The impact on investors' profit while violating the law of one price. Introduction: When investment opportunities of the same nature or commodities trade in two competitive markets with price differences, the investors will be benefited, as they will purchase in the market where the prices are cheap and they will sell in the market where the prices are high. By doing so, they will equalize the competitive prices of the market. This concept is known as “ the law of one price”.

Question

Want to see the full answer?

Answer 1

Question

Chapter 3.4, Problem 1CC

Summary Introduction

To discuss: The impact on investors' profit while violating the law of one price.

Introduction:

When investment opportunities of the same nature or commodities trade in two competitive markets with price differences, the investors will be benefited, as they will purchase in the market where the prices are cheap and they will sell in the market where the prices are high. By doing so, they will equalize the competitive prices of the market. This concept is known as “the law of one price”.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

No excel. I need to see the work or I will not understand. Blue Jeans Incorporated needs to raise $ 4.5 million of funds on a 12-year issue. If it places the bonds privately, the interest rate will be 10 percent. Fifty thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting spread will be 1.5 percent. There will be $110,000 in out-of-pocket costs. The debt will be outstanding for the full 12-year period, at which time it will be repaid. For each plan, compare the net amount of funds initially available to the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 13 percent annually.

(Do not use Excel) I like to see the work of how to solve the problem. The investment banking firm of Doots Incorporated. will use a dividend valuation model to appraise the shares of the Straight Fence Corporation. Dividends (D1) at the end of the current year will be $2.70. The growth rate (g) is 7 percent and the discount rate (Ke) is 13 percent. a. What should be the price of the stock to the public? b. If there is a 8 percent total underwriting spread on the stock, how much will the issuing corporation receive? c. If the issuing corporation requires a net price of $38.30 (proceeds to the corporation) and there is a 7 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.)

California Homes Associates is about to go public. The investment banking firm of Dillon and Associates is attempting to price the issue. The building industry generally trades at a 25 percent discount below the P/E ratio on the Standard & Poor’s 500 Stock Index. Assume that index currently has a P/E ratio of 30. The firm can be compared to the building industry as follows: CA Homes Building Industry Growth rate in earnings per share ............... 16% 13% Consistency of performance ...................... Increased earnings Increased earnings 3 out of 5 years 2 out of 5 years Debt to total assets.................................... 64%…