Corporation Finance Analysis Sample Essay

1. The following are illustrations of cloaked options for houses: I ) geting growing chances II ) ability of the house to end a undertaking when it is no longer profitable III ) options that are associated with corporate securities that provide flexibleness to alter the footings of the issues A. I merely B. II merely C. I and III merely D. I. II. and III 2. The proprietor of a regular exchange-listed call-option on the stock: A. has the right to purchase 100 portions of the underlying stock at the exercising monetary value B. has the right to sell 100 portions of the underlying stock at the exercising monetary value C. has the duty to purchase 100 portions of the underlying stock at the exercising monetary value D. has the duty to sell 100 portions of the underlying stock at the exercising monetary value 3. Figure-2 depicts the:

A. place diagram for the purchaser of a call option B. net income diagram for the purchaser of a call option C. place diagram for the purchaser of a put option D. net income diagram for the purchaser of a put option 4. If the stock makes a dividend payment before the termination day of the month so the put-call para is: A. Value of call = value of put + portion monetary value – present value ( PV ) of dividend – PV of exercising monetary value B. Value of call = value of put – portion monetary value + PV of dividend – PV of exercising monetary value C. Value of call = value of put + portion monetary value + PV of dividend + PV of exercising monetary value D. Value of call = value of put + portion monetary value + PV of dividend – PV of exercising monetary value

Chapter 21 Valuing Options 5. An equity option’s theoretical delta reflects the sensitiveness of its market monetary value to alterations in: A. the volatility of the underlying stock monetary value B. the dividends paid to the underlying shareholders C. the underlying stock monetary value D. the clip to expiration 6. The of import premises of the Black-Scholes expression are: I ) the monetary value of the implicit in plus follows a lognormal random walk. II ) investors can set their hedge continuously and at no cost. III ) the riskless rate is known. IV ) the implicit in plus does non pay dividends. A. I merely B. I and II merely C. I. II. III and IV D. III and IV merely Chapter 22 Real Options

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7. The chance to postpone puting to a ulterior day of the month may hold value because: I ) The cost of capital may increase in the close hereafter. II ) Uncertainty may be increased in the hereafter. III ) Investing costs fluctuate over clip. IV ) Market conditions may alter and increase the NPV of the undertaking. A. I merely B. I and II merely C. III merely D. IV merely 8. The chance to put in a undertaking can be thought of as a three-year existent option that is deserving $ 500 million with an exercising monetary value of $ 700 million. Calculate the value of the option given that. N ( d1 ) = 0. 3 and N ( d2 ) = 0. 15. Assume that the involvement is 6 % per twelvemonth. A. $ 60 million B. $ 61. 84 million C. $ 55. 55 million D. None of the above. C = 500 ( 0. 3 ) – ( 0. 15 ) ( 700 ) / ( 1. 06^3 ) = 61. 84

True / False inquiries 1. If you write a put option. you get the right to purchase stock at a fixed work stoppage monetary value. TRUE/ FALSE 2. Option delta for a put option is ever positive. TRUE/FALSE 3. Delta of a put option is equal to the delta of an tantamount call option minus one. TRUE/FALSE 4. The option to wait is a type of existent option. TRUE/FALSE 5. Options contracts are marked to market. TRUE/FALSE Short Answer Questions 1. Specify the footings ‘option’ . ‘call option’ and ‘put option’

An option is defined as a right. but non an duty. to purchase or sell an implicit in plus at a fixed monetary value during a specified period of clip. A call option is defined as a right. but non an duty. to purchase an implicit in plus at a fixed monetary value during a specified period of clip. A put option is defined as a right. but non an duty. to sell an implicit in plus at a fixed monetary value during a specified period of clip. 2. Explain the difference between a European option and an American option. A European option may be exercised merely on the termination day of the month. An American option may be exercised anytime up to the termination day of the month. 3. How can directors make existent options? Briefly explain. How does an forsaking option increase the value of a undertaking? Directors are non inactive looker-ons in a house. They can do determinations to capitalise on good luck or to extenuate losingss. By adding flexibleness to the firm’s investings and operations determinations. directors can make existent options and thereby add value to the house. The option to abandon a undertaking. a put option. provides partial insurance against failure and hence increases the value of a undertaking. It can besides be thought of as supplying a downside bound to the undertaking. thereby increasing its value.

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