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21.Consider a firm with a single loan. There no interest

Question : 21.Consider a firm with a single loan. There no interest : 1400610

 

21.Consider a firm with a single loan. There are no interest payments on the loan, but the principal and interest are all due in two years. It is uncertain whether the cash flow the company will produce will be enough to pay off the debt. The payoff to stockholders in this company resembles a call option.

a.True

b.False

22.Consider a company that is likely to go bankrupt in the next year. The bondholders may encourage the company to pursue risky negative-NPV projects in hopes that the firm will avoid financial distress.

a.True

b.False

23.Consider a company that is likely to go bankrupt in the next year. Stockholders may wish to pursue negative-NPV projects, even if there is no additional value to the project from real options.

a.True

b.False

24.By designing compensation plans with performance bonuses, stock-based compensation and stock options corporate boards are attempting to make the payoff function for managers look similar to the payoff function for stockholders.

a.True

b.False

25.Financial options can be used to hedge risks such as interest rates and foreign exchange rates.

a.True

b.False

26.Suppose the current spot price of wheat is $25 a bushel. A wheat farmer expects to produce 1,000 bushels at the end of the season, and she wants to ensure that she gets at least $19 a bushel. If a put option on 1,000 bushels of wheat with a strike price of $20,000 and an expiration date at the end of the season is selling for $1,000, the farmer can purchase the put option to guarantee she gets $19 a bushel.

a.True

b.False

27.Suppose the current spot price of corn is $20 a bushel. A corn farmer expects to produce 2,000 bushels at the end of the season, and she wants to ensure that she gets at least $18 per bushel. Call options on 1,000 bushels of wheat with a strike price of $15,000 and an expiration date at the end of the season are selling for $3,000. By selling call options on her corn crop, the farmer can guarantee that she gets at least $18 per bushel.

a.True

b.False

28.Hedging is the process of using financial instruments such as options, forwards, futures, and swaps to reduce the financial risks faced by a firm.

a.True

b.False

29.Socrates Motor Co. has a defined-benefit pension plan for its employees. To fund the plan, the company makes periodic contributions to a stock investment fund. If the stock market declines significantly, the company would have to make additional contributions to make up for lost revenue. The company could hedge its risk of a market downturn by periodically purchasing put options on the stock market.

a.True

b.False

30.A small soybean farmer wants to hedge the price risk of his next crop, but he is financially constrained. He can’t raise capital by either borrowing money or selling his current assets. Instead, he sells call options on his soybean crop with a strike price of $14 per bushel at a premium of $0.50 a bushel. Using the process from selling the call options, he buys put options on his soybean crop with a strike price of $11.00 per bushel at a premium of $0.35 per bushel. The risk-free interest rate is 0 percent. By taking these derivative positions, the farmer has guaranteed that he will earn somewhere between $14.15 and $11.15 per bushel.

a.True

b.False

 

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