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Unformatted text preview: 23-1CHAPTER 23 Options and Corporate Finance: Extensions and Applications Multiple Choice Questions: I. DEFINITIONS OPTION TO ABANDON a 1. The option to abandon is: a. a real option. b. usually of little value because of the cost associated with abandonment. c. irrelevant in capital budgeting analysis. d. nearly always less relevant the option to expand. e. All of the above. Difficulty level: Medium SPECIAL OPTION e 2. An example of a special option is: a. an executive stock options. b. the embedded option in a start-up company. c. the option in simple business contracts. d. the option to shut down and reopen a project. e. All of the above. Difficulty level: Medium FREEZE-OUT PERIOD b 3. Executives can not exercise their options for a fixed period of time, this is the: a. investing period. b. freeze-out period. c. valuation period. d. guaranteed growth period. e. strike period. Difficulty level: Medium II. CONCEPTS EMBEDDED OPTIONS b 4. The NPV approach must be: a. augmented by added analysis if there are a few embedded options. b. augmented by added analysis if a decision has significant embedded options. c. jettisoned if there are any embedded options. d. computed carefully to identify the options. e. None of the above. Difficulty level: Medium 23-2EXECUTIVE OPTIONS d 5. Options are granted to top corporate executives because: a. executives will make better business decision in line with benefiting the shareholders. b. executive pay is at risk and linked to firm performance. c. options are tax-efficient and taxed only when they are exercised. d. All of the above. e. None of the above. Difficulty level: Medium CALL OPTION ON DIVIDEND PAYING STOCK c 6. The call option on a dividend paying stock compared to a non-dividend paying stock is: a. more valuable because of the extra dividend payment. b. equal in value because cash dividends are paid on stock only. c. less valuable because cash dividends are paid on stock only. d. less valuable if the dividend paying stock is in-the-money while the non-dividend paying stock if out-of-the-money. e. None of the above. Difficulty level: Challenge EXECUTIVE OPTIONS d 7. The value of the options awarded executives is much less than face value to the executives because: a. the value to the executive depends on the stock price being greater than the exercise price. b. the options must be held beyond the freeze-out period. c. a highly undiversified portfolio can have a large drop in value with high variance stocks. d. All of the above. e. None of the above. Difficulty level: Medium EXECUTIVE OPTIONS a 8. Corporations by rewarding executives with large option positions: a. cause the executives to hold highly undiversified portfolios....
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