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

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 currently is $162.75 (bid)$162.80 (ask).What should you do?

If the risk-free interest rate is 10%,then of the four projects listed,if could only invest in two of these projects,which two projects would you select?

If the interest rate is 7%,the NPV of alternative #2 is closest to:

If the ETF is currently trading for $1300,what arbitrage opportunity is available? What trades would you make?

If the discount rate is 15%,then which alternative should the owner choose:

You have an investment opportunity in Germany that requires an investment of $250,100 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 7% 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 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?

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?

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

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: -If the ETF is currently trading for $1200,what arbitrage opportunity is available? What trades would you make?

What is the NPV of this project if the film maker invests his own money and does not issue the new security? What is the NPV if the film maker issues the new security?

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:

Consider a bond that pays $1000 in one year.Suppose that the market interest rate for savings is 8%,but the interest rate for borrowing is 10%.The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

Assuming you currently have 10,000 Bbls of WTI crude,the added benefit (cost)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:

You have an investment opportunity in the United Kingdom that requires an investment of $500,000 today and will produce a cash flow of £320,000 in one year with no risk.Suppose the risk-free rate of interest in the U.K is 6% and the current competitive exchange rate is $1.70/£.What is the NPV of this project? Would you take the project?

If the risk-free rate of interest is 7.5%,then the value of security "B" is closest to:

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

Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the added benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:

If the interest rate is 7%,the NPV of alternative #3 is closest to:

If the interest rate is 7%,the alternative with the highest NPV is: