Consider the Following Prices from a McDonald's Restaurant: a McDonald's

question 24

Multiple Choice

Consider the following prices from a McDonald's Restaurant: A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

• A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67.
• B) No, no arbitrage opportunity exists.
• C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34.
• D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67.

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Definitions:

SML Approach

Refers to the Security Market Line approach, a graphical representation in the Capital Asset Pricing Model (CAPM) that depicts the relationship between risk and expected return for all securities.

Flotation Costs

Expenses incurred by a company in issuing new securities, including legal, administrative, and underwriting fees.

Computed NPV

The calculated Net Present Value based on a specific discount rate and series of cash flows.

Perpetual Cash Flows

Cash flows that are expected to continue indefinitely without an end.