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### FIN534 FIN 534 WEEK 11PART 1 30 30 GUARANTEE

Question Details:
FIN534 FIN 534 WEEK 11PART 1 30 30 GUARANTEE
FIN534/FIN 534 WEEK 11PART 1 (30/30) GUARANTEE
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Question 1

Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?

The higher the strike price on XYZ's options, the higher the option's price will be.

Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.

If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.

If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend

The price of these call options is likely to rise if XYZ's stock price rises

Question 2

Suppose you believe that Florio Company's stock price is going to decline from its current level of \$82.50 sometime during the next 5 months. For \$5.10 you could buy a 5-month put option giving you the right to sell 1 share at a price of \$85 per share. If you bought this option for \$5.10 and Florio's stock price actually dropped to \$60, what would your pre-tax net profit be?

-\$5.10

\$19.90

\$20.90

\$22.50

\$27.60

Question 3

Which of the following statements is CORRECT?

If the underlying stock does not pay a dividend, it does not make good economic sense to exercise a call option prior to its expiration date, even if this would yield an immediate profit.

Call options generally sell at a price greater than their exercise value, and the greater the exercise value, the higher the premium on the option is likely to be.

Call options generally sell at a price below their exercise value, and the greater the exercise value, the lower the premium on the option is likely to be.

Call options generally sell at a price below their exercise value, and the lower the exercise value, the lower the premium on the option is likely to be.

Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at exactly the same price as a call option on the stock.

Question 4

Which of the following statements is CORRECT?

An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.

As the stock’s price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.

Issuing options provides companies with a low cost method of raising capital.

The market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.

The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.

Question 5

An option that gives the holder the right to sell a stock at a specified price at some future time is

a put option.

an out-of-the-money option.

a naked option.

a covered option.

a call option.

Question 6

Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the

Variability of the stock price

Option's time to maturity

Strike price

Strike price

All of the above

None of the above

Question 7

As a consultant to Basso Inc., you have been provided with the following data: D1 = \$0.67; P0 = \$27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach?

9.42%

9.91%

10.44%

10.96%

11.51%

Question 8

With its current financial policies, Flagstaff Inc. will have to issue new common stock to fund its capital budget. Since new stock has a higher cost than reinvested earnings, Flagstaff would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

Increase the percentage of debt in the target capital structure.

Incre

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