Bill Jones Inherited 5,000 Shares of Stock Priced at $45

question 88

Multiple Choice

Bill Jones inherited 5,000 shares of stock priced at $45 per share.He does not want to sell the stock this year due to tax reasons but he is concerned the stock will drop in value before year end.Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain.January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 exercise price are quoted at a cost of $3.If Bill establishes the collar and the stock price winds up at $35 in January,Bill's net position value including the option profit or loss and the stock is _________.

• A) $195,000
• B) $220,000
• C) $175,000
• D) $215,000

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Definitions:

Standard Labor Rate

The predetermined cost per hour for labor, used in budgeting and costing calculations.

Standard Machine-Hours

A predetermined amount of time that should be required to complete a task or produce a product on a machine, used for planning and efficiency analyses.

Variable Overhead Efficiency Variance

The difference between the actual hours taken to produce something and the standard hours expected, multiplied by the variable overhead rate per hour.

Manufacturing Overhead

All indirect costs associated with manufacturing a product, excluding direct materials and direct labor costs.