Question 1

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 Ausback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

Accepted Answer

The answer of You own 1000 shares of Newstar Financial...

Question 2

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

Accepted Answer

The value of money can be converted from one point in time to another using the current interest rate, which helps in calculating the present or future value of money.

Question 3

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 countermoves by competitors. This example illustrates which of the following points about the role of financial managers?

Accepted Answer

The example given in the passage illustrates the complex decision-making process that financial managers must engage in, and the need for input from multiple sources to make informed decisions. It also suggests that financial managers must consider both costs and potential benefits when making decisions, and that it may not always be possible to identify all costs and benefits associated with a decision. However, the passage does not suggest that financial managers have ultimate decision-making authority, as that may depend on the organizational structure and decision-making processes within a particular company.

Question 4

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the future value of this cash flow?

Accepted Answer

The future value of a fixed cash flow received in the future is not affected by changes in the interest rate, as it is already determined.

Question 5

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

Accepted Answer

The present value is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of years. Plugging in the values: PV = $100,000 / (1 + 0.08)^5 = $68,058.32.

Question 6

Use the table for the question(s) below.
Consider the following prices from a McDonald's Restaurant:
$\begin{array} { l l } 
\hline \text { Big Mac } & \$ 2.99 \
\hline \text { Large Coke } & \$ 1.39 \
\hline \text { Large Fries } & \$ 1.09 \
\hline
\end{array}$
-A McDonald's Big Mac value meal consists of a Big Mac, a 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 $4.79. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

Accepted Answer

The answer of Use the table for the question(s) below.
Consider...

Question 7

Sara wants to have $500,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years' time?

Accepted Answer

The correct answer is A.The present value of $500,000 in 20 years at an interest rate of 8% is $107,274. This is the amount that Sara must put in the account now to ensure that she has $500,000 in 20 years' time.

Question 8

$$\begin{array} { | l | l | l | l | l | l | } 
\hline \begin{array} { l } 
\text { Date } \
\text { (years) }
\end{array} & 0 & 1 & 2 & 3 & 4 \
\hline \begin{array} { l } 
\text { Cash } \
\text { Flows }
\end{array} & - \$ 3500 & \$ 1000 & \$ 1000 & \$ 1000 & \$ 1000 \
\hline
\end{array}$$

Accepted Answer

The answer of \[\begin{array} { | l | l |...

Question 9

An investment will pay you $100 in one year and $200 in two years. If the interest rate is 5%, what is the present value of these cash flows?

Accepted Answer

The present value of the cash flows is $276.65. This is calculated by taking the sum of the present values of each cash flow. The present value of the $100 cash flow in one year is $95.24 (100 / (1 + 0.05)^1). The present value of the $200 cash flow in two years is $181.41 (200 / (1 + 0.05)^2). The sum of these present values is $276.65.

Question 10

Which of the following statements is FALSE?

Accepted Answer

Finding the present value (PV) and compounding are not the same. PV involves calculating the current value of a future cash flow while compounding involves calculating the future value of a current cash flow.

Question 11

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 7% per year?

Accepted Answer

The answer of Jeff has the opportunity to receive lump-sum...

Question 12

Which of the following statements regarding the Law of One Price is INCORRECT?

Accepted Answer

The Law of One Price relies on the possibility of arbitrage to ensure that prices converge across markets. If arbitrage is not possible, the law may not hold.

Question 13

What is the future value (FV) of $10,000 in eight years, assuming the interest rate is 10% per year?

Accepted Answer

The future value is calculated using the formula FV = PV * (1 + r)^n, where PV is the present value, r is the interest rate, and n is the number of years. Plugging in the values: FV = $10,000 * (1 + 0.10)^8 = $21,435.89.

Question 14

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?

Accepted Answer

Both decisions require the financial manager to carefully weigh the benefits and costs over time in order to make a sound decision. In the case of the personal decision to buy or rent an apartment, the manager must compare the costs of renting and owning a home while considering any long-term benefits. Similarly, in the professional decision to acquire a stake in a fast growing company, the manager must evaluate the potential benefits of the investment against the costs and risks involved over time.

Question 15

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?

Accepted Answer

The competitive market value is determined by both buying and selling prices. The store's selling price doesn't reflect the market value because they won't buy oats from you at that price.

Question 16

$\begin{array} { l l c c l } 
\text { Country } & \text { Chile } & \text { Iceland } & \text { New Zealand } & \text { South Africa } \
\hline \begin{array} { l } 
\text { Abalone Cost } \
\text { Exchange }
\end{array} & \text { CLP 50,990,000 } & \text { ISK 5,400,000 } & \text { NZD 104,000 } & \text { ZAR 640,000 } \
\text { Rate: } \$ 1 \text { U.S. } = & 585 \text { CLP } & 61 \text { ISK } & 1.3 \text { NZD } & 7.8 \text { ZAR }
\end{array}$
-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 Australia and the other relevant currencies are also shown. In addition, $1 AUD = 105 yen. What is the value of the best deal the international seafood supplier can make, in Australian dollars?

Accepted Answer

The answer of \(\begin{array} { l l c c l...

Question 17

What is the future value (FV) of $60,000 in five years, assuming the interest rate is 5% per year?

Accepted Answer

Using the formula for future value: FV = PV x (1 + r)^n
where PV is the present value, r is the interest rate, and n is the number of periods.

FV = 60,000 x (1 + 0.05)^5
FV = 60,000 x 1.27628
FV = $76,576.89

Therefore, the correct answer is A.

Question 18

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

Accepted Answer

The answer of An investor has the opportunity to buy...

Question 19

Which of the following statements is INCORRECT?

Accepted Answer

The interest rate factor for risk-free cash flows is actually (1 + rf), not (1 - rf).

Question 20

To compute the future value of a cash flow, you mus?

Accepted Answer

To compute the future value of a cash flow, you need to compound it, which means calculating its value at a future point in time by adding the accumulated interest or growth over time to the initial amount. Discounting involves calculating the present value of future cash flows, while doubling and arbitraging have no relevance to computing future value.

Quiz 3: Time Value of Money: an Introduction