Instructions This quiz consist of 30 multiple choice questions. The first 15 questions cover the material in Chapter 8.

The second 15 questions cover the material in Chapter 9. Be sure you are in the correct Chapter when you take the quiz.
false

Question 1 0 out of 2 points An option that gives the holder the right to sell a stock at a specified price at some future time is Answer Selected Answer: Correct Answer: a put option. Question 2 0 out of 2 points Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the Answer Selected Answer: Correct Answer: All of the above. Question 3 0 out of 2 points Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson's stock price actually rises to $45, what would your pre-tax net profit [None Given] [None Given]

be? Answer Selected Answer: Correct Answer: $1,689.75 Question 4 0 out of 2 points Deeble Construction Co.s stock is trading at $30 a share. Call options on the companys stock are also available, some with a strike price of $25 and some with a strike price of $35. Both options expire in three months. Which of the following best describes the value of these options? Answer Selected Answer: Correct Answer: [None Given] [None Given]

If Deebles stock price rose by $5, the exercise value of the options with the $25 strike price would also increase by $5.

Question 5 0 out of 2 points Call options on XYZ Corporations common stock trade in the market. Which of the following statements is most correct, holding other things constant? Answer Selected Answer: [None Given]

Correct Answer: The price of these call options is likely to rise if XYZs stock price rises. Question 6 0 out of 2 points The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value? Answer Selected Answer: Correct Answer: $2.99 Question 7 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given] [None Given]

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.

Question 8 0 out of 2 points Which of the following statements is CORRECT?

Answer Selected Answer: Correct Answer: [None Given]

An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.

Question 9 0 out of 2 points Suppose you believe that Delva Corporation's stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva's stock price actually dropped to $60, what would your pre-tax net profit be?

Answer Selected Answer: Correct Answer: $1,989.75 Question 10 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given] [None Given]

Call options generally sell at prices above their exercise value, but for an in-the-

money option, the greater the exercise value in relation to the strike price, the lower the premium on the option is likely to be. Question 11 0 out of 2 points GCC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant? Answer Selected Answer: Correct Answer: The exercise price of the option is increased. Question 12 0 out of 2 points An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options? Answer Selected Answer: Correct Answer: Covered Question 13 0 out of 2 points Warner Motors stock is trading at $20 a share. Call options that expire in three months with a strike price of $20 sell for $1.50. Which of the following will occur if the stock price increases 10%, to $22 a share? Answer [None Given] [None Given]

Selected Answer: Correct Answer:

[None Given]

The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.

Question 14 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

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.

Question 15 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

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.

Question 16 0 out of 2 points

Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

If a companys tax rate increases, then, all else equal, its weighted average cost of capital will decline.

Question 17 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

Beta measures market risk, which is, theoretically, the most relevant risk measure for a publicly-owned firm that seeks to maximize its intrinsic value. This is true even if not all of the firms stockholders are well diversified.

Question 18 0 out of 2 points For a company whose target capital structure calls for 50% debt and 50% common equity, which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

The cost of equity is always equal to or greater than the cost of debt. Question 19 0 out of 2 points The MacMillen Company has equal amounts of low-risk, average-risk, and high-risk projects. The firm's overall WACC is 12%. The CFO believes that this is the correct WACC for the companys average-risk projects, but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects. The CEO disagrees, on the grounds that even though projects have different risks, the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources. If the CEOs position is accepted, what is likely to happen over time? Answer Selected Answer: Correct Answer: [None Given]

The company will take on too many high-risk projects and reject too many low-risk projects.

Question 20 0 out of 2 points Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth. Answer Selected Answer: Correct Answer: [None Given]

Project A has a standard deviation of expected returns of 20%, while Project Bs standard deviation is only 10%. As returns are negatively correlated with both the firms other assets and the returns on most stocks in the economy, while Bs returns are positively correlated. Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of

capital. Question 21 0 out of 2 points Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting? Answer Selected Answer: Correct Answer: Accounts payable. Question 22 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given] [None Given]

Surveys indicate that the CAPM is the most widely used method for estimating the cost of equity. However, other methods are also used because CAPM estimates may be subject to error, and people like to use different methods as checks on one another. If all of the methods produce similar results, this increases the decision maker's confidence in the estimated cost of equity.

Question 23 0 out of 2 points Safeco Company and Risco Inc are identical in size and capital structure. However, the riskiness of their assets and cash flows are somewhat different, resulting in Safeco having a WACC of

10% and Risco a WACC of 12%. Safeco is considering Project X, which has an IRR of 10.5% and is of the same risk as a typical Safeco project. Risco is considering Project Y, which has an IRR of 11.5% and is of the same risk as a typical Risco project. Now assume that the two companies merge and form a new company, Safeco/Risco Inc. Moreover, the new company's market risk is an average of the pre-merger companies' market risks, and the merger has no impact on either the cash flows or the risks of Projects X and Y. Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

If the firm evaluates these projects and all other projects at the new overall corporate WACC, it will probably become riskier over time.

Question 24 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

The relevant WACC can change depending on the amount of funds a firm raises during a given year. Moreover, the WACC at each level of funds raised is a weighted average of the marginal costs of each capital component, with the weights based on the firms target capital structure.

Question 25 0 out of 2 points If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most

likely Answer Selected Answer: Correct Answer: [None Given]

become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

Question 26 0 out of 2 points For a typical firm, which of the following sequences is CORRECT? All rates are after taxes, and assume that the firm operates at its target capital structure. Answer Selected Answer: Correct Answer: re > rs > WACC > rd. Question 27 0 out of 2 points When working with the CAPM, which of the following factors can be determined with the most precision? Answer Selected Answer: Correct [None Given] [None Given]

Answer:

The beta coefficient of the market, which is the same as the beta of an average stock.

Question 28 0 out of 2 points Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target capital structure consists of common stock, preferred stock, and debt. Which of the following events would REDUCE its WACC? Answer Selected Answer: Correct Answer: The market risk premium declines. Question 29 0 out of 2 points Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given] [None Given]

A firms cost of retained earnings is the rate of return stockholders require on a firms common stock.

Question 30 0 out of 2 points Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk adjustment. The risk-free rate is 5%, and the market risk

premium is 4%. The project being evaluated is riskier than an average project, in terms of both its beta risk and its total risk. Which of the following statements is CORRECT? Answer Selected Answer: Correct Answer: [None Given]

The accept/reject decision depends on the firm's risk-adjustment policy. If Norris' policy is to increase the required return on a riskier-than-average project to 3% over rS, then it should reject the project.