FIN 30100- Midterm Exam Guide - Comprehensive Notes for the exam ( 12 pages long!)
Document Summary
Lesson 2 financial decisions & the law of one price. Net present value (npv) decision rule: npv = pv(benefits) pv(costs, the decision rule is to accept investment projects with a positive npv and reject those that have a negative npv. In choosing among positive npv alternatives, we should take the alternative with the highest npv: maximize npv and then borrow or lend money to shift cash flows through time and find the most preferred pattern of cash flows. If a security sells for less than the pv of its future cash flows, then we can generate immediate arbitrage profits by buying the security and simultaneously borrowing the pv of all future cash flows. If a security sells for more than the pv of its future cash flows, we can generate arbitrage profits by selling (short sale) the security and simultaneously investing the pv of future cash flows.
