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

Question 1

Refer to the table above.An international seafood supplier is offered 9.45 million yen today for 1000 pounds of abalone frozen in the shell.The abalone can be sourced from various countries at the prices shown above.The current market exchange rates between the United States and the other relevant currencies are also shown.In addition,$1 U.S.= 105 yen.What is the value of the best deal the international seafood supplier can make,in U.S.dollars?

A) $5,000
B) $7,000
C) $8,000
D) $10,000
E) $9,450

Answer 1

$10,000

Question 2

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:

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

Answer 2

$773,908

Question 3

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

Answer 3

True

Question 4

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 time 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?

A) Costs and benefits must be in the same terms to be compared.
B) There may be other investments that he can make that will offer even bigger benefits.
C) The investment may have hidden costs that will reduce the amount of benefit he receives.
D) The value of the cash he has today is greater than the value of the cash he may have in the future.
E) Whether he has enough spare cash with which to invest.

Question 5

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.

Question 6

To enable costs and benefits to be compared,they are typically converted into cash value at the time the benefit is received.

Question 7

A company intends to install new management software for its warehouse.The software will cost $50,000 to buy and will cost an additional $150,000 to install and implement.It is anticipated that it will save the company $45,000 through reductions in staff and $65,000 in general inventory costs in the first year after installation.What is the benefit to the company in the first year if they choose to install the software?

A) $45,000
B) $90,000
C) $110,000
D) $180,000
E) $65,000

Question 8

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.
Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you currently have 10,000 Bbls of WTI crude,the added benefit (cost)to you if you take the trade is closest to:

A) ($1400)
B) $1400
C) ($3908)
D) $3908
E) $2508

Question 9

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 be increased.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.This example illustrates which of the following points about the role of financial managers?

A) Real-world decisions are complex and require information from many sources if the decisions are to be valid.
B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision.
C) All of the costs and benefits associated with a decision can never be fully identified.
D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.
E) A financial manager's job is to make decisions on behalf of the firm's investors.

Question 10

A wholesale food retailer is offered $14 per two-layer carton for 5000 cartons of peaches.The wholesaler can buy peaches from its growers at $12.50 per carton.Shipping costs $1.50 per carton,for the first 1000 cartons,and $1.00 per carton for every carton over that.Will taking this opportunity increase the value of the wholesale food retailer?

A) No. The costs are $1,200 more than the benefits.
B) No. The costs and the benefits are the same.
C) Yes. The costs are $1,000 less than the benefits.
D) Yes. The costs are $2,000 less than the benefits.
E) Yes. The costs are $1,500 less than the benefits.

Question 11

You have a used CD store.At an estate sale,you can purchase 260 compact discs for $400.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?

A) $650
B) $400
C) $1050
D) $250
E) $900

Question 12

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:

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

Question 13

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.
Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the total benefit (cost)to you if you take the trade is closest to:

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

Question 14

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

A) Decisions should generate the greatest benefits for the firm.
B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to others.
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.
E) Decisions should be in the strategic competitive interests of the firm.

Question 15

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?

A) $158,000
B) $275,000
C) $1,750,000
D) $4,900,000
E) $5,175,000

Question 16

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 added benefit (cost)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:

A) ($1400)
B) $1400
C) ($3908)
D) $3908
E) $2508

Question 17

A metal fabrication company is pricing raw supplies of aluminium.The following are the costs to the company to receive one tonne of aluminium from various sources.Which source offers the best price for aluminium per tonne?

A) 3,012 Canadian dollars per tonne
B) 3,206 Australian dollars per tonne, with $0.942 CAD = 1 AUD
C) 4,998 Brazilian reals per tonne, with $0.6000 CAD = 1 BRL
D) 121,756 Indian rupees per tonne, with $0.025 CAD = 1 INR
E) 3,000 U.S. dollars per tonne, with $1.015 CAD = 1 US

Question 18

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?

A) -$540
B) -$480
C) -$300
D) $280
E) $600

Question 19

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.
Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS)crude oil for 10,000 Bbls of West Texas Intermediate (WTI)crude oil.Assuming you currently have 10,000 Bbls of WTI crude,what should you do?

A) Sell 10,00 Bbls WTI crude on the market and use the proceeds to purchase and refine ANS crude.
B) Do nothing, refine the 10,000 Bbls of WTI crude.
C) Trade the 10,000 Bbls WTI crude with the other refiner and refine the 10,150 Bbls of ANS crude.
D) Trade the 10,000 Bbls WTI crude with the other refiner and then sell the 10,150 Bbls of ANS crude.
E) Purchase 10,150 Bbls of ANS on the market and refine both the ANS and WTI crude.

Question 20

Heavy Duty Inc.,a manufacturer of power tools,decides to offer a rebate of $100 on its 16-inch mid-range chain saw,which currently has a retail price $470.Heavy Duty's marketers estimate that,as a result of the rebate,sales of this model will increase from 50,000 to 80,000 units next year.The profit margin for Heavy Duty before the rebate is $150.Based on the given information,is the decision to give the rebate a wise one?

A) No, since costs are $5.0 million more than benefits.
B) No, since costs are $3.5 million more than benefits.
C) Yes, since the benefits are $0.2 million more than the costs.
D) Yes, since the benefits are $1.5 million more than the costs.
E) Yes, since the benefits are $0.5 million more than the costs.

Question 21

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

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.

Question 22

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

Question 23

Like other metals,uranium 308 is traded in competitive markets like the New York Metals Exchange.Which of the following would most likely value a given weight of uranium 308 the most?

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) a uranium mining company
E) All buyers and sellers would have the same value for 250 pounds of uranium.

Question 24

An elderly relative offers to sell you her used 1958 Cadillac Eldorado for $50,000.You note that very similar cars are selling on the open market for $90,000.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?

A) $90,000, since the Cadillac could be sold for this price.
B) $50,000, since the Cadillac could be bought for this price.
C) $40,000, since this is the difference between purchase and resale price of the Cadillac.
D) $35,000, since this is the value of the car that you really want to buy.
E) -$15,000, since this would cost that much more than the car that you really want to buy.

Question 25

What is one of the main obstacles in cost benefit analysis?

Question 26

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 5925 tons of low-grade copper ore for 4000 tons of high-grade copper ore.Assuming you currently have 4000 tons of high-grade ore,what are the total benefits and added benefits of taking the trade?

Question 27

A coin collector treasures his 1969-S Lincoln cent with a doubled die obverse because he found it in his pocket change,rather than purchasing it.He can sell it on the open market for $35,000,but would only sell it for at least twice that price,due to its sentimental value to him.It is anticipated that the coin will increase in market value in the foreseeable future.What is the value of the coin?

A) Nothing, since he paid nothing to obtain the coin.
B) $35,000, since this is the price that the coin would fetch on the open market.
C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value.
D) At least $35,000, since the value of the coin will increase in the future.
E) $0.01 since this is the face value of the coin.

Question 28

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 mining company is offering to trade you 7250 tons of low-grade copper ore for 5000 tons of high-grade copper ore.Assuming you currently have 5000 tons of high-grade ore,what should you do?

Question 29

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

Question 30

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.

Question 31

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels,if it also buys 5,000 bushels of wheat at $16.00 per bushel.However,the manufacturer does not use any barley in its products,and currently needs 20,000 bushels of wheat.If the current market price of barley is $3.80 per bushel,and wheat is $15.80 per bushel,should this opportunity be taken,and why?

A) Because the company has no need of barley, the opportunity should not be taken.
B) Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken.
C) Because the value of the opportunity is positive, the opportunity should be taken.
D) Because the value of the opportunity is negative the opportunity should not be taken.
E) Because the company will have to pay more for wheat, the opportunity should not be taken.

Question 32

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

A) supply
B) price
C) demand
D) cost
E) quantity

Question 33

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

A) greater than $2.97 per gallon
B) greater than $2.98 per gallon
C) greater than $2.99 per gallon
D) greater than $3.00 per gallon
E) greater than $3.01 per gallon

Question 34

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?

A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.
B) The posted prices of oats can vary widely between grocery stores, even within the same local area.
C) Grocery stores mark up the prices of their oats up to make a profit.
D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.
E) You can only by the oats in the quantities specified by the grocery store.

Question 35

Which of the following is an example of arbitrage?

A) 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.
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%.
C) 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.
D) 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%.
E) An investor buys palladium today hoping the price will increase and it can be sold for a profit.

Question 36

A company decides to close down its plastics division.It has on hand 20 tons of styrene monomer,a raw material that has a market price of $700 per ton,which had been originally purchased at $650 per ton.Given that the company has no use for the styrene monomer,and that it would cost the company $5000 to store it,what is the value of the 20 tons of styrene monomer to the company?

A) -$5000
B) $0
C) $13,000
D) $14,000
E) $19,000

Question 37

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

Question 38

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

A) They can be used to determine how much an asset can be sold for.
B) They can be used to convert different services and commodities into equivalent cash values which can be compared.
C) They allow all commodities and services to be assigned a fixed and unchanging value.
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.
E) They can be used to determine the correct value for assets to be purchased.

Question 39

What is a competitive market?

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 40

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

Question 41

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?

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

Question 42

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?

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

Question 43

On Commodity Exchange A it is possible to buy and sell crude oil at $117 per barrel,while on Commodity Exchange B crude oil can be bought and sold at $118 per barrel.If there are transaction costs of 1% when buying or selling on either exchange,what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?

A) -$1.35
B) -$0.17
C) $0.99
D) $1.01
E) $1.00

Question 44

You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer.You learn that the Dial-o-matic sells for $29.95.But wait,there's more! Ronco is also including in this deal a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95.Assuming that there is a competitive market for Ronco items,at what price must Ronco be selling this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?

Question 45

Why are arbitrage opportunities short-lived?

A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down.
B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values.
C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
E) Investors will stop taking advantage of them for fear of being caught by regulators.

Question 46

What role do transaction costs play in establishing the Law of One Price?

Question 47

Suppose the price of gold in New York is $1750 per ounce,while the price of gold in London is $1760.If there are transaction costs of 0.5% when buying or selling in either market,what is the net effect of buying one ounce of gold in New York and selling it in London?

A) $1.25
B) $1.20
C) -$7.55
D) -$1.25
E) $10.00

Question 48

Which of the following statements best describes the effect of transaction costs on arbitrage and the Law of One Price?

A) As long as the market is competitive, transaction costs will have no effect.
B) When there are transaction costs, there will never be arbitrage opportunities.
C) Prices can deviate but not by more than the amount of the transaction costs.
D) Prices will be different in different competitive markets, and this difference usually exceeds the amount of the transaction costs.
E) Arbitrage possibilities increase in the presence of transaction costs.

Question 49

A backhoe can dig 150 feet of trench per hour and costs $500 per hour to hire and operate.A ditch digger can dig six feet of trench per hour.Based on this information,what is the most a ditch digger can charge per hour when digging ditches?

A) $20 per hour
B) $25 per hour
C) $3.33 per hour
D) $83.33 per hour
E) $500 per hour

Question 50

How does arbitrage help the Law of One Price?

Question 51

Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Diwali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?

A) $1,560,000
B) $2,600,000
C) $1,040,000
D) $9,040,000
E) $12,000,000

Question 52

Walgreen Company (NYSE: WAG)is currently trading at $48.75 on the NYSE.Walgreen 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) 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.
E) Yes, buy on NYSE and sell on NASDAQ, make $250.

Question 53

Which of the following statements regarding the Law of One Price is most accurate?

A) At any point in time, the price of two equivalent goods trading in different competitive markets is expected to be different.
B) One consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we must check the price in all possible markets.
C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets.
D) An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.
E) Different goods trading simultaneously in the same competitive market will trade for different prices.

Question 54

The exchange rates in New York are ¥1000 = $9 and the exchange rates in Tokyo are ¥171 = $1.5.You incur a transaction fee of 0.1% when buying and selling in each market.You have $1 million dollars with which to purchase foreign currency.What is your maximum potential profit from exploiting the arbitrage opportunity?

A) $0
B) $0.024 million
C) $0.026 million
D) -$0.024 million
E) -$0.026 million

Question 55

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.Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79.Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.68.
B) No, no arbitrage opportunity exists.
C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.09.
D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.68.
E) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $1.09.

Question 56

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

A) No., because the market for a used XBOX One is not the same as the market for a new XBOX One.
B) No, because the market for a used XBOX One is a competitive market.
C) Yes, because the market for a used XBOX One is a competitive market.
D) Yes, because the market for a used XBOX One is not the same as the market for a new XBOX One.
E) No, because Kijiji is not a competitive market.

Question 57

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?

A) a surge in conversion of dollars to yen in Tokyo
B) a surge in conversion of euros to yen in Tokyo
C) a surge in conversion of euros to dollars in Paris
D) a surge in conversion of euros to yen in Paris
E) a drop in conversion of euros to dollars in Tokyo

Question 58

"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?

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 59

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 likely outcome of such a situation?

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

Question 60

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?

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.

Question 61

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

Question 62

You decide to deposit $5000 in a bank account paying 3.5% interest.What is the value of your savings in one year?

A) $5,175
B) $4,831
C) $5,000
D) $5,500
E) $5,350

Question 63

You decide to deposit your money in a bank account paying 6% interest.If the value of your savings grows to $3,180 in one year's time,how much money did you deposit?

A) $3,180
B) $3,371
C) $3,000
D) $3,100
E) $3,080

Question 64

What is one of the prerequisite conditions for the Valuation Principle to work?

Question 65

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?

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

Question 66

If the risk-free rate of interest (rf)is 6%,then you should be indifferent between receiving $250 in one year or

A) $235.85 today.
B) $250.00 today.
C) $265.00 today.
D) $244.00 today.
E) $256.00 today.

Question 67

Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE.Advanced Micro Devices is also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50.Does an arbitrage opportunity exist and,if so,how would you exploit it and how much would you make on a block trade of 1000 shares?

Question 68

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

A) using the current exchange rate
B) using a cost benefit analysis
C) using the Valuation Principle
D) using the current interest rate
E) using competitive market prices

Question 69

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

A) 0.05
B) 0.95
C) 1.05
D) 1.50
E) 0.24

Question 70

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?

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 71

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?

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 72

The one-year discount factor is the discount at which we can purchase money in the future.

Question 73

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

A) 0.05
B) 0.95
C) 1.05
D) 1.50
E) 0.24

Question 74

If the risk-free rate of interest (rf)is 6%,then you should be indifferent between receiving $250 today or

A) $235.85 in one year.
B) $250.00 in one year.
C) $265.00 in one year.
D) $244.00 in one year.
E) $256.00 in one year.

Question 75

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?

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 76

You have made an investment which will pay you $10,485 in one year's time.If the discount factor is 0.9728,what is the present value of your investment?

A) $10,200
B) $10,000
C) $10,485
D) $10,778
E) $10,400

Question 77

Owen expects to receive $20,000 at the end of next year from a trust fund.If a bank loans money at an interest rate of 7.5%,how much money can he borrow from the bank on the basis of this information?

A) $11,428
B) $15,000
C) $18,605
D) $21,500
E) $20,000

Question 78

You decide to $10,000 in a bank account.If the value of your savings grows to $10,200 in one year's time,what is the interest rate on your savings?

A) 5%
B) 4%
C) 3%
D) 2%
E) 1%

Question 79

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

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 80

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,realized 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?

A) He will earn $600,000 less if he releases the wine now.
B) He will earn $200,000 more if he releases the wine now.
C) He will earn $107,000 less if he releases the wine now.
D) He will earn $80,000 more if he releases the wine now.
E) He will earn $500,000 less if he releases the wine now.