Question 1

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 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

Why should interest rates be generally positive?

Accepted Answer

An investor should be compensa

Question 4

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)  -$320 
B)  -$340 
C)  -$300 
D)  $300 
A)  -$320 
B)  -$340 
C)  -$300 
D)  $300

Question 5

You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

Accepted Answer

A)  $445 
B)  $545 
C)  $645 
D)  $345 
A)  $445 
B)  $545 
C)  $645 
D)  $345

Question 6

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 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 (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 8

A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company?

Accepted Answer

A)  -$5200 
B)  $0 
C)  $15,000 
D)  $16,000 
A)  -$5200 
B)  $0 
C)  $15,000 
D)  $16,000

Question 9

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

Accepted Answer

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

Question 10

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 11

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.
Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.

Accepted Answer

A)  $794,274 
B)  $780,000 
C)  $781,550 
D)  $784,091 
A)  $794,274 
B)  $780,000 
C)  $781,550 
D)  $784,091

Question 12

If $17,000 is invested at 10% per year, in approximately how many years will the investment double?

Accepted Answer

A)  7.3 years 
B)  8.4 years 
C)  11.0 years 
D)  14.6 years 
A)  7.3 years 
B)  8.4 years 
C)  11.0 years 
D)  14.6 years

Question 13

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

Accepted Answer

A)  It does not consider the current market interest rate. 
B)  It does not consider the fact that though costs are incurred today, the benefits occur in one year's time. 
C)  It does not consider the value of the $10,000 in one year's time if invested elsewhere. 
D)  It does not consider whether the $10,000 will be needed elsewhere. 
A)  It does not consider the current market interest rate. 
B)  It does not consider the fact that though costs are incurred today, the benefits occur in one year's time. 
C)  It does not consider the value of the $10,000 in one year's time if invested elsewhere. 
D)  It does not consider whether the $10,000 will be needed elsewhere.

Question 14

Why are arbitrage opportunities short-lived?

Accepted Answer

A)  Federal regulations will kick in to restrict trade and effectively shut the opportunity down. 
B)  Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. 
C)  Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. 
D)  Arbitrage opportunities need a lot of information processing, which is very slow to arrive. 
A)  Federal regulations will kick in to restrict trade and effectively shut the opportunity down. 
B)  Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. 
C)  Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. 
D)  Arbitrage opportunities need a lot of information processing, which is very slow to arrive.

Question 15

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate 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. 
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.

Question 16

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

Accepted Answer

A)  Finding the present value (PV) and compounding are the same. 
B)  A dollar today and a dollar in one year are not equivalent. 
C)  If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. 
D)  The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money. 
A)  Finding the present value (PV) and compounding are the same. 
B)  A dollar today and a dollar in one year are not equivalent. 
C)  If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. 
D)  The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Question 17

A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton?

Accepted Answer

A)  3010 U.S. dollars per ton 
B)  3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD 
C)  5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL 
D)  105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR 
A)  3010 U.S. dollars per ton 
B)  3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD 
C)  5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL 
D)  105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR

Question 18

If the one-year discount factor is equal to 0.94340, the interest must be equal to ________,

Accepted Answer

A)  3.0% 
B)  4.8% 
C)  5.5% 
D)  6.0% 
A)  3.0% 
B)  4.8% 
C)  5.5% 
D)  6.0%

Question 19

How can we make a financial decision with cash flows occurring at different points in time?

Accepted Answer

We need to transform the cash flows to a

Question 20

Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years?

Accepted Answer

A)  $128,729 
B)  $180,221 
C)  $231,712 
D)  $139,541 
A)  $128,729 
B)  $180,221 
C)  $231,712 
D)  $139,541

Exam 3: Time Value of Money: an Introduction

Which of the following is an example of arbitrage?

Why should interest rates be generally positive?

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?

You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

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?

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

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

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

If $17,000 is invested at 10% per year, in approximately how many years will the investment double?

Why are arbitrage opportunities short-lived?

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow?

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

A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton?

If the one-year discount factor is equal to 0.94340, the interest must be equal to ________,

How can we make a financial decision with cash flows occurring at different points in time?

Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years?

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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