Question 1

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

Accepted Answer

A) For an investment project to be considered,costs must have a higher dollar value than benefits. 
B) In most investment projects costs are incurred up front,but benefits are provided in the future. 
C) For practical purposes,a dollar today may be considered to be equal to a dollar at some future time. 
D) Although costs and benefits generally occur concurrently,the benefits will accrue value over time,due to interest. 
E) Since money is worth more in the future,if the time value of money is not considered,profitable investments will be passed up. 
A) For an investment project to be considered,costs must have a higher dollar value than benefits. 
B) In most investment projects costs are incurred up front,but benefits are provided in the future. 
C) For practical purposes,a dollar today may be considered to be equal to a dollar at some future time. 
D) Although costs and benefits generally occur concurrently,the benefits will accrue value over time,due to interest. 
E) Since money is worth more in the future,if the time value of money is not considered,profitable investments will be passed up.

Question 2

Which of the following is the overarching principle that a financial manager should follow when making decisions?

Accepted Answer

A) Decisions should generate the greatest benefits for the firm. 
B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to others. 
C) Decisions should be on behalf of the firm's owners that give the greatest benefit to those owners,the firm's employees,and the firm's other stakeholders. 
D) Decisions should increase the value of the firm to its investors. 
E) Decisions should be in the strategic competitive interests of the firm. 
A) Decisions should generate the greatest benefits for the firm. 
B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to others. 
C) Decisions should be on behalf of the firm's owners that give the greatest benefit to those owners,the firm's employees,and the firm's other stakeholders. 
D) Decisions should increase the value of the firm to its investors. 
E) Decisions should be in the strategic competitive interests of the firm.

Question 3

What role do transaction costs play in establishing the Law of One Price?

Accepted Answer

Transaction costs play a negative role i

Question 4

You are scheduled to receive $10,000 in one year.An decrease in the interest rate will have what effect on the present value of this cash flow?

Accepted Answer

A) It will cause the present value to fall. 
B) It will cause the present value to rise. 
C) It will have no effect on the present value. 
D) The effect cannot be determined with the information provided. 
E) It will cause the present value to fall significantly. 
A) It will cause the present value to fall. 
B) It will cause the present value to rise. 
C) It will have no effect on the present value. 
D) The effect cannot be determined with the information provided. 
E) It will cause the present value to fall significantly.

Question 5

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?

Accepted Answer

A)    
B)    
C)    
D)    
E)    
A)    
B)    
C)    
D)    
E)

Question 6

You own 1000 shares of Newstar Financial stock,currently trading for $57 per share.You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock,currently trading at $63 per share.What is the value of this trade,if you choose to make it?

Accepted Answer

A) -$540 
B) -$480 
C) -$300 
D) $280 
E) $600 
A) -$540 
B) -$480 
C) -$300 
D) $280 
E) $600

Question 7

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 20% more,though there will be additional costs of $500,000,realized 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 $600,000 less if he releases the wine now. 
B) He will earn $200,000 more if he releases the wine now. 
C) He will earn $107,000 less if he releases the wine now. 
D) He will earn $80,000 more if he releases the wine now. 
E) He will earn $500,000 less if he releases the wine now. 
A) He will earn $600,000 less if he releases the wine now. 
B) He will earn $200,000 more if he releases the wine now. 
C) He will earn $107,000 less if he releases the wine now. 
D) He will earn $80,000 more if he releases the wine now. 
E) He will earn $500,000 less if he releases the wine now.

Question 8

Steve is offered an investment where for every $1.00 invested today,he will receive $1.10 at the end of each of the next five years.Steve concludes that in five years time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value.What is Steve's major error in reasoning when making this decision?

Accepted Answer

A) Costs and benefits must be in the same terms to be compared. 
B) There may be other investments that he can make that will offer even bigger benefits. 
C) The investment may have hidden costs that will reduce the amount of benefit he receives. 
D) The value of the cash he has today is greater than the value of the cash he may have in the future. 
E) Whether he has enough spare cash with which to invest. 
A) Costs and benefits must be in the same terms to be compared. 
B) There may be other investments that he can make that will offer even bigger benefits. 
C) The investment may have hidden costs that will reduce the amount of benefit he receives. 
D) The value of the cash he has today is greater than the value of the cash he may have in the future. 
E) Whether he has enough spare cash with which to invest.

Question 9

If $476 invested today yields $500 in one year's time,what is the discount factor?

Accepted Answer

A) 0.05 
B) 0.95 
C) 1.05 
D) 1.50 
E) 0.24 
A) 0.05 
B) 0.95 
C) 1.05 
D) 1.50 
E) 0.24

Question 10

If the interest rate is 5%,the one-year discount factor is equal to:

Accepted Answer

A) 0.050 
B) 1.050 
C) 0.952 
D) 1.045 
E) 0.950 
A) 0.050 
B) 1.050 
C) 0.952 
D) 1.045 
E) 0.950

Question 11

The timeline shown below best describes which of the following situations?

Accepted Answer

A) You make payments of $250 per month for six months. 
B) You receive payments of $250 per month for six months. 
C) You make payments of $250 per month for five months. 
D) You receive payments of $250 per month for five months. 
E) You make payments of $250 per year for five years. 
A) You make payments of $250 per month for six months. 
B) You receive payments of $250 per month for six months. 
C) You make payments of $250 per month for five months. 
D) You receive payments of $250 per month for five months. 
E) You make payments of $250 per year for five years.

Question 12

In a trade with the government of an oil-producing nation,a manufacturer will deliver 14 Caterpillar D9 tractors,with a value of $350,000 per tractor,and receive 45,000 barrels of oil,valued at $115 per barrel.What is the net benefit of this trade to the manufacturer?

Accepted Answer

A) $158,000 
B) $275,000 
C) $1,750,000 
D) $4,900,000 
E) $5,175,000 
A) $158,000 
B) $275,000 
C) $1,750,000 
D) $4,900,000 
E) $5,175,000

Question 13

If money is invested at 8% per year,after approximately how many years will the interest earned be equal to the original investment?

Accepted Answer

A) 5 years 
B) 6 years 
C) 9 years 
D) 12 years 
E) 8 years 
A) 5 years 
B) 6 years 
C) 9 years 
D) 12 years 
E) 8 years

Question 14

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

Accepted Answer

A) They can be used to determine how much an asset can be sold for. 
B) They can be used to convert different services and commodities into equivalent cash values which can be compared. 
C) They allow all commodities and services to be assigned a fixed and unchanging value. 
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value. 
E) They can be used to determine the correct value for assets to be purchased. 
A) They can be used to determine how much an asset can be sold for. 
B) They can be used to convert different services and commodities into equivalent cash values which can be compared. 
C) They allow all commodities and services to be assigned a fixed and unchanging value. 
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value. 
E) They can be used to determine the correct value for assets to be purchased.

Question 15

A dollar today and a dollar in one year may be considered to be equivalent.

Accepted Answer

A) True 
 B)False

Question 16

How can we convert the value of money from one point in time to another?

Accepted Answer

A) using the current exchange rate 
B) using a cost benefit analysis 
C) using the Valuation Principle 
D) using the current interest rate 
E) using competitive market prices 
A) using the current exchange rate 
B) using a cost benefit analysis 
C) using the Valuation Principle 
D) using the current interest rate 
E) using competitive market prices

Question 17

Which of the following is the best statement of the Valuation Principle?

Accepted Answer

A) It is not possible to compare costs and benefits that occur at different points in time,in different currencies,or with different risks. 
B) The value of a commodity or an asset to the firm or its investors is determined by its competitive market price.When the value of the benefits exceeds the value of the costs in terms of market prices,the decision will increase the market value of the firm. 
C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. 
D) If equivalent goods or securities trade simultaneously in different markets across the world,they will trade for the same price. 
E) The value of a commodity or an asset is determined by assessing its use to the firm. 
A) It is not possible to compare costs and benefits that occur at different points in time,in different currencies,or with different risks. 
B) The value of a commodity or an asset to the firm or its investors is determined by its competitive market price.When the value of the benefits exceeds the value of the costs in terms of market prices,the decision will increase the market value of the firm. 
C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. 
D) If equivalent goods or securities trade simultaneously in different markets across the world,they will trade for the same price. 
E) The value of a commodity or an asset is determined by assessing its use to the firm.

Question 18

You decide to deposit $5000 in a bank account paying 3.5% interest.What is the value of your savings in one year?

Accepted Answer

A) $5,175 
B) $4,831 
C) $5,000 
D) $5,500 
E) $5,350 
A) $5,175 
B) $4,831 
C) $5,000 
D) $5,500 
E) $5,350

Question 19

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 likely outcome of such a situation?

Accepted Answer

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

Question 20

Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE.Advanced Micro Devices is also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50.Does an arbitrage opportunity exist and,if so,how would you exploit it and how much would you make on a block trade of 1000 shares?

Accepted Answer

Yes,buy 1000 shares

Exam 3: The Valuation Principle: the Foundation of Financial Decision Making

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

Which of the following is the overarching principle that a financial manager should follow when making decisions?

What role do transaction costs play in establishing the Law of One Price?

You are scheduled to receive $10,000 in one year.An decrease in the interest rate will have what effect on the present value of this cash flow?

Samantha enters a rent-to-own agreement for living room furniture.She will pay $60 per month for one year.Which of the following shows the timeline for her payments if the first payment is one month from now?

You own 1000 shares of Newstar Financial stock,currently trading for $57 per share.You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock,currently trading at $63 per share.What is the value of this trade,if you choose to make it?

If $476 invested today yields $500 in one year's time,what is the discount factor?

If the interest rate is 5%,the one-year discount factor is equal to:

The timeline shown below best describes which of the following situations?

In a trade with the government of an oil-producing nation,a manufacturer will deliver 14 Caterpillar D9 tractors,with a value of $350,000 per tractor,and receive 45,000 barrels of oil,valued at $115 per barrel.What is the net benefit of this trade to the manufacturer?

If money is invested at 8% per year,after approximately how many years will the interest earned be equal to the original investment?

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

A dollar today and a dollar in one year may be considered to be equivalent.

How can we convert the value of money from one point in time to another?

Which of the following is the best statement of the Valuation Principle?

You decide to deposit $5000 in a bank account paying 3.5% interest.What is the value of your savings in one year?

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 likely outcome of such a situation?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters