1. Which of the following event is mostly diversifiable risk or market risk? Why?
a. Caterpillar faces a prolonged labor strike.
b. Walmart retail business is being undermined by the giant Amazon.
c. The Federal Reserve suddenly increases short-term interest rates.
d. Emerging economies like China and others are on the path of slow economic growth. China is our number 2 trading partner.
2. The price of a big mac in USA is US $4.50 and the price of a big mac in Germany is Euro 3.50. According to the Purchasing Power Parity (PPP), the spot exchange rate US $/Euro is:
a.) 1.2857 b.) 0.7778 c.) 1.4287 d.) 0.7001 please show work
3. A record company bought the rights to an artist’s music catalogue and they expect to receive royalty payments of $35,000 per year forever (a perpetuity). What is this cash flow worth? Assume interest rates are 6.5%.
$ 548,240
$ 493,240
$ 538,462
$ 41,760