Question

RTF stock is currently priced at $37.13 a share. The only options on this stock are the March $45 call option, which is priced at $1.72, and the March $45 put which is priced at $7.99. Flo would like the option to purchase 300 shares of RTF should the price suddenly rise as she expects. Her main concern is that the price will double after hours and she will miss out on some potential profits. She also realizes the stock is highly risky and she could lose her entire investment, which she prefers not to do. What should she do to help offset her concerns?

	A.	Buy 3 call option contracts at a cost of $516
	B.	Sell 3 call option contracts and receive $516
	C.	Buy 300 call option contracts at a cost of $5.16
	D.	Buy 3 put option contracts at a cost of $23.97

QZinc Furniture has 77,000 shares of stock outstanding with a par value of $0.50 per share. The current market value of the firm is $8,280,000. The balance sheet shows a balance of $1,142,000 in the capital in excess of par value account and retained earnings of $2,234,000. The company just announced a 7-for-2 stock split. What will be the market price per share after the split?

	A.	$43.89
	B.	$107.53
	C.	$30.72
	D.	$376.36

Answer 1

Solution :

Q1. Current Price of ETF = 37.13

Option available

Call : March 45, premium = 1.72

Put: March 45, Premium = 7.99

Since the investor is bullish and thinks the price will double from here so assume the price will move above 74.

If she purchases the call option then she has to pay a premium of 1.72 and effective price will become 45 + 1.72 = 46.72. If the price move above this then she will earn profits.

So she should buy 3 call option (Each option has 100 shares ) and total cost = 300 * 1.72 = 516

Option A is the correct answer

Question 2 )

Number of shares = 77,000

Market Value of the share = 8,280,000

Current Share price = market value / number of share = 8,280,000/ 77,000 = 107.53

Since stock split is 7-for-2 so it means that for every 2 shares investor will receive 7 shares.

So new price will become 107.53 * 2 / 7 = 30.72

and number of shares will become = 77000 * 7 / 2 = 269,500

Market value will remain same as Marjet value = share price * number of share = 30.72 * 269,500 = 8,280,000

So correct option is C. Share price = 30.72