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

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:

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

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?

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

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

Use the table for the question(s)below. Consider the following prices from a McDonald's Restaurant: -A McDonald's Big Mac value meal consists of a Big Mac Sandwich,Large Coke,and a Large Fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to ensure the absence of an arbitrage opportunity and uphold the law of one price?

A project you are considering is expected to provide benefits worth $225,000 in one year.If the risk-free rate of interest (r_f)is 8%,then the value of the benefits of this project today are closest to:

Suppose you have $1000 today and the risk-free rate of interest (r_f)is 3.5%.The equivalent value in one year is closest to:

Which of the following statements is FALSE?

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

Which of the following statements regarding the NPV decision rule is FALSE?

You are up late watching TV 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 is 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 insure the absence of an arbitrage opportunity and uphold the law of one price?

Use the following information to answer the question(s)below. 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. 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. -If the discount rate is 15%,the alternative with the highest NPV is:

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,then the price for this risky security is closest to:

In a normal market with transactions costs,is it possible for different investors to place different values on an investment opportunity? Are there any limits on the amount that their values can differ?

Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE.Advanced Micro Devices is also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50.Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on a block trade of 1000 shares?

Suppose that a security with a risk-free cash flow of $1000 in one year trades for $930 today.If there are no arbitrage opportunities,then the current risk-free rate is closest to:

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 for following bid and ask prices for PHE: Trading with which of these NASDAQ dealers provides an arbitrage opportunity when compared to the NYSE quotes?

Which of the following statements regarding arbitrage is the most correct?

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