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Bài test tiếng Anh ngành ngân hàng và đáp án phần 20

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
1. A put option with a strike price of $20 is expiring today. The stock is currently selling at
$25. Based on this information, the put option should not be exercised.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
2. A stock is selling for $50 today. A call option on the stock with a strike price of $50 is
set to expire next month. If the price of the stock goes down tomorrow we would expect
the price of the call option to go down as well.
A) True
B)


False

Ans: A

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
3. A call option can sometimes be priced higher than the underlying asset.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
4. Neither a call nor a put option can have a negative price.
A) True
B)

False

Ans: A

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Format: True/False
Learning Objective: LO 2
Level of Difficulty: medium
5. The current price of an asset is $75. A put option on the asset with a strike price of $100
expires one year from now. It is possible, without arbitrage, for this put option to be
priced at $24 today.
A) True
B)

False


Ans: A

Format: True/False
Learning Objective: LO 2
Level of Difficulty: medium
6. If the risk-free rate of interest increases, all else being equal, we would expect the value
of a call option to increase.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 2
Level of Difficulty: medium
7. In the binomial pricing model, an option is priced using a replicating portfolio that
typically consists of a risk-free bond and the asset underlying the option.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 2
Level of Difficulty: medium
8. To price an option using the binomial pricing model, it is important that we know the
probability that the asset will increase in value.
A) True

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B)

False

Ans: B

Format: True/False
Learning Objective: LO 2
Level of Difficulty: medium
9. When using the binomial pricing model to price an option, the volatility of the
underlying asset is represented by the difference between the two possible future values
of the underlying asset.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
10. Consider a call option on a stock with a strike price of $60. If the stock price at
expiration is $50, the payoff from the call option is $10.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
11. Consider a put option on a stock with a strike price of $60. If the stock price at
expiration is $50, the payoff from the put option is $10.
A) True
B)

False

Ans: A

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Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
12. Suppose you have sold a put option on a stock with a strike price of $25. If the stock
price at expiration is $30, your payoff will be $–5.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 2
Level of Difficulty: medium
13. A portfolio consisting of one put option and one call option, both with the same
exercise price, is called a straddle. A straddle is a good investment strategy for
investors who don't know whether an asset's value is likely to go up or down, but think
that the volatility of the asset will increase.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
14. If a project has a positive NPV, then the real options that affect the project are not
important to estimating the value of the project.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
15. The option to defer investment can be characterized as the flexibility to wait and learn
more information about a project before committing resources to the project.
A) True
B)

False

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Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
16. Incorporating real options will not decrease the value of the project relative to the basic
NPV analysis.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
17. After taking into account the value of real options, it is possible that some projects with
a negative NPV should be pursued.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
18. A company is negotiating for the option to develop a platinum mine. Under the terms of
the option contract, the company would be able to purchase the development rights to
the mine one year from now for an exercise price specified today. If, during the
negotiations over the option contract, the volatility of the price of platinum increases,
the company should expect to pay a higher price for the development option.
A) True
B)

False

Ans: A

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Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
19. The option to abandon a project can decrease its value.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
20. Kelvin's Thermostats Co. sells equipment to residential and commercial customers. It is
considering whether or not to develop a new line of advanced commercial thermostats.
The discounted cash flows from commercial thermostat sales are not likely to cover the
development costs. However, the company has decided to pursue the project anyway. If
the commercial technology is successful, it might be applied to a new line of very
profitable residential thermostats. This is an example of the option to make follow-on
investments.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
21. Consider a firm with a single loan. There are no interest payments on the loan, but the
principal and interest are all due in two years. It is uncertain whether the cash flow the
company will produce will be enough to pay off the debt. The payoff to stockholders in
this company resembles a call option.
A) True
B)

False

Ans: A

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Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
22. Consider a company that is likely to go bankrupt in the next year. The bondholders may
encourage the company to pursue risky negative-NPV projects in hopes that the firm
will avoid financial distress.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 3
Level of Difficulty: medium
23. Consider a company that is likely to go bankrupt in the next year. Stockholders may
wish to pursue negative-NPV projects, even if there is no additional value to the project
from real options.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 1
Level of Difficulty: medium
24. By designing compensation plans with performance bonuses, stock-based
compensation and stock options corporate boards are attempting to make the payoff
function for managers look similar to the payoff function for stockholders.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 5
Level of Difficulty: medium
25. Financial options can be used to hedge risks such as interest rates and foreign exchange
rates.
A) True

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B)

False

Ans: A

Format: True/False
Learning Objective: LO 5
Level of Difficulty: medium
26. Suppose the current spot price of wheat is $25 a bushel. A wheat farmer expects to
produce 1,000 bushels at the end of the season, and she wants to ensure that she gets at
least $19 a bushel. If a put option on 1,000 bushels of wheat with a strike price of
$20,000 and an expiration date at the end of the season is selling for $1,000, the farmer
can purchase the put option to guarantee she gets $19 a bushel.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 5
Level of Difficulty: medium
27. Suppose the current spot price of corn is $20 a bushel. A corn farmer expects to produce
2,000 bushels at the end of the season, and she wants to ensure that she gets at least $18
per bushel. Call options on 1,000 bushels of wheat with a strike price of $15,000 and an
expiration date at the end of the season are selling for $3,000. By selling call options on
her corn crop, the farmer can guarantee that she gets at least $18 per bushel.
A) True
B)

False

Ans: B

Format: True/False
Learning Objective: LO 5
Level of Difficulty: medium
28. Hedging is the process of using financial instruments such as options, forwards, futures,
and swaps to reduce the financial risks faced by a firm.
A) True
B)

False

Ans: A

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Format: True/False
Learning Objective: LO 5
Level of Difficulty: medium
29. Socrates Motor Co. has a defined-benefit pension plan for its employees. To fund the
plan, the company makes periodic contributions to a stock investment fund. If the stock
market declines significantly, the company would have to make additional contributions
to make up for lost revenue. The company could hedge its risk of a market downturn by
periodically purchasing put options on the stock market.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 5
Level of Difficulty: medium
30. A small soybean farmer wants to hedge the price risk of his next crop, but he is
financially constrained. He can't raise capital by either borrowing money or selling his
current assets. Instead, he sells call options on his soybean crop with a strike price of
$14 per bushel at a premium of $0.50 a bushel. Using the proceeds from selling the call
options, he buys put options on his soybean crop with a strike price of $11.00 per
bushel at a premium of $0.35 per bushel. The risk-free interest rate is 0 percent. By
taking these derivative positions, the farmer has guaranteed that he will earn
somewhere between $14.15 and $11.15 per bushel.
A) True
B)

False

Ans: A

Format: True/False
Learning Objective: LO 2
Level of Difficulty: Medium
31. If a firm adds financial options to their debt securities it will increase the
interest expense to the firm.
A) True
B)

False

Ans: B

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Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
32. An investor (the buyer) purchases a call option from a seller. On the expiration date of a
call option,
A) the buyer has the obligation to buy the underlying asset and the seller has the
obligation to sell it.
B) the buyer has the right to buy the underlying asset and the seller has the
obligation to sell it.
C) the buyer has the obligation to buy the underlying asset and the seller has the
right to sell it.
D) None of the above.
Ans: B

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
33. An investor (the buyer) purchases a put option from a seller. On the expiration date of a
call option,
A) the buyer has the obligation to sell the underlying asset and the seller has the right
to buy it.
B) the buyer has the obligation to sell the underlying asset and the seller has the
obligation to buy it.
C) the buyer has the right to sell the underlying asset and the seller has the obligation
to buy it.
D) None of the above
Ans: C

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
34. Which one of the following statements is NOT true?
A) The value of a call option can never be negative.
B)
C)
D)

The value of a call option can never be more than the value of the underlying
asset.
The value of a call option can never be worth less than the current value of the
asset minus present value of the strike price.
The value of a call option can never be worth more than the strike price.

Ans: D

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Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
35. Which one of the following statements is NOT true?
A) The value of a put option can never be negative.
B)

The value of a put option can never be worth more than the underlying asset.

C)

The value of a put option can never be less than the present value of the strike
price minus the current value of the underlying asset.
All the above statements are true.

D)

Ans: B

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
36. Suppose you own a call option on a stock with a strike price of $20 that expires today.
The price of the underlying stock is $15. If you exercise the option and immediately
sell the stock,
A) you will earn $5.
B)

you will lose $5.

C)

you will lose $15.

D)

you will earn $15.

Ans: B

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
37. Suppose you own a put option on a stock with a strike price of $35 that expires today.
The price of the underlying stock is $25. If you purchase the stock and exercise the put
option,
A) you will earn $10.
B)

you will lose $10.

C)

you will earn $25.

D)

you will lose $25.

Ans: A

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Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
38. Consider an option that gives the owner the right to buy a stock for $20 only on the
third Friday of May, next year. The option being described is
A) an American call option.
B)

a European put option.

C)

an American put option.

D)

a European call option.

Ans: D

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
39. Consider an American and a European call option on a dividend-paying stock, with
otherwise identical features (same strike price, etc.). Which one of the following
statements is true?
A) The American call option will never be worth less than the European call option.
B)

The European call option will never be worth less than the American call option.

C)

Both options should always have the same value.

D)

None of the above statements is true.

Ans: A

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
40. A straddle is a combination of a put option and a call option on the same asset with the
same strike price. Which one of the following statements about a straddle is NOT true?
A) The owner of a straddle will receive a payoff if the price of the underlying asset is
higher than the strike price at expiration.
B) The owner of a straddle will receive a payoff if the price of the underlying asset is
lower than the strike price at expiration.
C) The owner of a straddle will never exercise the put and the call option at the same
time.
D) The owner of a straddle will receive a higher payoff if the price of the underlying

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asset at expiration is near the strike price.
Ans: D

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
41. Which of the following changes, when considered individually, will increase the value
of a call option?
A) The value of the underlying asset becomes more volatile.
B)

The price of the underlying asset goes down.

C)

Getting closer to the expiration date (the passage of time).

D)

A higher strike price.

Ans: A

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
42. Which of the following changes, when considered individually, will increase the value
of a put option?
A) An increase in the risk-free interest rate
B)

Lower volatility of the price of the underlying asset

C)

A higher strike price

D)

None of the above

Ans: C

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: medium
43. What happens to the value of call and put options if the volatility of the price of
underlying asset decreases?
A) Put options will be worth more, call options will be worth less.
B)

Put options will be worth less, call options will be worth more.

C)

Both call and put options will be worth more.

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D)

Both call and put options will be worth less.

Ans: D

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: medium
44. If the price of the underlying asset increases, what happens to the value of call and put
options?
A) Put options will be worth more, call options will be worth less.
B)

Put options will be worth less, call options will be worth more.

C)

Both call and put options will be worth more.

D)

Both call and put options will be worth less.

Ans: B

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: medium
45. With everything else constant, as the expiration date gets closer, what happens to the
value of call and put options?
A) Call option will be worth more, put options will be worth less.
B)

Call option will be worth less, put options will be worth more.

C)

Both call and put options will be worth more.

D)

Both call and put options will be worth less.

Ans: D

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: medium
46. With everything else held constant, what happens to the value of call and put options if
the risk-free interest rate increases?
A) Call options will be worth more, put options will be worth less.
B)

Call options will be worth less, put options will be worth more.

C)

Both call and put options will be worth less.

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D)

Both call and put options will be worth more.

Ans: A

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: medium
47. The management at Socrates Motors considered the option to abandon when building
their new manufacturing plant. The design of the plant allows it to be easily converted
to manufacture other types of large machinery. If their new line of cars is poorly
received, their plant should be easy to sell to another manufacturing company. In this
example, the price at which they expect to sell the plant if things go poorly resembles
A) the premium of a put option on the plant.
B)

the premium of a call option on the plant.

C)

the strike price of a put option on the plant.

D)

the strike price of a call option the plant.

Ans: C

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: medium
48. Socrates Motors is very likely to enter financial distress. Without a dramatic change of
events over the next couple of years, the company will be unable to pay its lenders, who
will then gain control of the company's assets. A group of stockholders has pressured
the company's management to begin manufacturing and selling one of the company's
concept cars in the hope that it will be a big hit. Concept cars are prototypes that are
developed to test new ideas and to show off at auto shows. Although elements of
concept cars are often incorporated into product lines, rushing a concept car into
production is very risky. The best estimates about the concept car make it appear to be a
negative-NPV project. This is a good example of
A) the dividend payout problem.
B)

the underinvestment problem.

C)

the asset substitution problem.

D)

the agency cost of equity.

Ans: C

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Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: medium
49. Consider a CEO who holds neither stock nor stock options in the company she runs.
Her payoff function regarding the firm's performance is most likely to resemble
A) stockholders.
B)

lenders.

C)

owners of a call option on the firm.

D)

holders of a risk-free bond with coupon payments equal to her salary.

Ans: B

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: medium
50. Which of the following compensation methods is NOT likely to reduce agency costs
between stockholders and managers?
A) Stock compensation—giving the CEO stock in the company as part of her salary.
B)
C)

A golden parachute—a guaranteed large lump-sum payment in the event that the
CEO is fired.
A higher salary than that of other CEOs in similar companies.

D)

Performance bonuses—a higher bonus if the company's cash flows are higher
then expected.
Ans: B

Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: medium
51. Which of the following reasons is NOT a valid explanation of why managers
sometimes choose to take on negative-NPV Projects:
A) The NPV analysis does not include a valuable real option to expand the project if
things go well.
B) If the firm has debt, managers may create value for shareholders by taking on
some risky negative-NPV projects.
C) Managers' payoff functions represent the payoffs of lenders. By taking negativeNPV projects, the managers can create value for lenders.
D) All of the above descriptions are valid explanations for why managers sometimes
take on negative NPV projects.
Ans: C

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Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: medium
52. As the manager of a sporting goods company, you are presented with a new golf
project. An inventor has recently patented the design for a new golf club that makes
playing golf much easier. Your company has made contact with the inventor, who is
willing to sell the exclusive rights to the technology, but if you don't act fast he will sell
the rights to a rival company. You are not certain whether the new golf club will
become popular, but your analysts have completed a basic NPV analysis. Given the
available information, the project has a positive NPV. However, you know there are
several real options associated with the project, including the option to abandon the
project and the option to make follow-on investments. Which one of the following
statements regarding the project is correct?
A) Based on the NPV analysis, you should accept the project. The value of the
project may be worth more than the NPV analysis but not less.
B) Based on the NPV analysis, you should accept the project. The NPV analysis
contains all the information about the value of the project.
C) Based on the NPV analysis, you should reject the project. Without additional
information about the value of the real options, there is no way to make a
decision.
D) Based on the NPV analysis, you should reject the project. The NPV analysis
contains all the information about the value of the project.
Ans: A

Format: Multiple Choice
Learning Objective: LO 3
Level of Difficulty: medium
53. A start-up company is making a decision on whether to develop a new internet social
networking site. The site will cost $1 million to develop, but it is unclear whether the
new technology critical to the site will work correctly. If development is successful, it
will cost an additional $20 million next year to advertise the site to Internet users. If the
site becomes popular with Internet users, it is expected to generate a present value of
$100 million in advertising revenue. There is a 10 percent chance that the site will be
successfully developed and subsequently become popular with Internet users. The
company's cost of capital is 15 percent. Should the company pursue the project?
A) No, the project has a negative NPV.
B)

Yes, the project has a positive NPV.

C)

It doesn't matter. The project has zero NPV.

D)

There is not enough information to make a decision.

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Ans: D

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
54. The employment contracts for professional athletes often contain options for either the
player or the team. Consider one recent contract in Major League Baseball. The player's
salary was guaranteed for the first couple years. However, after several years, the team
had the option to cancel the contract if the player became injured. If we think of each
player as a project for the team, this option feature of the contract is best described as
A) the option to defer investment.
B)

the option to make follow-on investments.

C)

the option to change operations.

D)

the option to abandon projects.

Ans: D

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
55. RealEstates LLP is considering the construction of a new development of
condominiums in downtown Austin, Texas. The site for the new development is
currently occupied by an office building owned by the city. The project's profitability
will depend largely on the population increase in Austin over the next several years.
Rather than buy the site, RealEstates has entered into an agreement with the city to pay
$200,000 for the right to purchase the site for $10 million two years from now. The real
option embedded in this contract is best described as
A) the option to defer investment.
B)

the option to make follow-on investments.

C)

the option to change operations.

D)

the option to abandon projects.

Ans: A

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Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
56. Consider a new firm that is working on the first generation of long-awaited consumer
jet packs. The project will take a tremendous amount of R&D expenditure. Even if the
development is successful, manufacturing the first generation of jet packs is likely to be
so expensive that only a select few consumers will be able to afford them. The
projected sales of the first generation of jet packs almost certainly won't cover the
development and manufacturing costs—the project has a negative NPV. Which of these
reasons would validate the firm's decision to pursue the jet pack project?
A) If development is unsuccessful, it can abandon the project before spending
money on manufacturing.
B) If the project is successful, it may lead to a very profitable second project—a
cheaper jet pack that will be a positive-NPV project.
C) Because it is a high-tech firm, the cash flows generated by a project are not
important to valuing the company.
D) None of these reasons support the decision to pursue the project.
Ans: B

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
57. A local city government has awarded a contract to sequentially build five new
elementary schools over the next 10 years. The price for each school has been spelled
out in the contract, but at the beginning of each year the city can cancel the order for the
remaining schools. The city government is concerned that if the population of the town
does not grow as expected it may not need all of the schools. What sort of financial
option does the option to cancel the order resemble?
A) Owning a call option on the value of the new schools
B)

Owning a put option on the value of the new schools

C)

Selling a call option on the value of the new schools

D)

Selling a put option on the value of the new schools

Ans: A

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Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
58. Purchasing a house is a somewhat complicated process. Typically, if the buyer's offer is
accepted by the seller, the transaction will not be completed or “closed” for several
weeks. During this time the buyer may gather more information about the house or
research other houses in the area. Some home purchase contracts include an option fee.
The buyer may pay the seller a few hundred dollars for the right to walk away from the
contract prior to closing for any reason. This option fee is best described as
A) the option to defer investment.
B)

the option to make follow-on investments.

C)

the option to change operations.

D)

a put option on the house.

Ans: A

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
59. The management at Socrates Motors considered the option to abandon when building
their new manufacturing plant. The design of the plant allows it to easily be converted
to manufacture other types of large machinery. If their new line of cars is poorly
received, their plant should be easy to sell to another manufacturing company. In this
example, the extra cost of building the plant in such a way that it can easily be
converted for other uses resembles
A) the premium of a put option on the plant.
B)

the premium of a call option on the plant.

C)

the strike price of a put option on the plant.

D)

the strike price of a call option on the plant.

Ans: A

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Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
60. Franklin Foods has made the decision to invest in a new line of organic microwave
dinners. The new line of dinners is a negative-NPV project; paying its suppliers to
convert to organic practices will be expensive. However, the company will be in a good
position to expand into more profitable lines of food if consumer demand for organic
foods grows more then expected. The negative value of the organic dinner project most
closely resembles:
A) the premium of a put option on future organic projects.
B)

the premium of a call option on future organic projects.

C)

the strike price of a put option on future organic projects.

D)

the strike price of a call option on future organic projects.

Ans: B

Format: Multiple Choice
Learning Objective: LO 5
Level of Difficulty: medium
61. Gnu Homes, Inc., is a developer of planned residential communities. It has entered into
an option contract with a land owner outside Austin, Texas. It will pay the land owner
$100,000 for the option to buy the land in two years at a price of $20 million. During
that time Gnu Homes will evaluate population and real estate trends in Austin. Their
plan is to buy the land if real estate prices in Austin increase enough that developing the
land would be worth more then the $20 million price. The $20 million purchase price
resembles
A) the premium price of a put option on the land.
B)

the premium price of a call option on the land.

C)

the strike price of a put option on the land.

D)

the strike price of a call option on the land.

Ans: D

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: medium
62. The claim stockholders hold on cash flows in a company with outstanding debt is often
described as
A) a call option on the firm's assets.

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B)

a put option on the firm's assets.

C)

an interest-free bond with the same value as the firm's assets.

D)

none of the above

Ans: A

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: medium
63. Which of the following statements is NOT an example of the agency cost of debt?
A) ABC Co. shareholders pressure management to invest in very risky projects in
hopes that one of the investments might pay off. The company is highly
leveraged, so shareholders have little to lose.
B) ABC Co. has a large amount of debt but very few investment opportunities. The
board of directors decides to pay out a large special dividend, and the company
subsequently enters bankruptcy. Lenders collect about 60 percent of the face
value of the debt.
C) ABC Co. is very close to financial distress. The company has a positive-NPV
investment opportunity, but even with the project the company is likely to enter
bankruptcy. Investors refuse to invest the additional funds necessary to pursue the
project, even though it has a positive NPV.
D) Investors are unsure of the value for ABC Co. ABC Co. decides to issue equity to
pay down debt. The market assumes that ABC Co.'s managers are issuing equity
because they think that the company's stock is overvalued. As a result, the
company's stock price falls when the equity issue is announced.
Ans: D

Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: medium
64. The claim lenders' hold on cash flows in a company with outstanding risky debt is often
thought of as
A) holding a call option on the firm's assets.
B)

holding a put option on the firm's assets.

C)

selling a put option on the firm's assets and holding a risk-free bond.

D)

selling a call option on the firm's asset and holding a risk-free bond.

Ans: C

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Format: Multiple Choice
Learning Objective: LO 4
Level of Difficulty: medium
65. Adding stock options and bonuses for performance to the compensation of a manager is
intended to closer align the interest of the manager with
A) stockholders.
B)

lenders.

C)

employees.

D)

none of the above.

Ans: A

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
66. Option payoffs: What is the payoff for a call option with a strike price of $45 if the
underlying stock price at expiration is $75?
A) $30
B)

$45

C)

$75

D)

None of the above

Ans: A

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
67. Option payoffs: What is the payoff for a call option with a strike price of $30 if the
underlying stock price at expiration is $25?
A) $5
B)

$25

C)

$30

D)

None of the above

Ans: D

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Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
68. Option payoffs: What is the payoff for a put option with a strike price of $65 if the
underlying stock price at expiration is $33?
A) $0
B)

$33

C)

$32

D)

$65

Ans: C

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
69. Option payoffs: You own a put option on ABC. Co. stock with a strike price of $40.
The current stock price is $40. You will benefit if
A) the stock price goes up.
B)

the stock price goes down.

C)

the stock price stays the same.

D)

It doesn't matter; you are indifferent to changes in the stock price.

Ans: B

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: medium
70. Option payoffs: You have sold a call option on ABC Co. stock with a strike price of
$40. You do not intend to make any other transactions before the options expiration
date. The current stock price is $20. Which of the following statements best describes
your hopes for the stock?
A) You want the stock price to fall.
B)

You want the stock price to rise.

C)

You are indifferent, as long as the stock price stays under $40.

D)

It doesn't matter; you are indifferent to changes in the stock price.

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Ans: C

Format: Multiple Choice
Learning Objective: LO 1
Level of Difficulty: hard
71. Option payoffs: What is the payoff for a put option with a strike price of $20 if the
price of the underlying stock at expiration is $18?
A) $0
B)

$2

C)

$18

D)

$20

Ans: B

Format: Multiple Choice
Learning Objective: LO 2
Level of Difficulty: hard
72. Option valuation: Consider a call option with a strike price of $20, which expires in
one year. The risk-free rate of interest is 5 percent. The underlying stock price is $30.
Without arbitrage, which of the following is a possible price for the call option?
A) $0
B)

$8

C)

$15

D)

None of the above

Ans: C

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