Question 1

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

Accepted Answer

A)  $235.85 today. 
B)  $250.00 today. 
C)  $265.00 today. 
D)  none of the above 
A)  $235.85 today. 
B)  $250.00 today. 
C)  $265.00 today. 
D)  none of the above A

Question 2

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,and what is the closest estimate of the NPV?

Accepted Answer

A)  Yes; NPV = $165 
B)  No; NPV = $165 
C)  Yes; NPV = -$165 
D)  No; NPV = -$165 
A)  Yes; NPV = $165 
B)  No; NPV = $165 
C)  Yes; NPV = -$165 
D)  No; NPV = -$165 A

Question 3

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

Accepted Answer

A)  $475 
B)  $476 
C)  $500 
D)  $525 
A)  $475 
B)  $476 
C)  $500 
D)  $525 B

Question 4

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:
  
-Assume that the ETF is trading for $426.00.What (if any)arbitrage opportunity exists? What (if any)trades would you make?

Accepted Answer

Value of ETF = 2 × 79.50 + 3 ×

Question 5

The first step in evaluating a project is to identify its ________.

Accepted Answer

A)  amortization value and depreciation value 
B)  principal value and maturity value 
C)  present value and future value 
D)  costs and benefits 
A)  amortization value and depreciation value 
B)  principal value and maturity value 
C)  present value and future value 
D)  costs and benefits

Question 6

Use the information for the question(s) below.
An independent Canadian 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 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%.
-What is the NPV of this project if the film maker does not issue the new security? What is the NPV if the film maker issues the new security?

Accepted Answer

A)  $1.7 million; $1.7 million 
B)  $1.7 million; $2.7 million 
C)  $2.7 million; $1.7 million 
D)  $2.7 million; $2.7 million 
A)  $1.7 million; $1.7 million 
B)  $1.7 million; $2.7 million 
C)  $2.7 million; $1.7 million 
D)  $2.7 million; $2.7 million

Question 7

Use the table for the question(s) below.
  
-On June 5th 2009,a share of Lululemon stock on Toronto Stock Exchange (TSX)was quoted as Bid: $15.58 and Ask: $15.84.If a competitive price is $15.71,

Accepted Answer

A)  the transaction cost to buy or sell is $0.13. 
B)  the transaction cost to buy or sell is $0.26. 
C)  the transaction cost to buy or sell is zero. 
D)  none of the above 
A)  the transaction cost to buy or sell is $0.13. 
B)  the transaction cost to buy or sell is $0.26. 
C)  the transaction cost to buy or sell is zero. 
D)  none of the above

Question 8

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:

Accepted Answer

A)  $168.00 
B)  $336.00 
C)  $424.50 
D)  $504.00 
A)  $168.00 
B)  $336.00 
C)  $424.50 
D)  $504.00

Question 9

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 $168.15 (bid)$168.20 (ask).What should you do?

Accepted Answer

There is an arbitrage opportun

Question 10

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

Accepted Answer

A)  $235.85 in one year. 
B)  $250.00 in one year. 
C)  $265.00 in one year. 
D)  none of the above 
A)  $235.85 in one year. 
B)  $250.00 in one year. 
C)  $265.00 in one year. 
D)  none of the above

Question 11

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

Accepted Answer

A)  $190,333 
B)  $208,333 
C)  $225,000 
D)  $243,000 
A)  $190,333 
B)  $208,333 
C)  $225,000 
D)  $243,000

Question 12

Which of the following statements is false?

Accepted Answer

A)  Financial transactions are not sources of value, but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors. 
B)  The NPV of trading a security in a normal market is zero. 
C)  We cannot separate a firm's investment decision from the decision of how to finance the investment. 
D)  In normal markets, trading securities neither creates nor destroys value. 
A)  Financial transactions are not sources of value, but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors. 
B)  The NPV of trading a security in a normal market is zero. 
C)  We cannot separate a firm's investment decision from the decision of how to finance the investment. 
D)  In normal markets, trading securities neither creates nor destroys value.

Question 13

Net Present Value (NPV)is defined as the difference between ________.

Accepted Answer

A)  present value and future value 
B)  purchasing price and selling price 
C)  present value of benefits and present value of costs 
D)  present value of benefit and future value of costs 
A)  present value and future value 
B)  purchasing price and selling price 
C)  present value of benefits and present value of costs 
D)  present value of benefit and future value of costs

Question 14

Use the table for the question(s) below.
  
-If the risk-free interest rate is 10%,then the NPV for "eenie" is closest to:

Accepted Answer

A)  -3.64 
B)  2.73 
C)  3.18 
D)  3.64 
A)  -3.64 
B)  2.73 
C)  3.18 
D)  3.64

Question 15

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 insure the absence of an arbitrage opportunity and uphold the law of one price?

Accepted Answer

A)  $4.08 
B)  $4.38 
C)  $5.47 
D)  $5.77 
A)  $4.08 
B)  $4.38 
C)  $5.47 
D)  $5.77

Question 16

A competitive market is a market in which a good can be bought at ________ it is sold.

Accepted Answer

A)  a lower price than 
B)  the same price as 
C)  a higher price than 
D)  any price 
A)  a lower price than 
B)  the same price as 
C)  a higher price than 
D)  any price

Question 17

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?

Accepted Answer

A)  No, no arbitrage opportunity exists 
B)  Yes, buy on NASDAQ and sell on NYSE, make $25 
C)  Yes, buy on NYSE and sell on NASDAQ, make $25 
D)  Yes, buy on NASDAQ and sell on NYSE, make $250 
A)  No, no arbitrage opportunity exists 
B)  Yes, buy on NASDAQ and sell on NYSE, make $25 
C)  Yes, buy on NYSE and sell on NASDAQ, make $25 
D)  Yes, buy on NASDAQ and sell on NYSE, make $250

Question 18

Use the table for the question(s) below.
  
-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:

Accepted Answer

A)  $88 
B)  $92 
C)  $93 
D)  $95 
A)  $88 
B)  $92 
C)  $93 
D)  $95

Question 19

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.

Accepted Answer

Step #1 - Determine the risk-free rate
W

Question 20

Use the table for the question(s) below.
  
-Based upon the information provided about securities A,B,and C,the risk-free rate of interest is closest to:

Accepted Answer

A)  4% 
B)  5% 
C)  8% 
D)  10% 
A)  4% 
B)  5% 
C)  8% 
D)  10%

Exam 3: Arbitrage and Financial Decision Making

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

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,and what is the closest estimate of the NPV?

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

The first step in evaluating a project is to identify its ________.

Use the table for the question(s) below. -On June 5th 2009,a share of Lululemon stock on Toronto Stock Exchange (TSX)was quoted as Bid: $15.58 and Ask: $15.84.If a competitive price is $15.71,

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 $168.15 (bid)$168.20 (ask).What should you do?

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

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

Which of the following statements is false?

Net Present Value (NPV)is defined as the difference between ________.

Use the table for the question(s) below. -If the risk-free interest rate is 10%,then the NPV for "eenie" is closest to:

A competitive market is a market in which a good can be bought at ________ it is sold.

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?

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.

Use the table for the question(s) below. -Based upon the information provided about securities A,B,and C,the risk-free rate of interest is closest to:

The Corporation

Introduction to Financial Statement Analysis

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

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

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:

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

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: