1.1 The Goal of Finance: Relative Valuation
Which of the following statements is true?
In finance, it is important to determine an asset's absolute value. B)
The relative value of any asset is, at best, a lucky guess.
The true value of an asset is unaffected by externalities such as interest rate levels, the state of the economy, etc. D)
Valuation is not an exact science.
The law of one price stipulates that
identical goods must be sold to all buyers at the same price; otherwise price discrimination occurs. B)
assets that are identical in all respects should sell for the same price. C)
the price of an asset is independent of the market in which the asset is being offered for sale. D)
the absolute value of an asset will always equal its relative value. Answer:
Which of the following statements about the law of one price is true? A)
It is a useful tool in determining the absolute value of an asset. B)
Empirical evidence suggests that it will provide the true value of an asset, except in those rare cases in which no comparable asset exists. C)
Although it rarely will provide an exact value for an asset, it will often provide a close approximation. D)
It is most useful in assessing the true value of identical assets that are trading in more than one country. Answer:
Which of the following assets would be the most difficult to value? A)
a 1968 red Mustang convertible
a Caribbean vacation
World War II memorabilia
an uninhabited, privately-owned island
Which of the following would best reflect the current value of a dark green 2005 Subaru Outback, rated in good condition with 75,000 miles on it, located in Denver, Colorado? A)
the price of a red 2005 Subaru Outback rated in good condition with 83,000 miles on it, located in Fort Collins, Colorado B)
the price of a dark green 2005 Subaru Outback, rated in good condition with 65,000 miles on it and located in Fairbanks, Alaska C)
the price of a dark green 2005 Subaru Legacy sedan rated in good condition with 70,000 miles on it, located in Golden, Colorado D)
the price of a dark green 2005 Toyota RAV4 rated in good condition with 100,000 miles on it, located in Denver, Colorado Answer:
What does the term "opportunity cost" mean?
An opportunity cost refers to what is given up when choosing one option over another. For example, when you choose to buy a home rather than rent, one opportunity cost is what you might have earned on the money that you used for the down payment on the home had you instead invested it in your next best alternative. Diff: 1
1.2 Investments, Projects, and Firms
Kiley is considering opening a restaurant and is trying to identify the appropriate cash flows to use in evaluating this project. Which of the following should not be included? A)
Kiley's dislike of having to work weekends
the lease expense for the building that would house her restaurant C)
the cost of a liability insurance policy to protect her should a customer sue the business D)
All of the above should be included when determining the cash flows associated with the project. Answer:
Project cash flows
Which of the following statements about project cash flows is false? A)
In order to accurately evaluate a...