A Stock Price Is Currently $23

question 11

Multiple Choice

A stock price is currently $23.A reverse (i.e short) butterfly spread is created from options with strike prices of $20,$25,and $30.Which of the following is true?

• A) The gain when the stock price is greater than $30 is less than the gain when the stock price is less than $20
• B) The gain when the stock price is greater than $30 is greater than the gain when the stock price is less than $20
• C) The gain when the stock price is greater than $30 is the same as the gain when the stock price is less than $20
• D) It is incorrect to assume that there is always a gain when the stock price is greater than $30 or less than $20

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Definitions:

Equity Financing

The method of raising capital by selling company shares to investors; in return, the investors receive ownership interests in the company.

Rate of Return

The gain or loss on an investment over a specified period, expressed as a percentage of the investment's initial cost.

Debt Financing

Debt Financing involves raising capital through borrowing money that must be repaid over time, with interest.

Cost of Capital

The return a company needs to earn on its investment projects to maintain its value and attract funds.