Problem 2

Answer the following multiple-choice questions;

1. A____is an alternative method to cash dividends which is used to pay out a firm's earnings to shareholders

a. Tender Offer

b. IPO

c. Share repurchase

d. Stock Split

2.Real options

a. generally reduce the value of a company's investment projects due to their high level of uncertainty

b. generally, increase the value of the investment project but may not guarantee a positive NPV

c.are traded on derivative exchanges

d. can have both positive and negative values, so the company's management must avoid them when possible.

3. Your portfolio includes a call option on Company ABC Inc's stock with a transaction price of 100 dollars. You paid 4 euros for the option as a premium. The option is now about to expire. What is the value of the option if the current market price of the stock is 98 dollars?

(Show the calculation)

a. -2USD

b. 2 USD

c. -4USD

d. 0USD

4. A company has a cost of debt of 4% and a cost of equity of 12%. The corporate tax rate is 40%. If the company has target debt to total ratio of 50%, it's WACC is closest to:

(Show the calculation)

a. 8.0%

b. 8.4%

c.14.4%

c.7.2%

5. Which of the following investment criteria does not take the time value of the money into consideration?

a. simple payback period

b.Internal rate of return

C. net present value

d. none of the above