Question 1:

You are purchasing a new TV at VisionsElectronics, and the salesperson is trying to convince you to buy a four-year extended warranty. The cost of the warranty to you today will be $302. However, if there is no claim against thewarranty, you will get a store credit for $302 to spend four years from now. Assume youwon't have any problems with your TV and you plan on buying more electronics at Visions in four years(so you would be certain to use the storecredit). Also assume the interest rate is 7% per year.

a) What is the value to you today of the promised storecredit?

b) Given your answer toa, what is the net cost of the extendedwarranty?

Question 2:

A friend asks to borrow $51 from you and in return will pay you $54 in one year. If your bank is offering a 6.1% interest rate on deposits andloans:

a) How much would you have in one year if you deposited the $51 instead?

b) How much money could you borrow today if you pay the bank $54 in oneyear?

c) Should you loan the money to your friend or deposit it in thebank?

Question 3:

Brett has almondorchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap thisyear's crop with him in an even exchange. Assume he produces 1,029 tonnes of almonds and his neighbour produces 775 tonnes of walnuts. If the market price of almonds is $100 per tonne and the market price of walnuts is $118 pertonne:

a) Should he make theexchange?

b) Does it matter whether he prefers almonds orwalnuts? Why or whynot?

Question 4:

Some companiescross-list theirshares, meaning that their stock trades on more than one stock exchange. Forexample, BlackBerry(ticker symbol:BB), trades on both the TSX and NASDAQ. If its price in Toronto is 18 Canadian dollars per share and anyone can exchange Canadian dollars(CAD) for U.S. dollars(USD) at the rate of 0.88 USD/CAD, what mustBB's price be onNASDAQ?

a) BB's price on NASDAQ must be $__________ USD.

Question 5:

Suppose your employer offers you a choice between a $5,000 bonus and 100 shares of thecompany's stock. Whichever one you choose will be awarded today. The stock is currently trading at $63.41 per share.

a) Suppose that if you receive the stockbonus, you are free to trade it. Which form of the bonus should youchoose? What is itsvalue?

b) Suppose that if you receive the stockbonus, you are required to hold it for at least one year. What can you say about the value of the stock bonusnow? What will your decision dependon?