Question

1.

Which of the following variables does NOT affect the value of a stock option?

		The predicted future price of the underlying stock
		The current price of the underlying stock
		The option’s time to maturity
		The option’s strike price
		The interest rate

2.

Zack owns a bond that will pay him $35 each year in interest plus a $1,000 principal payment at maturity. The $1,000 principal payment is called the

		coupon.
		par value.
		discount.
		yield.
		call premium.
		None of the options are correct.

3.

Which of the following statements regarding preferred stock is true?

		Holders of preferred stock have the same voting rights as common stockholders.
		Preferred stock dividend payments are a deductible expense for corporate tax purposes.
		Almost all public corporations are at least partly financed with preferred stock.
		None of the options are correct.

4.

Which one of the following statements is true?

		Equity securities offer fixed claims on future cash payouts.
		Unlike bondholders, for their returns, shareholders rely entirely on price appreciation.
		In theory, common shareholders exercise very little control over company decisions.
		Historically, common shareholders have earned a risk premium as compensation for risk borne in excess of government bonds.
		Preferred shareholders are the first investors to be repaid in bankruptcy liquidation.
		None of the options are correct.

5.

The price of a call option tends to be lower when which of the following is higher (all else equal)?

		The expected volatility of the underlying stock
		The price of the underlying stock
		The time to maturity
		The strike price
		None of the options are correct.

6.

According to the pecking order theory of capital structure, why do firms avoid issuing equity?

		Because fees associated with issuing new equity are so high
		Because they want to avoid dilution of earnings per share
		Because they don’t want to commit to paying dividends on the new equity
		Because equity issuance signals that managers believe their stock is overvalued, which causes the price of the stock to fall

7.

Which of the following factors favor the issuance of debt in the financing decision?

I. Market signaling
II. Distress costs
III. Management incentivess
IV. Financial flexibility

		I and II only
		I and III only
		II and IV only
		I, II, and III only
		I, II, and IV only
		None of the options are correct.

Answer 1

1 the predicted future price

2 par value

3 almost all public companies have partial preferred stock

4 historically common shareholders..........

5 the strike price

6 because they want to avoid dilution

7 I and III