Exam
Name___________________________________
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
1) In general, if an action increases a firm’s value by providing benefits with a value greater than any costs
involved, then that action is good for the firm’s investors.
2) To enable costs and benefits to be compared they are typically converted into cash value at the time the
benefit is received.
3) Costs and benefits must be put in common terms if they are to be compared.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
4) Which of the following is the overarching principal that a financial manager should follow when making
decisions?
A) Decisions should generate the greatest benefits for the firm.
B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to
others.
C) Decisions should be on behalf of the firm’s owners that give the greatest benefit to those owners, the
firm’s employees and the firm‘s other stakeholders.
D) Decisions should increase the value of the firm to its investors.
5) A U.S.–based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at
major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed
international events will then raise the domestic sales of the manufacturers products. Which of the following
factors will probably raise the LEAST difficulties when comparing the costs and benefits associated with this
particular decision?
A) The costs will be incurred well before any benefits are likely to be seen.
B) The costs and benefits will be in different currencies.
C) The costs and benefits will not be expressed in common terms.
D) The costs and benefits will be difficult to measure.
6) 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
counter–moves by competitors. This example illustrates which of the following points about the role of
financial managers?
A) Real–world decisions are complex and require information from many sources if the decisions are to be
valid.
B) Determining the costs associated with making a decision is easier than determining the potential
benefits of the decision.
C) All of the costs and benefits associated with a decision can never be fully identified.
D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a
company.
7) 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?
A) Both decisions involve the purchase of assets.
B) Both decisions will be made based on what provides the greatest long–term benefit.
C) Both decisions are vital to the financial health of the decision maker.
D) Both decisions should be made based upon the tradeoff benefits and costs across time.
8) Which of the following statements regarding the valuing of costs and benefits is NOT correct?
A) The first step in evaluating a project is to identify its costs and benefits.
B) In the absence of competitive markets, we can use one–sided prices to determine exact cash values.
C) Competitive market prices allow us to calculate the value of a decision without worrying about the
tastes or opinions of the decision maker.
D) Because competitive markets exist for most commodities and financial assets, we can use them to
determine cash values and evaluate decisions in most situations.
Use the information for the question(s) below.
Alaska North Slope Crude Oil (ANS)
$71.75/Bbl
West Texas Intermediate Crude Oil (WTI)
$73.06/Bbl
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS)
crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West
Texas Intermediate (WTI) crude.
9) Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS) crude oil for 10,000 Bbls
of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 Bbls of WTI crude, the
added benefit (cost) to you if you take the trade is closest to:
A) ($1400)
B) $1400
C) ($3908)
D) $3908
10) Assuming you currently have 10,000 Bbls of WTI crude, the added benefit (cost) to you if you were to sell the
10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
A) ($1400)
B) $1400
C) ($3908)
D) $3908
11) Assuming you just purchased 10,000 Bbls of WTI crude at the current market price, the total benefit (cost) to
you if you were to refine this crude oil and sell the unleaded gasoline is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
12) Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS) crude oil for 10,000 Bbls
of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 10,000 Bbls of WTI crude at the
current market price, the total benefit (cost) to you if you take the trade is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
13) Assuming you currently have 10,000 Bbls of WTI crude, the total benefits to you if you were to sell the 10,000
Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to:
A) $730,600
B) $770,000
C) $771,400
D) $773,908
14) Another oil refiner is offering to trade you 10,150 Bbls of Alaska North Slope (ANS) crude oil for 10,000 Bbls
of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 Bbls of WTI crude, what
should you do?
A) Sell 10,00 Bbls WTI crude on the market and use the proceeds to purchase and refine ANS crude.
B) Do nothing, refine the 10,000 Bbls of WTI crude.
C) Trade the 10,000 Bbls WTI crude with the other refiner and refine the 10,150 Bbls of ANS crude.
D) Trade the 10,000 Bbls WTI crude with the other refiner and then sell the 10,150 Bbls of ANS crude.
15) Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each
of the next five years. Steve concludes that in five years time he will have $1.10 for every $1.00 invested and
that this investment will increase his personal value. What is Steve‘s major error in reasoning when making
this decision?
A) Costs and benefits must be in the same terms to be compared.
B) There may be other investments that he can make that will offer even bigger benefits.
C) The investment may have hidden costs that will reduce the amount of benefit he receives.
D) The value of the cash he has today is greater than the value of the cash he may have in the future.
16) In a trade with the government of an oil producing nation, a manufacturer will deliver 14 Caterpillar D9
tractors, with a value of $350,000 per tractor, and receive 45,000 barrels of oil, valued at $115 per barrel.
What is the net benefit of this trade to the manufacturer?
A) $158,000
B) $275,000
C) $1,750,000
D) $4,900,000
17) A wholesale food retailer is offered $14 per two–layer carton for 5000 cartons of peaches. The wholesaler can
buy peaches from their growers at $12.50 per carton. Shipping costs $1.50 per carton, for the first 1000
cartons, and $1.00 per carton for every carton over that. Will taking this opportunity increase the value of the
wholesale food retailer?
A) No. The costs are $1200 more than the benefits.
B) No. The costs and the benefits are the same.
C) Yes. The costs are $1000 less than the benefits.
D) Yes. The costs are $2000 less than the benefits.
18) 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 $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?
A) No, since costs are $5.0 million more than benefits.
B) No, since costs are $3.5 million more than benefits.
C) Yes, since the benefits are $0.2 million more than the costs.
D) Yes, since the benefits are $1.5 million more than the costs.
Country Australia Chile Iceland New Zealand South Africa
Abalone Cost AUD 93,500 CLP 50,990,000 ISK 5,400,000 NZD 104,000 ZAR 640,000
Exchange
Rate: $1 U.S. = 1.1 AUD 585 CLP 61 ISK 1.3 NZD 7.8 ZAR
19) 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 the United States and the other relevant currencies are also
shown. In addition, $1 U.S. = 105 yen. What is the value of the best deal the international seafood supplier
can make, in U.S. dollars?
A) $5000
B) $7000
C) $8000
D) $10,000
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?
A)
3,012 U.S. dollars per tonne
B) 3,206 Australian dollars per tonne, with $0.942 U.S. = 1 AUD
C) 4,998 Brazilian reals per tonne, with $0.6000 U.S. = 1 BRL
D) 121,756 Indian rupees per tonne, with $0.025 U.S. = 1 INR
21) 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 Amback Financial Group stock, currently trading at
$63 per share. What is the value of this trade, if you choose to make it?
A) –$540
B) –$480
C) –$300
D) $280
22) A company intends to install new management software for its warehouse. The software will cost $50,000 to
buy and will cost an additional $150,000 to install and implement. It is anticipated that it will save the
company $45,000 through reductions in staff and $65,000 in general inventory costs in the first year after
installation. What is the benefit to the company in the first year if they choose to install the software?
A) $45,000
B) $90,000
C) $110,000
D) $180,000
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
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.
23) A mining company is offering to trade you 7250 tons of low–grade copper ore for 5000 tons of high–grade
copper ore. Assuming you currently have 5000 tons of high–grade ore, what should you do?
24) A company that manufactures copper piping is offering to trade you 5925 tons of low–grade copper ore for
4000 tons of high–grade copper ore. Assuming you currently have 4000 tons of high–grade ore, what are the
total benefits and added benefits of taking the trade?
25) 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?
A) $650
B) $400
C) $1050
D) $250
26) Whenever a good trades in a competitive market, the ________ determines the value of the good.
A) supply
B) price
C) demand
D) cost
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
27) Explain the role played by some of the other management disciplines in financial decision making.
28) What is one of the main obstacles in cost benefit analysis?
29) How can we perform cost benefit analysis in case they are occurring in different currencies?
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F‘ if the statement is false.
30) Whenever a good trades in a competitive market, the price the good trades for determines the value of the
good.
31) The Law of One Price states that if equivalent goods or securities are traded simultaneously in different
competitive markets, they will trade for the same price in each market.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
33) Which of the following best explains why market prices are useful to a financial manager when performing a
cost benefit analysis?
A) They can be used to determine how much an asset can be sold for.
B) They can be used to convert different services and commodities into equivalent cash values which can
be compared.
C) They allow all commodities and services to be assigned a fixed and unchanging value.
D) They can be evaluated to determine whether the market in which the manager exchanges goods and
services offers true value.
34) A coin collector treasures his 1969–S Lincoln cent with a doubled die obverse 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.
35) What is a competitive market?
A) a market in which goods can be bought at the ask price and sold at bid price
B) a market in which a good can be bought and sold at the same price
C) a market in which a good is sold at a lower price than that for which it can be bought
D) a market in which a good is bought for a lower price than that for which it can be sold
36) An elderly relative offers to sell you their used 1958 Cadillac Eldorado 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
Ford Explorer for $35,000. What is the net value of buying the Cadillac?
A) $90,000, since the Cadillac could be sold for this price.
B) $50,000, since the Cadillac could be bought for this price.
C) $40,000, since this is the difference between purchase and resale price of the Cadillac.
D) $35,000, since this is the value of the car that you really want to buy.
37) 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 $700 per ton, which had been originally purchased at $650 per ton.
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 tons of styrene monomer to the company?
A) –$5000
B) $0
C) $13,000
D) $14,000
38) A firm has contracted to supply 500,000 gallons of propane fuel for $1.49 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 firm to benefit from breaking the contract?
A) greater than $2.97 per gallon
B) greater than $2.98 per gallon
C) greater than $2.99 per gallon
D) greater than $3.00 per gallon
39) A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000
bushels, if it also buys 5000 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 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.
40) Which of the following is the best statement of the Valuation Principle?
A) It is not possible to compare costs and benefits that occur at different points in time, in different
currencies, or with different risks.
B) 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.
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 different markets across the world, they will
trade for the same price.
41) Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the
competit ive 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 profit.
D) Grocery stores typically sell oats in different packaging, which results in different prices within the
same store.
42) Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which
of the following would most likely 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.
43) 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 different competitive markets will be
the same.
B) One useful consequence of the Law of One Price is that when evaluating costs and benefits 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 different 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 not
possible.
Use the table for the question(s) below.
Consider the following prices from a McDonald’s Restaurant:
Big Mac Sandwich
$2.99
Large Coke
$1.39
Large Fry
$1.09
44) A McDonald’s Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fry. 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) $4.38
C) $5.47
D) $5.77
45) A McDonald’s Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fry. 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?
A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.68.
B) No, no arbitrage opportunity exists.
C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.09.
D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.68.
46) Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also
listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage
opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of
100 shares?
A) No, no arbitrage opportunity exists.
B) Yes, buy on NASDAQ and sell on NYSE, make $25.
C) Yes, buy on NYSE and sell on NASDAQ, make $25.
D) Yes, buy on NASDAQ and sell on NYSE, make $250.
47) Which of the following is an example of arbitrage?
A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing
that its price will rise when the technology is adopted.
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest
rate is 10%.
C) An investor, seeing that the price of palladium on the metals exchange in two different countries is
slightly different, buys on one and sells on the other to make a profit.
D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates
rise above 10%.
48) Why are arbitrage opportunities short–lived?
A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down.
B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net
present value (NPV) fluctuating between positive and negative values.
C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling
price become equal.
D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
49) 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?
A) The State Bank would experience a surge in demand for loans.
B) The Colonial Bank would experience a surge in demand for deposits.
C) The State Bank would experience a fall in demand for deposits.
D) The Colonial Bank would experience a surge in demand for loans.
50)
If the exchange rates, after fees, in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 =
¥171, which of the following would you expect to occur?
A) a surge in conversion of dollars to yen in Tokyo
B) a surge in conversion of euros to yen in Tokyo
C) a surge in conversion of euros to dollars in Paris
D) a surge in conversion of euros to yen in Paris
51) A backhoe can dig 150 feet of trench per hour and costs $500 per hour to hire and operate. A ditch digger can
dig six feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per
hour when digging ditches?
A) $20 per hour
B) $25 per hour
C) $3.33 per hour
D) $83.33 per hour
52) “If equivalent investment opportunities trade simultaneously in different competitive markets, then they
must trade for the same price in both markets.”
What do we call the above statement?
A) the Net Present Value rule
B) the Law of One Price
C) the Valuation Principle
D) the time value of money
53) A 2008 Toyota Camry can be bought in Buffalo, NY, for $18,720. The same model Camry can be purchased
across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be
the expected price of a 2008 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to
$0.98 Canadian?
A) $18,345
B) $18,720
C) $19,102
D) $20,212