Question 1

Use the table for the question(s)below.  
-If the risk-free rate of interest is 7.5%,then the value of security "A" is closest to:

Accepted Answer

A) $91.00. 
B) $92.50. 
C) $93.00. 
D) $100.00. 
A) $91.00. 
B) $92.50. 
C) $93.00. 
D) $100.00.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) Financial transactions are not sources of value,but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors. 
B) The NPV of trading a security in a normal market is zero. 
C) We cannot separate a firm's investment decision from the decision of how to finance the investment. 
D) In normal markets,trading securities neither creates nor destroys value. 
A) Financial transactions are not sources of value,but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors. 
B) The NPV of trading a security in a normal market is zero. 
C) We cannot separate a firm's investment decision from the decision of how to finance the investment. 
D) In normal markets,trading securities neither creates nor destroys value.

Question 3

Which one of the following statements is FALSE?

Accepted Answer

A) When we compute the return of a security based on the average payoff we expect to receive,we call it the expected return. 
B) The notion that investors prefer to have a safe income rather than a risky one of the same average amount is called risk aversion. 
C) Because investors are risk averse,the risk-free interest rate is not the right rate to use when converting risky cash flows across time. 
D) The more risk averse investors are,the higher the current price of a risky asset will be compared to a risk-free bond. 
A) When we compute the return of a security based on the average payoff we expect to receive,we call it the expected return. 
B) The notion that investors prefer to have a safe income rather than a risky one of the same average amount is called risk aversion. 
C) Because investors are risk averse,the risk-free interest rate is not the right rate to use when converting risky cash flows across time. 
D) The more risk averse investors are,the higher the current price of a risky asset will be compared to a risk-free bond.

Question 4

By evaluating cost and benefits using competitive market prices,we can determine whether a decision will make the firm and its investors wealthier.This central concept is called:

Accepted Answer

A) the Law of One Price. 
B) the Present Value. 
C) the Valuation Principle. 
D) the Internal Rate of Return. 
A) the Law of One Price. 
B) the Present Value. 
C) the Valuation Principle. 
D) the Internal Rate of Return.

Question 5

Pfizer Inc.(PFE)stock is currently trading on the NYSE with a quoted bid of $18.35 and an ask price of $18.40.At the same time NASDAQ dealers are posting the following bid and ask prices for PFE:   Trading with which of these NASDAQ dealers provides an arbitrage opportunity when compared to the NYSE quotes?

Accepted Answer

A) Only NASDAQ dealer #1 
B) Only NASDAQ dealer #2 
C) Only NASDAQ dealer #3 
D) Both NASDAQ dealer #1 and dealer #3 
E) None of the above 
A) Only NASDAQ dealer #1 
B) Only NASDAQ dealer #2 
C) Only NASDAQ dealer #3 
D) Both NASDAQ dealer #1 and dealer #3 
E) None of the above

Question 6

Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is INCORRECT?

Accepted Answer

A) If the total price of A and B is cheaper than the price of C,then we could make a profit selling A and B and buying C. 
B) Price(
C) = Price(
A) + Price(
B) . 
C) Because security C is equivalent to the portfolio of A and B,by the law of one price they must have the same price. 
D) The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts. 
A) If the total price of A and B is cheaper than the price of C,then we could make a profit selling A and B and buying C. 
B) Price(
C) = Price(
A) + Price(
B) . 
C) Because security C is equivalent to the portfolio of A and B,by the law of one price they must have the same price. 
D) The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts.

Question 7

You are offered an investment opportunity in which you will receive $23,750 today in exchange for paying $25,000 in one year.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:

Accepted Answer

A) Yes;NPV = $165 
B) No;NPV = $165 
C) Yes;NPV = -$165 
D) No;NPV = -$165 
A) Yes;NPV = $165 
B) No;NPV = $165 
C) Yes;NPV = -$165 
D) No;NPV = -$165

Question 8

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,the added benefit (cost)to you if you take the trade is closest to:

Accepted Answer

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

Question 9

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 #1 is closest to:

Accepted Answer

A) $350,000. 
B) $357,000. 
C) $375,500. 
D) $400,000. 
A) $350,000. 
B) $357,000. 
C) $375,500. 
D) $400,000.

Use the table for the question(s)below. -If the risk-free rate of interest is 7.5%,then the value of security "A" is closest to:

Which of the following statements is FALSE?

Which one of the following statements is FALSE?

By evaluating cost and benefits using competitive market prices,we can determine whether a decision will make the firm and its investors wealthier.This central concept is called:

Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is INCORRECT?

You are offered an investment opportunity in which you will receive $23,750 today in exchange for paying $25,000 in one year.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:

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

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

Use the table for the question(s)below. -If the risk-free rate of interest is 7.5%,then the value of security "A" is closest to:

Which of the following statements is FALSE?

Which one of the following statements is FALSE?

By evaluating cost and benefits using competitive market prices,we can determine whether a decision will make the firm and its investors wealthier.This central concept is called:

Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is INCORRECT?

You are offered an investment opportunity in which you will receive $23,750 today in exchange for paying $25,000 in one year.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:

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