Imagine that an investor in the common stock of a company has two choices, either to (1) but 100 shares of a company's common stock at $10 per share or (2) to purchase a call for $125 to purchase 100 shares at the same $10 price at the end of nine months. If the investor chooses to buy the stock, the investor must pay $1,000 immediately and is at risk for the entire $1,000 investment. If the investor chooses to purchase the call option, the investor will pay only $125 immediately and can wait until the option's expiration date to decide whether or not to buy the stock for an additional $1,000. The investor's risk is limited to $125. If the option is ____________________, the option will be exercised. If it is ____________________, the option will simply lapse.
A. In-the-money, Out-of-the-money
B. At-the-money, Out-of-the-money
C. At-the-money, In-of-the-money
D. At-the-money, At-of-the-money
____________________ is common stock received when the option is exercised.
A. Underlying stock
B. American option
C. European option
D. Strike
Situations commonly requiring the valuation of option are all of the following EXCEPT:
A. When the option is designed, granted exchanged, or terminated
B. When financial statement disclosure requires that the option value is recognized
C. When the option value is at issue in a damage suit, such as a breach of contract suit between an existing or former executive and the issuing company
D. When the option is a repurchased option by the OTC market
Continuing the above example, if earnings were $30,000, earning per share would be:
A. $2.50
B. $3.00
C. $4.00
D. $2.25
Book value per share is based on the number of shares outstanding at the end of accounting period rather than the weighted average used in computing earnings per share. Also, book value normally is computed without considering:
A. Treasury stock
B. Possible dilutive effects of conversions
C. Maximum potential dilution
D. Anti-dilutives and their effects
Let's say that a company had 100,000 shares outstanding at the beginning of the year and issued 30,000 more shares on May 1. The 100,000 shares would be outstanding for four months and the 130,000 shares for eight months, or two- thirds of the year. The weighted average number of shares outstanding for the year would be:
A. 100, 000
B. 120,000
C. 140,000
D. 180,000
Since the use of the extraordinary designation is so restrictive, obviously many items do not meet the strict definition for accounting purposes but nevertheless should be regarded as nonrecurring for analytical purposes. Some examples of such items would be all of the following EXCEPT:
A. Gains or losses on the sale of assets
B. Gains or losses on disposition of a segment of the business
C. Write-offs and other expenses related to an acquisition
D. Effects of normal price fluctuations
An item that frequently causes controversy in a business valuation is the value of a:
A. Net operating loss carryforward
B. Accounting of leases
C. Installment sales
D. Contract work
Many cost items fall into a "___________", in which the decision to expense or to capitalize the expenditures is subjective. One such decision is the dividing line between maintenance expenditures, which are expenses and capital improvements, which are capitalized.
A. White area
B. Gray area
C. Red area
D. White and gray area
In comparing companies with very different accounting practices, one way for an analyst to adjust for intangible items on the financial statements is to eliminate:
A. All intangible assets from the balance sheets
B. All amortization expense from the income statements
C. Identifying the true economic value
D. Both A and B
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