Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Finding the present value (PV)and compounding are the same. 
B) The equivalent value of two cash flows at two different points in time is sometimes referred to as the 'time value' of money. 
C) A dollar today and a dollar in one year are not equivalent. 
D) 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. 
A) Finding the present value (PV)and compounding are the same. 
B) The equivalent value of two cash flows at two different points in time is sometimes referred to as the 'time value' of money. 
C) A dollar today and a dollar in one year are not equivalent. 
D) 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.

Question 2

Consider the following timeline:   If the current market rate of interest is 8%, then the value as of year 1 is closest to:

Accepted Answer

A) $540 
B) $1 003 
C) $0 
D) $77 
A) $540 
B) $1 003 
C) $0 
D) $77

Question 3

A firm has contracted to supply 500 000 gallons of propane fuel for $1.49 million to the local council. The council 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 $2.98 per gallon 
B) greater than $2.99 per gallon 
C) greater than $3.00 per gallon 
D) greater than $2.97 per gallon 
A) greater than $2.98 per gallon 
B) greater than $2.99 per gallon 
C) greater than $3.00 per gallon 
D) greater than $2.97 per gallon

Question 4

In a trade with the government of an oil-producing nation, a manufacturer will deliver 14 Caterpillar D9 tractors, with a value of $350 000 per tractor, and receive 45 000 barrels of oil, valued at $115 per barrel. What is the net benefit of this trade to the manufacturer?

Accepted Answer

A) $275 000 
B) $4 900 000 
C) $1 750 000 
D) $158 000 
A) $275 000 
B) $4 900 000 
C) $1 750 000 
D) $158 000

Question 5

To enable costs and benefits to be compared, they are typically converted into a common currency and common point of time, such as dollars today.

Accepted Answer

A) True 
 B)False

Question 6

A company decides to close down its plastics division. It has on hand 20 tonnes of styrene monomer, a raw material that has a market price of $700 per tonne, which had been originally purchased at $650 per tonne. Given that the company has no use for the styrene monomer, and that it would cost the company $5 000 to store it, what is the value of the 20 tonnes of styrene monomer to the company?

Accepted Answer

A) $14 000 
B) $13 000 
C) $0 
D) -$5 000 
A) $14 000 
B) $13 000 
C) $0 
D) -$5 000

Question 7

Which of the following statements is FALSE?

Accepted Answer

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

Question 8

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

Accepted Answer

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

Question 9

You have a used CD store. At an estate sale, you can purchase 250 compact discs for $500. You believe you could sell the CDs for an average of $2.50 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

Accepted Answer

A) $125 
B) $200 
C) $625 
D) $500 
A) $125 
B) $200 
C) $625 
D) $500

Question 10

What is the present value (PV)of $280 000 received 25 years from now, assuming the interest rate is 4% per year?

Accepted Answer

A) $138 422.76 
B) $140 000.00 
C) $176 452.99 
D) $105 032.70 
A) $138 422.76 
B) $140 000.00 
C) $176 452.99 
D) $105 032.70

Question 11

What is the future value (FV)of $20 000 in four years, assuming the interest rate is 12% per year?

Accepted Answer

A) $32 020.64 
B) $28 292.66 
C) $31 470.39 
D) $17 096.08 
A) $32 020.64 
B) $28 292.66 
C) $31 470.39 
D) $17 096.08

Question 12

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

Accepted Answer

A) The Colonial Bank would experience a surge in demand for loans. 
B) The Colonial Bank would experience a surge in demand for deposits. 
C) The State Bank would experience a surge in demand for loans. 
D) The State Bank would experience a fall in demand for deposits. 
A) The Colonial Bank would experience a surge in demand for loans. 
B) The Colonial Bank would experience a surge in demand for deposits. 
C) The State Bank would experience a surge in demand for loans. 
D) The State Bank would experience a fall in demand for deposits.

Question 13

Another oil refiner is offering to trade you 10 150 tonnes of TOC crude oil for 10 000 tonnes of WAI crude oil. Assuming you currently have 10 000 tonnes of WAI crude, what should you do?

Accepted Answer

A) Do nothing, refine the 10 000 tonnes of WAI crude. 
B) Sell 10 000 tonnes WAI crude on the market and use the proceeds to purchase and refine TOC crude. 
C) Trade the 10 000 tonnes WAI crude with the other refiner and refine the 10 150 tonnes of TOC crude. 
D) Trade the 10 000 tonnes WAI crude with the other refiner and then sell the 10 150 tonnes of TOC crude. 
A) Do nothing, refine the 10 000 tonnes of WAI crude. 
B) Sell 10 000 tonnes WAI crude on the market and use the proceeds to purchase and refine TOC crude. 
C) Trade the 10 000 tonnes WAI crude with the other refiner and refine the 10 150 tonnes of TOC crude. 
D) Trade the 10 000 tonnes WAI crude with the other refiner and then sell the 10 150 tonnes of TOC crude.

Question 14

A backhoe can dig 175 metre of trench per hour and costs $525 per hour to hire and operate. A ditch digger can dig 5 metre of trench per hour. Based on this information, what is the most a ditch digger can charge per hour when digging ditches?

Accepted Answer

A) $13.33 per hour 
B) $25 per hour 
C) $15 per hour 
D) $23.33 per hour 
A) $13.33 per hour 
B) $25 per hour 
C) $15 per hour 
D) $23.33 per hour

Question 15

Sara wants to have $500 000 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 $500 000 in 20 years' time?

Accepted Answer

A) $107 274 
B) $180 884 
C) $231 480 
D) $144 616 
A) $107 274 
B) $180 884 
C) $231 480 
D) $144 616

Question 16

The timeline shown below best describes which of the following situations?

Accepted Answer

A) You make payments of $250 per month for six months. 
B) You receive payments of $250 per month for five months. 
C) You make payments of $250 per month for five months. 
D) You receive payments of $250 per month for six months. 
A) You make payments of $250 per month for six months. 
B) You receive payments of $250 per month for five months. 
C) You make payments of $250 per month for five months. 
D) You receive payments of $250 per month for six months.

Question 17

Which of the following is an example of 'arbitrage'?

Accepted Answer

A) 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. 
B) 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. 
C) 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%. 
D) A metals merchant is offered $108 000 in one year for $100 000 of palladium today, when the interest rate is 10%. 
A) 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. 
B) 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. 
C) 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%. 
D) A metals merchant is offered $108 000 in one year for $100 000 of palladium today, when the interest rate is 10%.

Question 18

A vintner is deciding when to release a vintage of sauvignon blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel-aged for a further year, it will be worth 20% more, though there will be additional costs of $500 000. If the interest rate is 7%, what is the difference in the benefit the vintner will realise if he releases the wine after barrel-aging it for one year or if he releases the wine now?

Accepted Answer

A) He will earn $600 000 less if he releases the wine now. 
B) He will earn $107 000 less if he releases the wine now. 
C) He will earn $80 000 less if he releases the wine now. 
D) He will earn $60 000 more if he releases the wine now. 
A) He will earn $600 000 less if he releases the wine now. 
B) He will earn $107 000 less if he releases the wine now. 
C) He will earn $80 000 less if he releases the wine now. 
D) He will earn $60 000 more if he releases the wine now.

Question 19

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, a 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) $5.47 
B) $5.17 
C) $5.37 
D) $5.072 
A) $5.47 
B) $5.17 
C) $5.37 
D) $5.072

Question 20

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

Accepted Answer

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

Which of the following statements is FALSE?

Consider the following timeline: If the current market rate of interest is 8%, then the value as of year 1 is closest to:

A firm has contracted to supply 500 000 gallons of propane fuel for $1.49 million to the local council. The council 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?

In a trade with the government of an oil-producing nation, a manufacturer will deliver 14 Caterpillar D9 tractors, with a value of $350 000 per tractor, and receive 45 000 barrels of oil, valued at $115 per barrel. What is the net benefit of this trade to the manufacturer?

To enable costs and benefits to be compared, they are typically converted into a common currency and common point of time, such as dollars today.

Which of the following statements is FALSE?

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

You have a used CD store. At an estate sale, you can purchase 250 compact discs for $500. You believe you could sell the CDs for an average of $2.50 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

What is the present value (PV)of $280 000 received 25 years from now, assuming the interest rate is 4% per year?

What is the future value (FV)of $20 000 in four years, assuming the interest rate is 12% per year?

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

Another oil refiner is offering to trade you 10 150 tonnes of TOC crude oil for 10 000 tonnes of WAI crude oil. Assuming you currently have 10 000 tonnes of WAI crude, what should you do?

A backhoe can dig 175 metre of trench per hour and costs $525 per hour to hire and operate. A ditch digger can dig 5 metre of trench per hour. Based on this information, what is the most a ditch digger can charge per hour when digging ditches?

Sara wants to have $500 000 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 $500 000 in 20 years' time?

The timeline shown below best describes which of the following situations?

Which of the following is an example of 'arbitrage'?

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

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro-Forma Analysis

Working Capital Management

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Insurance and Risk Management

Filters

Exam 3: Time Value of Money: an Introduction

Which of the following statements is FALSE?

Consider the following timeline: If the current market rate of interest is 8%, then the value as of year 1 is closest to:

A firm has contracted to supply 500 000 gallons of propane fuel for $1.49 million to the local council. The council 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?

In a trade with the government of an oil-producing nation, a manufacturer will deliver 14 Caterpillar D9 tractors, with a value of $350 000 per tractor, and receive 45 000 barrels of oil, valued at $115 per barrel. What is the net benefit of this trade to the manufacturer?

To enable costs and benefits to be compared, they are typically converted into a common currency and common point of time, such as dollars today.

Which of the following statements is FALSE?

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

You have a used CD store. At an estate sale, you can purchase 250 compact discs for $500. You believe you could sell the CDs for an average of $2.50 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

What is the present value (PV)of $280 000 received 25 years from now, assuming the interest rate is 4% per year?

What is the future value (FV)of $20 000 in four years, assuming the interest rate is 12% per year?

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

Another oil refiner is offering to trade you 10 150 tonnes of TOC crude oil for 10 000 tonnes of WAI crude oil. Assuming you currently have 10 000 tonnes of WAI crude, what should you do?

A backhoe can dig 175 metre of trench per hour and costs $525 per hour to hire and operate. A ditch digger can dig 5 metre of trench per hour. Based on this information, what is the most a ditch digger can charge per hour when digging ditches?

Sara wants to have $500 000 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 $500 000 in 20 years' time?

The timeline shown below best describes which of the following situations?

Which of the following is an example of 'arbitrage'?

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

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bond Valuation

Share Valuation: the Dividend-Discount Model

Investment Decision Rules

Fundamentals of Capital Budgeting

Share Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro-Forma Analysis

Working Capital Management

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Insurance and Risk Management

Filters