Q&A Hero

Q: Which one of the following is not required for an acquisition to be considered tax-free? A) The continuity of equity interest B) A business purpose, other than avoiding taxes, for the acquisition C) The obtainment of equity shares in the acquirer by the target firm's shareholders D) A cash payment to the target firm's shareholders E) An exchange that is considered to be of equal value

Q: In a tax-free acquisition, the shareholders of the target firm: A) receive income that is considered to be tax-exempt. B) gift their shares to a tax-exempt organization and therefore have no taxable gain. C) are viewed as having exchanged shares on a dollar-for-dollar basis. D) sell their shares to a qualifying entity thereby avoiding both income and capital gains taxes. E) sell their shares at cost thereby avoiding the capital gains tax.

Q: Dixie and ten of her wealthy friends formed a group and borrowed the funds necessary to acquire all of the outstanding shares of Southern Fried Chicken. This transaction is known as a: A) proxy contest. B) management buyout. C) vertical acquisition. D) leveraged buyout. E) unfriendly takeover.

Q: Firms A and B formally agree to each put up $25 million to create firm C. Firm C will perform environmental testing on the products produced by both Firm A and Firm B. Which one of the following terms describes Firm C? A) Joint venture B) Going-private transaction C) Conglomerate D) Subsidiary E) Leveraged buyout

Q: All of the following are related to a takeover except a: A) tender offer. B) consolidation. C) going private transaction. D) proxy contest. E) strategic alliance.

Q: If Food Markets were to acquire Meat Processors, the acquisition would be classified as a ________ acquisition. A) vertical B) longitudinal C) conglomerate D) horizontal E) integrated

Q: If GE, a highly diversified company, were to acquire Ocean Freight Limited, the acquisition would be classified as a ________ acquisition. A) horizontal B) longitudinal C) conglomerate D) vertical E) integrated

Q: An automaker recently acquired a windshield manufacturer. Which type of an acquisition was this? A) Horizontal B) Longitudinal C) Conglomerate D) Vertical E) Indirect

Q: Biltwell Hotels is acquiring all of the assets of Green Roof Inns. As a result, Green Roof Inns: A) will become a fully owned subsidiary of Biltwell Hotels. B) will remain as a shell corporation unless the shareholders opt to dissolve it. C) will be fully merged into Biltwell Hotels and will no longer exist as a separate entity. D) and Biltwell Hotels will both cease to exist and a new firm will be formed. E) will automatically be dissolved.

Q: KN Markets has decided to acquire a controlling interest in BJ's by purchasing shares of BJ stock in the public markets. Which one of these statements correctly applies to this acquisition? A) This method of acquisition guarantees a quick and efficient merger. B) KN Markets is limited by law to obtaining a maximum of 49 percent of the shares prior to obtaining the approval of BJ management. C) The purchase of publicly traded shares may be more expensive than an outright merger. D) Once KN Markets obtains 80 percent of BJ's shares, the remaining BJ shareholders will be required to sell their shares to KN. E) KN Markets must obtain the approval of BJ's board of directors before purchasing shares.

Q: Which one of the following is a disadvantage of a merger? A) Transferring the title to all the target firm's assets B) Disbanding the operations of the target firm C) Hiring an underwriter to distribute the IPO shares D) Incurring the costs of creating a new legal entity E) Seeking approval of the shareholders of both firms

Q: In a merger the: A) legal status of both the acquiring firm and the target firm is terminated. B) acquiring firm retains its pre-merger legal status. C) acquiring firm acquires the assets, but not the liabilities, of the target firm. D) shareholders of the target firm have little, if any, say as to whether or not the merger occurs. E) target firm continues to exist but will be a wholly owned subsidiary of the acquiring firm.

Q: Which one of the following statements correctly applies to a merger? A) The acquiring firm does not have to seek approval for the merger from its shareholders. B) The shareholders of the target firm must approve the merger. C) The acquiring firm will acquire the assets but not the debt of the target firm. D) The merged firm will have a new company name. E) The titles to individual assets of the target firm must be transferred into the acquiring firm's name.

Q: Which one of the following statements correctly applies to a legally defined merger? A) The acquiring firm retains its identity and absorbs only the assets of the acquired firm. B) The acquired firm is completely absorbed and ceases to exist as a separate legal entity. C) A new firm is created that includes all the assets and liabilities of the acquiring firm plus the assets only of the acquired firm. D) A new firm is created from the assets and liabilities of both the acquiring and acquired firms. E) A merger reclassifies the acquired firm into a new entity that becomes a subsidiary of the acquiring firm.

Q: Diet Soda and High Caffeine are two firms that compete in the soft drink market. These two competitors have decided to invest $10 million to form a new company, Fruit Tea, which will manufacture flavored teas. This new firm is defined as a: A) consolidation. B) strategic alliance. C) joint venture. D) merged alliance. E) takeover project.

Q: Johnson Co. and Peabody Enterprises are both manufacturers of plastic products. These two firms have decided to work together to find a more efficient way to recycle rejected products. Thus, the two companies are each going to assign two engineers to this project and have agreed to share any and all costs. This project is an example of a: A) consolidation. B) merged alliance. C) joint venture. D) takeover project. E) strategic alliance.

Q: The current officers of MTC have decided to form a private investment group for the sole purpose of purchasing MTC. These individuals will borrow 90 percent of their offer price. The purchase of this firm is referred to as a: A) conglomeration. B) proxy contest. C) merger. D) management buyout. E) consolidation.

Q: A group of individual investors is in the process of acquiring all of the publicly traded shares of OM Outfitters. Once the shares are acquired, they will no longer be publicly traded. Which of the following terms applies to this process? A) Tender offer B) Proxy contest C) Going-private transaction D) Merger E) Consolidation

Q: Which one of these statements is false? A) Acquisitions are sometimes unfriendly. B) Shareholders of the target firm must vote to approve an acquisition by stock. C) The cost of a stock acquisition can be higher than the cost of a merger if the target firm's management resists. D) The complete absorption of one firm by another requires a merger. E) In stock acquisitions the bidding firm deals directly with the target firm's shareholders.

Q: The Daily News published an ad today wherein it announced its desire to purchase shares of a competing newspaper, the Oil Town Gossip. Which one of the following terms is best described by this announcement? A) Merger request B) Consolidation C) Tender offer D) Spinoff E) Divestiture

Q: The Cat Box acquired The Dog House. As part of this transaction, both firms ceased to exist in their prior form and combined to create an all-new entity, Animal World. Which one of the following terms best describes this transaction? A) Divestiture B) Consolidation C) Tender offer D) Spinoff E) Conglomeration

Q: Last month, Keyser Design acquired all of the assets and liabilities of Tenor Machine Works. The combined firm is known as Keyser Design. Tenor Machine Works no longer exists as a separate entity. This acquisition is best described as a: A) merger. B) consolidation. C) tender offer. D) spinoff. E) divestiture.

Q: Which one of the following cannot be either used by or calculated by the Black-Scholes option pricing model? A) Risk-free rate of return B) Premium on an American call option C) Time to maturity greater than one year D) Underlying asset value E) An exercise price equal to the face value of a firm's debt

Q: Which one of the following statements is correct? A) The price of an American put is equal to the stock price minus the exercise price. B) The value of a European call is greater than the value of a comparable American call. C) The value of a put is equal to one minus the value of an equivalent call. D) The value of a put minus the value of a comparable call is equal to the value of the stock minus the exercise price. E) The value of an American put will equal or exceed the value of a comparable European put.

Q: To compute the value of a put using the Black-Scholes option pricing model, you: A) assume the equivalent call is worthless and then apply the put-call parity formula. B) have to compute the value of the put as if it is a call and then apply the put-call parity formula. C) subtract the value of an equivalent call from 1.0. D) subtract the value of an equivalent call from the market price of the stock. E) multiply the value of an equivalent call by e−rt.

Q: All of the following affect the value of a call option except the: A) strike price. B) stock price. C) standard deviation of the returns on a risk-free asset. D) continuously compounded risk-free rate. E) time to maturity.

Q: In the Black-Scholes option pricing model, the symbol "σ" is used to represent the standard deviation of the: A) option premium on a call with a specified exercise price. B) rate of return on the underlying asset. C) volatility of the risk-free rate of return. D) rate of return on a risk-free asset. E) option premium on a put with a specified exercise price.

Q: In the Black-Scholes option pricing formula, N(d1) is the probability that a standardized, normally distributed random variable is: A) less than or equal to N(d2). B) less than 1. C) equal to 1. D) equal to d1. E) less than or equal to d1.

Q: Under European put-call parity, the present value of the strike price is equivalent to the present value of: A) the current value of the stock minus the call premium. B) the market value of the stock plus the put premium. C) a U.S. Treasury coupon bond with a face value equal to the strike price. D) a U.S. Treasury bill with a face value equal to the strike price. E) any risk-free security with a face value equal to the strike price and a coupon rate equal to the risk-free rate of return.

Q: Which one of these is most equivalent to e− Rt? A) −2.71828Rt B) −1/2.71828Rt C) 1/2.71828Rt D) 1 − 2.71828Rt E) 1/2.71828Rt

Q: Which one of the following can be used to replicate a protective put strategy? A) Riskless investment and stock purchase B) Stock purchase and call option C) Call option and riskless investment D) Riskless investment and writing a put E) Call option, stock purchase, and riskless investment

Q: The primary purpose of a protective put is to: A) ensure a maximum purchase price in the future. B) offset an equivalent call option. C) limit the downside risk of asset ownership. D) lock in a risk-free rate of return on a financial asset. E) increase the upside potential return on an investment.

Q: Which one of the following provides the option of selling a stock at a specified price on a stated date even if the market price of the stock declines to zero? A) American call B) European call C) American put D) European put E) Either an American or European put

Q: In the put-call parity formula, the present value of the exercise price is computed using the: A) nominal market rate. B) real market rate. C) real inflation rate. D) nominal inflation rate. E) risk-free rate.

Q: According to put-call parity, the present value of the exercise price is equal to the: A) stock price plus the call premium minus the put premium. B) call premium plus the put premium minus the stock price. C) stock price minus the put premium minus the call premium. D) put premium plus the call premium minus the stock price. E) stock price plus the put premium minus the call premium.

Q: Travis owns a stock that is currently valued at $45.80 a share. He is concerned that the stock price may decline so he just purchased a put option on the stock with an exercise price of $45. Which one of the following terms applies to this strategy? A) Put-call parity B) Covered call C) Protective put D) Straddle E) Strangle

Q: Use the information below to answer the following question. Alpha is considering a purely financial merger with Beta. Alpha currently has a market value of $14 million, an asset return standard deviation of 55 percent, and pure discount debt of $6 million that matures in four years. Beta has a market value of $6 million, an asset return standard deviation of 60 percent, and pure discount debt of $2 million that matures in four years. The risk free rate, continuously compounded, is 3.5 percent. The combined equity value of the two separate firms is $14,180,806. By what amount will the combined equity value change if the merger occurs and the asset return standard deviation of the merged firm is 45 percent? A) −$548,285 B) −$314,007 C) $0 D) $99,087 E) $286,403

Q: Use the information below to answer the following question. S&C Co. has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm's assets is $23,000. The standard deviation of the return on the firm's assets is 52 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. What is the firm's continuously compounded cost of debt? A) 11.24 percent B) 20.32 percent C) 16.48 percent D) 18.69 percent E) 17.09 percent

Q: Use the information below to answer the following question. Upside Down has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $12,400 while the standard deviation of the returns on those assets is 22 percent annually. The annual risk-free rate is 4.6 percent, compounded continuously. What is the market value of the firm's debt based on the Black-Scholes model? A) $8,415 B) $8,900 C) $9,413 D) $8,962 E) $9,311

Q: The current market value of the assets of AMN Co. is $47 million, with a standard deviation of 21 percent per year. The firm has zero-coupon bonds outstanding with a total face value of $35 million. These bonds mature in two years. The risk-free rate is 3.6 percent per year, compounded continuously. What is the value of d1as it applies to the Black-Scholes option pricing model? A) 1.32471 B) 1.48002 C) 1.60067 D) 1.38357 E) .89006

Q: The delta of a call option on a firm's assets is .408. By how much will a $220,000 project increase the value of equity? A) $89,760 B) $71,622 C) $309,760 D) $130,240 E) $539,216

Q: The delta of a call option on a firm's assets is .624. How much will a project valued at $48,000 increase the value of equity? A) $18,048 B) $45,336 C) $29,952 D) $76,923 E) $32,189

Q: A call option matures in six months. The underlying stock price is $37 and the stock's return has a standard deviation of 27 percent per year. The annual risk-free rate is 3.4 percent, compounded continuously. The exercise price is $0. What is the price of the call option? A) $39.65 B) $32.14 C) $36.37 D) $32.23 E) $37.00

Q: Use the information below to answer the following question. Assume a stock price of $88; risk-free rate of 4 percent per year, compounded continuously; time to maturity of five months; standard deviation of 48 percent per year; and a put and call exercise price of $85. What is the delta of the put option? A) −.6850 B) −.3742 C) −.3158 D) −.0525 E) −.4685

Q: Use the information below to answer the following question. You own a lot in Key West, Florida, that you are considering selling. Similar lots have recently sold for $1.2 million. Over the past five years, the price of land in the area has varied with a standard deviation of 19 percent. A potential buyer wants an option to buy the land in the next 9 months for $1,310,000. The risk-free rate of interest is 7 percent per year, compounded continuously. How much should you charge for the option? Round your answer to the nearest $100. A) $62,000 B) $68,900 C) $63,700 D) $62,500 E) $60,400

Q: Use the information below to answer the following question. Assume a stock price of $42; a risk-free rate of 3.5 percent per year, compounded continuously; a six-month maturity; and a standard deviation of 64 percent per year. If a six-month call with an exercise price of $45 is priced at $6.66, what is the price of the six-month $45 put? A) $8.57 B) $7.93 C) $8.88 D) $9.07 E) $8.74

Q: A stock is currently selling for $34 a share. The risk-free rate is 3.1 percent and the standard deviation is 33 percent. What is the value of d1of a 3-month call option with a strike price of $35? A) −.01872 B) −.04621 C) −.05047 D) −.02950 E) −.20356

Q: A stock is currently selling for $39 a share. The risk-free rate is 2.5 percent and the standard deviation is 26 percent. What is the value of d1of a 9-month call option with a strike price of $40? A) −.01506 B) .08341 C) .07746 D) .06420 E) −.06752

Q: Assume a stock price of $16.80, risk-free rate of 2.7 percent, standard deviation of 59 percent, N(d1) value of .93116, and an N(d2) value of .85708. What is the value of a 6-month call with a strike price of $10 given the Black-Scholes option pricing model? A) $7.62 B) $7.19 C) $8.06 D) $7.85 E) $6.97

Q: Assume a stock price of $31.18, risk-free rate of 3.6 percent, standard deviation of 44 percent, N(d1) value of .62789, and an N(d2) value of .54232. What is the value of a 3-month call option with a strike price of $30 given the Black-Scholes option pricing model? A) $3.38 B) $3.99 C) $3.68 D) $1.76 E) $3.45

Q: Assume a stock price of $34.80, an exercise price of $35, nine months to expiration, risk-free rate of 2.40 percent, standard deviation of 57 percent, and a d1value of .27167. What is the value of d2as it is used in the Black-Scholes option pricing model? A) −.22196 B) −.18657 C) −.18241 D) −.27427 E) −.22238

Q: Assume a stock price of $21.80, an exercise price of $20, three months to expiration, a risk-free rate of 3.40 percent, standard deviation of 46 percent, and a d1value of .52664. What is the value of d2as it is used in the Black-Scholes option pricing model? A) .31218 B) .31225 C) .29664 D) .29535 E) .31340

Q: A stock is currently priced at $38. A call option with an expiration of one year has an exercise price of $40. The risk-free rate is 4.2 percent per year, compounded continuously, and the standard deviation of the stock's return is infinitely large. What is the price of the call option? A) $2.47 B) $34.80 C) $38.00 D) $5.63 E) $40.00

Q: A stock is priced at $52.90 a share, the 3-month $45 call is priced at $9.31 a share, and the risk-free rate is 4.5 percent, compounded continuously. What is the value of the 3-month put with a strike price of $45? A) $.57 B) $.63 C) $.91 D) $1.36 E) $1.54

Q: What is the value of a 6-month put with a strike price of $27.50 if the stock price is $22.60, the 6-month $27.50 call is priced at $1.46, and the risk-free rate is 3.5 percent, compounded continuously? A) $4.71 B) $5.43 C) $5.24 D) $5.88 E) $6.62

Q: A call option with an exercise price of $25 and 9 months to expiration has a price of $4.92. The stock is currently priced at $26.90, and the risk-free rate is 4.1 percent per year, compounded continuously. What is the price of a put option with the same exercise price and expiration date? A) $3.89 B) $1.57 C) $1.24 D) $2.69 E) $2.26

Q: The stock of EHI has a current market value of $21.50 a share. The 3-month call with a strike price of $20 is selling for $2.07 while the 3-month put with a strike price of $20 is priced at $.41. What is the continuously compounded risk-free rate of return? A) 2.9 percent B) 3.0 percent C) 4.1 percent D) 3.7 percent E) 3.2 percent

Q: WT Foods stock is selling for $38 a share. The 6-month $40 call on this stock is selling for $2.01 while the 6-month $40 put is priced at $3.60. What is the continuously compounded risk-free rate of return? A) 2.7 percent B) 2.4 percent C) 1.8 percent D) 1.5 percent E) 2.1 percent

Q: Todd invested $12,000 in an account today at 4.5 percent, compounded continuously. What will this investment be worth in 15 years? A) $26,203 B) $25,845 C) $24,287 D) $25,941 E) $23,568

Q: You invest $2,500 today at 5.5 percent, compounded continuously. How much will this investment be worth 12 years from now? A) $3,728 B) $4,837 C) $4,311 D) $3,422 E) $3,791

Q: J&N stock has a current market price of $51.97 a share and the annual risk-free rate is 4.2 percent, compounded continuously. The 1-year call on this stock with a strike price of $55 is priced at $2.30. What is the price of the one-year put with a strike price of $55? A) $3.07 B) $2.86 C) $3.22 D) $2.94 E) $2.99

Q: Grocery Express stock is selling for $22 a share. A three-month, $20 call on this stock is priced at $2.85. Risk-free assets are currently returning .2 percent per month. What is the price of a three-month put on Grocery Express stock with a strike price of $20? A) $.37 B) $.73 C) $.87 D) $1.10 E) $1.18

Q: The one-year call on TLM stock with a strike price of $65 is priced at $2.20 while the one-year put with a strike price of $65 is priced at $11.18. The annual risk-free rate is 3.8 percent, compounded continuously. What is the current price of TLM stock? A) $53.60 B) $48.90 C) $56.70 D) $50.10 E) $47.65

Q: Day's End stock is selling for $43 a share. The 6-month call with a strike price of $45 is priced at $.30. Risk-free assets are currently returning 4.1 percent per year, compounded continuously. What is the price of a 6-month put with a strike price of $45? A) $1.39 B) $1.46 C) $1.28 D) $1.51 E) $1.32

Q: Webster United stock is priced at $35.79 per share. The 6-month $35 call options are priced at $1.40 and the risk-free rate is 3.2 percent, compounded continuously. What is the per share value of the 6-month put option? A) $.15 B) $.05 C) $0 D) $.20 E) $.25

Q: Today, Ted purchased 500 shares of ABC stock at a price of $42.20 per share. He also purchased five put option contracts on ABC at a price of $.10 per share, an exercise price of $40 and a 1-year term. What is the maximum loss Ted can realize on his investments over the next year? A) −$1,105 B) −$1,050 C) −$1,115 D) −$1,150 E) $0

Q: Today, you purchased 300 shares of Lazy Z stock for $49.80 per share. You also bought three 1-year, $50 put options on Lazy Z stock at a cost of $.55 per share. What is the maximum total amount you can lose over the next year on these purchases? A) −$15,105 B) −$11,050 C) −$160 D) −$105 E) $0

Q: A put option that expires in eight months with an exercise price of $55 sells for $7.34. The stock is currently priced at $52, and the risk-free rate is 3.1 percent per year, compounded continuously. What is the price of a call option with the same exercise price and expiration date? A) $5.67 B) $5.47 C) $5.34 D) $4.71 E) $4.92

Q: A stock is selling for $62 per share. A call option with an exercise price of $65 sells for $3.85 and expires in three months. The risk-free rate of interest is 2.8 percent per year, compounded continuously. What is the price of a put option with the same exercise price and expiration date? A) $6.74 B) $6.23 C) $6.67 D) $6.40 E) $6.95

Q: You need $15,400 in three years. How much do you need to deposit today to fund this need if you can earn 5 percent per year, compounded continuously? Assume this is the only deposit you make. A) $13,506 B) $13,049 C) $14,179 D) $13,255 E) $12,916

Q: This morning, Kate put a European protective put strategy in place when the cost of ABC stock was $29.15 per share and the 1-year $30 ABC put was priced at $1.05 per share. How much profit per share will she earn from this strategy if the stock is worth $28 a share on the put expiration date? A) $7.80 B) −$1.05 C) −$.20 D) $8.85 E) $1.25

Q: If the risk-free rate is 6.5 percent compounded annually, what is the continuously compounded risk-free rate equal to? A) 1/ln1.065 B) 6.10% C) ln1.065 D) 6.24% E) e1.065− 1

Q: Which one of the following statements is correct? A) Mergers benefit shareholders but not creditors. B) Positive NPV projects will automatically benefit both creditors and shareholders. C) There may be conflicts between the interests of bondholders and shareholders. D) Creditors prefer negative NPV projects while shareholders prefer positive NPV projects. E) Mergers rarely affect bondholders.

Q: A purely financial merger: A) increases the risk that the merged firm will default on its debt obligations. B) has no effect on the risk level of the firm's debt. C) reduces the value of the option to go bankrupt. D) has no effect on the equity value of a firm. E) reduces the risk level of the firm thereby increasing the value of the firm's equity.

Q: Purely financial mergers: A) are beneficial to stockholders. B) are beneficial to both stockholders and bondholders. C) are detrimental to stockholders. D) add value to both the total assets and the total equity of a firm. E) reduce both the total assets and the total equity of a firm.

Q: A firm has assets of $16.4 million and 2-year, zero-coupon, risky bonds with a total face value of $7.4 million. The bonds have a total current market value of $7.1 million. The shareholders of this firm can change these risky bonds into risk-free bonds by purchasing a ________ option with a 2-year life and a strike price of ________ million. A) call; $7.1 B) call; $7.4 C) put; $16.4 D) put; $7.1 E) put; $7.4

Q: The value of the risky debt of a firm is equal to the value of: A) a call option plus the value of a risk-free bond. B) a risk-free bond plus a put option. C) the equity of the firm minus a put. D) the equity of the firm plus a call option. E) a risk-free bond minus a put option.

Q: The shareholders of a firm will benefit the most from a positive net present value project when the delta of the call option on the firm's assets is: A) equal to one. B) between zero and one. C) equal to zero. D) between zero and minus one. E) equal to minus one.

Q: Paying off a firm's debt is comparable to ________ on the assets of the firm. A) purchasing a put option B) purchasing a call option C) exercising an in-the-money put option D) exercising an in-the-money call option E) writing a put option

Q: For the equity of a firm to be considered a call option on the firm's assets, the firm must: A) be in default. B) be leveraged. C) pay dividends. D) have a negative cash flow from operations. E) have a negative cash flow from assets.