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

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: -Suppose that a security with a risk-free cash flow of $1000 one year from now trades for $930 today.If there are no arbitrage opportunities,then the current risk-free rate is closest to:

Use the table for the question(s)below. -Suppose a risky security pays an average cash flow of $100 in one year.The risk-free rate is 5%,and the expected return on the market index is 13%.If the returns on this security are high when the economy is strong and low when the economy is weak,but the returns vary by only half as much as the market index,what risk premium is appropriate for this security?

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. -Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the added benefit (cost)to you if you take the trade is closest to:

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 alternative with the highest NPV is:

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 6% and the current competitive exchange rate is €0.78 to $1.00.What is the NPV of this project? Would you take the project?

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 current quote for this ETF is $265.59 (bid)$265.64 (ask).What should you do?

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 discount rate is 15%,the alternative with the lowest NPV is:

Recycle America Inc.has the opportunity to trade 8000 pounds of plastic pellets made from recycled soda bottles for 5000 pounds of aluminum cans.If the current market price of scrap aluminum is $0.83 per pound and the current market price for plastic pellets is $0.57 per pound,then the added benefit (cost)of making this trade is:

Walgreen Company (NYSE: WAG)is currently trading at $48.75 on the NYSE.Walgreen 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? How much would you make on a block trade of 100 shares?

Which of the following statements is FALSE?

If the risk-free rate of interest (rf)is 6%,then you should be indifferent between receiving $250 today or

Use the table for the question(s)below. -What is the no-arbitrage price for security C?

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 current quote for this ETF is $265.19 (bid)$265.24 (ask).What should you do?

Use the information for 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 International Business Machines (IBM),three shares of Merck (MRK),and three shares of Citigroup Inc.(C).Suppose the current market price of each individual stock are shown below: -Assume that the ETF is trading for $670.00,what (if any)arbitrage opportunity exists? What (if any)trades would you make?

If the risk-free rate of interest (rf)is 6%,then you should be indifferent between receiving $250 in one year or

If we use future value rather than present value to decide whether to make an investment:

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 #2 is closest to:

Due to a pre-existing contract,Recycle America Inc.has the opportunity to acquire 10,000 pounds of scrap aluminum and 2500 pounds of scrap lead for $10,750.If the current market price for scrap aluminum is $0.83 per pound and the current market price for lead is $1.06 per pound,then the added benefit (cost)to you if you acquire this metal is:

Suppose you have $1000 today and the risk-free rate of interest (rf)is 3.5%.The equivalent value in one year is closest to:

Use the information for the question(s)below. Coloma Copper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore.Because of its higher copper content,Coloma can produce $940 worth of copper from one ton of high-grade copper ore. -A company that manufactures copper piping is offering to trade you 5925 tons of low-grade copper ore for 4000 tons of high-grade copper ore.Assuming you currently have 4000 tons of high-grade ore,what are the total benefits and added benefits of taking the trade?