Exam 3: The Valuation Principle: the Foundation of Financial Decision Making

You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer.You learn that the Dial-o-matic sells for $29.95.But wait,there's more! Ronco is also including in this deal a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95.Assuming that there is a competitive market for Ronco items,at what price must Ronco be selling this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?

A wholesale food retailer is offered $14 per two-layer carton for 5000 cartons of peaches.The wholesaler can buy peaches from its growers at $12.50 per carton.Shipping costs $1.50 per carton,for the first 1000 cartons,and $1.00 per carton for every carton over that.Will taking this opportunity increase the value of the wholesale food retailer?

Which of the following is the overarching principle that a financial manager should follow when making decisions?

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 7% per year?

Which of the following statements best describes the effect of transaction costs on arbitrage and the Law of One Price?

You have a used CD store.At an estate sale,you can purchase 260 compact discs for $400.You believe you could sell the CDs for an average of $2.50 each.What is the net benefit of buying the CDs at the estate sale and selling them in your store?

Which of the following is an example of arbitrage?

What is the present value (PV)of $85,000 received 15 years from now,assuming the interest rate is 3% per year?

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?

Suppose the price of gold in New York is $1750 per ounce,while the price of gold in London is $1760.If there are transaction costs of 0.5% when buying or selling in either market,what is the net effect of buying one ounce of gold in New York and selling it in London?

Heavy Duty Inc.,a manufacturer of power tools,decides to offer a rebate of $100 on its 16-inch mid-range chain saw,which currently has a retail price $470.Heavy Duty's marketers estimate that,as a result of the rebate,sales of this model will increase from 50,000 to 80,000 units next year.The profit margin for Heavy Duty before the rebate is $150.Based on the given information,is the decision to give the rebate a wise one?

A coin collector treasures his 1969-S Lincoln cent with a doubled die obverse 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?

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

If the interest rate is 5%,the one-year discount factor is equal to:

Consider the following timeline: If the current market rate of interest is 12%,then the value of the cash flows in year 0 and year 2 as of year 1 is closest to:

If an arbitrage opportunity exists,an investor can act quickly in the hope of making a risk-free profit.

How can we take a financial decision with cash flows occurring at different points in time?

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

You are scheduled to receive $10,000 in one year.An decrease in the interest rate will have what effect on the present value of this cash flow?

What role do transaction costs play in establishing the Law of One Price?