Question

1.

Which of the following statements is not true?

	a.	Exercising an option involves buying or selling some asset.
	b.	The option price is the price paid to acquire the option.
	c.	An option is the right to buy or sell an underlying asset at the strike price.
	d.	After the expiration date the option becomes valuable.

2.

Which of the following examples best represents a passive dividend policy?

	a.	The firm sets a policy such that the proportion of dividends paid from net income remains constant.
	b.	The firm pays dividends with what remains of net income after taking acceptable investment projects.
	c.	The firm sets a policy such that the quantity (dollar amount per share) of dividends paid from net income remains constant.
	d.	All of the above are examples of various types of passive dividend policies.

3.

Suppose a company pays out fully franked dividends of $140 each to investors with marginal tax rates 45%. The statutory company tax rate is 30%. How much tax will each investor pay on his/her franked dividend?

	a.	$30
	b.	-$30
	c.	$60
	d.	$90

4.

Apple Computer initiated a cash dividend and stock split in 1987 to:

	a.	signal the stock market about their potential growth and positive NPV prospects.
	b.	confirm the large gains in sales.
	c.	satisfy a market hungry for cash rewards.
	d.	a and b.

5.

Suppose an individual subject to a 30 per cent marginal rate of income tax has 2,500 shares in a company that is paying a partially franked dividend of 40 cents per share, with a franking ratio of 0.70 (i.e. 70%). The individual is a resident for taxation purposes. If the company tax rate is 30 per cent, the tax credit can the individual claim due to the partially franked dividends is:

	a.	$210
	b.	$1000
	c.	$390
	d.	$300

6.

A capital loss occurs when:

	a.	the selling price is less than the purchase price.
	b.	the purchase price is less than the selling price.
	c.	there is no income component of return.
	d.	there is no dividend paid.

7.

The buyer of a call option has the choice to exercise, but the writer of the call option has:

	a.	the obligation to call the shares in.
	b.	the obligation to deliver the shares at exercise.
	c.	the choice to offset with a put option.
	d.	the choice to deliver shares or take a cash payoff.

8.

Suppose a stock exists with a price of $17, and a put option on the stock exists with an exercise price of $32. What is the approximate minimum value of the put option?

	a.	$15.
	b.	$17.
	c.	$32.
	d.	$ 0.

9.

The merger of Westpac Bank and St George bank is an example of ________merger.

	a.	Congeneric
	b.	Horizontal
	c.	Conglomerate
	d.	Vertical

10

Mr. Martin buys a put option to sell 100 shares. The strike price=$70; Current stock price=$65, price of the put option to sell one share=$7. At the time of the expiration of the put option, the share price is $72. What is the total gain or loss of Mr. Martin?

	a.	Gain $7
	b.	Gain $1300
	c.	Loss $700
	d.	Loss $7

Answer 1

[1] which of the following statements are not true ?

ans : (d) after the expiration date the option becomes valuable

It is the wrong statement. The value will keep on increasing as the time to expiration decreases. And if the the expiration time will be closer , then the value of option decreases and become null.

All other statements are true. Excerising an option includes buying or selling of some assets. And also includes the righ to sell or buy and underlying asset at a specified strike price. The amount paid by the buyer of option to the seller is called premium/option price.

[2] Which of the following best represents a passive dividend policy ?

ans : The firm pays dividends with what remains of net income after acceptable investment projects.

Passive dividend policy is the treatment of dividend as a passive residual determined strictly by the availability of acceptable investment proposal implies that dividends are irrelevant.

[3] Amount of franked dividend ?

ans : (c) $60

calculation

franked dividend = ( dividend amount / (1- company tax rate) ) - dividend amount

franked dividend = ( $140 / (1- .30) ) - $140

= ( $140 / .70 ) - $140

= $ 60

[4] Apple company initiated a cash dividend and stock split in 1987 to :

ans : [c] a & b

Apple company initiated for it's first quarterly cash dividend and stock split in 1987 inorder to show their confidence in the apple computer. And also it is made available to broader group of investors. They need apple stock to be more accessible to the wider range of investors. And also to shown their potential growth in the market.