Question 1

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. B

Question 2

Sellers can make typographical errors when listing items on the online auction site eBay.These items often attract very few bidders.For example,someone listing a Nokia phone as a Nokya phone would have very few potential buyers sent to the incorrectly listed item by eBay's search engines.Some buyers look for items that are mislisted,buy them for a low price,then immediately list them for resale under the correct listing.Why does an arbitrage opportunity exist in this case?

Accepted Answer

A)  eBay's search engine makes it a fundamentally non-competitive market, since sellers do not have the same advantages as buyers. 
B)  Buyers with a greater knowledge of the market than sellers can purchase goods for a discount. 
C)  The same item can be bought and sold on what are essentially two different markets, a market of mislisted items where they sell low and a market of correctly listed items where they sell high. 
D)  The items are, in effect, not equivalent, since the item listed incorrectly will sell, in general, for a lower price than the correctly listed item. 
E)  Sellers deliberately change the spelling to avoid getting caught selling stolen goods. 
A)  eBay's search engine makes it a fundamentally non-competitive market, since sellers do not have the same advantages as buyers. 
B)  Buyers with a greater knowledge of the market than sellers can purchase goods for a discount. 
C)  The same item can be bought and sold on what are essentially two different markets, a market of mislisted items where they sell low and a market of correctly listed items where they sell high. 
D)  The items are, in effect, not equivalent, since the item listed incorrectly will sell, in general, for a lower price than the correctly listed item. 
E)  Sellers deliberately change the spelling to avoid getting caught selling stolen goods. A

Question 3

Use the table for the question(s) below.
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 fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?

Accepted Answer

A)  $4.08 
B)  $4.38 
C)  $5.47 
D)  $5.77 
E)  $5.00 
A)  $4.08 
B)  $4.38 
C)  $5.47 
D)  $5.77 
E)  $5.00 C

Question 4

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 total benefits 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)  $730,600 
B)  $770,000 
C)  $771,400 
D)  $773,908 
E)  $775,000 
A)  $730,600 
B)  $770,000 
C)  $771,400 
D)  $773,908 
E)  $775,000

Question 5

You are scheduled to receive $10,000 in one year.An increase 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 rise 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 rise significantly.

Question 6

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 just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:

Accepted Answer

A)  $730,600 
B)  $770,000 
C)  $771,400 
D)  $773,908 
E)  $775,000 
A)  $730,600 
B)  $770,000 
C)  $771,400 
D)  $773,908 
E)  $775,000

Question 7

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year.If the market interest rate is 8% over the same period,should this investment be made?

Accepted Answer

A)  No, because the investment will yield $6240 less than putting the money in a bank. 
B)  Yes, because the investment will yield $2360 more than putting the money in a bank. 
C)  Yes, because the investment will yield $4280 more than putting the money in a bank. 
D)  Yes, because the investment will yield $7360 more than putting the money in a bank. 
E)  Yes, because the investment will yield $14,640 more than putting the money in a bank. 
A)  No, because the investment will yield $6240 less than putting the money in a bank. 
B)  Yes, because the investment will yield $2360 more than putting the money in a bank. 
C)  Yes, because the investment will yield $4280 more than putting the money in a bank. 
D)  Yes, because the investment will yield $7360 more than putting the money in a bank. 
E)  Yes, because the investment will yield $14,640 more than putting the money in a bank.

Question 8

Why should interest rates be generally positive?

Accepted Answer

An investor should be compensa

Question 9

What is a competitive market?

Accepted Answer

A)  a market in which goods can be bought at the ask price and sold at 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 
E)  a market in which buyers do not have to shop around for the cheapest price 
A)  a market in which goods can be bought at the ask price and sold at 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 
E)  a market in which buyers do not have to shop around for the cheapest price

Question 10

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 11

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 12

Samantha has holdings of 250 troy ounces of platinum,currently valued at $815 dollars per ounce.She estimates that the price of platinum will rise to $850 per ounce in the next year.If the interest rate is 8%,should she sell the platinum today?

Accepted Answer

A)  Yes, as the difference between selling now and selling in one year is $7550 dollars one year from now. 
B)  Yes, as the difference between selling now and selling in one year is $6991 dollars one year from now. 
C)  Yes, as the difference between selling now and selling in one year is $5513 dollars one year from now. 
D)  No, as the difference between selling now and selling in one year is -$6988 dollars one year from now. 
E)  No, the difference between selling now and selling in one year is -$8750 dollars one year from now. 
A)  Yes, as the difference between selling now and selling in one year is $7550 dollars one year from now. 
B)  Yes, as the difference between selling now and selling in one year is $6991 dollars one year from now. 
C)  Yes, as the difference between selling now and selling in one year is $5513 dollars one year from now. 
D)  No, as the difference between selling now and selling in one year is -$6988 dollars one year from now. 
E)  No, the difference between selling now and selling in one year is -$8750 dollars one year from now.

Question 13

What is the present value (PV)of $1 million received 100 years from now,assuming the interest rate is 5% per year?

Accepted Answer

A)  $10,000 
B)  $7,604 
C)  $9,524 
D)  $11,114 
E)  $112 
A)  $10,000 
B)  $7,604 
C)  $9,524 
D)  $11,114 
E)  $112

Question 14

"If equivalent investment opportunities trade simultaneously in different competitive markets,then they must trade for the same price in both markets." What do we call the above statement?

Accepted Answer

A)  the Net Present Value rule 
B)  the Law of One Price 
C)  the Valuation Principle 
D)  the time value of money 
E)  an arbitrage opportunity 
A)  the Net Present Value rule 
B)  the Law of One Price 
C)  the Valuation Principle 
D)  the time value of money 
E)  an arbitrage opportunity

Question 15

Suppose that Bondi Inc.is a holding company that owns both Pizza Hut and KFC franchised restaurants.If the value of Bondi is $130 million,and the Pizza Hut franchises are worth $70 million,then what is the value of the KFC franchises?

Accepted Answer

A)  $60 million 
B)  $70 million 
C)  $130 million 
D)  $200 million 
E)  $50 million 
A)  $60 million 
B)  $70 million 
C)  $130 million 
D)  $200 million 
E)  $50 million

Question 16

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?

Accepted Answer

A)  $305.00 
B)  $285.71 
C)  $276.65 
D)  258.32 
E)  $272.11 
A)  $305.00 
B)  $285.71 
C)  $276.65 
D)  258.32 
E)  $272.11

Question 17

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 18

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. 
E)  first find the present value. 
A)  discount it. 
B)  compound it. 
C)  double it. 
D)  arbitrage it. 
E)  first find the present value.

Question 19

What is the future value (FV)of $100 in 30 years,assuming the interest rate is 8% per year?

Accepted Answer

A)  $102 
B)  $3,240 
C)  $1,800 
D)  $1,006 
E)  $1,080 
A)  $102 
B)  $3,240 
C)  $1,800 
D)  $1,006 
E)  $1,080

Question 20

Stella deposits $5000 in a savings account at a bank that offers interest of 5.5% on such accounts.What is the value of the money in her savings account in one year's time?

Accepted Answer

A)  $4739 
B)  $5135 
C)  $5275 
D)  $7750 
E)  $5000 
A)  $4739 
B)  $5135 
C)  $5275 
D)  $7750 
E)  $5000

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

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

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

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year.If the market interest rate is 8% over the same period,should this investment be made?

Why should interest rates be generally positive?

What is a competitive market?

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

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

Samantha has holdings of 250 troy ounces of platinum,currently valued at $815 dollars per ounce.She estimates that the price of platinum will rise to $850 per ounce in the next year.If the interest rate is 8%,should she sell the platinum today?

What is the present value (PV)of $1 million received 100 years from now,assuming the interest rate is 5% per year?

"If equivalent investment opportunities trade simultaneously in different competitive markets,then they must trade for the same price in both markets." What do we call the above statement?

Suppose that Bondi Inc.is a holding company that owns both Pizza Hut and KFC franchised restaurants.If the value of Bondi is $130 million,and the Pizza Hut franchises are worth $70 million,then what is the value of the KFC franchises?

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?

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?

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

What is the future value (FV)of $100 in 30 years,assuming the interest rate is 8% per year?

Stella deposits $5000 in a savings account at a bank that offers interest of 5.5% on such accounts.What is the value of the money in her savings account in one year's time?

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