Question 1

Honda Motor Company is considering offering a $$2000 rebate on its minivans, lowering the vehicle's price from 30$$,000 to $28,000. If the marketing group estimates that this rebate will increase sales over the next year from 40,000 to 60,000 vehicles, what is the net benefit of the rebate, ignoring the time value of money?

Accepted Answer

$80 million

Question 2

A Czech food producer offers to pay you 2,000,000 CZK in one year for a shipment. The current exchange rate is 25.50 CZK/USD, and the one-year forward rate is 25.40 CZK/USD. If the U.S. risk-free rate is 4% and the Czech risk-free rate is 6%, what is the present value in USD of the payment if you hedge using the forward contract?

Accepted Answer

$78,740.16

Question 3

Suppose you are offered a price of $$3.75 per bushel for wheat. Your firm has a technology that can convert each bushel of wheat into either (a) 1.5 gallons of ethanol and 0.6 gallons of oil, or (b) 1 gallon of ethanol and 0.8 gallons of oil. If the market price of ethanol is 1.75/$$gallon and oil is $1.40/gallon, what is the arbitrage profit per bushel?

Accepted Answer

$0.15

Question 4

Suppose you are offered a choice between a $$600 cash bonus or 630 in $$company stock, which you must hold for at least one year. The stock is currently trading for $630 per share. If you expect the stock price to remain unchanged, what is the present value of the stock bonus if the risk-free rate is 5%?

Accepted Answer

$600

Question 5

You have a choice to buy 5,000 airline miles for $$0.08 per mile. A ticket for 25,000 miles costs 399. $$What is the price per mile if you purchase the miles, and should you buy the miles or the ticket directly?

Accepted Answer

Buy the ticket; price per mile is $0.016

Question 6

Suppose the risk-free interest rate is 4%. What is the present value of $200 to be received in one year?

Accepted Answer

$192.31

Question 7

A Japanese firm can invest $$114 million today to earn 140 $$million in one year. The risk-free interest rate in the United States is 4%, and the risk-free interest rate in Japan is 2%. The current competitive exchange rate is 110 ¥/$1. What is the NPV of this investment in USD?

Accepted Answer

$1.16 million

Question 8

You are offered a risk-free investment opportunity where you can invest $$140,000 today and receive 170$$,000 in one year. If the risk-free interest rate is 10%, what is the NPV of this opportunity?

Accepted Answer

$14,545

Question 9

Suppose a construction firm can invest $$18 million today to build a new government office building. It will take one year to complete, requiring an investment of 20 $$million today and $$8 million in one year. The government will pay 30 $$million in one year and $10 million in two years. If the risk-free interest rate is 10%, what is the NPV of this project?

Accepted Answer

$4.55 million

Question 10

Your computer manufacturing firm must purchase 10,000 keyboards from a supplier. One supplier demands a prepayment of $$100,000 plus 10 $$per keyboard payable in one year. Another supplier will charge $21 per keyboard, also payable in one year. If the risk-free interest rate is 6%, what is the present value of the total cost for each supplier, and which should you use?

Accepted Answer

Supplier 1: $$194,339.62; Supplier 2: 198$$,113.21; choose Supplier 1

Question 11

Suppose Bank One offers a risk-free interest rate of 5% on both savings and loans, and Bank Two offers a risk-free interest rate of 6% on both savings and loans. Which bank would experience a surge in the demand for loans?

Accepted Answer

Bank Two

Question 12

An American Depositary Receipt (ADR) is worth $$6.74 per share and the U.S. dollar risk-free rate is 5%. The share of Nokia on the Helsinki stock exchange trades for €5.00 per share, and the euro risk-free rate is 3%. If the current exchange rate is 1.35$$/€, what is the no-arbitrage price of Nokia in the U.S.?

Accepted Answer

$6.74

Question 13

Suppose you have three projects with the following cash flows and a risk-free interest rate of 10%:
Project A: -$$20,000 today, 22$$,000 in one year
Project B: -$$20,000 today, 25$$,000 in one year
Project C: -$$40,000 today, 50$$,000 in one year
What is the NPV of each project, and which should you choose if you can only select one?

Accepted Answer

A: $$0, B: 2$$,727.27, C: $5,454.55; choose C

Question 14

Suppose a security with a risk-free cash flow of $$150 in one year is priced at 140 $$today. What is the risk-free interest rate?

Accepted Answer

$7.14\%

Question 15

Suppose a security pays $$100 in one year and 100 in $$two years. If the current market price is $182 and the risk-free interest rate is 5%, what is the no-arbitrage price of the security?

Accepted Answer

$182

Question 16

If an ETF currently trades for $$150, but the arbitrage portfolio value is 154$$, what arbitrage opportunity is available?

Accepted Answer

Sell the ETF and buy the arbitrage portfolio

Question 17

Suppose the price of a security is $$1053 when the economy is weak and 1800 $$when the economy is strong. The risk-free interest rate is 4%. What is the expected return if the probability of a strong economy is 60%?

Accepted Answer

42\%

Question 18

Suppose you are considering two securities. Security A has a market price of $$231 and pays 600 in $$one year if the economy is strong, $$0 if weak. Security B has a market price of 346 $$and pays $$600 in one year if the economy is weak, 0 if $$strong. What is the market price of a portfolio of one share of A and one share of B?

Accepted Answer

$577

Question 19

Suppose an Exchange-Traded Fund (ETF) is a security that represents a portfolio of 3 individual stocks: HPO, SHD, and GE. If the current stock prices are HPO: $$62, SHD: 40$$, GE: $58, what is the no-arbitrage price of the ETF?

Accepted Answer

$160

Chapter 3: Financial Decision Making and the Law of One Price: Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards