9780321818171_berk_ch03

How is it related to the valuation principle 10 why

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Unformatted text preview: most preferred pattern of cash flows. Concept Check 9. What is the NPV decision rule? How is it related to the Valuation Principle? 10. Why doesn’t the NPV decision rule depend on the investor’s preferences? 3.6 The Law of One Price Up to this point, we have emphasized the importance of using competitive market prices to compute the NPV. But is there always only one such price? What if the same good trades for different prices in different markets? Consider gold. Gold trades in many different markets, with the largest markets in New York and London. Gold can trade easily in many markets because investors are not literally transacting in the gold bars themselves (which are quite heavy!), but are trading ownership rights to gold that is stored securely elsewhere.3 To value an ounce of gold, we could look up the competitive price in either of these markets. But suppose gold is trading for $1200 per ounce in New York and $1300 per ounce in London. Which price should we use? In fact, situations such as this one, where...
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