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?

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





Answer: B

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?

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.

Answer: C

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

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.

Answer: B

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?

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




Answer: A

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 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

Answer: A

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

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.

Answer: A

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,

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.






Answer: A

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,

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.



Answer: B

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

A) The higher a firm's ROE, the higher the SGR.
B) The higher the plowback ratio, the larger the proportion of net income retained in the firm and the greater the firm's SGR.
C) Both a and b are true
D) None of the above.

Answer: C

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

Which one of the following statements about the sustainable growth rate (SGR) is NOT true?

A) The SGR is a function of the plowback ratio and the ROE.
B) The SGR determines the rate of growth that the firm can sustain without selling additional shares of equity.
C) The SGR helps management determine whether they can avoid issuing new debt.
D) All of the above are true of the SGR.



Answer: C

The sustainable growth rate (SGR)

The sustainable growth rate (SGR)

A) is a function of the plowback ratio and the ROE.
B) the rate of growth that the firm can sustain without selling additional shares of equity.
C) helps management determine whether they can avoid issuing new equity.
D) All of the above are true of the SGR.




Answer: D

Firms that achieve higher growth rates without seeking external financing

Firms that achieve higher growth rates without seeking external financing

A) have a low plowback ratio.
B) have less equity and/or are able to generate high net income leading to a high ROE.
C) are highly leveraged.
D) None of the above.

Answer: B

Firms that achieve higher growth rates without seeking external financing

Firms that achieve higher growth rates without seeking external financing

A) have a high plowback ratio.
B) have less equity and/or are able to generate high net income leading to a high ROE.
C) are not highly leveraged.
D) All of the above are true.

Answer: D

Which one of the following statements is NOT true?

Which one of the following statements is NOT true?

A) The internal growth rate (IGR) is defined as the maximum growth rate that a firm can achieve without external financing.
B) The higher the retained earnings generated by a firm, the higher the growth possible without using external funding.
C) Given the same level of retained earnings, a firm that has the higher amount of total assets, the higher the growth possible without using external funding.
D) All of the above are true.





Answer: C

External funding needed (EFN) is

External funding needed (EFN) is

A) the additional debt or equity a firm needs to issue so that it can purchase additional assets to support an increase in sales.
B) the additional funds raised by a firm to pay off existing short-term debt.
C) the additional funds raised by a firm to pay off existing long-term debt.
D) None of the above are true.




Answer: A

In accounting for changes in fixed assets, which one of the following statements is NOT true?

In accounting for changes in fixed assets, which one of the following statements is NOT true?

A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added as the firm nears full capacity.
C) Fixed assets are added in large discrete amounts called lumpy assets.
D) All of the above are true.




Answer: D

In accounting for changes in fixed assets, which one of the following statements is NOT true?

In accounting for changes in fixed assets, which one of the following statements is NOT true?

A) When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets.
B) Since it requires time to get new assets operational, they are added in small discrete quantities.
C) Fixed assets are added in large discrete amounts called lumpy assets.
D) All of the above are true.

Answer: B

Some weaknesses in financial planning models include:

Some weaknesses in financial planning models include:

A) Interest expense is not accounted for.
B) All working capital accounts do not necessarily vary directly with sales, especially cash and inventory.
C) How fixed assets are adjusted.
D) All of the above are weaknesses.



Answer: D

In using more sophisticated planning models, which one of the following statements is NOT true?

In using more sophisticated planning models, which one of the following statements is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary as sales changes but not directly as it is affected by the firm's dividend payout policy.
D) All of the above are true



Answer: D

In using more sophisticated planning models, which one of the following statements is NOT true?

In using more sophisticated planning models, which one of the following statements is NOT true?

A) Current liabilities are likely to vary directly with sales.
B) Long-term liabilities and equity accounts change as a direct result of managerial decisions.
C) Retained earnings will vary directly as sales changes.
D) All of the above are true



Answer: C