Key to Quiz 1 - Corporate Financial Management | FIN 4360, Quizzes of Finance

Download Key to Quiz 1 - Corporate Financial Management | FIN 4360 and more Quizzes Finance in PDF only on Docsity! Finance 4360; Key to Quiz 1; Spring 2008; 1:00 Class Note: For any question with numbers, all of the points are earned by setting up solutions. There are no points for any calculations. As a result, you will likely earn a higher grade on this quiz if you simply set up problems but never touch your calculator. In some cases, “setting up solutions” may involve writing a single number. Assumptions for all problems on this quiz: 1) The one-year risk-free interest rate in the United States is 3%. 2) The market index can be purchased for $1000 and will generate a cash flow one year from today of $1500 if the economy is strong or $700 if the economy is weak. These two outcomes are equally likely. 1. What would you compare if someone offered to trade you shares of Google for an equal number of shares of eBay? Market prices. 2. Other things being equal, what is the attitude of investors towards risk? Prefer less. 3. Set up the calculations required to determine the net present value of a risk-free investment that will cost $20,000 today and that will pay $25,000 one year from today. 25,000/1.03 – 20,000 4. An ETF includes one share of A and one share of B. The market price of the ETF is $50, of A is $20, and of B is $25. Set up the calculations that show the arbitrage profit you can earn per share of the ETF. 50 – 20 – 25 5. Is arbitrage possible given the following prices for two risk-free bonds that will pay $1000 a year from today? Note: you do not need to show any work. Bid Ask Bond #1 970.72 970.87 Bond #2 970.85 971.05 No.