1. Call option values___, while put option values ___ as the underlying stock price rises.
a. fall, fall
b. fall, rise
c. rise, fall
d. rise, rise
2. Johnson Company’s current price is 25. Tom believes that Johnson Company's stock price is going to increase during the next 10 months. A 10-month call option giving the right to buy 100 shares with a strike price of $58 is available. For each option (to buy each share), the option price or premium is $6.98. If Tom buys this option, and Johnson's stock price actually rises to $60, what would be his total pre-tax net profit?
a. -$598
b. $598
c. -$498
d. $498
3. To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 10 years to maturity. This bond has a 9.25% annual coupon, paid annually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation? (
a. 4.878%
b. 4.126%
c. 4.952%
d. 4.526%
e. 4.231%
4. The current price of a stock is $20, and at the end of one year its price will be either $25 or $17. The annual risk-free rate is 8.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?
a. $1.285
b. $1.498
c. $1.615
d. $1.825
e. $2.697