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19) In a trade with the government of an oil producing nation, a manufacturer will deliver
13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels
of oil, valued at $120 per barrel. What is the net beneit of this trade to the manufacturer?
A) $744,000
B) $1,240,000
C) $992,000
D) $1,488,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
20) A wholesale food retailer is ofered $15.60 per two-layer carton for 5000 cartons of
peaches. The wholesaler can buy peaches from their growers at $13.20 per carton.
Shipping costs $2.40 per carton, for the irst 1000 cartons, and $1.90 per carton for every
carton over that. Will taking this opportunity increase the value of the wholesale food
retailer?
A) No, the costs are $1500 more than the beneits.
B) No, the costs and the beneits are the same.
C) Yes, the costs are $2500 less than the beneits.
D) Yes, the costs are $2000 less than the beneits.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
21) Heavy Duty Company, a manufacturer of power tools, decides to ofer a rebate of $130
on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Duty's
marketers estimate that, as a result of the rebate, sales of this model will increase from
60,000 to 80,000 units next year. The proit margin for Heavy Duty before the rebate is
$180. Based on the given information, is the decision to give the rebate a wise one?
A) No, since costs are $7,800,000 more than beneits.
B) No, since costs are $6,800,000 more than beneits.
C) Yes, since the beneits are $3,400,000 more than the costs.
D) Yes, since the beneits are $7,300,000 more than the costs.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
22)
11
Refer to the table above. An international seafood supplier is ofered 9.52 million yen today
for 1000 pounds of abalone frozen in the shell. One thousand pounds of 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. = 102 yen. What is the value, in U.S. dollars, of the best deal the
international seafood supplier can make?
A) $12,333
B) $14,333
C) $14,833
D) $13,333
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
23) A metal fabrication company is pricing raw supplies of aluminum. The following are the
costs to the company to receive one ton of aluminum from various sources. Which source
ofers the best price for aluminum per ton?
A) 3010 U.S. dollars per ton
B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD
C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL
D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
12
24) You own 1000 shares of Newstar Financial stock, currently trading for $57 per share.
You are ofered 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) -$320
B) -$340
C) -$300
D) $300
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
25) A company intends to install new management software for its warehouse. The
software will cost $47,000 to buy and will cost an additional $148,000 to install and
implement. It is anticipated that it will save the company $44,000 through reductions in
staf and $69,000 in general inventory costs in the irst year after installation. What is the
total beneit to the company in the irst year if they choose to install the software?
A) $56,500
B) $45,200
C) $113,000
D) $79,100
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
26) You have a used CD store. At an estate sale, you can purchase 230 compact discs for
$356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net
beneit of buying the CDs at the estate sale and selling them in your store?
A) $445
B) $545
C) $645
D) $345
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
13
27) Whenever a good trades in a competitive market, the ________ determines the value of
the good.
A) supply
B) price
C) demand
D) cost
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
Use the information for the question(s) below.
Low-Grade Copper Ore $571 per Ton
High-Grade Copper Ore $843 per Ton
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.
28) A mining company is ofering to trade 7,250 tons of low-grade copper ore for 5,000 tons
of high-grade copper ore. Assuming Coloma currently has 5,000 tons of high-grade ore,
what should it do?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14
29) A company that manufactures copper piping is ofering to trade you 5,925 tons of low-
grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have
4,000 tons of high-grade ore, what are the total beneits and added beneits of taking the
trade?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
30) Explain the role played by some of the other management disciplines in inancial
decision making.
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
31) What is one of the main obstacles in cost-beneit analysis?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
32) How can we perform a cost-beneit analysis in case they are occurring in diferent
currencies?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
15
3.2 Market Prices and the Valuation Principle
1) The Law of One Price states that if equivalent goods or securities are traded
simultaneously in diferent competitive markets, they will trade for the same price in each
market.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) If an arbitrage opportunity exists, an investor can act quickly in the hope of making a
risk-free proit.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Which of the following best explains why market prices are useful to a inancial manager
when performing a cost-beneit analysis?
A) They can be used to determine how much an asset can be sold for.
B) They can be used to convert diferent services and commodities into equivalent cash
values which can be compared.
C) They allow all commodities and services to be assigned a ixed and unchanging value.
D) They can be evaluated to determine whether the market in which the manager
exchanges goods and services ofers true value.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16
4) A coin collector treasures his 1969-S doubled die obverse Lincoln cent 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) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent.
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.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
5) 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 $800 per ton, which had been
originally purchased at $750 per ton. Given that the company has no use for the styrene
monomer, and that it would cost the company $5200 to store it, what is the total value of
the 20 tons of styrene monomer to the company?
A) -$5200
B) $0
C) $15,000
D) $16,000
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) A irm has contracted to supply 500,000 gallons of propane fuel for $1.46 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 irm to beneit from breaking
the contract?
A) greater than $2.90 per gallon
B) greater than $2.92 per gallon
C) greater than $2.94 per gallon
D) greater than $2.96 per gallon
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) 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 that
17
of 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.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) Which of the following best describes the valuation principle?
A) It is not possible to compare costs and beneits that occur at diferent points in time, in
diferent currencies, or with diferent risks.
B) The value of a commodity or an asset to a irm or its investors is determined by its
competitive market price. When the value of the beneits exceeds the value of the costs in
terms of market prices, the decision will increase the market value of the irm.
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 diferent markets across the
world, they will trade for the same price.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
18
9) 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 proit.
D) Grocery stores typically sell oats in diferent packaging, which results in diferent prices
within the same store.
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
10) Like other metals, uranium 308 is traded in competitive markets like the New York
Metals Exchange. Which of the following would 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) All buyers and sellers would have the same value for 250 pounds of uranium 308.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) Which of the following statements regarding the Law of One Price is INCORRECT?
A) At any point in time, the price of two equivalent goods trading in diferent competitive
markets will be the same.
B) One useful consequence of the Law of One Price is that when evaluating costs and
beneits to compute a net present value (NPV), we can use any competitive price to
determine a cash value, without checking the price in all possible markets.
C) If equivalent goods or securities trade simultaneously in diferent 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 possible.
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
19
12) Consider the following prices from a McDonald's Restaurant:
Big Mac Sandwich $2.81
Large Coke $1.49
Large Fries $1.14
A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large
fries. Assuming that there is a competitive market for McDonald's food items, at what price
must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and
uphold the Law of One Price?
A) $4.08
B) $4.62
C) $5.44
D) $6.80
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13) Consider the following prices from a McDonald's Restaurant:
Big Mac Sandwich $2.68
Large Coke $1.45
Large Fries $1.13
A McDonald's Big Mac value meal consists of a Big Mac sandwich, 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 $4.59. 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 proit
of $0.67.
B) No, no arbitrage opportunity exists.
C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage proit of
$1.34.
D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage proit of
$0.67.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20
