Fundamentals of Corporate Finance 3rd ed Jonathan

©2015PearsonEducationLimitedChapter3TimeValueofMoney:AnIntroductionNote:AllproblemsinthischapterareavailableinMyFinanceLab.Anasterisk(*)indicatesproblemswithahigherlevelofdifficulty.1..Plan:ThebenefitoftherebateisthatHondawillsellmorevehiclesandearnaprofitoneachadditionalvehiclesold:BenefitProfitof$6,000pervehicle15,000additionalvehiclessold$90million.Execute:ThecostoftherebateisthatHondawillmakelessonthevehiclesitwouldhavesold:CostLossof$2000pervehicle40,000vehiclesthatwouldhavesoldwithoutrebate$80million.Evaluate:Thus,BenefitCost$90million$80million$10million,andofferingtherebatelooksattractive.(Alternatively,wecouldviewitintermsoftotal,ratherthanincremental,profits.Thebenefitis$6000/vehicle55,000sold$330million,andthecostis$8000/vehicle40,000sold$320million.)2.Plan:IftheshrimpfromyourCzechandThaisuppliersareofequalquality,youwillbuytheshrimpfromthesupplierwhooffersyouthelowestprice.OneproblemistheCzechsupplierquotesyouapriceinkorunaandtheThaisupplierquotesyouapriceinbaht.Becauseyouwillhavetoconvertdollarstoeitherkorunaorbaht,youwillbuytheshrimpfromthesupplierwhowillchargeyouthelowestcostindollars.Execute:Czechbuyer’sofferindollars2,000,000CZK/(25.50CZK/USD)78,431.37USD.Thaisupplier’sofferindollars3,000,000THB/(41.25THB/USD)72,727.27USD.Evaluate:YouwouldbuytheshrimpfromtheThaisupplierbecausetheThaishrimpare($78,431$72,727),$5,704lessexpensivetoday.16Berk/DeMarzo/Harford•FundamentalsofCorporateFinance,ThirdEdition,GlobalEdition©2015PearsonEducationLimited3.Plan:Therearetworelated,butdifferent,decisionstoanalyze.Inbothcasesyouwilltakethechoicethatwillgiveyouthehighestvalue.Execute:a.Valueofthestockbonustoday100$63$6,300Valueofthecashbonustoday$5,000Becauseyoucansellthestockfor$6,300incashtoday,itsvalueis$6,300,whichisbetterthanthecashbonusof$5,000today.Takethestock.b.Becauseyoucouldbuythestocktodayfor$6,300ifyouwantedto,thevalueofthestockbonuscannotbemorethan$6,300.Butifyouarenotallowedtosellthecompany’sstockforthenextyear,itsvaluetoyoucouldbelessthan$6,300.Itsvaluewilldependonwhatyouexpectthestocktobeworthinoneyear,aswellashowyoufeelabouttheriskinvolved.Thereisnoclear-cutanswertowhichalternativeisbestbecausetakingthestocktodayandholdingitforayearinvolvesrisk.Youmightdecidethatitisbettertotakethe$5,000incashthantowaitfortheuncertainvalueofthestockinoneyear.Thiswouldbeespeciallytrueifyoubelievedyoucouldinvestthe$5,000todayinanotherassetthatwouldbeworthmorethan$6,300inoneyear.Evaluate:Inpart(a)thereisaclear-cutanswer.Takethestocktodaybecauseitisworthmorethanthecashbonus.Inpart(b)thereisnotaclear-cutanswerbecauseyoucannotdirectlycompare$5,000cashtodayagainsttheuncertainvalueof100sharesofstockinoneyear.Differentpeoplecouldmakedifferentdecisionsbasedlargelyontheirestimateofthefuturevalueofthestock.4.Plan:Withtwodifferentinterestratesforthesamething(borrowingorsaving),youcanmakeasureprofitbyborrowingatthelowerrateanddepositingthemoneyatthehigherrate.a.TakealoanfromBigBankat5.5%andsavethemoneyinBankEnnat6%.b.BigBankwouldexperienceasurgeinthedemandforloans,whileBankEnnwouldreceiveasurgeindeposits.c.BigBankwouldincreasetheinterestrate,and/orBankEnnwoulddecreaseitsrate.Evaluate:Youractionsalongwiththoseofotherswouldcreateasurgeindemandforloansatthelowrateanddepositsatthehighrate,causingthebankstochangetheratesuntiltheyareequal—thearbitrageopportunitywouldquicklydisappear.5.Applecannotchargemorethanthecostofdoingityourself,sothemaximumis$25,thesameasthecostofbuyingtheCDandrippingthetrackstoyouriPod.6.Plan:Thesameshareofstockcannottradefortwodifferentprices—otherwisetherewouldbeanarbitrageopportunity(youwouldbuyitontheexchangewiththelowerpriceandimmediatelysellitontheexchangewiththehigherprice).Thus,theU.S.pricemustbetheCanadianpricemultipliedbytheexchangerate.USUS$0.95RIM$50CanadianUS$47.50C$1.00Chapter3TimeValueofMoney:AnIntroduction17©2015PearsonEducationLimitedEvaluate:Ifthepricewereanydifferent,therewouldbeanarbitrageopportunityasdescribedintheplanstatementandafloodofbuyandsellorderswouldforcethepricestobeequal.7.Plan:Determinethevalueof1tonofshrimptoBubba,anddeterminethechangeinvaluetoBubbaof1tonofshrimpbecauseofhisallergy.Execute:a.Thevalueof1tonofshrimptoBubbais$10,000becausethatisthemarketprice.b.No.Aslongashecanbuyorsellshrimpat$10,000perton,hispersonalpreferenceoruseforshrimpisirrelevanttothevalueoftheshrimp.Evaluate:Inwell-functioningmarkets,theprice,andthereforethevalue,issetbythesupplyanddemandofallsuppliersandusers.8.Plan:Brettmustdetermineifheshouldaccepthisneighbor’soffertotradehisalmondcropfortheneighbor’swalnutcrop.Heshouldcalculatethevalueofkeepinghisalmondcropversusthevalueoftradingforthewalnutcrop.Brettshouldtakethealternativethatmakeshimthebestofffinancially.Brettmustalsodetermineifhispreferenceforwalnutsoveralmondsshouldinfluencehisdecision.Execute:a.Brettcalculatesthemarketvalueofthealmondcropis$100,000(1,000tonsat@$100perton),whilethemarketvalueofthewalnutcropis$88,000(800tons@$110perton).Evaluate:No,heshouldnotmaketheexchange.Hewouldnotgiveupanassetworth$100,00