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Answer: The (II.) stock dividend will have no impact on the strike price or quantity of Peter's option position
**A is false.** A 20% stock dividend is equivalent to a 6-for-5 stock split, so Peter's contract would be adjusted to **120 shares** at an adjusted strike of **$12.50**. The other statements are true: - **B:** Intrinsic value is preserved under the contract adjustment. At the original prices, intrinsic value is \((18 - 15) \times 100 = 300\). - **C:** A 1-for-5 reverse split adjusts the contract to **20 shares** at a strike of **$75.00**. - **D:** A 2-for-1 split adjusts the contract to **200 shares** at a strike of **$7.50**. So the false statement is **A**.
Author: Manit Arora
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Q-724.2. Last week, Peter purchased one contract for 100 call options on StrongDrill Corporation (ticker: SDC) with a strike price of $15.00. The options on SDC are exchange-traded. Today the stock price is $18.00 so Peter's options are "in the money." Consider the impact of the following four corporate actions if they were immediately affected, when the stock price is $18.00:
I. 2-for-1 split
II. 20.0% stock dividend
III. 1-for-5 reverse split
IV. 12.0% one-time cash dividend
Each of the following statements is true EXCEPT which is false?
A
The (II.) stock dividend will have no impact on the strike price or quantity of Peter's option position
B
Peter's intrinsic value in his option position is $300.00 and it will be unchanged by any of the four scenarios
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