Exam 3: Time Value of Money: an Introduction

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?

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 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now?

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

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 bbl of WTI crude, the added benefit (cost) to you if you were to sell the of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.

If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur?

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?

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

Costs and benefits must be put in common terms if they are to be compared.

Explain the role played by some of the other management disciplines in financial decision making.

How can we convert the value of money from one point in time to another?

Consider the following timeline: If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________.

Use the information for the question(s) below. As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you of Alaska North Slope (ANS) crude oil for of West Texas Intermediate (WTI) crude oil. Assuming you currently have of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________.

Whenever a good trades in a competitive market, the price determines the value of the good.

Which of the following statements is INCORRECT based on the time value of money?

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

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

What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year?

Consider the following timeline: If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________.

If $432 invested today yields $450 in a year's time, what is the discount factor?