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

Use the information for the question(s) below. Coloma Cooper 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?

A vintner is deciding when to release a vintage of sauvignon blanc.If it is bottled and released now,the wine will be worth $2.2 million.If it is barrel aged for a further year,it will be worth 20% more,though there will be additional costs of $500,000,realized at the end of the year.If the interest rate is 7%,what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels,if it also buys 5,000 bushels of wheat at $16.00 per bushel.However,the manufacturer does not use any barley in its products,and currently needs 20,000 bushels of wheat.If the current market price of barley is $3.80 per bushel,and wheat is $15.80 per bushel,should this opportunity be taken,and why?

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 and how much would you make on a block trade of 100 shares?

On the day Justine was born,her grandparents put $10,000 into a savings account that pays interest of 6% per year.How much money will Justine have in her account when she turns 18?

How does arbitrage help the Law of One Price?

If an analyst mistakenly adds cash flows occurring at different points in time,what is the implied assumption in the process?

Consider the following timeline: If the current market rate of interest is 8%,then the value as of year 1 is closest to:

Consider the following timeline: If the current market rate of interest is 9%,then the present value (PV)of this timeline as of year 0 is closest to:

The exchange rates in New York are ¥1000 = $9 and the exchange rates in Tokyo are ¥171 = $1.5.You incur a transaction fee of 0.1% when buying and selling in each market.You have $1 million dollars with which to purchase foreign currency.What is your maximum potential profit from exploiting the arbitrage opportunity?

In general,if an action increases a firm's value by providing benefits with a value greater than any costs involved,then that action is good for the firm's investors.

Use the information for the question(s) below. Coloma Cooper 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?

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

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?

A dollar today and a dollar in one year may be considered to be equivalent.

What is one of the main obstacles in cost benefit analysis?

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:

To calculate a cash flow's present value (PV),you must compound it.

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets,they will trade for the same price in each market.

The State Bank offers an interest rate of 5.5% on savings and 6% on loans,while the Colonial Bank offers 6.5% on savings and 7% on loans.Which of the following is the likely outcome of such a situation?