USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 42

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

-Refer to Exhibit 16.8. If you establish a long straddle using the options with a 95 exercise price, what is your dollar gain or loss if at expiration XYZ is still trading at 101 11/16?

• A) $668.75 gain
• B) $668.75 loss
• C) $94.56 gain
• D) $94.56 loss
• E) $81.25 loss

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Definitions:

Operating Leverage

A financial measure of a firm's fixed versus variable costs, which assesses how revenue growth translates into growth in operating income.

Financial Leverage

The use of borrowed funds to increase the potential return on investment.

MM Model

The MM Model, or Modigliani-Miller Theorem, is a finance theory that suggests market value of a company is determined by its earning power and risk of underlying assets, independent of its capital structure.

Cost Of Equity

The return a company requires to decide if an investment meets capital return requirements, often used in capital budgeting to evaluate projects.