Question 1

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. 
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. 
A)  Decisions should generate the greatest benefits for the firm. 
B)  Decisions should provide benefit to the firm without incurring costs. 
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.

Question 2

Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?

Accepted Answer

A)  $1,200,000 
B)  $3,900,000 
C)  $2,700,000 
D)  $9,000,000 
A)  $1,200,000 
B)  $3,900,000 
C)  $2,700,000 
D)  $9,000,000

Question 3

A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?

Accepted Answer

A)  $24.0 per hour 
B)  $29.0 per hour 
C)  $4.0 per hour 
D)  $48.0 per hour 
A)  $24.0 per hour 
B)  $29.0 per hour 
C)  $4.0 per hour 
D)  $48.0 per hour

Question 4

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 5

Consider the following timeline:   If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.

Accepted Answer

A)  $502 
B)  $653 
C)  $600 
D)  $1004 
A)  $502 
B)  $653 
C)  $600 
D)  $1004

Question 6

Consider the following prices from a McDonald's Restaurant:
 
A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

Accepted Answer

A)  Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. 
B)  No, no arbitrage opportunity exists. 
C)  Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34. 
D)  Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67. 
A)  Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. 
B)  No, no arbitrage opportunity exists. 
C)  Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34. 
D)  Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67.

Question 7

Which of the following statements regarding the cost-benefit analysis is NOT correct?

Accepted Answer

A)  The first step in evaluating a project is to identify its costs and benefits. 
B)  In the absence of competitive markets, we can use one-sided prices to determine exact cash values. 
C)  Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. 
D)  Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations. 
A)  The first step in evaluating a project is to identify its costs and benefits. 
B)  In the absence of competitive markets, we can use one-sided prices to determine exact cash values. 
C)  Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. 
D)  Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

Question 8

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one year's time?

Accepted Answer

A)  $4298 
B)  $212 
C)  $4712 
D)  $6597 
A)  $4298 
B)  $212 
C)  $4712 
D)  $6597

Question 9

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 bbl of WTI crude, the added benefit (cost) to you if you were to sell the  
Of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.

Accepted Answer

A)  ($1400) 
B)  $1400 
C)  ($3908) 
D)  $3908 
A)  ($1400) 
B)  $1400 
C)  ($3908) 
D)  $3908

Question 10

If an analyst incorrectly adds cash flows occurring at different points in time, what is the implied assumption in the process?

Accepted Answer

Cash flows occurring at different points

Question 11

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 12

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?

Accepted Answer

A)  a power station that uses uranium 308 to produce electrical energy 
B)  a metals trader who stockpiles and sells actual physical quantities of uranium 308 
C)  a speculator who buys and sells uranium 308 on the market without ever using the metal 
D)  All buyers and sellers would have the same value for 250 pounds of uranium 308. 
A)  a power station that uses uranium 308 to produce electrical energy 
B)  a metals trader who stockpiles and sells actual physical quantities of uranium 308 
C)  a speculator who buys and sells uranium 308 on the market without ever using the metal 
D)  All buyers and sellers would have the same value for 250 pounds of uranium 308.

Question 13

Explain the role played by some of the other management disciplines in financial decision making.

Accepted Answer

The role played by some of the other man

Question 14

A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?

Accepted Answer

A)  $56,500 
B)  $45,200 
C)  $113,000 
D)  $79,100 
A)  $56,500 
B)  $45,200 
C)  $113,000 
D)  $79,100

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

Accepted Answer

A)  greater than $2.90 per gallon 
B)  greater than $2.92 per gallon 
C)  greater than $2.94 per gallon 
D)  greater than $2.96 per gallon 
A)  greater than $2.90 per gallon 
B)  greater than $2.92 per gallon 
C)  greater than $2.94 per gallon 
D)  greater than $2.96 per gallon

Question 17

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)  7 years 
B)  8 years 
C)  9 years 
D)  11 years 
A)  7 years 
B)  8 years 
C)  9 years 
D)  11 years

Question 18

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?

Accepted Answer

A)  You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. 
B)  The posted prices of oats can vary widely between grocery stores, even within the same local area. 
C)  Grocery stores mark up the prices of their oats up to make a profit. 
D)  Grocery stores typically sell oats in different packaging, which results in different prices within the same store. 
A)  You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. 
B)  The posted prices of oats can vary widely between grocery stores, even within the same local area. 
C)  Grocery stores mark up the prices of their oats up to make a profit. 
D)  Grocery stores typically sell oats in different packaging, which results in different prices within the same store.

Question 19

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)    
A)    
B)    
C)    
D)

Question 20

What is a competitive market?

Accepted Answer

A)  a market in which goods have a different ask price and bid price 
B)  a market in which a good can be bought and sold at the same price 
C)  a market in which a good is sold at a lower price than that for which it can be bought 
D)  a market in which a good is bought for a lower price than that for which it can be sold 
A)  a market in which goods have a different ask price and bid price 
B)  a market in which a good can be bought and sold at the same price 
C)  a market in which a good is sold at a lower price than that for which it can be bought 
D)  a market in which a good is bought for a lower price than that for which it can be sold

Exam 3: Time Value of Money: an Introduction

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

Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?

A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?

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

Consider the following timeline: If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.

Which of the following statements regarding the cost-benefit analysis is NOT correct?

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one year's time?

If an analyst incorrectly adds cash flows occurring at different points in time, what is the implied assumption in the process?

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?

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?

Explain the role played by some of the other management disciplines in financial decision making.

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

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

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 you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?

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?

What is a competitive market?

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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