Question 1

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 2

Walgreens Company (NYSE: WAG)is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares?

Accepted Answer

A) No, no arbitrage opportunity exists. 
B) Yes, buy on NASDAQ and sell on NYSE, make $25. 
C) Yes, buy on NYSE and sell on NASDAQ, make $25. 
D) Yes, buy on NASDAQ and sell on NYSE, make $250. 
A) No, no arbitrage opportunity exists. 
B) Yes, buy on NASDAQ and sell on NYSE, make $25. 
C) Yes, buy on NYSE and sell on NASDAQ, make $25. 
D) Yes, buy on NASDAQ and sell on NYSE, make $250.

Question 3

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 4

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 5

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

Accepted Answer

A) $4.08 
B) $4.62 
C) $5.44 
D) $6.80 
A) $4.08 
B) $4.62 
C) $5.44 
D) $6.80

Question 6

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 7

Use the information for the question(s)below.   Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high-grade copper ore.
-A company that manufactures copper piping is offering to trade you 5,925 tons of low-grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have 4,000 tons of high-grade ore, what are the total benefits and added benefits of taking the trade?

Accepted Answer

Total Benefits
No trade and refine high-

Question 8

What is the future value (FV)of $50,000 in thirty years, assuming the interest rate is 6% per year?

Accepted Answer

A) $32,500.00 
B) $244,098.38 
C) $258,457.10 
D) $287,174.56 
A) $32,500.00 
B) $244,098.38 
C) $258,457.10 
D) $287,174.56

Question 9

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 10

Consider the following timeline:   If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

Accepted Answer

A) $0 
B) $1000 
C) $570 
D) $68 
A) $0 
B) $1000 
C) $570 
D) $68

Question 11

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 12

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

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

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

What is the future value (FV)of $50,000 in thirty years, assuming the interest rate is 6% per year?

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?

Consider the following timeline: If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

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?

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

Filters

Exam 3: Time Value of Money: an Introduction

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

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

What is the future value (FV)of $50,000 in thirty years, assuming the interest rate is 6% per year?

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?

Consider the following timeline: If the current market rate of interest is 7%, then the value as of year 1 is closest to ________.

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?

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

Filters