BD_SM03 - Chapter 3 Arbitrage and Financial Decision Making...

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Chapter 3 Arbitrage and Financial Decision Making 3-1. The benefit of the rebate is that Honda will sell more vehicles and earn a profit on each additional vehicle sold: Benefit = Profit of $6,000 per vehicle × 15,000 additional vehicles sold = $90 million. The cost of the rebate is that Honda will make less on the vehicles it would have sold: Cost = Loss of $2,000 per vehicle × 40,000 vehicles that would have sold without rebate = $80 million. Thus, Benefit – Cost = $90 million – $80 million = $10 million, and offering the rebate looks attractive. (Alternatively, we could view it in terms of total, rather than incremental, profits. The benefit as $6000/vehicle × 55,000 sold = $330 million, and the cost is $8,000/vehicle × 40,000 sold = $320 million.) 3-2. Czech buyer’s offer = 2,000,000 CZK / (25.50 CZK/USD) = 78,431.37 USD Thai supplier’s offer = 3,000,000 THB / (41.25 THB/USD) = 72,727.27 USD The value of the deal is $78,431 – 72,727 = $5704 today. 3-3. a. Stock bonus = 100 × $63 = $6,300 Cash bonus = $5,000 Since you can sell (or buy) the stock for $6,300 in cash today, its value is $6,300 which is better than the cash bonus. b. Because you could buy the stock today for $6,300 if you wanted to, the value of the stock bonus cannot be more than $6,300. But if you are not allowed to sell the company’s stock for the next year, its value to you could be less than $6,300. Its value will depend on what you expect the stock to be worth in one year, as well as how you feel about the risk involved. You might decide that it is better to take the $5,000 in cash then wait for the uncertain value of the stock in one year. 3-4. a. Having $200 today is equivalent to having 200 × 1.04 = $208 in one year. b. Having $200 in one year is equivalent to having 200 / 1.04 = $192.31 today. c. Because money today is worth more than money in the future, $200 today is preferred to $200 in one year. This answer is correct even if you don’t need the money today, because by investing the $200 you receive today at the current interest rate, you will have more than $200 in one year.
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10 Berk/DeMarzo • Corporate Finance 3.5. Cost = $1 million today Benefit ¥114 million in one year ¥1.02 in one year ¥114 million in one year ¥111.76 million today ¥ today 110¥ ¥111.76 million today $1.016 million today $ today = = ÷ = = ÷ = NPV $1.016 million $1 million $16,000 = - = The NPV is positive, so it is a good investment opportunity. 3.6.
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BD_SM03 - Chapter 3 Arbitrage and Financial Decision Making...

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