Question 1

You see on Kijiji that a used XBOX One sells for $100 and a new XBOX One sells for $300.Is this an arbitrage opportunity?

Accepted Answer

A)  No., because the market for a used XBOX One is not the same as the market for a new XBOX One. 
B)  No, because the market for a used XBOX One is a competitive market. 
C)  Yes, because the market for a used XBOX One is a competitive market. 
D)  Yes, because the market for a used XBOX One is not the same as the market for a new XBOX One. 
E)  No, because Kijiji is not a competitive market.

Question 2

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

Question 3

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. 
E)  Investors will stop taking advantage of them for fear of being caught by regulators.

Question 4

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?

Accepted Answer

A)  a surge in conversion of dollars to yen in Tokyo 
B)  a surge in conversion of euros to yen in Tokyo 
C)  a surge in conversion of euros to dollars in Paris 
D)  a surge in conversion of euros to yen in Paris 
E)  a drop in conversion of euros to dollars in Tokyo

Question 5

Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Diwali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?

Accepted Answer

A)  $1,560,000 
B)  $2,600,000 
C)  $1,040,000 
D)  $9,040,000 
E)  $12,000,000

Question 6

Dollar amounts received at different points in time cannot be compared in absolute terms.

Accepted Answer

A) True 
 B)False

Question 7

A tenant wants to lease a building for $48,000 per year.She signs a five-year rental agreement that states that she will pay $24,000 every six months for the next five years.Which of the following is the timeline for her rental payments,assuming she makes the first payment immediately?

Accepted Answer

A)   
B)   
C)   
D)   
E)

Question 8

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. 
E)  You can only by the oats in the quantities specified by the grocery store.

Question 9

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 $700 per ton,which had been originally purchased at $650 per ton.Given that the company has no use for the styrene monomer,and that it would cost the company $5000 to store it,what is the value of the 20 tons of styrene monomer to the company?

Accepted Answer

A)  -$5000 
B)  $0 
C)  $13,000 
D)  $14,000 
E)  $19,000

Question 10

Like other metals,uranium 308 is traded in competitive markets like the New York Metals Exchange.Which of the following would most likely 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)  a uranium mining company 
E)  All buyers and sellers would have the same value for 250 pounds of uranium.

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

In order to distinguish between inflows and outflows,different colours are assigned to each of these cash flows when constructing a timeline.

Accepted Answer

A) True 
 B)False

Question 13

If $1 million is invested at 6% per year,in approximately how many years will the investment double?

Accepted Answer

A)  10.1 
B)  11.9 
C)  12.9 
D)  15 
E)  8.7

Question 14

Why should you approach every problem by drawing a timeline?

Accepted Answer

A)  Timelines allow you to quickly sum cash flows over time. 
B)  Timelines eliminate the majority of flawed financial decisions. 
C)  Timelines can be used to schedule events which are yet to occur. 
D)  Timelines identify events in a transaction or investment that might otherwise be easily overlooked. 
E)  Timelines give present values at each time period.

Question 15

An elderly relative offers to sell you her used 1958 Cadillac Eldorado for $50,000.You note that very similar cars are selling on the open market for $90,000.You don't care for classic cars and would rather buy a new Ford Explorer for $35,000.What is the net value of buying the Cadillac?

Accepted Answer

A)  $90,000, since the Cadillac could be sold for this price. 
B)  $50,000, since the Cadillac could be bought for this price. 
C)  $40,000, since this is the difference between purchase and resale price of the Cadillac. 
D)  $35,000, since this is the value of the car that you really want to buy. 
E)  -$15,000, since this would cost that much more than the car that you really want to buy.

Question 16

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 Bbls of WTI crude,the added benefit (cost)to you if you were to sell the 10,000 Bbls 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 
E)  $2508

Question 17

Which of the following statements is correct?

Accepted Answer

A)  The process of moving a value or cash flow forward in time is known as discounting. 
B)  The effect of earning interest on interest is known as compound interest. 
C)  It is possible to compare or combine values at different points in time. 
D)  A dollar in the future is worth more than a dollar today. 
E)  Calculating the value of a future cash flow at an earlier point in time is known as compounding.

Question 18

Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?

Accepted Answer

A)  $11,428 
B)  $15,000 
C)  $18,605 
D)  $21,500 
E)  $20,000

Question 19

-Refer to the table above.An international seafood supplier is offered 9.45 million yen today for 1000 pounds of abalone frozen in the shell.The abalone can be sourced from various countries at the prices shown above.The current market exchange rates between the United States and the other relevant currencies are also shown.In addition,$1 U.S.= 105 yen.What is the value of the best deal the international seafood supplier can make,in U.S.dollars?

Accepted Answer

A)  $5,000 
B)  $7,000 
C)  $8,000 
D)  $10,000 
E)  $9,450

Question 20

If the one-year discount factor is equal to 0.90909,the interest must be equal to:

Accepted Answer

A)  5.0% 
B)  9.1% 
C)  9.5% 
D)  10.0% 
E)  10.5%

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

You see on Kijiji that a used XBOX One sells for $100 and a new XBOX One sells for $300.Is this an arbitrage opportunity?

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

Why are arbitrage opportunities short-lived?

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?

Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Diwali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?

Dollar amounts received at different points in time cannot be compared in absolute terms.

A tenant wants to lease a building for $48,000 per year.She signs a five-year rental agreement that states that she will pay $24,000 every six months for the next five years.Which of the following is the timeline for her rental payments,assuming she makes the first payment immediately?

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?

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

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

In order to distinguish between inflows and outflows,different colours are assigned to each of these cash flows when constructing a timeline.

If $1 million is invested at 6% per year,in approximately how many years will the investment double?

Why should you approach every problem by drawing a timeline?

An elderly relative offers to sell you her used 1958 Cadillac Eldorado for $50,000.You note that very similar cars are selling on the open market for $90,000.You don't care for classic cars and would rather buy a new Ford Explorer for $35,000.What is the net value of buying the Cadillac?

Which of the following statements is correct?

Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?

If the one-year discount factor is equal to 0.90909,the interest must be equal to: