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The Law of One Price states that equivalent investment opportunities trading in different competitive markets will have the same price. Yet, one can find examples where that rule seems to be violated. It is a well-known fact that Americans pay a much higher price for most prescription drugs than people in most other countries. Also, the price (when adjusted for exchange rates) for the same make and model of automobile varies greatly across different countries. Furthermore, the price of a barrel of crude oil varies between locations. For example, on October 12, 2012, the price for Brent crude oil produced in Europe was $114.21 and the price for West Texas Intermediate (WTI) crude oil produced in Texas was $91.86.
Do these three cases demonstrate that the Law of One Price is false? Why or why not?
A loan is being repaid by 2n level payments, starting one year after the loan. Just after the nth payment the borrower finds that she still owe (3/4) of the original amount. What proportion of the next payment is interest?
The purchasing agent responsible for ordering cotton underwear for Ace Retail Stores has come up with the following information:Sol:
A stock is trading at $70 per share. The stock is expected to have a year-end dividend of $3 per share (D1 = $3), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 12% (assume the market is in ..
At the end of a fiscal year, a company makes a net profit of $100 and does not pay a dividend. Which of the following is a possible change of the balance sheet?
A Carlyle chemical is evaluating a new chemical compound used in the manufacture of a wide range of consumer products. The firm is concerned that inflation in the cost of raw materials will have an adverse effect on the projects cash flow. Specifical..
Save Our Beaches, a NFP organization, prepared and distributed a tri-fold flyer to individuals and families at White Sands Beach, a popular beach for both residents and tourists. In addition, one segment of the flyer solicited contributions to the or..
Suppose your company needs $20 million to build a new assembly line. Your target debt−equity ratio is 0.80. The flotation cost for new equity is 9 percent, but the flotation cost for debt is only 6 percent. What is your company’s weighted average flo..
Midwest Mining (MWM) expects its sales to grow by 20 percent next year. Last year, when the firm was operating at full capacity, MWM, generated sales equal to $250,000 with assets of $800,000. Estimate MWM's additional funds needed (AFN) for the next..
Comfy Coach Travel Agencies has a price of $72 per share and the dividends have been: 2010 - $1.25, 2011 - $1.28, 2012 - $1.35, 2013 - $1.42, 2014 - $1.51. What is the company's required rate of return? (show work)
Lambardi Company sells 3 types of bags. Bag A sells for $18 and has variable cost of $9.00 per unit. Bag B sells for $16 and has variable cost of $12.00 per unit. Bag C sells for $8 and has variable costs of $6.00 per unit. Lambardi sells in a mix of..
Provide two reasons for a company to lease some type of capital equipment, rather than buying it. Provide three reasons for a company to buy some capital equipment, rather than lease it.
Do you think the project should be accepted? Why? Assume the company has a P/B (payback) policy of not accepting projects with life of over 3 years.
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