Question 1

You own a call option on NICo stock that expires in one year.The exercise price is $35.The current price of the stock is $37.40 and the risk-free rate of return is 4.25 percent.Assume the option will finish in the money.What is the current value of the call option?

Accepted Answer

C₀ = $37.40 - $35/1.0425 = $3.83

Question 2

A stock is selling for $48 a share.The 6-month options have an exercise price of $50.The risk-free rate is 3.5 percent,the standard deviation is 32 percent,and the d₁ value is .01007.What is the value of d₂?

Accepted Answer

d₂ = .01007 - (.32 × √.50)= -.21620

Question 3

The Bakery's assets are currently valued at $2,150.These assets are expected to be worth either $1,900 or $2,100 one year from now.The company has a pure discount bond outstanding with a $2,000 face value and a maturity date of one year.The risk-free rate is 5 percent.What is the value of the equity in this firm?

Accepted Answer

Number of options needed = ($2,100 - 1,900)/($100 - 0)= 2$2,150 = 2C₀ + $1,900/1.05C₀ = $170.24

Question 4

Valley Foods has a stock price of $37 a share.The 9-month options have a strike price of $35.The risk-free rate is 3.5 percent,the standard deviation is 24 percent,N(d₁)is .69061 and N(d₂)is .61399. What is the call price?

Accepted Answer

C = ($37 × .69061)- ($35 × 2.71828^{-.035 × .75} × .61399)= $4.62

Question 5

The delta of a call option on a firm's assets is .316.This means that a 409,000 project will increase the value of equity by:

Accepted Answer

Increase in equity value = $409,000 × .316 = $129,244

Question 6

The Whistle Stop has a stock price of $23 a share.One-year options have a strike price of $22.50.The risk-free rate is 4.2 percent,the standard deviation is 31 percent,N(d₁)is .64109 and N(d₂)is .52049. What is the call price?

Accepted Answer

C = ($23 × .64109)- ($22.50 × 2.71828^{-.042 × 1} × .52049)= $3.52

Question 7

Wilt's has a stock price of $54 a share.The 3-month options have a strike price of $55.The risk-free rate is 3.6 percent,the standard deviation is 26 percent,N(d₁)is .49724 and N(d₂)is .44555. What is the call price?

Accepted Answer

C = ($54 × .49724)- ($55 × 2.71828^{-.036 × .25} × .44555)= $2.57

Question 8

OK Corral stock is selling for $29 a share.A 4-month $30 call is priced at $1.50.Risk-free assets are currently returning .25 percent per month.What is the price of the 4-month $30 put?

Accepted Answer

P = $30/1.0025⁴ + $1.50 - 29 = $2.20

Question 9

Benny's is reviewing a $384,000 project that is expected to increase the firm's equity by $128,400.What is the project's delta?

Accepted Answer

Delta = $128,400/$384,000 = .3344

Question 10

Bruno's stock is currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next year.The risk-free rate is 4 percent.What is the current value of a 1-year call option with an exercise price of $30?

Accepted Answer

Number of options needed = ($34 - 28)/($4 - 0)= 1.5$27.80 = 1.5C₀ + $28/1.04C₀ = $.58

Question 11

A stock is currently priced at $52.50 a share.One year from now,the stock price is expected to be either $54 or $60 a share.The risk-free rate of return is 4 percent.What is the value of a 1-year call option with an exercise price of $55?

Accepted Answer

Number of options needed = ($60 - 54)/($5 - 0)= 1.2$52.50 = 1.2C₀ + $54/1.04C₀ = $.48

Question 12

Hilltop stock has a current market price of $56.80 a share.The 1-year $55 call is priced at $2.75 while the 1-year $55 put is priced at $.30.What is the risk-free rate of return?

Accepted Answer

$56.80 + .30 = $2.75 + $55/(1 + R_rf)R_rf = .0120,or 1.20%

Question 13

A stock is priced at $26.50 and the risk-free rate of return is 3.5 percent annually.Assume a 1-year $20 call will finish in the money.What is the current value of the call option?

Accepted Answer

C₀ = $26.50 - $20/1.035 = $7.18

Question 14

IOU stock is selling for $39.40 a share.The 6-month $40 call costs $1.20.Risk-free assets are currently returning .15 percent per month.What is the price of the 6-month $40 put?

Accepted Answer

P = $40/1.0015⁶ + $1.20 - 39.40 = $1.44

Question 15

A stock is selling for $43.90 a share while the annual risk-free rate is 4.5 percent.What is the current value of a 1-year call option on this stock if the exercise price is $37.50 and you assume the option will finish in the money?

Accepted Answer

C₀ = $43.90 - $37.50/1.045 = $8.01

Question 16

Assume the delta of a call option on a firm's assets is .456.This means that a $218,000 project will increase the value of equity by:

Accepted Answer

Increase in equity value = $218,000 × .456 = $99,408

Question 17

Ed's Sheds has a $1,200 pure discount bond that comes due in one year.The risk-free rate of return is 4 percent.The firm's assets are expected to be worth either $900 or $1,400 in one year.Currently,these assets are worth $1,100.What is the current value of the firm's debt?

Accepted Answer

Number of options needed = ($1,400 - 900)/($200 - 0)= 2.5$1,100 = 2.5C₀ + $900/1.04C₀ = $93.85Value of debt = $1,100 - 93.85 = $1,006.15

Question 18

The 6-month options on XYZ stock have a strike price of $40 while the stock price is $39.The risk-free rate is 3.75 percent,the standard deviation is 27 percent,N(d₁)is .52434 and N(d₂)is .44834. What is the call price?

Accepted Answer

C = ($39 × .52434)- ($40 × 2.71828^{-.0375 × .5} × .44834)= $2.85

Question 19

High Mountain has a stock price of $19 a share.The 3-month options have a strike price of $15.The risk-free rate is 2.5 percent and the standard deviation of returns is 17 percent.The value of d₁ is 2.89707.What is the value of d₂ as it is used in the Black-Scholes option pricing model?

Accepted Answer

d₂ = 2.89707 - (.17 × √.25)= 2.81207

Question 20

Katie D's has total assets valued at $1,950.These assets are expected to increase in value to either $1,800 or $2,400 by next year.One year from now,the company must repay a $2,000 pure discount bond.The risk-free rate is 6 percent.What is the current value of the firm's debt?

Accepted Answer

Number of options needed = ($2,400 - 1,800)/($400 - 0)= 1.5$1,950 = 1.5C₀ + $1,800/1.06C₀ = $167.92Value of debt = $1,950 - 167.92 = $1,782.08

Quiz 17: Options and Corporate Finance

You own a call option on NICo stock that expires in one year.The exercise price is $35.The current price of the stock is $37.40 and the risk-free rate of return is 4.25 percent.Assume the option will finish in the money.What is the current value of the call option?

A stock is selling for $48 a share.The 6-month options have an exercise price of $50.The risk-free rate is 3.5 percent,the standard deviation is 32 percent,and the d₁ value is .01007.What is the value of d₂?

Valley Foods has a stock price of $37 a share.The 9-month options have a strike price of $35.The risk-free rate is 3.5 percent,the standard deviation is 24 percent,N(d₁) is .69061 and N(d₂) is .61399. What is the call price?

The delta of a call option on a firm's assets is .316.This means that a 409,000 project will increase the value of equity by:

The Whistle Stop has a stock price of $23 a share.One-year options have a strike price of $22.50.The risk-free rate is 4.2 percent,the standard deviation is 31 percent,N(d₁) is .64109 and N(d₂) is .52049. What is the call price?

Wilt's has a stock price of $54 a share.The 3-month options have a strike price of $55.The risk-free rate is 3.6 percent,the standard deviation is 26 percent,N(d₁) is .49724 and N(d₂) is .44555. What is the call price?

OK Corral stock is selling for $29 a share.A 4-month $30 call is priced at $1.50.Risk-free assets are currently returning .25 percent per month.What is the price of the 4-month $30 put?

Benny's is reviewing a $384,000 project that is expected to increase the firm's equity by $128,400.What is the project's delta?

Bruno's stock is currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next year.The risk-free rate is 4 percent.What is the current value of a 1-year call option with an exercise price of $30?

A stock is currently priced at $52.50 a share.One year from now,the stock price is expected to be either $54 or $60 a share.The risk-free rate of return is 4 percent.What is the value of a 1-year call option with an exercise price of $55?

Hilltop stock has a current market price of $56.80 a share.The 1-year $55 call is priced at $2.75 while the 1-year $55 put is priced at $.30.What is the risk-free rate of return?

A stock is priced at $26.50 and the risk-free rate of return is 3.5 percent annually.Assume a 1-year $20 call will finish in the money.What is the current value of the call option?

IOU stock is selling for $39.40 a share.The 6-month $40 call costs $1.20.Risk-free assets are currently returning .15 percent per month.What is the price of the 6-month $40 put?

A stock is selling for $43.90 a share while the annual risk-free rate is 4.5 percent.What is the current value of a 1-year call option on this stock if the exercise price is $37.50 and you assume the option will finish in the money?

Assume the delta of a call option on a firm's assets is .456.This means that a $218,000 project will increase the value of equity by:

Ed's Sheds has a $1,200 pure discount bond that comes due in one year.The risk-free rate of return is 4 percent.The firm's assets are expected to be worth either $900 or $1,400 in one year.Currently,these assets are worth $1,100.What is the current value of the firm's debt?

The 6-month options on XYZ stock have a strike price of $40 while the stock price is $39.The risk-free rate is 3.75 percent,the standard deviation is 27 percent,N(d₁) is .52434 and N(d₂) is .44834. What is the call price?

High Mountain has a stock price of $19 a share.The 3-month options have a strike price of $15.The risk-free rate is 2.5 percent and the standard deviation of returns is 17 percent.The value of d₁ is 2.89707.What is the value of d₂ as it is used in the Black-Scholes option pricing model?

Katie D's has total assets valued at $1,950.These assets are expected to increase in value to either $1,800 or $2,400 by next year.One year from now,the company must repay a $2,000 pure discount bond.The risk-free rate is 6 percent.What is the current value of the firm's debt?

Quiz 17: Options and Corporate Finance

You own a call option on NICo stock that expires in one year.The exercise price is $35.The current price of the stock is $37.40 and the risk-free rate of return is 4.25 percent.Assume the option will finish in the money.What is the current value of the call option?

A stock is selling for $48 a share.The 6-month options have an exercise price of $50.The risk-free rate is 3.5 percent,the standard deviation is 32 percent,and the d1 value is .01007.What is the value of d2?

Valley Foods has a stock price of $37 a share.The 9-month options have a strike price of $35.The risk-free rate is 3.5 percent,the standard deviation is 24 percent,N(d1) is .69061 and N(d2) is .61399. What is the call price?

The delta of a call option on a firm's assets is .316.This means that a 409,000 project will increase the value of equity by:

The Whistle Stop has a stock price of $23 a share.One-year options have a strike price of $22.50.The risk-free rate is 4.2 percent,the standard deviation is 31 percent,N(d1) is .64109 and N(d2) is .52049. What is the call price?

Wilt's has a stock price of $54 a share.The 3-month options have a strike price of $55.The risk-free rate is 3.6 percent,the standard deviation is 26 percent,N(d1) is .49724 and N(d2) is .44555. What is the call price?

OK Corral stock is selling for $29 a share.A 4-month $30 call is priced at $1.50.Risk-free assets are currently returning .25 percent per month.What is the price of the 4-month $30 put?

Benny's is reviewing a $384,000 project that is expected to increase the firm's equity by $128,400.What is the project's delta?

Bruno's stock is currently selling for $27.80 a share but is expected to increase to either $28 or $34 a share over the next year.The risk-free rate is 4 percent.What is the current value of a 1-year call option with an exercise price of $30?

A stock is currently priced at $52.50 a share.One year from now,the stock price is expected to be either $54 or $60 a share.The risk-free rate of return is 4 percent.What is the value of a 1-year call option with an exercise price of $55?

Hilltop stock has a current market price of $56.80 a share.The 1-year $55 call is priced at $2.75 while the 1-year $55 put is priced at $.30.What is the risk-free rate of return?

A stock is priced at $26.50 and the risk-free rate of return is 3.5 percent annually.Assume a 1-year $20 call will finish in the money.What is the current value of the call option?

IOU stock is selling for $39.40 a share.The 6-month $40 call costs $1.20.Risk-free assets are currently returning .15 percent per month.What is the price of the 6-month $40 put?

A stock is selling for $43.90 a share while the annual risk-free rate is 4.5 percent.What is the current value of a 1-year call option on this stock if the exercise price is $37.50 and you assume the option will finish in the money?

Assume the delta of a call option on a firm's assets is .456.This means that a $218,000 project will increase the value of equity by:

Ed's Sheds has a $1,200 pure discount bond that comes due in one year.The risk-free rate of return is 4 percent.The firm's assets are expected to be worth either $900 or $1,400 in one year.Currently,these assets are worth $1,100.What is the current value of the firm's debt?

The 6-month options on XYZ stock have a strike price of $40 while the stock price is $39.The risk-free rate is 3.75 percent,the standard deviation is 27 percent,N(d1) is .52434 and N(d2) is .44834. What is the call price?

High Mountain has a stock price of $19 a share.The 3-month options have a strike price of $15.The risk-free rate is 2.5 percent and the standard deviation of returns is 17 percent.The value of d1 is 2.89707.What is the value of d2 as it is used in the Black-Scholes option pricing model?

Katie D's has total assets valued at $1,950.These assets are expected to increase in value to either $1,800 or $2,400 by next year.One year from now,the company must repay a $2,000 pure discount bond.The risk-free rate is 6 percent.What is the current value of the firm's debt?

A stock is selling for $48 a share.The 6-month options have an exercise price of $50.The risk-free rate is 3.5 percent,the standard deviation is 32 percent,and the d₁ value is .01007.What is the value of d₂?

Valley Foods has a stock price of $37 a share.The 9-month options have a strike price of $35.The risk-free rate is 3.5 percent,the standard deviation is 24 percent,N(d₁) is .69061 and N(d₂) is .61399. What is the call price?

The Whistle Stop has a stock price of $23 a share.One-year options have a strike price of $22.50.The risk-free rate is 4.2 percent,the standard deviation is 31 percent,N(d₁) is .64109 and N(d₂) is .52049. What is the call price?

Wilt's has a stock price of $54 a share.The 3-month options have a strike price of $55.The risk-free rate is 3.6 percent,the standard deviation is 26 percent,N(d₁) is .49724 and N(d₂) is .44555. What is the call price?

The 6-month options on XYZ stock have a strike price of $40 while the stock price is $39.The risk-free rate is 3.75 percent,the standard deviation is 27 percent,N(d₁) is .52434 and N(d₂) is .44834. What is the call price?

High Mountain has a stock price of $19 a share.The 3-month options have a strike price of $15.The risk-free rate is 2.5 percent and the standard deviation of returns is 17 percent.The value of d₁ is 2.89707.What is the value of d₂ as it is used in the Black-Scholes option pricing model?