Question 1

A jewellery manufacturer can trade 800 ounces of silver (market price $22/oz) for 10 ounces of gold (market price $2000/oz) today. What is the net value of this trade?

Accepted Answer

$2,400

Question 2

Which of the following best describes the Valuation Principle?

Accepted Answer

The value of a commodity or asset is determined by its competitive market price.

Question 3

You have won four tickets to a Drake concert (face value $150 each), but you see they sell for $300 each on eBay. You can exchange them for two Weeknd tickets (face value $350 each), which sell for $400 each. What should you do to maximize value?

Accepted Answer

Sell the Drake tickets for $1,200, as this is the highest market value.

Question 4

According to the Law of One Price, which of the following statements is correct?

Accepted Answer

Identical goods must have the same price in competitive markets.

Question 5

A firm can acquire 200 barrels of oil (market price $90/barrel) and 3,000 pounds of copper (market price $3.50/pound) for $25,000. What is the net value of this opportunity?

Accepted Answer

$31,500

Question 6

What is arbitrage?

Accepted Answer

The practice of buying and selling equivalent goods in different markets to profit from price differences without risk.

Question 7

If the interest rate is 7%, what is the future value in one year of $100,000 invested today?

Accepted Answer

$107,000

Question 8

A firm invests $100,000 today and expects to receive $105,000 in one year. If the interest rate is 7%, what is the net value of this investment in one year?

Accepted Answer

-$2,000

Question 9

Which formula correctly calculates the present value (PV) of a future cash flow $C$ received in $n$ years at an interest rate $r$?

Accepted Answer

$PV = \frac{C}{(1+r)^n}$

Question 10

If you want to have $105,000 in one year and the interest rate is 7%, how much do you need to invest today?

Accepted Answer

$98,130.84

Question 11

What is the discount factor for one year at an interest rate $r$?

Accepted Answer

$\frac{1}{1+r}$

Question 12

Sony expects to sell $2$ billion in PlayStation 3 consoles if launched in 2005, or $1.6$ billion if delayed to 2006. If the interest rate is $8\%$, what is the present value in 2005 of the $1.6$ billion received in 2006?

Accepted Answer

$1.48$ billion

Question 13

Which of the following statements about compounding is correct?

Accepted Answer

Compounding involves earning interest on both the original principal and the accumulated interest.

Question 14

What is the future value (FV) of a cash flow $C_0$ invested for $n$ years at an interest rate $r$?

Accepted Answer

$FV = C_0 	imes (1+r)^n$

Question 15

You are considering a Government of Canada bond that will pay $15,000 in 10 years. If the market interest rate is 6% per year, what is the bond worth today?

Accepted Answer

$8,415.07

Question 16

Which of the following is NOT a requirement for a competitive market?

Accepted Answer

Goods can be bought and sold at different prices by different buyers.

Question 17

If $826.45$ is invested today for two years at $10\%$ interest, what will be the value at the end of two years?

Accepted Answer

$1,000.00

Question 18

Which of the following best describes the Principle of No Arbitrage?

Accepted Answer

In competitive markets, prices adjust so that arbitrage opportunities are eliminated.

Question 19

Which of the following is true about comparing and combining cash flows?

Accepted Answer

Cash flows can only be compared or combined if they are at the same point in time.

Chapter 3: The Valuation Principle – Foundation of Financial Decision Making (Fundamentals of Corporate Finance)

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