Finance Ch 3 & 4
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________. A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved.
A) $100,000
(Timeline) If the current market rate of interest is 8%, then the future value (FV) of this stream of cash flows is closest to ________. A) $11,699 B) $5850 C) $14,039 D) $18,718
A) $11,699
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________. A) $110,793 B) $55,397 C) $77,555 D) $132,952
A) $110,793
Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years? A) $128,729 B) $180,221 C) $231,712 D) $139,541
A) $128,729
A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 . After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.) A) $145 B) $160 C) $175 D) $190
A) $145
Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car? A) $16,598 B) $19,918 C) $23,237 D) $26,557
A) $16,598
A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian? A) $17,130 B) $24,287 C) $20,239 D) $28,335
A) $17,130
(Timeline) 10) If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to ________. A) $1723 B) $1,500 C) $2068 D) $2757
A) $1723
Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make? A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02
A) $18,653.76
A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches? A) $24.0 per hour B) $29.0 per hour C) $4.0 per hour D) $48.0 per hour
A) $24.0 per hour
Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $37,086.78 B) $22,252.07 C) $44,504.14 D) $51,921.49
A) $37,086.78
(Timeline) If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.
A) $502
A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year? A) $603.94 B) $301.97 C) $724.73 D) $966.30
A) $603.94
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________. A) $61,303 B) $30,652 C) $42,912 D) $67,433
A) $61,303
If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________. A) $688.07 today B) $750 today C) $825.68 today D) None of the above
A) $688.07 today
On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B? A) -$1.33 B) -$0.67 C) $1.06 D) $1.60
A) -$1.33
How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000? A) 4.25 years B) 3.25 years C) 5.25 years D) 6.25 years
A) 4.25 years
If $17,000 is invested at 10% per year, in approximately how many years will the investment double? A) 7.3 years B) 8.4 years C) 11.0 years D) 14.6 years
A) 7.3 years
Which of the following statements is FALSE about valuing cash at different points in time? A) Finding the present value (PV) and compounding are the same. B) A dollar today and a dollar in one year are not equivalent. C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money
A) Finding the present value (PV) and compounding are the same.
Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision? A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms. B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now. C) He fails to consider the costs of not consuming the $1.00 today. D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.
A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms.
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A) Investment X has a higher growth rate than Investment Y. B) Investment X has a lower growth rate than Investment Y. C) The answer cannot be determined without knowing the interest rate for both investments. D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.
A) Investment X has a higher growth rate than Investment Y.
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with the information provided.
A) It will cause the present value to fall.
You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity? A) No, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360. B) No, because the market for a used XBOX 360 is a competitive market. C) Yes, because the market for a used XBOX 360 is a competitive market. D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
A) No, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
Which of the following formulas is INCORRECT? A) PV of a growing annuity = C × 1 r - g 1 - 1 + r 1 + g N B) PV of an annuity = C × 1 r 1 - 1 (1 + r)N C) PV of a growing perpetuity = C r - g D) PV of a perpetuity = C r
A) PV of a growing annuity = C × 1 r - g 1 - 1 + r 1 + g N
A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate? A) Real-world decisions are complex and require information from many sources if the decisions are to be valid. B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision. C) All of the costs and benefits associated with a decision can never be fully identified. D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.
A) Real-world decisions are complex and require information from many sources if the decisions are to be valid.
(Table) 17) As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do? A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. B) Do nothing; refine the 10,000 bbl of WTI crude. C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.
A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude.
Which of the following is true about perpetuities? A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. B) Since a perpetuity generates cash flows every period infinitely, initial cash outflow must be discounted to calculate the present value. C) Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow using the present value and the interest rate. D) Since a perpetuity generates cash flows every period infinitely, its FV is the same as its PV.
A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. D) No comparison can be madeNwe need to know the cash flows to calculate the present value.
A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
Which of the following statements regarding growing perpetuities is FALSE? A) We assume that r < g for a growing perpetuity. B) PV of a growing perpetuity = C r - g C) To find the value of a growing perpetuity one cash flow at a time would take forever. D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
A) We assume that r < g for a growing perpetuity.
(Table) 13) A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonaldʹs food items and that McDonaldʹs sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal? A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. B) No, no arbitrage opportunity exists. C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34. D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67
A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67.
Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats? A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. B) The posted prices of oats can vary widely between grocery stores, even within the same local area. C) Grocery stores mark up the prices of their oats up to make a profit. D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.
A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.
Which of the following situations is best described by the timeline shown below? A) You make payments of $250 per month for six months. B) You receive payments of $250 per month for six months. C) You make payments of $250 per month for five months. D) You receive payments of $250 per month for five months.
A) You make payments of $250 per month for six months.
In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer? A) $744,000 B) $1,240,000 C) $992,000 D) $1,488,000
B) $1,240,000
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________. A) $722,766 B) $1,445,531 C) $1,011,872 D) $1,590,084
B) $1,445,531
A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year? A) $94.40 million B) $118.00 million C) $165.20 million D) $188.80 million
B) $118.00 million
(Timeline) 14) You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________. A) $12,500 B) $12,000 C) $13,000 D) $10,000
B) $12,000
(Table) 12) As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________. A) ($1550) B) $1550 C) ($3475) D) $3475
B) $1550
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________. A) $80,232 B) $160,463 C) $112,324 D) $176,509
B) $160,463
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent? A) $14,630 B) $18,287 C) $25,602 D) $29,259
B) $18,287
(Timeline) 7) If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________. A) $10,114 B) $20,227 C) $24,272 D) $32,363
B) $20,227
Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity? A) $1,200,000 B) $3,900,000 C) $2,700,000 D) $9,000,000
B) $3,900,000
If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year? A) $158.13 B) $316.25 C) $379.50 D) $506.00
B) $316.25
A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin? A) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. B) $35,000, since this is the price that the coin would fetch on the open market. C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. D) At least $35,000, since the value of the coin will increase in the future.
B) $35,000, since this is the price that the coin would fetch on the open market.
If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________. A) $24,479 B) $40,799 C) $48,959 D) $57,119
B) $40,799
On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21? A) $3263 B) $4079 C) $8158 D) $3766
B) $4079
Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $32,181 B) $53,635 C) $64,362 D) $75,089
B) $53,635
What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year? A) $60,000.00 B) $63,016.96 C) $78,771.20 D) $110,279.68
B) $63,016.96
You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________. A) $548 B) $685 C) $959 D) $1096
B) $685
(Table) 14) As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________. A) ($766,150) B) $766,150 C) ($770,032) D) $770,032
B) $766,150
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%? A) $5776 B) $9626 C) $11,551 D) $13,476
B) $9626
(Timeline) If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________.
B) -$98.7
If $432 invested today yields $450 in a yearʹs time, what is the discount factor? A) 0.10 B) 0.96 C) 1.96 D) 1.92
B) 0.96
A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer? A) 5.8% B) 6.8% C) 7.8% D) 9.8%
B) 6.8%
A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now? A) He will earn $1,980,000 less if he releases the wine now. B) He will earn $328,972 more if he releases the wine now. C) He will earn $328,972 less if he releases the wine now. D) He will earn $356,400 more if he releases the wine now.
B) He will earn $328,972 more if he releases the wine now.
Why is it usually necessary to use the time value of money when performing a cost-benefit analysis? A) For an investment project to be considered, costs must have a higher dollar value than benefits. B) In most investment projects, costs are incurred up front, but benefits are received in the future. C) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. D) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.
B) In most investment projects, costs are incurred up front, but benefits are received in the future.
Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.
B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
(Table) 3) Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be madeNwe need to know the interest rate to calculate the present value.
B) Investment Y has a higher present value.
Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.
B) No, since costs are $6,800,000 more than benefits.
If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets What do we call the above statement? A) The Net Present Value rule B) The Law of One Price C) The Valuation Principle D) The Time Value of Money
B) The Law of One Price
Which of the following statements regarding annuities is FALSE? A) PV of an annuity = C × 1 r 1 - 1 (1 + r)N B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. C) An annuity is a stream of N equal cash flows paid at regular intervals. D) Most car loans, mortgages, and some bonds are annuities.
B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.
Which of the following best describes the valuation principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis? A) They can be used to determine how much an asset can be sold for. B) They can be used to convert different services and commodities into equivalent cash values which can be compared. C) They allow all commodities and services to be assigned a fixed and unchanging value. D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.
B) They can be used to convert different services and commodities into equivalent cash values which can be compared.
Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today? A) Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today. B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today. C) Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today. D) No, as the difference between the present value of selling now and selling in one year is - $8786 dollars today.
B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.
Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares? A) No, no arbitrage opportunity exists. B) Yes, buy on NASDAQ and sell on NYSE, make $25. C) Yes, buy on NYSE and sell on NASDAQ, make $25. D) Yes, buy on NASDAQ and sell on NYSE, make $250.
B) Yes, buy on NASDAQ and sell on NYSE, make $25.
What is a competitive market? A) a market in which goods have a different ask price and bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold
B) a market in which a good can be bought and sold at the same price
To compute the future value of a cash flow, you must ________. A) discount it B) compound it C) double it D) arbitrage it
B) compound it
A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract? A) greater than $2.90 per gallon B) greater than $2.92 per gallon C) greater than $2.94 per gallon D) greater than $2.96 per gallon
B) greater than $2.92 per gallon
Whenever a good trades in a competitive market, the ________ determines the value of the good. A) supply B) price C) demand D) cost
B) price
(Answers are tables) Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now?
C
(Answers are tables) A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lenderʹs perspective?
C
A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software? A) $56,500 B) $45,200 C) $113,000 D) $79,100
C) $113,000
Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%? A) $58,334 B) $93,334 C) $116,667 D) $70,000
C) $116,667
If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________. A) $7581 B) $15,162 C) $12,635 D) $17,689
C) $12,635
A perpetuity has a PV of $20,000 . If the interest rate is 6%, how much will the perpetuity pay every year? A) $600 B) $960 C) $1200 D) $720
C) $1200
An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%? A) $85.60 B) $171.20 C) $142.67 D) $199.74
C) $142.67
What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year? A) $32,500.00 B) $13,251.70 C) $15,590.24 D) $27,282.92
C) $15,590.24
You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46
C) $16,770.33
Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest? A) $100,000.00 B) $160,000.00 C) $200,000.00 D) $240,000.00
C) $200,000.00
What is the future value (FV) of $20,000 in four years, assuming the interest rate is 4% per year? A) $15,208.16 B) $19,887.59 C) $23,397.17 D) $25,736.89
C) $23,397.17
Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information? A) $2460 B) $13,863 C) $27,726 D) $32,460
C) $27,726
Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following? A) $1420 ; $110,739 B) $2271 ; $166,109 C) $2839 ; $184,565 D) $3123 ; $221,478
C) $2839 ; $184,565
An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $304.91 B) $307.69 C) $300.29 D) $320.00
C) $300.29
You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________. A) $2554 B) $4470 C) $3193 D) $5109
C) $3193
An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You donʹt care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac? A) $87,000, since the Cadillac could be sold for this price. B) $52,000, since the Cadillac could be bought for this price. C) $35,000, since this is the difference between purchase and resale price of the Cadillac. D) $35,000, since this is the value of the car that you really want to buy
C) $35,000, since this is the difference between purchase and resale price of the Cadillac.
Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one yearʹs time? A) $4298 B) $212 C) $4712 D) $6597
C) $4712
(Timeline) 9) If the current market rate of interest is 8%, then the present value (PV) of this stream of cash flows is closest to ________. A) $242 B) $581 C) $484 D) $774
C) $484
(Table) 12) A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assuming that there is a competitive market for McDonaldʹs food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price? A) $4.08 B) $4.62 C) $5.44 D) $6.80
C) $5.44
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234
C) $5390
If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________. A) $462.96 in one year B) $500.00 in one year C) $540.00 in one year D) None of the above
C) $540.00 in one year
What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year? A) $58,500.00 B) $57,085.48 C) $67,159.39 D) $117,528.93
C) $67,159.39
(Table) 15) As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,100 bbl of Alaska North Slope (ANS) crude oil for 9950 bbl of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to ________. A) $755,650 B) $766,150 C) $767,600 D) $776,650
C) $767,600
(Table) 16) As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) $794,274 B) $780,000 C) $781,550 D) $784,091
C) $781,550
An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074
C) $79,228
You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it? A) -$320 B) -$340 C) -$300 D) $300
C) -$300
If the interest rate is 9%, the one-year discount factor is equal to ________. A) 0.090 B) 1.090 C) 0.917 D) 0.981
C) 0.917
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ? A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years
C) 5.3 years
A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________. A) 5.0% B) 7.1% C) 6.0% D) 8.2%
C) 6.0%
If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 7 years B) 8 years C) 9 years D) 11 years
C) 9 years
Which of the following is an example of arbitrage? A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.
C) An investor, seeing that the price of palladium on the metals exchange in two different
A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why? A) Because the company has no need of barley, the opportunity should not be taken. B) Because the opportunity does not meet the companyʹs need for wheat, the opportunity should not be taken. C) Because the value of the opportunity is positive, the opportunity should be taken. D) Because the value of the opportunity is negative, the opportunity should not be taken.
C) Because the value of the opportunity is positive, the opportunity should be taken.
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow? A) It will cause the future value to fall. B) It will cause the future value to rise. C) It will have no effect on the future value. D) The effect cannot be determined with the information provided.
C) It will have no effect on the future value.
(Table) Whose cash flow is best described by the timeline shown below? A) Joe, who puts down $3,500 to buy a car, and then makes annual payments of $1,000 B) Harry, who borrows $3,500, and then receives an annual payment of $1,000 C) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000 D) Leo, who borrows $3,500, and then pays back the loan in four annual payments of $1,000
C) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000
Why are arbitrage opportunities short-lived? A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down. B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
C) Once investors take advantage of the opportunity, prices will respond so that the buying
Which of the following statements regarding perpetuities is FALSE? A) To find the value of a perpetuity by discounting one cash flow at a time would take forever. B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. C) PV of a perpetuity = r/C D) One example of a perpetuity is the British government bond called a consol.
C) PV of a perpetuity = r / C
Which of the following statements is INCORRECT based on the time value of money? A) In general, money today is worth more than money in one year. B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows. D) For most financial decisions, costs and benefits occur at different points in time
C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows.
Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).
C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years
C) one that pays $1350 in five years
(Answers are tables) A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?
D
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year? A) $32,500.00 B) $1,273,296.69 C) $1,348,196.50 D) $1,497,996.11
D) $1,497,996.11
You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years? A) $7291.00 B) $14,582.00 C) $17,012.34 D) $12,151.67
D) $12,151.67
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year? A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79
D) $13,240.79
(Table) 22) Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make? A) $12,333 B) $14,333 C) $14,833 D) $13,333
D) $13,333
An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%? A) $8258.91 B) $16,517.82 C) $19,270.79 D) $13,764.85
D) $13,764.85
A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company? A) -$5200 B) $0 C) $15,000 D) $16,000
D) $16,000
Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity? A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00
D) $250,000.00
An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%? A) $1563.88 B) $3127.76 C) $3649.06 D) $2606.47
D) $2606.47
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year? A) $32,500.00 B) $244,098.38 C) $258,457.10 D) $287,174.56
D) $287,174.56
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%? A) -$3189.80 B) -$5907.57 C) 5907.57 D) $3189.80
D) $3189.80
You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store? A) $445 B) $545 C) $645 D) $345
D) $345
(Table) 13) As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) ($1400) B) $1400 C) ($3908) D) $3908
D) $3908
What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%? A) $2500 B) $4000 C) $3000 D) $5000
D) $5000
(Timeline) If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.
D) $68
A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is 11%? A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74
D) $7,681,257.74
What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time? A) 37% B) 44% C) 43% D) 40%
D) 40%
If the one-year discount factor is equal to 0.94340, the interest must be equal to ________, A) 3.0% B) 4.8% C) 5.5% D) 6.0%
D) 6.0%
Which of the following statements is FALSE about valuing cash at different points in time? A) The process of moving forward along the timeline to determine a cash flowʹs value in the future is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.
D) A dollar in the future is worth more than a dollar today.
Why should you approach every problem by drawing a timeline? A) A timeline allows you to quickly sum cash flows over time. B) A timeline eliminates the majority of flawed financial decisions. C) A timeline can be used to schedule events which are yet to occur. D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.
D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.
Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most? A) a power station that uses uranium 308 to produce electrical energy B) a metals trader who stockpiles and sells actual physical quantities of uranium 308 C) a speculator who buys and sells uranium 308 on the market without ever using the metal D) All buyers and sellers would have the same value for 250 pounds of uranium 308.
D) All buyers and sellers would have the same value for 250 pounds of uranium 308.
Which of the following is true about perpetuities? A) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. B) All else equal, the present value of a perpetuity is higher when the interest rate is lower. C) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. D) All of the above are true statements.
D) All of the above are true statements.
Which of the following statements regarding the Law of One Price is INCORRECT? A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.
D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.
Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets that are essential for the existence of the investor B) Both decisions involve the rental of a useful asset. C) Both decisions have the potential to affect the firm. D) Both decisions should be made based upon the tradeoff benefits and costs across time.
D) Both decisions should be made based upon the tradeoff benefits and costs across time.
Which of the following is the overarching principle that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs. C) Decisions should be on behalf of the firmʹs owners that give the greatest benefit to those owners, the firmʹs employees and the firmʹs other stakeholders. D) Decisions should increase the value of the firm to its investors.
D) Decisions should increase the value of the firm to its investors.
An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one yearʹs time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investorʹs decision may be flawed? A) It does not consider the current market interest rate. B) It does not consider the fact that though costs are incurred today, the benefits occur in one yearʹs time. C) It does not consider the value of the $10,000 in one yearʹs time if invested elsewhere. D) It does not consider whether the $10,000 will be needed elsewhere.
D) It does not consider whether the $10,000 will be needed elsewhere.
The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans
D) The Colonial Bank would experience a surge in demand for loans.
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%? A) $1456 B) $19,867 C) $21,320 D) There is no solution to this problem
D) There is no solution to this problem
An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made? A) No, because the investment will yield $82,840 less than putting the money in a bank. B) Yes, because the investment will yield $66,272 more than putting the money in a bank. C) Yes, because the investment will yield $74,556 more than putting the money in a bank. D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.
D) Yes, the costs are $2000 less than the benefits.
If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur? A) a surge in conversion of dollars to yen in Tokyo B) a surge in conversion of euros to yen in Tokyo C) a surge in conversion of euros to dollars in Paris D) a surge in conversion of euros to yen in Paris
D) a surge in conversion of euros to yen in Paris
A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision? A) the cost of the machine used to produce the sunscreen B) the manufacturing process of the sunscreen C) the cost of the existing advertising campaign D) the cost of the courtside advertising at the tennis matches
D) the cost of the courtside advertising at the tennis matches
How can we convert the value of money from one point in time to another? A) using the current exchange rate B) using a cost-benefit analysis C) using the valuation principle D) using the current interest rate
D) using the current interest rate
T or F A dollar today and a dollar in one year may be considered to be equivalent
False
T or F To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.
False
T or F In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.
False
T or F To calculate a cash flowʹs present value (PV), you must compound it
False
T or F Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.
False
T or F Cash flows from an annuity occur every year in the future.
False
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business?
PV = $100,000 + $50,000 / (1.06)1 + $50,000 / (1.06)2 + $75,000 / (1.06)3 = $254,641
If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.
True
T or F Costs and benefits must be put in common terms if they are to be compared.
True
T or F The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.
True
T or F Whenever a good trades in a competitive market, the price determines the value of the good.
True
T or F A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).
True
T or F Dollar amounts received at different points in time cannot be compared in absolute terms
True
T or F The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.
True
T or F The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.
True
T or F The one-year discount factor is the discount at which we can purchase money in the future, one year from now.
True
T or F The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.
True
T or F In general, if an action increases a firmʹs value by providing benefits with a value greater than any costs involved, then that action is good for the firmʹs investors.
True
Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?
Yes, buy 1,000 shares × 20.50 ($20,500) and sell 1,000 shares × 20.75 ($20,750) = $250.00.