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

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: -Suppose a security with a risk-free cash flow of $1000 one year from now trades for $909 today.If there are no arbitrage opportunities,then the current risk-free interest rate is closest to:

Suppose that Bondi Inc.is a holding company that owns both Pizza Hut and Kentucky Fried Chicken Franchised Restaurants.If the value of Bondi is $130 million,and the Pizza Hut Franchises are worth $70 million,then what is the value of the Kentucky Fried Chicken Franchises?

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 bid price for this ETF in a normal market is closest to:

Use the table for the question(s)below. -Based upon the information provided about securities A,B,and C,the risk-free rate of interest is closest to:

Use the table for the question(s)below. -If the risk-free interest rate is 10%,then the NPV for Eenie 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 discount rate is 15%,the alternative with the highest NPV is:

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: -The price per share of the ETF in a normal market 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 mining company is offering to trade you 7250 tons of low-grade copper ore for 5000 tons of high-grade copper ore.Assuming you currently have 5000 tons of high-grade ore,what should you do?

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)$265.34 (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 interest rate is 7%,the alternative with the lowest NPV is:

Which of the following formulas regarding NPV is INCORRECT?

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: -Suppose that the ETF is trading for $666.95;you should:

Suppose you have $500 today and the risk-free interest rate (rf)is 5%.The equivalent value in one year is closest to:

Which of the following statements regarding Net Present Value (NPV)is INCORRECT?

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 two of these projects,which two projects would you select?

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 currently have 10,000 Bbls of WTI crude,what should you do?

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 benefits 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:

Which of the following statements regarding arbitrage and security prices is INCORRECT?

When we express the value of a cash flow or series of cash flows in terms of dollars today,we call it the ________ of the investment.If we express it in terms of dollars in the future,we call it the ________.

Use the table for the question(s)below. -Suppose that security C had a risk premium of 30%.Describe the arbitrage opportunity which exists and how you would exploit it.