Suppose a Firm Offers an Equity-Linked Security

question 7

Multiple Choice

Suppose a firm offers an equity-linked security.The face value is $1 million and its payoff is based on any appreciation in an equity index currently at 855.50.It has determined that of the $1 million raised,it can structure the option component so that its value is $135,000.Currently an at-the-money call option is worth $125.What percentage of the gain in the index can it offer?

• A)92 percent
• B)100 percent
• C)50 percent
• D)8.23 percent
• E)none of the above

---

Definitions:

Dividends Account

An account in the ledger that records dividends paid out to shareholders by a company.

Retained Earnings Account

An equity account that represents the accumulated portion of net income not distributed to shareholders in the form of dividends.

Current Ratio

A financial liquidity metric that compares a company's current assets to its current liabilities, used to evaluate its ability to pay short-term obligations.

Temporary Accounts

Accounts that track revenues and expenses within a specific accounting period and are reset to zero at the period’s end.