Simon Believed That He Might Want to Buy Certain Shares

question 2

Multiple Choice

Simon believed that he might want to buy certain shares from Melinda in the near future. On June 1st, he therefore paid her $1000 in exchange for an option to purchase 5000 shares in Acme Inc at $10 each on or before October 1st. Which of the following statements is TRUE?

• A) If the market value of the shares immediately dropped to $5 each and stayed there throughout the option period, Simon would be obligated to buy 5000 shares from Melinda at double their actual value.
• B) Simon will be entitled to enforce the option only if Melinda cannot find any other potential buyers.
• C) If the market value of the shares immediately increased to $20 each and stayed there throughout the option period, Melinda might be obligated to sell 5000 shares to Simon at half of their market value.
• D) The option would create enforceable obligations only if and when Simon agreed to buy the shares.
• E) If the market value of the shares immediately increased to $20 each, Melinda could revoke her offer to sell the shares any time before Simon accepted it.

---

Definitions:

Discount Factor

A multiplicative factor used in discounted cash flow (DCF) analysis to calculate the present value of future cash flows.

Straight-Line Depreciation

A strategy for apportioning the cost of a concrete asset over its effective life in equal yearly installments.

Net Present Value

A financial metric that calculates the present value of all cash flows (both incoming and outgoing) expected from an investment, adjusted for time and interest.

After-Tax Net

The amount of money left after all applicable taxes have been deducted from gross income or profit.