You Currently Own a One-Year Call Option on Mayer Industries

question 313

Multiple Choice

You currently own a one-year call option on Mayer Industries stock. The current stock price is $37.18 and the risk-free rate of return is 4.5 percent. Your option has a strike price of $32.50 and you assume that it will finish in the money. What is the current value of your call option?

• A) $4.49
• B) $4.68
• C) $4.89
• D) $5.82
• E) $6.08

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Definitions:

Financing Activities

Transactions related to raising capital and repaying investors, including issuing shares, taking out loans, and paying dividends.

10-Year Bond

A debt security issued by governments or corporations with a fixed interest rate and maturity of ten years.

Statement of Cash Flows

A financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, breaking the analysis down to operating, investing, and financing activities.

Direct Method

In cash flow reporting, this accounting method lists major cash inflows and outflows directly, showing the exact sources and uses of cash during the reporting period.