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FIN 534 Week 1 Homework Chapter 1 to 17

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FIN 534 Week 1 Homework Chapter 1 to 17;Fin 534 (Week 1 Homework Assignment Chapter 1);1. Which of the following statements is CORRECT?;a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.;b. It is generally easier to transfer one?s ownership interest in a partnership than in a corporation.;c. One of the advantages of the corporate form of organization is that it avoids double taxation.;d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., ?one person, one vote.?;e. Corporations of all types are subject to the corporate and personal income tax.;2. Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?;a. Households start saving a larger percentage of their income.;b. Households start saving a larger percentage of their income.;c. The level of inflation begins to decline.;d. Corporations step up their expansion plans and thus increase their demand for capital.;e. The Federal Reserve uses monetary policy in an attempt to stimulate the economy.;3. Which of the following statements is CORRECT?;a. If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding.;b. Capital market transactions only include preferred stock and common stock transactions.;c. The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments. That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.;d. Both NASDAQ "dealers" and NYSE ?specialists? hold inventories of stocks.;e. An electronic communications network (ECN) is a physical location exchange.;4. Which of the following statements is CORRECT?;a. A good goal for a firm?s management is maximization of expected EPS.;b. Most business in the U.S. is conducted by corporations, and corporations? popularity results primarily from their favorable tax treatment.;c. Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.;d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.;e. The potential exists for agency conflicts between stockholders and managers.;5. Which of the following statements is NOT CORRECT?;a. When a corporation?s shares are owned by a few individuals and are not traded on public markets, we say that the firm is ?closely, or privately, held.;b. ?Going public? establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm?s shares.;c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called ?going public,? and the market for such stock is called the new issue market.;d. Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC.;e. It is possible for a firm to go public and yet not raise any additional new capital at the time.;FIN 534 ? Homework Chapter 2;1. Which of the following statements is CORRECT?;a. Typically, a firm?s DPS should exceed its EPS.;b. Typically, a firm?s EBIT should exceed its EBITDA.;c. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.;d. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.;e. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.;2. Which of the following statements is CORRECT?;a. The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.;b. The statement of cash flows shows where the firm?s cash is located, indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.;c. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.;d. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.;e. The statement of cash flows shows how much the firm?s cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year.;3. Which of the following statements is CORRECT?;a. Dividends paid reduce the net income that is reported on a company?s income statement.;b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.;c. If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.;d. Accounts receivable are reported as a current liability on the balance sheet.;e. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.;4. Last year Roussakis Company?s operations provided a negative net cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company?s financial statements were prepared under generally accepted accounting principles?;a. The company repurchased some of its common stock.;b. The company dramatically increased its capital expenditures.;c. The company retired a large amount of its long-term debt.;d. The company sold some of its fixed assets.;e. The company had high depreciation expenses.;5. Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?;a. $673.27;b. $708.70;c. $746.00;d. $783.30;e. $822.47;Homework Week 2 Chapter 3;1. Which of the following statements is CORRECT?;a. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.;b. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.;c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.;d. An increase in the DSO, other things held constant, could be expected to increase the ROE.;e. An increase in a firm?s debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.;2. Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?;a. Company HD has a lower equity multiplier.;b. Company HD has more net income.;c. Company HD pays more in taxes.;d. Company HD has a lower ROE.;e. Company HD has a lower times interest earned (TIE) ratio.;3. Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?;a. Given this information, LD must have the higher ROE.;b. Company LD has a higher basic earning power ratio (BEP).;c. Company HD has a higher basic earning power ratio (BEP).;d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE.;e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.;4. Muscarella Inc. has the following balance sheet and income statement data;Cash $ 14,000 Accounts payable $ 42,000;Receivables 70,000 Other current liabilities 28,000;Inventories 210,000 Total CL $ 70,000;Total CA $294,000 Long-term debt 70,000;Net fixed assets 126,000 Common equity 280,000;Total assets $420,000 Total liab. and equity $420,000;Sales $280,000;Net income $ 21,000;The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the;current ratio to equal the industry average, 2.70, without affecting either sales or net income.;Assuming that inventories are sold off and not replaced to get the current ratio to the target level;and that the funds generated are used to buy back common stock at book value, by how much;would the ROE change?;a. 4.28%;b. 4.50%;c. 4.73%;d. 4.96%;e. 5.21%;5. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?;a. 3.83%;b. 4.02%;c. 4.22%;d. 4.43%;e. 4.65%;FIN 534 ? Homework Chapter 4;1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?;a. The annual payments would be larger if the interest rate were lower.;b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.;c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.;d. The last payment would have a higher proportion of interest than the first payment.;e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.;2. Which of the following statements is CORRECT?;a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.;b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.;c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.;d. If you solve for I and get a negative number, then you must have made a mistake.;e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.;3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?;a. 0.52%;b. 0.44%;c. 0.36%;d. 0.30%;e. 0.24%;4. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve's 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a "trust fund baby," but he also wants to ensure that Steve is provided for in his old age.;Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?;a. $3,726;b. $3,912;c. $4,107;d. $4,313;e. $4,528;5. John and Daphne are saving for their daughter Ellen's college education. Ellen just turned 10 at (), and she will be entering college 8 years from now (at). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years--if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at, 9, 10, and 11).So far, John and Daphne have accumulated $15,000 in their college savings account (at). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years,, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at, 6, and 7 be to cover Ellen's anticipated college costs?;a. $1,965.21;b. $2,068.64;c. $2,177.51;d. $2,292.12;e. $2,412.76;FIN 534 ? Homework Chapter 5;1. Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?;a. Bond A?s current yield will increase each year.;b. Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.;c. Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.;d. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.;e. Over the next year, Bond A?s price is expected to decrease, Bond B?s price is expected to stay the same, and Bond C?s price is expected to increase.;2. Which of the following statements is CORRECT?;a. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.;b. A callable 10-year, 10% bond should sell at a higher price than an otherwise similar non-callable bond.;c. Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if non-callable bonds with the same maturity were used.;d. Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.;e. The actual life of a callable bond will always be equal to or less than the actual life of a non-callable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.;3. Which of the following statements is CORRECT?;a. Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.;b. A bond?s current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.;c. If a bond sells at par, then its current yield will be less than its yield to maturity.;d. If a bond sells for less than par, then its yield to maturity is less than its coupon rate.;e. A discount bond?s price declines each year until it matures, when its value equals its par value.;4. Suppose a new company decides to raise a total of $200 million, with $100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT?;a. The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm?s total dollar interest charges will be.;b. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm?s total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.;c. In this situation, we cannot tell for sure how, or whether, the firm?s total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm?s total interest charges would not be affected materially by the mix between the two.;d. The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.;e. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm?s total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.;5. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.;a. 4,228;b. 4,337;c. 4,448;d. 4,562;e. 4,676;FIN 534 Homework Chapter 6;1. Which of the following statements is CORRECT?;a. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.;b. If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky possible portfolio would include some shares of each one.;c. If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.;d. Market risk can be eliminated by forming a large portfolio, and if some Treasury bonds are held in the portfolio, the portfolio can be made to be completely riskless.;e. A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.;2. Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?;a. Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.;b. The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.;c. Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.;d. If the two portfolios have the same beta, their required returns will be the same, but Jane's portfolio will have less market risk than Dick's.;e. The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.;3. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Portfolio P consists of 50% X and 50% Y. Given this information, which of the following statements is CORRECT?;a. Portfolio P has a standard deviation of 20%.;b. The required return on Portfolio P is equal to the market risk premium (rM? rRF).;c. Portfolio P has a beta of 0.7.;d. Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.;e. Portfolio P has the same required return as the market (rM).;4. Which of the following statements is CORRECT?;a. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.;b. Portfolio diversification reduces the variability of returns on an individual stock.;c. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events.;d. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.;e. A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio.;5. Which of the following statements is CORRECT?;a. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.;b. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.;c. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.;d. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.;e. Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.;FIN 534 Week 4 Homework Chapter 7;1. Which of the following statements is CORRECT?;a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock.;b. Two firms with the same expected dividend and growth rates must also have the same stock price.;c. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.;d. If a stock has a required rate of return10 %, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock?s dividend yield is also 5%.;e. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.;2. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?;A B;Price $25 $25;Expected growth (constant) 10% 5%;Required return 15% 15%;a. Stock A's expected dividend at is only half that of Stock B.;b. Stock A has a higher dividend yield than Stock B.;c. Currently the two stocks have the same price, but over time Stock B's price will pass that of A.;d. Since Stock A?s growth rate is twice that of Stock B, Stock A?s future dividends will always be twice as high as Stock B?s.;e. The two stocks should not sell at the same price. If their prices are equal, then disequilibrium must exist.;3. Which of the following statements is CORRECT?;a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.;b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm?s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.;c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.;d. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.;Estimated %(must be changed to force Calculated Price to equal the Actual Market Price)$15.00Year012345Dividend growth rate (insert correct values)10%10%10%5%5%Calculated dividends (D0 has been paid)$1.00????? = D4/(rs? g4). Find using Estimatedrs.?Total CFs???PVs of CFs when discounted at Estimatedrs???Calculated = Sum of PVs =$0.00 A positive number will be here when dividends are estimated. The Calculated Price will equal the Actual Market Price once the correct rs has been found.RapidgrowthActual Market Price, P0:Normal growth;e. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.;4. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., The company?s last dividend, D, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?;a. $26.77;b. $27.89;c. $29.05;d. $30.21;e. $31.42;5. Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share. Sally asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis.Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimatedrs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?;a. 11.84%;b. 12.21%;c. 12.58%;d. 12.97%;e. 13.36%;FIN 534 Week 5 Homework Chapter 8;1. Which of the following statements is CORRECT?;a. Put options give investors the right to buy a stock at a certain strike price before a specified date.;b. Call options give investors the right to sell a stock at a certain strike price before a specified date.;c. Options typically sell for less than their exercise value.;d. LEAPS are very short-term options that were created relatively recently and now trade in the market.;e. An option holder is not entitled to receive dividends unless he or she exercises their option before the stock goes ex dividend.;2. Which of the following statements is CORRECT?;a. If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as soon as the stock?s price exceeds the strike price by about 10%, because this permits the option holder to lock in an immediate profit.;b. Call options generally sell at a price less than their exercise value.;[11];c. If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.;d. 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.;e. 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.;3. Which of the following statements is CORRECT?;a. 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.;b. 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.;c. Issuing options provides companies with a low cost method of raising capital.;d. 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.;[12];[13];e. The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.;4. 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?;a. $2.43;b. $2.70;c. $2.99;d. $3.29;e. $3.62;5. An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data;The price of the stock is $40.;The strike price of the option is $40.;The option matures in 3 months ().;The standard deviation of the stock?s returns is 0.40,

 

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