Question 1

Which is the following statements is correct?

Accepted Answer

A)  The expected return is the return of a security that we compute based on the payoff value that we expect to receive on average. 
B)  The expected return is the return of a security that we compute based on the future value that we expect to receive on average. 
C)  The expected return is the return of a security that we compute based on the present value that we expect to receive on average. 
D)  The expected return is the return of a security that we compute based on the book value that we expect to receive on average. 
A)  The expected return is the return of a security that we compute based on the payoff value that we expect to receive on average. 
B)  The expected return is the return of a security that we compute based on the future value that we expect to receive on average. 
C)  The expected return is the return of a security that we compute based on the present value that we expect to receive on average. 
D)  The expected return is the return of a security that we compute based on the book value that we expect to receive on average.

Question 2

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:
  
-Suppose a security with a risk-free cash flow of $1,000 in one year trades for $909 today.If there are no arbitrage opportunities,then the current risk-free interest rate is closest to:

Accepted Answer

A)  8% 
B)  10% 
C)  11% 
D)  12% 
A)  8% 
B)  10% 
C)  11% 
D)  12%

Question 3

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 minimum ask price for this ETF in a normal market is closest to:

Accepted Answer

A)  $167.80 
B)  $167.90 
C)  $168.00 
D)  $168.10 
A)  $167.80 
B)  $167.90 
C)  $168.00 
D)  $168.10

Question 4

The value today of any financial asset equals ________ of all of its future cash flows.

Accepted Answer

A)  the future value 
B)  the present value 
C)  the book value 
D)  the maturity value 
A)  the future value 
B)  the present value 
C)  the book value 
D)  the maturity value

Question 5

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

Accepted Answer

A)  Reject projects with an NPV of zero, as accepting them is equivalent to losing the present value of the projects' costs. 
B)  When faced with a set of alternatives, choose the one with the highest NPV. 
C)  Accept those projects with a positive NPV, as accepting them is equivalent to receiving their NPV in cash today. 
D)  Reject those projects with a negative NPV, as not doing them has NPV = 0. 
A)  Reject projects with an NPV of zero, as accepting them is equivalent to losing the present value of the projects' costs. 
B)  When faced with a set of alternatives, choose the one with the highest NPV. 
C)  Accept those projects with a positive NPV, as accepting them is equivalent to receiving their NPV in cash today. 
D)  Reject those projects with a negative NPV, as not doing them has NPV = 0.

Question 6

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 $167.85 (bid)$167.95 (ask).What should you do?

Accepted Answer

Nothing; there is no arbitrage

Question 7

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?

Accepted Answer

NPV = -500,000 + (£3

Question 8

A nominal interest rate is normally composed of following elements

Accepted Answer

A)  real interest rate, expected inflation rate and risk premium. 
B)  real interest rate and risk premium. 
C)  periodic interest rate, real interest rate and expected inflation rate. 
D)  periodic interest rate, expected inflation rate and risk premium. 
A)  real interest rate, expected inflation rate and risk premium. 
B)  real interest rate and risk premium. 
C)  periodic interest rate, real interest rate and expected inflation rate. 
D)  periodic interest rate, expected inflation rate and risk premium.

Question 9

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's 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?

Accepted Answer

29.95 + 10

Question 10

The Time Value of Money (TVM)is defined as ________.

Accepted Answer

A)  the difference in value between money today and money in the future 
B)  the difference in value between accounting book value and marketplace value 
C)  the difference in value between purchase and sales of any asset values 
D)  none of the above 
A)  the difference in value between money today and money in the future 
B)  the difference in value between accounting book value and marketplace value 
C)  the difference in value between purchase and sales of any asset values 
D)  none of the above

Question 11

A McDonald's Big Mac value meal consists of a Big Mac Sandwich,Large Coke,and a Large Fry.Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79.Does an arbitrage opportunity exist and,if so,how would you exploit it and how much would you make on one extra value meal?

Accepted Answer

A)  Yes, buy an extra value meal and then sell the Big Mac, Coke, and Fries to make an arbitrage profit of $0.68 
B)  No, no arbitrage opportunity exists 
C)  Yes, buy a Big Mac, Coke, and Fries then sell the value meal to make an arbitrage profit of $1.09 
D)  Yes, buy a Big Mac, Coke, and Fries then sell the value meal to make an arbitrage profit of $0.68 
A)  Yes, buy an extra value meal and then sell the Big Mac, Coke, and Fries to make an arbitrage profit of $0.68 
B)  No, no arbitrage opportunity exists 
C)  Yes, buy a Big Mac, Coke, and Fries then sell the value meal to make an arbitrage profit of $1.09 
D)  Yes, buy a Big Mac, Coke, and Fries then sell the value meal to make an arbitrage profit of $0.68

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:
  
-Suppose that the ETF is trading for $424.50; you should

Accepted Answer

A)  sell the ETF and buy 2 shares of IBM, 3 shares of MRK, and 3 shares of C. 
B)  sell the ETF and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C. 
C)  buy the ETF and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C. 
D)  do nothing, no arbitrage opportunity exists. 
A)  sell the ETF and buy 2 shares of IBM, 3 shares of MRK, and 3 shares of C. 
B)  sell the ETF and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C. 
C)  buy the ETF and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C. 
D)  do nothing, no arbitrage opportunity exists.

Question 13

You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today.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

Question 14

Use the table for the question(s) below.
  
-If the risk-free interest rate is 10%,then of the four projects listed,if you could only invest in one project,which one would you select?

Accepted Answer

A)  Eenie 
B)  Meenie 
C)  Minie 
D)  Moe 
A)  Eenie 
B)  Meenie 
C)  Minie 
D)  Moe

Question 15

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

Accepted Answer

A)  We call the price of a security in a normal market the no-arbitrage price for the security. 
B)  In financial markets it is possible to sell a security you do not own by doing a short sale. 
C)  When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. 
D)  The general formula for the no-arbitrage price of a security is Price(security) = PV(All cash flows paid by the security). 
A)  We call the price of a security in a normal market the no-arbitrage price for the security. 
B)  In financial markets it is possible to sell a security you do not own by doing a short sale. 
C)  When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. 
D)  The general formula for the no-arbitrage price of a security is Price(security) = PV(All cash flows paid by the security).

Question 16

Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is incorrect?

Accepted Answer

A)  If the total price of A and B is cheaper than the price of C, then we could make a profit selling A and B and buying C. 
B)  Price(
C)  = Price(
A)  + Price(
B)  
C)  Because security C is equivalent to the portfolio of A and B, by the law of one price they must have the same price. 
D)  The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts. 
A)  If the total price of A and B is cheaper than the price of C, then we could make a profit selling A and B and buying C. 
B)  Price(
C)  = Price(
A)  + Price(
B)  
C)  Because security C is equivalent to the portfolio of A and B, by the law of one price they must have the same price. 
D)  The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts.

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.
-Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you currently have 10,000 Bbls of WTI crude,the added benefit (cost)to you if you take the trade is closest to:

Accepted Answer

A)  ($1,400) 
B)  $1,400 
C)  ($3,908) 
D)  $3,908 
A)  ($1,400) 
B)  $1,400 
C)  ($3,908) 
D)  $3,908

Question 18

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 maximum bid price for this ETF in a normal market is closest to:

Accepted Answer

A)  $167.80 
B)  $167.90 
C)  $168.00 
D)  $168.10 
A)  $167.80 
B)  $167.90 
C)  $168.00 
D)  $168.10

Question 19

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%.
-Without issuing the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?

Accepted Answer

A)  $1.7 million; Yes 
B)  $1.7 million; No 
C)  $2.7 million; Yes 
D)  $2.7 million; No 
A)  $1.7 million; Yes 
B)  $1.7 million; No 
C)  $2.7 million; Yes 
D)  $2.7 million; No

Exam 3: Arbitrage and Financial Decision Making

Which is the following statements is correct?

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 minimum ask price for this ETF in a normal market is closest to:

The value today of any financial asset equals ________ of all of its future cash flows.

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

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 $167.85 (bid)$167.95 (ask).What should you do?

A nominal interest rate is normally composed of following elements

The Time Value of Money (TVM)is defined as ________.

You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today.Suppose the risk-free interest rate is 6% per year.Should you take this project,and what is the closest estimate of the NPV?

Use the table for the question(s) below. -If the risk-free interest rate is 10%,then of the four projects listed,if you could only invest in one project,which one would you select?

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

Consider two securities,A & B.Suppose a third security,C,has the same cash flows as A and B combined.Given this information about securities A,B,& C,which of the following statements is incorrect?

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 maximum bid price for this ETF in a normal market 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

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