You Own a Call Option on NICo Stock That Expires

question 33

Multiple Choice

You own a call option on NICo stock that expires in one year.The exercise price is $35.The current price of the stock is $37.40 and the risk-free rate of return is 4.25 percent.Assume the option will finish in the money.What is the current value of the call option?

• A)$2.40
• B)$3.83
• C)$3.50
• D)$2.31
• E)$2.50

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Definitions:

Interest Tax Shield

The reduction in income taxes that results from the deductibility of interest expense from taxable income.

Capital Structure

The mix of debt and equity financing a company uses for its operations and growth.

Optimal Capital Structure

Optimal capital structure is the mix of debt, equity, and other financing sources that minimizes a firm's cost of capital and maximizes shareholder value, balancing risk and return.

Financial Distress

A situation where a company cannot meet or has difficulty paying off its financial obligations to creditors, often leading to bankruptcy or restructuring.