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saint mba570 module 2 quiz (jan 19, 2014)




Question;1.Which of the following statements regarding the valuing of costs and benefits is not correct? (Points: 10) The first step in evaluating a project is to identify its costs and benefits.In the absence of competitive markets, we can use one-sided prices to determine exact cash values.Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker.Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.Question 2.2.If the risk-free rate of interest (rf) is 3.5%, then you should be indifferent between receiving $1,000 in one-year or: (Points: 10) $965.00 today.$966.18 today.$1,000.00 today.$1,035.00 today.Question 3.3.Suppose you will receive $500 in one year and the risk-free interest rate (rf) is 5%. The equivalent value today is closest to __________. (Points: 10) $475$476$500$525Question 4.4.The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives: 1. Sell the restaurant now and retire. 2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant. 3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant. If the discount rate is 15%, then which alternative should the owner choose: (Points: 10) #1#2#3either #1 or #2either #1 or #3Question 5.5.Which of the following statements regarding arbitrage is the most correct? (Points: 10) Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity.Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity.We call a competitive market in which there are no arbitrage opportunities an arbitrage market.The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.Question 6.6.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? (Points: 10) 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.Price(C) = Price(A) + Price(B)Because security C is equivalent to the portfolio of A and B, by the law of one price they must have the same price.The relationship known as value additivity says that the value of a portfolio is equal to the sum of the values of its parts.Question 7.7.At an annual interest rate of 7%, the future value of $5,000 in five years is closest to __________. (Points: 10) $3,565$6,750$7,015$7,035Question 8.8.If the current rate of interest is 8%, then the present value of an investment that pays $1,000 per year and lasts 20 years is closest to __________. (Points: 10) $18,519$45,761$9,818$20,000Question 9.9.You are looking for a new truck and see the following advertisement: "Own a new truck! No money down. Just five easy annual payments of $8,000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to __________. (Points: 10) 9%8%8.5%10%Question 10.10.You are considering investing in a security that will pay you $80 in interest at the end of each of the next 10 years. If this security is currently selling for $588.81, then the IRR for investing in this security is closest to __________. (Points: 10) 6.0%7.0%6.5%5.0%


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