Firms concerned with the sharemarket reaction to dividend announcements may adopt a “sticky" dividend policy. As a call option is an option to buy and a put option an option to sell, the opposite position to buying an option to buy is buying an option to sell. Therefore, any factor that increases the value of a call option will decrease the value of a put option written on the same asset.

Firms concerned with the sharemarket reaction to dividend announcements may adopt a “sticky" dividend policy. As a call option is an option to buy and a put option an option to sell, the opposite position to buying an option to buy is buying an option to sell. Therefore, any factor that increases the value of a call option will decrease the value of a put option written on the same asset.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 3MC

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Which of the following statement(s) is(are) TRUE? (i) The valuation price of a stock primarily depends on expected future dividends to its shareholders and its required rate of return. (ii) An investor who intends to sell a stock after holding it for a short period will forgo all future dividends, thus will be willing to pay for a lower price for the stock compared to another investor who prefers to hold the share for a longer period. (iii) The valuation share price is positively related to the share's required rate of return.
A company announces a major expansion which causes the price of its stock to increase and also causes an increase in the standard deviation (or volatility) of stock returns. How will these two market reactions affect the value of put options on the firm’s stock? A) Both reactions decrease the value of the put options. B) Both reactions increase the value of the put options. C) The change in volatility will not affect put option values while the increased stock price will decrease the put option values. D) The reactions will have offsetting effects on put option values.
Which of the following statements is correct? As the volatility of the stock price increases (all else remaining unchanged), both European calls and puts become less valuable. The seller of an option can choose whether to post a margin or not. Consider a call and a put which are both written on the same asset, and have the same strike price and the same time-to-maturity. It is possible for the call and the put to be out-of-the-money at the same time. The intrinsic value of a European option is the value it would have if the time-to-maturity was zero. Please explain and justify your choice using your own words.
f) discuss the two assumptions underlying the analysis of option strategies: a) the stock pays no dividends, and b) there are no taxes or transaction costs. g) demonstrate an understanding of the position of buying or writing a call by identifying breakeven stock price, maximum profit, and maximum loss. h) demonstrate an understanding of the position of buying or writing a put by identifying the breakeven stock price, the maximum profit, and the maximum loss. i) define a covered call. j) demonstrate an understanding of the position of writing a covered call by identifying breakeven stock price, maximum profit, and maximum loss.
which of the following statements is true? Select one: Investors sell a stock when required return is less than expected return and buy a stock when required return above expected return None of the answers are correct Investors buy a stock when it is under-valued and sell it when it is over-valued Investors sell a stock when it is under-valued and buy it when it is over-valued.
which one is correct please confirm? QUESTION 21 Finance researcher Myron Gordon argues that ____. a. the clientele effect has no influence on share value b. the existence of transaction costs has no impact on the dividend decision c. dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value d. risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline
If the bid fails in a hostile tender offer, what impact will it have on the market price? A. Market price falls because the minority owner was unable to complete the offer B. Market price stays the same because it is apparent that no one wants to buy the stock C. Market price increases because the minority owner has signaled to the market that shares are worth more D. None of the above
Two other interesting points brought up by Miller and Modigliani, as highlighted in Berk and DeMarzo (2020) were that “In perfect capital markets, investors are indifferent between the firm distributing funds via dividends or share repurchase” (p. 612) and that “In perfect capital markets, holding fixed the investment policy of a firm, the firm’s choice of dividend policy is irrelevant and does not affect the initial share price” (p. 614). Respond to this question by focusing on either dividend payout policy or the decision between stock repurchases and dividend payouts and illustrate how the assumptions made to support these axioms tend to oversimplify what occurs.
BUFFET'S REASON FOR PREFERRING SHARE REPURCHASES VALID? IS A "HOMEMADE DIVIDEND" A VIABLE ALTERNATIVE TO CASH DIVIDENDS FOR THE INVESTOR?
Which of the following statements is CORRECT? a. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless. b. The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return. c. Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio. d. A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock. e. A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.
If the expected rate of return on a stock is less than its required rate of return, investors will desire to ________ the stock Choose answer rise sell buy decline There will also be a tendency for the stock's price to _________. rise sell buy decline
According to the efficient market, which of the following are not true? Select one: securities are in equilibrium prices fully reflect all public information available the investors should not waste their time on under- or over-valued securities None of the answers are correct the market has demonstrated that stocks are not reasonably priced.