Question 1

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 LEAST likely outcome of such a situation?

Accepted Answer

The Colonial Bank offers a higher interest rate on loans compared to the State Bank, making it less attractive for borrowers, so a surge in demand for loans at Colonial Bank is least likely.

Question 2

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?

Accepted Answer

The net benefit is the difference between the selling price and the purchase price. The selling price is 260 CDs x $2.50/CD = $650. The purchase price is $400. Therefore, the net benefit is $650 - $400 = $250.

Question 3

Whenever a good trades in a competitive market, th?

Accepted Answer

In a competitive market, the price of a good is determined by the forces of supply and demand. Therefore, the correct answer is price (option D).

Question 4

Why are arbitrage opportunities short-lived?

Accepted Answer

Once investors take advantage of the opportunity, prices will adjust to eliminate the arbitrage opportunity and ensure buying and selling prices are equal. This process is relatively fast, leading to short-lived opportunities. Options A, B, and D are not accurate explanations for why arbitrage opportunities are short-lived.

Question 5

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

Accepted Answer

The Valuation Principle states that 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. This statement incorporates the idea of opportunity cost, as well as the concept of making decisions based on comparing costs and benefits in terms of market prices. Option B is incorrect because it suggests that costs and benefits cannot be compared across time, currency, or risk, which is not true. Option C is incorrect because it describes the Law of One Price, which is related but not the same as the Valuation Principle. Option D is incorrect because it only relates to the market interest rate and does not address the valuation of commodities or assets.

Question 6

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

Accepted Answer

The firm is contracted to supply propane at $1.49 million for 500,000 gallons, which is $2.98 per gallon. To benefit from breaking the contract, the market price must be greater than $2.98 per gallon.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A dollar in the future is worth less than a dollar today due to the time value of money, which accounts for potential earning capacity and inflation.

Question 8

Which of the following is an example of arbitrage?

Accepted Answer

Arbitrage involves taking advantage of price differences between two or more markets. In this case, the investor is buying palladium at a lower price in one country and selling it at a higher price in another country, thereby profiting from the price differential. The other options are not examples of arbitrage, as they involve taking positions based on expectations of price movements or interest rate changes.

Question 9

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 of $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?

Accepted Answer

The answer of Heavy Duty Inc., a manufacturer of power...

Question 10

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

Accepted Answer

Market prices can be used to convert different services and commodities into equivalent cash values which can be compared, and this is essential in performing cost-benefit analysis.

Question 11

What is the present value (PV) of $80,000 received ten years from now, assuming the interest rate is 5% per year?

Accepted Answer

The answer of What is the present value (PV) of...

Question 12

A company decides to close down its plastics division. It has on hand 20 tonnes of styrene monomer, a raw material that has a market price of $700 per tonne, which had been originally purchased at $650 per tonne. 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 tonnes of styrene monomer to the company?

Accepted Answer

The value of the styrene monomer is its market price minus storage costs. The market value is 20 tonnes * $700 = $14,000. Since the company has no use for it, the value is $14,000.

Question 13

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

Accepted Answer

The answer of Like other metals, uranium 308 is traded...

Question 14

Samantha has holdings of 250 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?

Accepted Answer

The difference between selling now and selling in one year is $7550 dollars today. This is calculated as follows:Selling now: 250 ounces * $815 per ounce = $203,750Selling in one year: 250 ounces * $850 per ounce = $212,500Difference: $212,500 - $203,750 = $7550The interest rate is 8%, so the present value of the $7550 difference is $7550 / (1 + 0.08) = $6991. Therefore, Samantha should sell the platinum today.

Question 15

If $15,000 is invested at 10% per year, in approximately how many years will the investment double?

Accepted Answer

The Rule of 72 is a simple way to estimate the number of years required to double the investment at a given annual rate of return. By dividing 72 by the annual interest rate (10%), we get approximately 7.2 years, which is closest to option A (7.3 years).

Question 16

$$\begin{array} { | l | l | l | l | l | l | l | } 
\hline \begin{array} { l } 
\text { Date } \
\text { (Months) }
\end{array} & 0 & 1 & 2 & 3 & 4 & 5 \
\hline \begin{array} { l } 
\text { Cash } \
\text { Flows }
\end{array} & - \$ 250 & - \$ 250 & - \$ 250 & - \$ 250 & - \$ 250 & - \$ 250 \
\hline
\end{array}$$

Accepted Answer

The cash flows are negative $250 for each of the six months, indicating payments made each month.

Question 17

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

Accepted Answer

In most investment projects, costs are incurred upfront, and benefits are realized in the future. The time value of money accounts for the fact that money today is worth more than the same amount in the future due to its potential earning capacity.

Question 18

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

Accepted Answer

When a bond is underpriced, the arbitrage strategy involves buying the bond and selling some of the proceeds. This is because the bond is expected to increase in price, resulting in a profit for the arbitrageur. Selling the bond and investing the proceeds would result in a loss if the bond price increased.

Question 19

An elderly relative offers to sell you their used 1959 Jaguar Mark 9 saloon 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 Subaru Outback for $35,000. What is the net value of buying the Jaguar?

Accepted Answer

The net value of buying the Jaguar is the difference between its purchase and resale price, which is $40,000 ($90,000 - $50,000). Since the person does not care for classic cars and wants to buy a new Subaru Outback for $35,000, the Jaguar does not hold any value for them unless they plan to resell it for a profit. Therefore, it is best for them to not buy the Jaguar and go for the Subaru Outback instead.

Question 20

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?

Accepted Answer

The answer of A metal fabrication company is pricing raw...

Quiz 3: Time Value of Money: an Introduction