) $1.57
C) $1.24
D) $2.69
E) $2.26
60) What is the value of a 6-month put with a strike price of $27.50 if the stock price is $22.60,
the 6-month $27.50 call is priced at $1.46, and the risk-free rate is 3.5 percent, compounded
continuously?
A) $4.71
B) $5.43
C) $5.24
D) $5.88
E) $6.62
61) A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the
risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put
with a strike price of $45?
A) $.57
B) $.63
C) $.91
D) $1.36
E) $1.54
62) A stock is currently priced at $38. A call option with an expiration of one year has an
exercise price of $40. The risk-free rate is 4.2 percent per year, compounded continuously, and
the standard deviation of the stock’s return is infinitely large. What is the price of the call option?
A) $2.47
B) $34.80
C) $38.00
D) $5.63
E) $40.00
63) Assume a stock price of $21.80, an exercise price of $20, three months to expiration, a risk-
free rate of 3.40 percent, standard deviation of 46 percent, and a d1 value of .52664. What is the
value of d2 as it is used in the Black-Scholes option pricing model?
A) .31218
B) .31225
C) .29664
D) .29535
E) .31340
64) Assume a stock price of $34.80, an exercise price of $35, nine months to expiration, risk-free
rate of 2.40 percent, standard deviation of 57 percent, and a d1 value of .27167. What is the value
of d2 as it is used in the Black-Scholes option pricing model?
A) −.22196
B) −.18657
C) −.18241
D) −.27427
E) −.22238
65) Assume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44
percent, N(d1) value of .62789, and an N(d2) value of .54232. What is the value of a 3-month
call option with a strike price of $30 given the Black-Scholes option pricing model?
A) $3.38
B) $3.99
C) $3.68
D) $1.76
E) $3.45
66) Assume a stock price of $16.80, risk-free rate of 2.7 percent, standard deviation of 59
percent, N(d1) value of .93116, and an N(d2) value of .85708. What is the value of a 6-month
call with a strike price of $10 given the Black-Scholes option pricing model?
A) $7.62
B) $7.19
C) $8.06
D) $7.85
E) $6.97
67) A stock is currently selling for $39 a share. The risk-free rate is 2.5 percent and the standard
deviation is 26 percent. What is the value of d1 of a 9-month call option with a strike price of
$40?
A) −.01506
B) .08341
C) .07746
D) .06420
E) −.06752
68) A stock is currently selling for $34 a share. The risk-free rate is 3.1 percent and the standard
deviation is 33 percent. What is the value of d1 of a 3-month call option with a strike price of
$35?
A) −.01872
B) −.04621
C) −.05047
D) −.02950
E) −.20356