Ch3 Handout solutions - FIN 326 Intermediate Corporate...

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FIN 326 Intermediate Corporate Finance Chapter 3 Time Value of Money Cost Benefit Analysis Competitive Market Prices Determine Value 1. You have just won a radio contest and are disappointed to learn that the prize is 4 tickets to the Def Leppard reunion tour (face value $40 each). Not being a fan of 1980s power rock, you have no intention of going to the show. However, it turns out that there is a second choice: Two tickets to Bruno Mars’s sold -out show (face value $45 each). You notice that on Ebay, tickets to the Def Leppard show are being bought and sold for $30 apiece and tickets to Bruno Mars’s show are being bought and sold at $50 each. What should you do? Market prices, not your personal preference (nor the face value of the tickets), are relevant here: o 4 Def Leppard tickets at $30 apiece o 2 of Bruno Mars’s tickets at $50 apiece You need to compare the market value of each option and choose the one with the highest market value. o The Def Leppard tickets have a total value of $120 (4 $30) versus the $100 total value of the other two tickets (2 $50). o Instead of taking the tickets to your favorite band, you should accept the Def Leppard tickets, sell them on Ebay, and use the proceeds to buy two tickets to your Bruno Mars’s show.
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