Use the table for the question(s) below.
Security Bid Ask
IBM 79.45 79.50
MRK 39.95 40.05
C48.50 48.55
38)
Consider an ETF that is made up of one share each of IBM, MRK, and C. The minimum bid price
for this ETF in a normal market is closest to:
38)
A)
$167.80
B)
$167.90
C)
$168.00
D)
$168.10
39)
Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is
8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a
normal market if no arbitrage opportunities exist is closest to:
39)
A)
$917 to $926
B)
$909 to $1000
C)
$909 to $926
D)
$909 to $917
40)
Consider two securities, A & B. Suppose a third security, C, has the same cash flows as A and B
combined. Given this information about securities A,B, & C, which of the following statements is
incorrect?
40)
A)
Price(C) = Price(A) + Price(B)
B)
If the total price of A and B is cheaper than the price of C, then we could make a profit selling
A and B and buying C.
C)
Because security C is equivalent to the portfolio of A and B, by the law of one price they must
have the same price.
D)
The relationship known as value additivity says that the value of a portfolio is equal to the
sum of the values of its parts.
41)
Suppose a risky security pays an average cash flow of $100 in one year. The risk–free rate is 5%,
and the expected return on the market index is 13%. If the returns on this security are high when
the economy is strong and low when the economy is weak, but the returns vary by only half as
much as the market index, then the price for this risky security is closest to:
41)
A)
$88
B)
$92
C)
$93
D)
$95
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.
42)
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:
42)
A)
$730,600
B)
$770,000
C)
$771,400
D)
$773,908
43)
Suppose that Bondi Inc. is a holding company that owns both Pizza Hut and Kentucky Fried
Chicken Franchised Restaurants. If the value of Bondi is $130 million, and the Pizza Hut Franchises
are worth $70 million, then what is the value of the Kentucky Fried Chicken Franchises?
43)
A)
$60 million
B)
$70 million
C)
$130 million
D)
Unable to determine with the information provided
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.
44)
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?
44)
A)
Trade the 10,000 Bbls WTI crude with the other refiner and refine the 10,150 Bbls of ANS
crude.
B)
Trade the 10,000 Bbls WTI crude with the other refiner and then sell the 10,150 Bbls of ANS
crude.
C)
Sell 10,00 Bbls WTI crude on the market and use the proceeds to purchase and refine ANS
crude.
D)
Do nothing, refine the 10,000 Bbls of WTI crude.
Use the table for the question(s) below.
Project
Cash flow
today
Cash flow
in one year
“eenie” –10 15
“meenie” 10 –8
“minie” –15 20
“moe” 10 –15
45)
If the risk–free interest rate is 10%, then the NPV for “moe” is closest to:
45)
A)
–3.64
B)
2.73
C)
3.18
D)
3.64
46)
A project you are considering is expected to provide benefits worth $225,000 in one year. If the
risk–free rate of interest (rf) is 8%, then the value of the benefits of this project today are closest to:
46)
A)
$190,333
B)
$208,333
C)
$225,000
D)
$243,000
47)
You are offered an investment opportunity in which you will receive $25,000 in one year in
exchange for paying $23,750 today. Suppose the risk–free interest rate is 6% per year. Should you
take this project? The NPV for this project is closest to:
47)
A)
Yes; NPV = $165
B)
No; NPV = $165
C)
Yes; NPV = – $165
D)
No; NPV = – $165
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.
48)
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:
48)
A)
$730,600
B)
$770,000
C)
$771,400
D)
$773,908
49)
Suppose a risky security pays an average cash flow of $100 in one year. The risk–free rate is 5%,
and the expected return on the market index is 13%. If the returns on this security are high when
the economy is strong and low when the economy is weak, but the returns vary by only half as
much as the market index, what risk premium is appropriate for this security?
49)
A)
4%
B)
6.5%
C)
9%
D)
11%
Use the table for the question(s) below.
Security
Cash flow
today
Cash flow
in one year
A 0 100
B100 0
C100 100
50)
If the risk–free rate of interest is 7.5%, then the value of security “B” is closest to:
50)
A)
$91.00
B)
$92.50
C)
$93.00
D)
$100.00
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.
51)
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:
51)
A)
($1,400)
B)
$1,400
C)
($3,908)
D)
$3,908
52)
Which of the following statements regarding Net Present Value (NPV) is incorrect?
52)
A)
When faced with a set of alternatives, choose the one with the lowest NPV in order to
minimize the preset value of costs.
B)
The NPV of a project is the difference between the present value of its benefits and the present
value of its costs.
C)
The NPV represents the value of the project in terms of cash today.
D)
Good projects will have a positive NPV.
53)
Which of the following statements regarding value additivity is false?
53)
A)
The price or value of the entire firm is equal to the sum of the values of all projects and
investments within the firm.
B)
The value of a portfolio is equal to the sum of the values of its parts.
C)
To maximize the value of the entire firm, managers should make decisions that maximize
NPV.
D)
Value additivity does not have important consequences for the value of the entire firm, only
on portfolios of firms.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the table for the question(s) below.
Security Bid Ask
IBM 79.45 79.50
MRK 39.95 40.05
C48.50 48.55
54)
Consider an ETF that is made up of one share each of IBM, MRK, and C. The current quote for this ETF
currently is $167.85 (bid) $167.95 (ask). What should you do?
Use the information for the question(s) below.
An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each
share represents a portfolio of two shares of International Business Machines (IBM), three shares of Merck (MRK), and three
shares of Citigroup Inc. (C). Suppose the current market price of each individual stock are shown below:
Stock Current Price
IBM $79.50
MRK $40.00
C$48.50
55)
Assume that the ETF is trading for $426.00, what (if any) arbitrage opportunity exists? What (if any) trades
would you make?
56)
The price per share of the ETF in a normal market is:
57)
You are up late watching TV one night and see an ad from Ronco for the Dial–o–matic food slicer. You learn
that the Dial–o–matic sells for $29.95. But wait, theres more. Ronco is also including in this deal a set of Ginsu
steak knives worth $10.95 and another free gift worth $7.95. Assuming that there is a competitive market for
Ronco items, at what price must Ronco be selling this three item Dial–o–matic deal to insure the absence of an
arbitrage opportunity and uphold the law of one price?
58)
Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is
also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50. Does an arbitrage
opportunity exists and if so how would you exploit it and how much would you make on a block trade of 1000
shares?
59)
In a normal market with transactions costs, is it possible for different investors to place different values on an
investment opportunity? Are there any limits on the amount that their values can differ?
Use the table for the question(s) below.
Market Price Cash Flow in One Year
Security Today Poor Economy Good Economy
A200 840 0
B600 0840
C??? 840 4200
60)
Suppose that security C had a risk premium of 30%, describe what arbitrage opportunity exists and how you
would exploit it.
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.
61)
A company that manufactures copper piping is offering 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 benefits and added benefits of taking the trade?
Use the table for the question(s) below.
Security Bid Ask
IBM 79.45 79.50
MRK 39.95 40.05
C48.50 48.55
62)
Consider an ETF that is made up of one share each of IBM, MRK, and C. The current quote for this ETF
currently is $167.75 (bid) $167.85 (ask). What should you do?
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.
63)
A mining company is offering to trade you 7,250 tons of low–grade copper ore for 5,000 tons of high–grade
copper ore. Assuming you currently have 5,000 tons of high–grade ore, what should you do?
64)
You have an investment opportunity in the United Kingdom that requires an investment of $500,000 today and
will produce a cash flow of £320,000 in one year with no risk. Suppose the risk–free rate of interest in the U.K is
6% and the current competitive exchange rate is $1.70/£. What is the NPV of this project? Would you take the
project?
Use the table for the question(s) below.
Security Bid Ask
IBM 79.45 79.50
MRK 39.95 40.05
C48.50 48.55
65)
Consider an ETF that is made up of one share each of IBM, MRK, and C. The current quote for this ETF
currently is $168.15 (bid) $168.20 (ask). What should you do?
Use the table for the question(s) below.
Project
Cash flow
today
Cash flow
in one year
“alpha” –18 23
“beta” 15 –12
“gamma” 15 –20
“delta” –16 21
66)
Assume that the risk–free interest rate is 10%. Rank each of the four projects from most desirable to least
desirable based upon NPV. Which project would you invest in first? Are there any projects that you wouldn’t
invest in?
Answer Key
Testname: C3
Answer Key
Testname: C3
Answer Key
Testname: C3
26