Why is an option a contingent claim?
A contingent claim is one whose existence depends on some event taking place. For example, if your little brother is first on the waiting list…
Why is an option a contingent claim?
Identify the following terms about an option on common stock
a. Call option the right to purchase a specified number of shares of common stock at a specified price (the exercise or strike price) until,…
Why is an “out of the money” option
a. Not worthless if time remains until its expiration? With time remaining until expiration, the possibility exists that the price of the underlying asset will…
“In the money” options
Most holders of “in the money” options do not use them to buy the underlying stock, even on the option’s expiration date, but instead sell…
Why does capital budgeting analysis pay attention only to cash flows?
Capital budgeting looks only at cash flows because finance theory argues that cash flows are the underlying determinant of the financial value of a company….
What is a sunk cost? Why is it ignored in capital budgeting?
A sunk cost is a cost that has already taken place. It is ignored in capital budgeting because it cannot be changed by the decision…
Capital budgeting analysis and inflation
What would happen to a capital budgeting analysis if inflation were omitted from the cash flow estimates? Omitting projected inflation would result in a miscalculation…
What is a sunk cost? Why is it ignored in capital budgeting?
A sunk cost is a cost that has already taken place. It is ignored in capital budgeting because it cannot be changed by the decision…
What is meant by the “option” inherent in a capital budgeting decision?
Every capital budgeting project takes place over a period of time during which a company will face many choices. Examples of these choices are to…
Capital budgeting analysis
What function does a cash flow table play in capital budgeting analysis? A cash flow table is a spreadsheet that organizes cash flows by event…