Chapter 23 Options and Corporate Finance: Extensions and Applications Answer Key
Multiple Choice Questions
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 Topic: OPTION TO ABANDON Type: DEFINITIONS
2. An example of a special option is: A. an executive stock option.
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 Topic: SPECIAL OPTION Type: DEFINITIONS
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 Topic: FREEZE-OUT PERIOD Type: DEFINITIONS
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 Topic: EMBEDDED OPTIONS Type: CONCEPTS
5. Options are granted to top corporate executives because:
A. executives will make better business decisions 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 Topic: EXECUTIVE OPTIONS Type: CONCEPTS