You Own One Call Option with an Exercise Price of $40

question 44

Multiple Choice

You own one call option with an exercise price of $40 on Northwest Exporters stock. This stock is currently selling for $37.90 a share but is expected to increase to either $38 or $43 a share over
The next year. The risk-free rate of return is 4 percent and the inflation rate is 3.5 percent. What is
The current value of your option if it expires in one year?

• A) $.41
• B) $.82
• C) $1.67
• D) $2.10
• E) $5.00

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Definitions:

Net Present Value

A method used in capital budgeting to assess the profitability of an investment or project, by calculating the difference between the present value of cash inflows and outflows over a period of time.

Salvage Value

The predicted price that an asset will fetch when it is sold at the conclusion of its usable life.

Working Capital

The difference between a company's current assets and current liabilities, representing the liquidity available to run its operations.

Contribution Margin

The amount by which the sale of a product or service exceeds its variable costs, used to cover fixed costs and generate profit.