Question 1 When the market risk of a project that the firm is considering undertaking is equal to the average market risk of the firm's existing investments, the cost of capital of that project is: equal to the firm's weighted average cost of capital. zero. equal to the firm's market capitalization. positive. Question 2 Holding a call option and a put option on the same stock will allow the holder to make money on either the call option or the put option at the strike date. This arrangement is called a __________. straddle cover call-put strangle Question 3 If you have a short position on a call option with a strike price of $53.50 and the stock price is $55.50 at the expiration date and the holder of the option exercise the option, what will be the result to you? You can cancel the transaction because the strike price is less than the stock price. You can buy the stock for $53.50 and sell it for $55.50 and make a profit of $2.00. You will have to purchase the stock at the market price ($55.50) and sell the stock at the strike price for a loss of $2.00. You can renegotiate the strike price. Question 4 A project's free flow to equity shows the: maximum debt that the firm can afford. expected amount of additional cash the firm will have available to pay dividends or repurchase stock each year. amount of leverage that the firm can afford. risk that the firm has assumed. Question 5 __________ option allows the holder to exercise the option at any time up to and on the expiration date. An American An European A full A progressive Question 6 The primary difference between a financial option and a real option is: financial options are derivative while real options are direct options. real options are a more important consideration for a firm than financial options. real options are not usually traded in competitive markets. financial options affect the bottom line of a firm more directly than real options. Question 7 If you own an option with a strike price of $47.50 and on the expiration date the stock price is $48.50, what should you do, and what will be the result? Do not exercise the option. Exercise the option, buy the stock for $47.50, immediately sell the stock for $48.50, and realize a profit of $1.00. Exercise the option, buy the stock for $48.50, immediately sell the stock for $47.50, and realize a loss of $1.00. Do not exercise the option, and request a refund of the price paid for the option. A financial statement that is based on hypothetical assumptions rather than on historical data is called a __________ financial statement. projected invalid proposed pro forma Question 9 The value of an interest tax shield is calculated by: subtracting interest payments from dividends paid by the firm. determining the unlevered value of the firm. multiplying the interest paid by the corporation's tax rate. reducing the debt capacity of the firm by the debt load of the firm. Question 10 A __________ option allows the owner of the right to sell a specific asset at a specific price within a specific period of time. call perfect put covered Question 11 On page 644 of the textbook, the authors say: ?While comparables provide a useful starting point, whether this acquisition is a successful investment for KKP depends on Ideko?s post-acquisition performance.? What does this statement mean? How can a firm measure the post-acquisition performance of a firm it is acquiring before that performance occurs? Question 12 Options are the right or obligation to sell or buy some asset. In the context of financial options, options represent a right in an underlying asset. Describe call and put options, and explain why someone would want to deal in options rather than in the underlying asset.

Question 1 When the market risk of a project that the firm is considering undertaking is equal to the average market risk of the firm's existing investments, the cost of capital of that project is: equal to the firm's weighted average cost of capital. zero. equal to the firm's market capitalization. positive. Question 2 Holding a call option and a put option on the same stock will allow the holder to make money on either the call option or the put option at the strike date. This arrangement is called a __________. straddl e cover call-put strangl e Question 3 If you have a short position on a call option with a strike price of $53.50 and the stock price is $55.50 at the expiration date and the holder of the option exercise the option, what will be the result to you? You can cancel the transaction because the strike price is less than the stock price. You can buy the stock for $53.50 and sell it for $55.50 and make a profit of $2.00. You will have to purchase the stock at the market price ($55.50) and sell the stock at the strike price for a loss of $2.00. You can renegotiate the strike price. Question 4 A project's free flow to equity shows the: maximum debt that the firm can afford. expected amount of additional cash the firm will have available to pay dividends or repurchase stock each year. amount of leverage that the firm can afford. risk that the firm has assumed. Question 5 __________ option allows the holder to exercise the option at any time up to and on the expiration date. An American An European A full A progressive Question 6 The primary difference between a financial option and a real option is: financial options are derivative while real options are direct options. real options are a more important consideration for a firm than financial options. real options are not usually traded in competitive markets. financial options affect the bottom line of a firm more directly than real options. Question 7 If you own an option with a strike price of $47.50 and on the expiration date the stock price is $48.50, what should you do, and what will be the result? Do not exercise the option. Exercise the option, buy the stock for $47.50, immediately sell the stock for $48.50, and realize a profit of $1.00. Exercise the option, buy the stock for $48.50, immediately sell the stock for $47.50, and realize a loss of $1.00. Do not exercise the option, and request a refund of the price paid for the option. A financial statement that is based on hypothetical assumptions rather than on historical data is called a __________ financial statement. projecte d invalid propose d pro forma Question 9 The value of an interest tax shield is calculated by: subtracting interest payments from dividends paid by the firm. determining the unlevered value of the firm. multiplying the interest paid by the corporation's tax rate. reducing the debt capacity of the firm by the debt load of the firm. Question 10 A __________ option allows the owner of the right to sell a specific asset at a specific price within a specific period of time. call perfect put covere d Question 11 On page 644 of the textbook, the authors say: \"While comparables provide a useful starting point, whether this acquisition is a successful investment for KKP depends on Ideko's postacquisition performance.\" What does this statement mean? How can a firm measure the postacquisition performance of a firm it is acquiring before that performance occurs? Question 12 Options are the right or obligation to sell or buy some asset. In the context of financial options, options represent a right in an underlying asset. Describe call and put options, and explain why someone would want to deal in options rather than in the underlying asset