Chapter 24 - practice problems

Chapter 24 - practice problems - A the size of the firm...

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Chapter 24 1. 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. Answer: D 2. Executives can not exercise their options for a fixed period of time, this is the: A) investing period. D) guaranteed growth period. B) freeze-out period. E) strike period C) valuation period. Answer: B 3. Corporations by rewarding executives with large option positions: A) cause the executives to hold highly undiversified portfolios. B) put the firm in a risky position to pay off the options. C) cause the value of the stock to fall because the options are theft. D) are really valueless because most options are never exercised. E) none of the above. Answer: A 4. Rejecting an investment today forever may not be a good choice because:
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Unformatted text preview: A) the size of the firm will decline. B) there are always errors in the estimation of NPVs. C) the option value is negative. D) the company's foregoing the future rights or option to the investment. E) none of the above. Answer: D 5. If Mr. Maxim earned $500,000 in regular annual salary why might why might he prefer to have $1,500,000 in straight salary versus salary and options? Answer: Mr. Maxim likely has a large portion of his wealth tied up in Digital Storage Devices. If he is in a very undiversified position and his pay-off is dependent on the firm stock doing well to make the options pay-off, he is exposed to a large amount of risk. If the stock price falls he will suffer a large decrease in wealth. Mr. Maxim must also wait the 3 year freeze-out period before exercising the options and while price may rise it can also fall drastically....
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