Question 1

Use the table for the question(s)below.  
-If the risk-free interest rate is 10%,then the NPV for Moe is closest to:

Accepted Answer

A) -$3.64 million. 
B) $2.73 million. 
C) $3.18 million. 
D) $3.64 million. 
A) -$3.64 million. 
B) $2.73 million. 
C) $3.18 million. 
D) $3.64 million. A

Question 2

Use the table for the question(s)below.  
-If the risk-free interest rate is 10%,then of the four projects listed,if you could only invest in one project,which one would you select?

Accepted Answer

A) Eenie 
B) Meenie 
C) Mighty 
D) Moe 
A) Eenie 
B) Meenie 
C) Mighty 
D) Moe A

Question 3

Use the following information to answer the question(s)below.
An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of Apple Inc.(APPL),one share of Google (GOOG),and ten shares of Microsoft (MSFT).Suppose the current stock prices of each individual stock are as shown below:  
-The price per share of this ETF in a normal market is closest to:

Accepted Answer

A) $800. 
B) $1001. 
C) $1067. 
D) $1267. 
A) $800. 
B) $1001. 
C) $1067. 
D) $1267. D

Question 4

Consider a bond that pays $1000 in one year.Suppose that the market interest rate for savings is 8%,but the interest rate for borrowing is 10%.The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

Accepted Answer

A) $909 to $917. 
B) $909 to $926. 
C) $917 to $926. 
D) $909 to $1000. 
A) $909 to $917. 
B) $909 to $926. 
C) $917 to $926. 
D) $909 to $1000.

Question 5

Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE.Advanced Micro Devices is also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50.Does an arbitrage opportunity exist and if so how would you exploit it? How much would you make on a block trade of 1000 shares?

Accepted Answer

Yes,buy 1000 shares

Question 6

Which of the following statements is INCORRECT?

Accepted Answer

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. 
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.

Question 7

Use the table for the question(s)below.  
-Consider an ETF that is made up of one share each of IBM,MRK,and C.The minimum ask price for this ETF in a normal market is closest to:

Accepted Answer

A) $265.29. 
B) $265.44. 
C) $270.00. 
D) $270.15. 
A) $265.29. 
B) $265.44. 
C) $270.00. 
D) $270.15.

Question 8

Use the following information to answer the question(s)below.
An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of Apple Inc.(APPL),one share of Google (GOOG),and ten shares of Microsoft (MSFT).Suppose the current stock prices of each individual stock are as shown below:  
-If the ETF is currently trading for $1300,what arbitrage opportunity is available? What trades would you make?

Accepted Answer

The ETF is overpriced.Therefore,an arbit

Question 9

A project that you are considering today is expected to provide benefits worth $168,000 in one year.If the risk-free rate of interest (rf)is 4.5%,then the value of the benefits of this project today are closest to:

Accepted Answer

A) $160,440. 
B) $160,766. 
C) $168,000. 
D) $175,560. 
A) $160,440. 
B) $160,766. 
C) $168,000. 
D) $175,560.

Question 10

Use the information for the question(s)below.   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 Bbls of WTI crude,the added benefit (cost)to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:

Accepted Answer

A) ($1400). 
B) $1400. 
C) ($3908). 
D) $3908. 
A) ($1400). 
B) $1400. 
C) ($3908). 
D) $3908.

Question 11

Which of the following statements regarding the Law of One Price is INCORRECT?

Accepted Answer

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,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 not possible. 
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,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 not possible.

Question 12

Which of the following statements regarding the NPV decision rule is FALSE?

Accepted Answer

A) Reject projects with a NPV of zero,as accepting them is equivalent to reducing firm value. 
B) When faced with a set of alternatives,choose the one with the highest NPV. 
C) Accept those projects with a positive NPV,as accepting them is equivalent to receiving their NPV in cash today. 
D) Reject those projects with a negative NPV. 
A) Reject projects with a NPV of zero,as accepting them is equivalent to reducing firm value. 
B) When faced with a set of alternatives,choose the one with the highest NPV. 
C) Accept those projects with a positive NPV,as accepting them is equivalent to receiving their NPV in cash today. 
D) Reject those projects with a negative NPV.

Question 13

Use the table for the question(s)below.  
-If the value of security "C" is $180,then what must be the value of security "A"?

Accepted Answer

A) $80 
B) $90 
C) $100 
D) Unable to determine without the risk-free rate. 
A) $80 
B) $90 
C) $100 
D) Unable to determine without the risk-free rate.

Question 14

A project you are considering is expected to provide benefits worth $225,000 in one year.If the risk-free rate of interest (rf)is 8%,then the value of the benefits of this project today are closest to:

Accepted Answer

A) $190,333. 
B) $208,333. 
C) $225,000. 
D) $243,000. 
A) $190,333. 
B) $208,333. 
C) $225,000. 
D) $243,000.

Question 15

Use the information for the question(s)below.   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 10,000 Bbls of WTI crude at the current market price,the added benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:

Accepted Answer

A) $730,600. 
B) $39,400. 
C) $770,000. 
D) -$39,400. 
A) $730,600. 
B) $39,400. 
C) $770,000. 
D) -$39,400.

Question 16

Use the following information to answer the question(s)below.
An exchange traded fund (ETF)is a security that represents a portfolio of individual stocks.Consider an ETF for which each share represents a portfolio of two shares of Apple Inc.(APPL),one share of Google (GOOG),and ten shares of Microsoft (MSFT).Suppose the current stock prices of each individual stock are as shown below:  
-If the ETF is currently trading for $1200,what arbitrage opportunity is available? What trades would you make?

Accepted Answer

The ETF is underpriced.Therefore,an arbi

Question 17

If the risk-free rate of interest (rf)is 3.5%,then you should be indifferent between receiving $1000 in one-year or:

Accepted Answer

A) $965.00 today. 
B) $966.18 today. 
C) $1000.00 today. 
D) $1035.00 today. 
A) $965.00 today. 
B) $966.18 today. 
C) $1000.00 today. 
D) $1035.00 today.

Question 18

In a normal market with transactions costs,is it possible for different investors to place different values on an investment opportunity? Are there any limits on the amount that their values can differ?

Accepted Answer

Values can differ,bu

Question 19

Use the information below to answer the following question(s):
The owner of the Krusty Krab is considering selling his restaurant and retiring.An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement.The owner is considering the following three alternatives:
1.Sell the restaurant now and retire.
2.Hire someone to manage the restaurant for the next year and retire.This will require the owner to spend $50,000 now,but will generate $100,000 in profit next year.In one year the owner will sell the restaurant for $350,000.
3.Scale back the restaurant's hours and ease into retirement over the next year.This will require the owner to spend $40,000 on expenses now,but will generate $75,000 in profit at the end of the year.In one year the owner will sell the restaurant for $350,000.
-If the interest rate is 7%,the NPV of alternative #3 is closest to:

Accepted Answer

A) $350,000. 
B) $357,196. 
C) $370,561. 
D) $401,121. 
A) $350,000. 
B) $357,196. 
C) $370,561. 
D) $401,121.

Question 20

Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:  
-A McDonald's Big Mac Extra Value Meal® consists of a Big Mac Sandwich,Large Coke,and a Large Fry.Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79.Does an arbitrage opportunity exist and if so how would you exploit it? How much would you make on one extra value meal?

Accepted Answer

A) Yes,buy the Big Mac Extra Value Meal® and then sell Big Mac,Coke,and Fries to make arbitrage profit of $0.68. 
B) No,no arbitrage opportunity exists. 
C) Yes,buy Big Mac,Coke,and Fries then sell the Extra Value Meal® to make an arbitrage profit of $1.09. 
D) Yes,buy a Big Mac,Coke,and Fries then sell the Extra Value Meal® to make an arbitrage profit of $0.68. 
A) Yes,buy the Big Mac Extra Value Meal® and then sell Big Mac,Coke,and Fries to make arbitrage profit of $0.68. 
B) No,no arbitrage opportunity exists. 
C) Yes,buy Big Mac,Coke,and Fries then sell the Extra Value Meal® to make an arbitrage profit of $1.09. 
D) Yes,buy a Big Mac,Coke,and Fries then sell the Extra Value Meal® to make an arbitrage profit of $0.68.

Exam 3: Financial Decision Making and the Law of One Price

Use the table for the question(s)below. -If the risk-free interest rate is 10%,then the NPV for Moe is closest to:

Use the table for the question(s)below. -If the risk-free interest rate is 10%,then of the four projects listed,if you could only invest in one project,which one would you select?

Consider a bond that pays $1000 in one year.Suppose that the market interest rate for savings is 8%,but the interest rate for borrowing is 10%.The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

Which of the following statements is INCORRECT?

Use the table for the question(s)below. -Consider an ETF that is made up of one share each of IBM,MRK,and C.The minimum ask price for this ETF in a normal market is closest to:

A project that you are considering today is expected to provide benefits worth $168,000 in one year.If the risk-free rate of interest (rf)is 4.5%,then the value of the benefits of this project today are closest to:

Which of the following statements regarding the Law of One Price is INCORRECT?

Which of the following statements regarding the NPV decision rule is FALSE?

Use the table for the question(s)below. -If the value of security "C" is $180,then what must be the value of security "A"?

A project you are considering is expected to provide benefits worth $225,000 in one year.If the risk-free rate of interest (rf)is 8%,then the value of the benefits of this project today are closest to:

If the risk-free rate of interest (rf)is 3.5%,then you should be indifferent between receiving $1000 in one-year or:

In a normal market with transactions costs,is it possible for different investors to place different values on an investment opportunity? Are there any limits on the amount that their values can differ?

The Corporation

Introduction to Financial Statement Analysis

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters