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

Use the information for the question(s)below. An independent film maker is considering producing a new movie.The initial cost for making this movie will be $20 million today.Once the movie is completed,in one year,the movie will be sold to a major studio for $25 million.Rather than paying for the $20 million investment entirely using its own cash,the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year.Suppose the risk-free rate of interest is 10%. -Without issuing the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?

Use the information for 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 International Business Machines (IBM),three shares of Merck (MRK),and three shares of Citigroup Inc.(C).Suppose the current market price of each individual stock are shown below: -The price per share of the ETF in a normal market is closest to:

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:

If the discount rate is 15%,the alternative with the lowest NPV is:

Which of the following statements regarding arbitrage and security prices is INCORRECT?

A project that you are considering today is expected to provide benefits worth $168,000 in one year.If the risk-free rate of interest (r_f)is 4.5%,then the value of the benefits of this project today are closest to:

If we use future value rather than present value to decide whether to make an investment:

Which of the following statements is FALSE?

Use the table for the question(s)below. -Assume that the risk-free interest rate is 10%.Rank each of the four projects from most desirable to least desirable based upon NPV.Which project would you invest in first? Are there any projects that you wouldn't invest in?