Question 1

Which one of the following statements is false?

Accepted Answer

A)  When we compute the return of a security based on the average payoff we expect to receive, we call it the expected return. 
B)  The notion that investors prefer to have a safe income rather than a risky one of the same average amount is call risk aversion. 
C)  Because investors are risk averse, the risk-free interest rate is not the right rate to use when converting risky cash flows across time. 
D)  The more risk averse investors are, the higher the current price of a risky asset will be compared to a risk-free bond. 
A)  When we compute the return of a security based on the average payoff we expect to receive, we call it the expected return. 
B)  The notion that investors prefer to have a safe income rather than a risky one of the same average amount is call risk aversion. 
C)  Because investors are risk averse, the risk-free interest rate is not the right rate to use when converting risky cash flows across time. 
D)  The more risk averse investors are, the higher the current price of a risky asset will be compared to a risk-free bond.

Question 2

Which of the following statements regarding value additivity is false?

Accepted Answer

A)  The value of a portfolio is equal to the sum of the values of its parts. 
B)  The price or value of the entire firm is equal to the sum of the values of all projects and investments within the firm. 
C)  To maximize the value of the entire firm, managers should make decisions that maximize NPV. 
D)  Value additivity does not have important consequences for the value of the entire firm, only for portfolios of firms. 
A)  The value of a portfolio is equal to the sum of the values of its parts. 
B)  The price or value of the entire firm is equal to the sum of the values of all projects and investments within the firm. 
C)  To maximize the value of the entire firm, managers should make decisions that maximize NPV. 
D)  Value additivity does not have important consequences for the value of the entire firm, only for portfolios of firms.

Question 3

Which of the following formulas regarding NPV is incorrect?

Accepted Answer

A)  NPV + PV(benefits) = PV(Cost) 
B)  NPV + PV(costs) = PV(benefits) 
C)  NPV = PV(All project cash flows) 
D)  NPV = PV(benefits) - PV(costs) 
A)  NPV + PV(benefits) = PV(Cost) 
B)  NPV + PV(costs) = PV(benefits) 
C)  NPV = PV(All project cash flows) 
D)  NPV = PV(benefits) - PV(costs)

Question 4

Use the table for the question(s) below.
  
-If the risk-free interest rate is 10%,then the NPV for "moe" 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 5

Use the table for the question(s) below.
  
-If the risk-free rate of interest is 7.5%,then the value of security "A" is closest to:

Accepted Answer

A)  $91.00 
B)  $92.50 
C)  $93.00 
D)  $100.00 
A)  $91.00 
B)  $92.50 
C)  $93.00 
D)  $100.00

Question 6

No arbitrage is equivalent to the idea that all risk-free investments should offer investors ________.

Accepted Answer

A)  zero return 
B)  the same return 
C)  positive returns 
D)  negative returns 
A)  zero return 
B)  the same return 
C)  positive returns 
D)  negative returns

Question 7

Which of the following statements regarding the Law of One Price is incorrect?

Accepted Answer

A)  At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. 
B)  One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value, we can use any competitive price to determine a cash value, without checking the price in all possible markets. 
C)  If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. 
D)  An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible. 
A)  At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. 
B)  One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value, we can use any competitive price to determine a cash value, without checking the price in all possible markets. 
C)  If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. 
D)  An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.

Question 8

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

Accepted Answer

Values can differ,bu

Question 9

Use the table for the question(s) below.
  
-If the risk-free rate of interest is 7.5%,then the value of security "B" is closest to:

Accepted Answer

A)  $91.00 
B)  $92.50 
C)  $93.00 
D)  $100.00 
A)  $91.00 
B)  $92.50 
C)  $93.00 
D)  $100.00

Question 10

The no-arbitrage price of any financial asset is

Accepted Answer

A)  the future value of all future cash flows received from the assets. 
B)  the accounting book value of all future cash flows received from the asset. 
C)  the present value of all future cash flows received from the asset. 
D)  the market value of all future cash flows received from the asset. 
A)  the future value of all future cash flows received from the assets. 
B)  the accounting book value of all future cash flows received from the asset. 
C)  the present value of all future cash flows received from the asset. 
D)  the market value of all future cash flows received from the asset.

Question 11

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 $167.75 (bid)$167.85 (ask).What should you do?

Accepted Answer

There is an arbitrage opportun

Question 12

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:

Accepted Answer

Value of ETF = 2 × 7

Question 13

Use the table for the question(s) below.
  
-Which of the following statements is false?

Accepted Answer

A)  No arbitrage opportunities will exist until the underlying prices diverge by more than the amount of the transaction costs. 
B)  Because you will generally pay a slightly lower price when you buy a security (the ask price) than you receive when you sell (the bid price) you will pay the bid-ask spread. 
C)  The price of a security should equal to the present value of its cash flows, up to the transaction costs of trading the security and the cash flows. 
D)  In most markets, you must pay transactions costs to trade securities. 
A)  No arbitrage opportunities will exist until the underlying prices diverge by more than the amount of the transaction costs. 
B)  Because you will generally pay a slightly lower price when you buy a security (the ask price) than you receive when you sell (the bid price) you will pay the bid-ask spread. 
C)  The price of a security should equal to the present value of its cash flows, up to the transaction costs of trading the security and the cash flows. 
D)  In most markets, you must pay transactions costs to trade securities.

Question 14

Which of the following statements regarding arbitrage is not correct?

Accepted Answer

A)  Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity. 
B)  Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity. 
C)  We call a competitive market in which there are no arbitrage opportunities an arbitrage market. 
D)  The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage. 
A)  Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity. 
B)  Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity. 
C)  We call a competitive market in which there are no arbitrage opportunities an arbitrage market. 
D)  The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.

Question 15

Use the table for the question(s) below.
  
-A competitive market in which there are no arbitrage opportunities is called

Accepted Answer

A)  a normal market. 
B)  a fair market. 
C)  an arbitrage market. 
D)  a free market. 
A)  a normal market. 
B)  a fair market. 
C)  an arbitrage market. 
D)  a free market.

Question 16

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

Accepted Answer

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

Question 17

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.
-Assuming you currently have 10,000 Bbls of WTI crude,the total benefit 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:

Accepted Answer

A)  $730,600 
B)  $770,000 
C)  $771,400 
D)  $773,908 
A)  $730,600 
B)  $770,000 
C)  $771,400 
D)  $773,908

Question 18

Which of the following statements is correct?

Accepted Answer

A)  When making an investment decision, take the alternative with the positive NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
B)  When making an investment decision, take the alternative with the negative NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
C)  When making an investment decision, take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
D)  When making an investment decision, take the alternative with the lowest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
A)  When making an investment decision, take the alternative with the positive NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
B)  When making an investment decision, take the alternative with the negative NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
C)  When making an investment decision, take the alternative with the highest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today. 
D)  When making an investment decision, take the alternative with the lowest NPV. Choosing this alternative is equivalent to receiving its NPV in cash today.

Question 19

You have an investment opportunity in Germany that requires an investment of $250,000 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 6% and the current competitive exchange rate is €0.78 to $1.00.What is the NPV of this project? Would you take the project?

Accepted Answer

A)  NPV = 0; No 
B)  NPV = 2,358; No 
C)  NPV = 2,358; Yes 
D)  NPV = 13,650; Yes 
A)  NPV = 0; No 
B)  NPV = 2,358; No 
C)  NPV = 2,358; Yes 
D)  NPV = 13,650; Yes

Question 20

Which of the following statements is incorrect?

Accepted Answer

A)  In general, money today is worth more than money in one year. 
B)  We define the risk-free interest rate, rf, for a given period as the interest rate at which money can be borrowed or lent without risk over that period. 
C)  We refer to (1 - rf) as the interest rate factor for risk-free cash flows. 
D)  For most financial decisions, costs and benefits occur at different points in time. 
A)  In general, money today is worth more than money in one year. 
B)  We define the risk-free interest rate, rf, for a given period as the interest rate at which money can be borrowed or lent without risk over that period. 
C)  We refer to (1 - rf) as the interest rate factor for risk-free cash flows. 
D)  For most financial decisions, costs and benefits occur at different points in time.

Exam 3: Arbitrage and Financial Decision Making

Which one of the following statements is false?

Which of the following statements regarding value additivity is false?

Which of the following formulas regarding NPV is incorrect?

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

Use the table for the question(s) below. -If the risk-free rate of interest is 7.5%,then the value of security "A" is closest to:

No arbitrage is equivalent to the idea that all risk-free investments should offer investors ________.

Which of the following statements regarding the Law of One Price is incorrect?

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

Use the table for the question(s) below. -If the risk-free rate of interest is 7.5%,then the value of security "B" is closest to:

The no-arbitrage price of any financial asset is

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 $167.75 (bid)$167.85 (ask).What should you do?

Use the table for the question(s) below. -Which of the following statements is false?

Which of the following statements regarding arbitrage is not correct?

Use the table for the question(s) below. -A competitive market in which there are no arbitrage opportunities is called

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

Which of the following statements is correct?

Which of the following statements is incorrect?

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

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