All are true/false except 8 and 9[1] An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

[2] The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock’s price is below the strike price.

[3] The exercise value is also called the strike price, but this term is generally used when discussing convertibles rather than financial options.

[4] If the current price of a stock is below the strike price, then an option to buy the stock is worthless and will have a zero value.

[5] If the market is in equilibrium, then an option must sell at a price that is exactly equal to the difference between the stock’s current price and the option’s strike price.

[6] Since investors tend to dislike risk and like certainty, the more volatile a stock, the less valuable will be an option to purchase the stock, other things held constant.

[7] Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.

[8] An option that gives the holder the right to sell a stock at a specified price at some future time is
a call option.
a put option.

[9] Call options on XYZ Corporation’s common stock trade in the market. Which of the following statements is most correct, holding other things constant?
The price of these call options is likely to rise if XYZ’s stock price rises.
The higher the strike price on XYZ’s options, the higher the option’s price will be.

[10] "Capital" is sometimes defined as funds supplied to a firm by investors.

[11] The cost of capital used in capital budgeting should reflect the average cost of the various sources of long-term funds a firm uses to acquire assets.

[12] The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC.

[13] The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.

[14] The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation's taxable income.

[15] For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital--i.e., use these funds first--because retained earnings have no cost to the firm.

[16] The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock.

[17] The higher the firm's flotation cost for new common equity, the more likely the firm is to use preferred stock, which has no flotation cost, and retained earnings, whose cost is the average return on the assets that are acquired.

[18] If a firm's marginal tax rate is increased, this would, other things held constant, lower the cost of debt used to calculate its WACC.

[19] Put options give investors the right to buy a stock at a certain strike price before a specified date.

[20] Call options give investors the right to sell a stock at a certain strike price before a specified date.