Question

Exercise No. Mod 6-1

Assume that a stock is selling for P66.75 with options available at 60, 65, and 70 strike prices. The 65 call option price is at P4.50.

a. What is the intrinsic value of the 65 call?

b. Is the 65 call in the money?

c. What is the speculative premium on the 65 call option?

d. What percentage does the speculative premium represent of common stock price?

e. Are the 60 and 70 call options in the money?

Exercise No. Mod 6-2

Assume a stock is selling for P48.50 with options available at 40, 50, and 60 strike prices. The 50 call option price is at P2.75.

a. What is the intrinsic value of the 50 call?

b. Is the 50 call in the money?

c. What is the speculative premium on the 50 call option?

d. What percentage of common stock price does the speculative premium represent?

e. Are the 40 and 60 call options in the money?

Exercise No. Mod 6-3

Assume a 40 July put option is purchased for 6.50 on a stock selling at P35 per share. If the stock ends up on expiration at 38.75, what will be the value of the put option?

Exercise No. Mod 6-4

Assume you sell 100 shares of Levis Corporation short at P72. You also buy a 70 call option for P5.25 to protect against the stock price going up.

a. If the stock ends up at P90, what will be your overall gain or loss?

b. If the stock ends up at P50, what will be your overall gain or loss?

Exercise No. Mod 6-5

Assume you sell 100 shares of Alston Corporation short at P43. You also buy a 40 call option for P4.80 to protect against the stock price going up.

a. If the stock ends up at P60, what will be your overall gain or loss?

b. If the stock ends up at P20, what will be your overall gain or loss?

Exercise No. Mod 7-1

Acquirer purchases 100% of target by issuing additional stock to purchase target shares

No premium is offered above target's current share price

Given:

Acquirer Target

Share Price P20 P40

P/E ratio 8x 5x

EPS Next Year P3 P6

Shares Outstanding 6000 2000

Requirement:

1.Compute the accretion/dilution per share

2.Compute the accretion/dilution in %

3.What is the result of the deal?

4.Is target company expensive to purchase? Why?

Exercise Mod 8-1 (Multiple Choice)

1.The following are major causes of business failures except

a.mismanagementb. overexpansionc. poor financial actions d. employee maturity

2.The following are considered to not add shareholder value, except

a. diversificationb. economies of scalec.over-extension d. vertical integration

3.In a combination when the acquiring company makes an offer to purchase the target company but the management of the target company resists the offer, it is called

a.Friendly combinationb. divestituresc. hostile combination d. differential management

4.The following are important theories of mergers and acquisitions, except

a.Tax credits & concessions c. market power

b.Agency and managerialism d. none of the above

5.A contract to give the investor the right but not an obligation to buy or sell something

a.warrantsb.optionsc. futuresd. all of the above

6.Refers to the purchase of the shares and assets of the company

a.acquisitionb. mergerc. consolidationd. all of the above

7.A type of acquisition that involves the sale of a portion of a company

a.Leverage buyoutb. divestiturec. holding company d. none of the above

8.Two separate companies combine and only one of them survives

a.acquisitionb. mergerc. consolidationd. all of the above

9.Under this method, the assets and liabilities of the two combining companies are simply added together

a.Purchase methodb. pooling of interest methodc. capital expenditure methodd. none of the above

10.Under this method, the acquired company is treated by the acquiring company as an investment

a.Capital expenditure methodb. purchased methodc. pooling of interestmethodd. none of the above

11.This refers to the fact that the combined company can often reduce duplicate departments or operations

a.Joint ventureb. economies of scale c. diversification d. split up

12.This occurs when the stated value of the business enterprise's liabilities exceeds the fair market value of its assets.

a.Insolvency b. bankruptcy c. negative profitability d. Solvency

13.Derivatives are presented in the financial statements at fair market value as:

a.Asset b. liability c. asset or liability d. all of the above

14.Business combinations are used by firms to externally expand in order to achieve all of the following objectives EXCEPT

a.To increase productive capacity d. to acquire needed assets

b. To increase liquidity e. answer not given

c.To increase common stock outstanding

15.Common forms of business combination include all of the following EXCEPT

a.Congeneric formation d. holding companies

b.Consolidations e. answer not given

c.Mergers

16.The combination of two or more companies to form a completely new corporation is a

a.Congeneric formation d. holding companies

b.Consolidations e. answer not given

c.Merger

17.The firm in a merger transaction that attempts to merge or takeover another company is called the

a.Target company d. conglomerate

b.Holding company e. answer not given

c.Acquiring company

18.Generally, a combination of two firms of unequal sixe is called

a.A congeneric formation d. a holding company

b.A consolidation e. answer not given

c.A merger

19.Most firms seeking merger partners will hire the services of

a.A commercial banker d. an investment banker

b.An investment broker e. answer not given

c.A private contractor

20.The combination of a dress manufacturer and a credit bureau is an example of

a.Congeneric merger d. vertical merger

b.Conglomerate merger e. answer not given

c.Horizontal merger

21.When a firm undertakes a merger in order to eliminate redundant functions or increase market share, this is an example of

a.Financial merger d. strategic merger

b.Hostile takeover e. answer not given

c.Friendly merger

22.A friendly merger transaction is typically consummated through all of the following EXCEPT

a.A cash purchase d. an exchange of the acquirers stock & bonus

b.A tender offer e. answer not given

c.An exchange of the acquirer's stock

23.A merger of a paper manufacturer and a logging company is an example of

a.Congeneric merger d. vertical merger

b.Conglomerate merger e. answer not given

c.Horizontal merger

24.An attempt to gain control of the firm by buying sufficient shares of the target firm in the marketplace is known as a and is typically accomplished through a

a.Friendly takeover; tender offer d. hostile takeover; tender offer

b.Hostile takeover; merger e. answer not given

c.Friendly takeover; merger

25.A merger involving the purchase of a specific product line, rather than the whole company is

a.An operating merger d. a variation of the strategic merger

b.A financial merger e. answer not given

c.A selective lines merger