Question 1

If the interest rate is 9%, the one-year discount factor is equal to ________.

Accepted Answer

A) 0.090 
B) 1.090 
C) 0.917 
D) 0.981 
A) 0.090 
B) 1.090 
C) 0.917 
D) 0.981

Question 2

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 bbl of Alaska North Slope (ANS)crude oil for 10,000 bbl of West Texas Intermediate (WTI)crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do?

Accepted Answer

A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. 
B) Do nothing; refine the 10,000 bbl of WTI crude. 
C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. 
D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude. 
A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. 
B) Do nothing; refine the 10,000 bbl of WTI crude. 
C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. 
D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.

Question 3

To compute the future value of a cash flow, you must ________.

Accepted Answer

A) discount it 
B) compound it 
C) double it 
D) arbitrage it 
A) discount it 
B) compound it 
C) double it 
D) arbitrage it

Question 4

On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21?

Accepted Answer

A) $3263 
B) $4079 
C) $8158 
D) $3766 
A) $3263 
B) $4079 
C) $8158 
D) $3766

Question 5

Whenever a good trades in a competitive market, the ________ determines the value of the good.

Accepted Answer

A) supply 
B) price 
C) demand 
D) cost 
A) supply 
B) price 
C) demand 
D) cost

Question 6

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

Accepted Answer

A) The State Bank would experience a surge in demand for loans. 
B) The Colonial Bank would experience a surge in demand for deposits. 
C) The State Bank would experience a fall in demand for deposits. 
D) The Colonial Bank would experience a surge in demand for loans. 
A) The State Bank would experience a surge in demand for loans. 
B) The Colonial Bank would experience a surge in demand for deposits. 
C) The State Bank would experience a fall in demand for deposits. 
D) The Colonial Bank would experience a surge in demand for loans.

Question 7

Which of the following statements is INCORRECT based on the time value of money?

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.

Question 8

You are watching TV late 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. Ronco also includes a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95 in this deal. Assuming that there is a competitive market for Ronco items, at what price must Ronco offer this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?

Accepted Answer

29.95 + 10

Question 9

Which of the following is an example of arbitrage?

Accepted Answer

A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. 
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. 
C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. 
D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%. 
A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. 
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. 
C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. 
D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.

Question 10

An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made?

Accepted Answer

A) No, because the investment will yield $82,840 less than putting the money in a bank. 
B) Yes, because the investment will yield $66,272 more than putting the money in a bank. 
C) Yes, because the investment will yield $74,556 more than putting the money in a bank. 
D) Yes, because the investment will yield $82,840 more than putting the money in a bank. 
A) No, because the investment will yield $82,840 less than putting the money in a bank. 
B) Yes, because the investment will yield $66,272 more than putting the money in a bank. 
C) Yes, because the investment will yield $74,556 more than putting the money in a bank. 
D) Yes, because the investment will yield $82,840 more than putting the money in a bank.

Question 11

To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.

Accepted Answer

A) True 
 B)False

Question 12

What is one of the prerequisite conditions for the Valuation Principle to work?

Accepted Answer

The availability of competitiv

Question 13

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 (NPV), 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 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 (NPV), 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 possible.

Question 14

To calculate a cash flow's present value (PV), you must compound it.

Accepted Answer

A) True 
 B)False

Question 15

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

Accepted Answer

A) True 
 B)False

Question 16

A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?

Accepted Answer

A) He will earn $1,980,000 less if he releases the wine now. 
B) He will earn $328,972 more if he releases the wine now. 
C) He will earn $328,972 less if he releases the wine now. 
D) He will earn $356,400 more if he releases the wine now. 
A) He will earn $1,980,000 less if he releases the wine now. 
B) He will earn $328,972 more if he releases the wine now. 
C) He will earn $328,972 less if he releases the wine now. 
D) He will earn $356,400 more if he releases the wine now.

Question 17

A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian?

Accepted Answer

A) $17,130 
B) $24,287 
C) $20,239 
D) $28,335 
A) $17,130 
B) $24,287 
C) $20,239 
D) $28,335

Question 18

Use the information for the question(s)below.   As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS)crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI)crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS)crude oil for 10,000 bbl of West Texas Intermediate (WTI)crude oil. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost)to you if you take the trade is closest to ________.

Accepted Answer

A) ($1550) 
B) $1550 
C) ($3475) 
D) $3475 
A) ($1550) 
B) $1550 
C) ($3475) 
D) $3475

Question 19

Which of the following statements is FALSE about valuing cash at different points in time?

Accepted Answer

A) The process of moving forward along the timeline to determine a cash flow's value in the future is known as compounding. 
B) The effect of earning interest on interest is known as compound interest. 
C) It is only possible to compare or combine values at the same point in time. 
D) A dollar in the future is worth more than a dollar today. 
A) The process of moving forward along the timeline to determine a cash flow's value in the future is known as compounding. 
B) The effect of earning interest on interest is known as compound interest. 
C) It is only possible to compare or combine values at the same point in time. 
D) A dollar in the future is worth more than a dollar today.

Question 20

What is the present value (PV)of $90,000 received six years from now, assuming the interest rate is 5% per year?

Accepted Answer

A) $58,500.00 
B) $57,085.48 
C) $67,159.39 
D) $117,528.93 
A) $58,500.00 
B) $57,085.48 
C) $67,159.39 
D) $117,528.93

Exam 3: Time Value of Money: an Introduction

If the interest rate is 9%, the one-year discount factor is equal to ________.

To compute the future value of a cash flow, you must ________.

On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21?

Whenever a good trades in a competitive market, the ________ determines the value of the good.

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

Which of the following statements is INCORRECT based on the time value of money?

Which of the following is an example of arbitrage?

An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made?

To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.

What is one of the prerequisite conditions for the Valuation Principle to work?

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

To calculate a cash flow's present value (PV), you must compound it.

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

Which of the following statements is FALSE about valuing cash at different points in time?

What is the present value (PV)of $90,000 received six years from now, assuming the interest rate is 5% per year?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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