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Answer: If there is a 10.0% stock dividend, the option contract becomes one to sell 90.0 shares with an exercise price of $55.56
The false statement is **B**. - A **4-for-1 stock split** multiplies the share count by 4 and divides the strike by 4, so 100 shares become 400 shares and the strike becomes $12.50. - A **10% stock dividend** increases the number of shares by 10%, so the contract should become one to sell **110 shares**, and the strike should be adjusted downward to about **$45.45**, not 90 shares with a strike of $55.56. - A **cash dividend** generally does **not** affect standardized exchange-traded option contract terms. - A **reverse 1-for-5 split** reduces the share count to 20 and increases the strike to $250.00. Therefore, **B** is the only incorrect choice.
Author: Manit Arora
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$50.00. Each of the following is true EXCEPT which is not? (note: this question is based on Hull's Problem 10.24)A
If there is a 4-for-1 stock split, the option contract becomes one to sell 400 shares with an exercise price of $12.50
B
If there is a 10.0% stock dividend, the option contract becomes one to sell 90.0 shares with an exercise price of $55.56
C
If there is $2.00 cash dividend declared, there is no effect on the contract
D
If there is a reverse 1-for-5 stock split, the option contract becomes one to sell 20 shares with an exercise price of $250.00
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