1 - Holding a call option and a put option on the same stock will allow the holder to make money on either the call option or the put option at the strike date. This arrangement is called a __________.
Answer
straddle
cover
call-put
strangle
2 - If you own an option with a strike price of $47.50 and on the expiration date the stock price is $48.50, what should you do, and what will be the result?
Answer
Do not exercise the option.
Exercise the option, buy the stock for $47.50, immediately sell the stock for $48.50, and realize a profit of $1.00.
Exercise the option, buy the stock for $48.50, immediately sell the stock for $47.50, and realize a loss of $1.00.
Do not exercise the option, and request a refund of the price paid for the option.
3 - The __________ applies a higher discount rate to the NPV calculation to sort out higher value projects.
Answer
callable annuity rate
hurdle rate rule
profitability index rule
equivalent annual benefit method
4 - When the market risk of a project that the firm is considering undertaking is equal to the average market risk of the firm's existing investments, the cost of capital of that project is:
Answer
equal to the firm's weighted average cost of capital.
zero.
equal to the firm's market capitalization.
positive.
5 - The price of a call option on a non-dividend-paying stock is:
Answer
usually equal to the intrinsic value of the option.
the same as the price of a call option on a dividend-paying stock.
has no relation to the intrinsic value of the option
always exceeds the intrinsic value of the option.
6 - __________ option allows the holder to exercise the option at any time up to and on the expiration date.
Answer
An American
An European
A full
A progressive
7 - The __________ method is the method that is most commonly used in practice for capital budgeting purposes.
Answer
debt-equity ratio
adjusted present value
weighted average cost of capital
free cash flow to equity
8 - The pre-tax weighted average cost of capital represents the:
Answer
market capitalization of the firm.
average cost of borrowing for the firm.
debt capacity of the form.
investors' required rate of return for investing in the firm.
9 - An option to reduce the scale of a firm's investment in the future is __________ option.
Answer
a growth
an expansion
a withdrawal
an abandonment
10 - The valuation method that determines the value of a proposed investment without any leverage and then adds the value of the interest tax shield of the investment is the __________ method.
Answer
weighted average cost of capital
adjusted present value
free cash flow to equity
debt-equity ratio
11 - Weighted average cost of capital (WACC) is an important consideration in capital budgeting and valuing options. What is WACC, and how is the basic WACC calculated?