Corporation traded call options

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Reference no: EM131813062

1. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 22% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

a. $23.39

b. $32.69

c. $26.57

d. $27.37

e. $28.97

2. Which of the following statements is most correct, holding other things constant, for Z Corporation's traded call options?

If Z's stock price stabilizes (becomes less volatile), then the price of its options will increase.

If Z pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.

The price of these call options is likely to rise if Z's stock price rises.

The price of these call options is likely to rise if Z's stock price falls.

None fo the above

3. Which of the following statements is correct?

An option holder is not entitled to receive dividends unless he exercises his option before the stock goes ex dividend.

LEAPS are very short-term options that were created relatively recently and now trade in the market

Options can only be written on stocks that pay dividends.

Options typically sell for less than their exercise value.

None of the above

Reference no: EM131813062

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