The Law of One Price and the Principle of No Arbitrage

1. What is the relation between the Law of One Price and the Principle of No Arbitrage?

2. How does the Valuation Principle help a financial manager make decisions?

3. Can we directly compare dollar amounts received at different points in time?

Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose Honda’s profit margin with the rebate is $6000 per vehicle.

If the change in sales is the only consequence of this decision, what are its costs and benefits? Is it a good idea?



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