1. Which of the following is correct for the owner of a June call, valued at $3, on XYZ Corporation with a strike price of $60? XYZ Corporation shares currently trade at $55.
a. XYZ stock will go to $63 per share within the option period.
b. The option should be exercised now.
c. The option owner’s current profit is $3 per share.
d. The option may expire without value.
2. The basic idea for a credit spread is to have the upper and lower leg options of the spread expire worthless.
True False
3. Capital budgeting criteria: mutually exclusive projects Project S costs $11,000 and its expected cash flows would be $5,500 per year for 5 years. Mutually exclusive Project L costs $48,500 and its expected cash flows would be $10,500 per year for 5 years. If both projects have a WACC of 13%, which project would you recommend?
I. Both Projects S and L, since both projects have IRR's > 0.
II. Neither S or L, since each project's NPV < 0.
III. Project L, since the NPVL > NPVS.
IV. Project S, since the NPVS > NPVL.
V. Both Projects S and L, since both projects have NPV's > 0.