Exam 3: Time Value of Money: an Introduction

A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision?

How can we perform a cost-benefit analysis in case they are occurring in different currencies?

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

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?

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?

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year?

If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________.

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 is FALSE about valuing cash at different points in time?

What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year?

An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. 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?

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

What is a competitive market?

"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?

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.

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?

Which of the following is an example of arbitrage?

Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information?

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate?