Chapter_03_sol_students -...

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Corporate Finance: The Core  (Berk/DeMarzo) Chapter 3  -  Arbitrage and Financial Decision Making     7) 
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You have  an  investmen t opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one  year with no risk.  Suppose the risk - free rate of interest in Germany is 6% and the current competitive exchange rate is  €0.78 to $1.00.  What is the NPV of this project?  Would you take the project?  A) 
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NPV  =  0; No  B) 
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NPV  =  2,358;  No  C) 
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NPV  =  2,358;  Yes  D) 
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NPV  =  13,650;  Yes  Answer:  
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Explanation:  
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A) 
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NPV   =   - 250,000  +  (€208,650  / 1.06)  ×  $1.00 / €0.78  =  2358, so since NPV   >  0, accept  D) 
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Diff: 3  Topic: 3.3 Present Value and the NPV Decision Rule  Skill: Analytical    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     10) 
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If the  risk - free  interest rate is 10%, then of the four projects listed, if you could only invest in one project, which on e would you select?  A) 
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Eenie  B) 
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Meenie  C) 
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Minie  D) 
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Moe  Answer:  
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Explanation:  
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A)  E N N N N
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C) 
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D) 
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Diff: 2  Topic: 3.3 Present Value and the NPV Decision Rule  Skill: Analytical    11) 
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If the  risk - free interest rate is 10%, then of the four projects listed, which project would you never want to invest in?  A) 
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Eenie  B) 
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Meenie  C) 
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Minie  D) 
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Moe  Answer:  
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Explanation:  
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A) 
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D) 
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Moe has negative NPV NPV  Eenie  =   - 10  +  15 / 1.1  =  3.64 NPV  Meenie  =  10  -   8/1.1  =  2.73 NPV  Minie  =   - 15  +  20 / 1.1  =  3.18 NPV  moe  =  10  -  15 / 1.1  =   - 3.64  Diff: 2  Topic: 3.3 Present Value and the NPV Decision Rule  Skill: Analytical 
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    3.4 Arbitrage and the Law of One Price    2) 
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This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.

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Chapter_03_sol_students -...

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