Question :
41.Which of the following changes, when considered individually, will increase : 1400612
41.Which of the following changes, when considered individually, will increase the value of a put option?
a.An increase in the risk-free interest rate
b.Lower volatility of the price of the underlying asset
c.A higher strike price
d.None of the above
42.What happens to the value of call and put options if the volatility of the price of underlying asset decreases?
a.Put options will be worth more, call options will be worth less.
b.Put options will be worth less, call options will be worth more.
c.Both call and put options will be worth more.
d.Both call and put options will be worth less.
43.If the price of the underlying asset increases, what happens to the value of call and put options?
a.Put options will be worth more, call options will be worth less.
b.Put options will be worth less, call options will be worth more.
c.Both call and put options will be worth more.
d.Both call and put options will be worth less.
44.With everything else constant, as the expiration date gets closer, what happens to the value of call and put options?
a.Call option will be worth more, put options will be worth less.
b.Call option will be worth less, put options will be worth more.
c.Both call and put options will be worth more.
d.Both call and put options will be worth less.
45.With everything else held constant, what happens to the value of call and put options if the risk-free interest rate increases?
a.Call options will be worth more, put options will be worth less.
b.Call options will be worth less, put options will be worth more.
c.Both call and put options will be worth less.
d.Both call and put options will be worth more.
46.The management at Socrates Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles
a.the premium of a put option on the plant.
b.the premium of a call option on the plant.
c.the strike price of a put option on the plant.
d.the strike price of a call option the plant.
47.Socrates Motors is very likely to enter financial distress. Without a dramatic change of events over the next couple of years, the company will be unable to pay its lenders, who will then gain control of the company’s assets. A group of stockholders has pressured the company’s management to begin manufacturing and selling one of the company’s concept cars in the hope that it will be a big hit. Concept cars are prototypes that are developed to test new ideas and to show off at auto shows. Although elements of concept cars are often incorporated into product lines, rushing a concept car into production is very risky. The best estimates about the concept car make it appear to be a negative-NPV project. This is a good example of
a.the dividend payout problem.
b.the underinvestment problem.
c.the asset substitution problem.
d.the agency cost of equity.
48.Consider a CEO who holds neither stock nor stock options in the company she runs. Her payoff function regarding the firm’s performance is most likely to resemble
a.stockholders.
b.lenders.
c.owners of a call option on the firm.
d.holders of a risk-free bond with coupon payments equal to her salary.
49.Which of the following compensation methods is NOT likely to reduce agency costs between stockholders and managers?
a.Stock compensation—giving the CEO stock in the company as part of her salary.
b.A golden parachute—a guaranteed large lump-sum payment in the event that the CEO is fired.
c.A higher salary than that of other CEOs in similar companies.
d.Performance bonuses—a higher bonus if the company’s cash flows are higher then expected.
50.Which of the following reasons is NOT a valid explanation of why managers sometimes choose to take on negative-NPV Projects:
a.The NPV analysis does not include a valuable real option to expand the project if things go well.
b.If the firm has debt, managers may create value for shareholders by taking on some risky negative-NPV projects.
c.Managers’ payoff functions represent the payoffs of lenders. By taking negative-NPV projects, the managers can create value for lenders.
d.All of the above descriptions are valid explanations for why managers sometimes take on negative NPV projects.
