Question 1

Which three of the statements are advantages of using sensitivity analysis?

Accepted Answer

A)  It provides information for decision making. 
B)  It can be used when making contingency plans. 
C)  It identifies the relationships between various unpredictable variables. 
D)  It may lead to an indication of where further investigation might be worthwhile. 
A)  It provides information for decision making. 
B)  It can be used when making contingency plans. 
C)  It identifies the relationships between various unpredictable variables. 
D)  It may lead to an indication of where further investigation might be worthwhile.

Question 2

What is meant by the term 'sensitivity analysis'?

Accepted Answer

A)  An assessment of the effect of objective changes on the accuracy of inputs 
B)  A calculation of what changes are needed in inputs to create a specified change in output 
C)  Calculation of the dependence of NPV on levels of risk 
D)  A series of 'what- if' analyses to assess the effects of future changes of predicted profits and other key variables 
A)  An assessment of the effect of objective changes on the accuracy of inputs 
B)  A calculation of what changes are needed in inputs to create a specified change in output 
C)  Calculation of the dependence of NPV on levels of risk 
D)  A series of 'what- if' analyses to assess the effects of future changes of predicted profits and other key variables

Question 3

The NewProduct project involves an initial investment of £400,000. The predicted annual cash flow is £150,000 for a four year period, after which the product will be replaced. The required rate of return is 15 per cent. What is the net present value?

Accepted Answer

A)  - £25,750 
B)  £200,000 
C)  £35,750 
D)  £28,250 
A)  - £25,750 
B)  £200,000 
C)  £35,750 
D)  £28,250

Question 4

Which two methods do firms have for allowing for different levels of risk?

Accepted Answer

A)  Raising the discount rate 
B)  Lowering the discount rate 
C)  Issuing bonds 
D)  Issuing more shares 
A)  Raising the discount rate 
B)  Lowering the discount rate 
C)  Issuing bonds 
D)  Issuing more shares

Question 5

A project is predicted to have a return of - £16m in a recession, and the probability of a recession is estimated to be 0.25. In a growth period the return would be 16m (with probability 0.50) and in a boom the return would be £24m (with probability 0.25). What is the expected return?

Accepted Answer

A)  £80m 
B)  £24m 
C)  £50m 
D)  £10m 
A)  £80m 
B)  £24m 
C)  £50m 
D)  £10m

Question 6

Which three following statements are correct?

Accepted Answer

A)  Risk averters prefer a more certain return to an alternative with an equal but more risky expected outcome. 
B)  Most investors in shares are risk averters. 
C)  Risk averters demonstrate diminishing marginal utility. 
D)  Risk averters expect companies to behave as risk lovers. 
A)  Risk averters prefer a more certain return to an alternative with an equal but more risky expected outcome. 
B)  Most investors in shares are risk averters. 
C)  Risk averters demonstrate diminishing marginal utility. 
D)  Risk averters expect companies to behave as risk lovers.

Question 7

Evaluation of two projects has shown for Project X a return of £10m with a 0.8 probability and a return of 0 with probability 0.2, while Project Y has a return of £20m with a probability of 0.5 and a return of 0 with the same probability. What is the expected return?

Accepted Answer

A)  £21m 
B)  £18m 
C)  £30m 
D)  £2m 
A)  £21m 
B)  £18m 
C)  £30m 
D)  £2m

Question 8

Which three of the following problems is most likely to result from using probability analysis?

Accepted Answer

A)  The investigation is too complicated for managers to understand. 
B)  Projects may be viewed in isolation. 
C)  Too much faith is placed in quantified subjective probabilities. 
D)  The analysis does not offer information on the likely outcomes and the associated probabilities. 
A)  The investigation is too complicated for managers to understand. 
B)  Projects may be viewed in isolation. 
C)  Too much faith is placed in quantified subjective probabilities. 
D)  The analysis does not offer information on the likely outcomes and the associated probabilities.

Question 9

What term is used for the concept that "The additional utility from consumption diminishes as consumption increases."

Accepted Answer

A)  Increasing marginal utility 
B)  Utilised marginal increase 
C)  Diminishing marginal utility 
D)  Utilised marginal diminution 
A)  Increasing marginal utility 
B)  Utilised marginal increase 
C)  Diminishing marginal utility 
D)  Utilised marginal diminution

Question 10

Which of the following options highlights a key benefit of scenario analysis when compared with sensitivity analysis?

Accepted Answer

A)  It considers situations in which many variables change at the same time. 
B)  It highlights factors that managers may previously not have considered. 
C)  It calculates the probability of various outcomes. 
D)  It focuses on the effect of changes in a single variable. 
A)  It considers situations in which many variables change at the same time. 
B)  It highlights factors that managers may previously not have considered. 
C)  It calculates the probability of various outcomes. 
D)  It focuses on the effect of changes in a single variable.

Question 11

In probability analysis, what technique is used to calculate the expected return?

Accepted Answer

A)  Weight each of the possible outcomes by the probability of occurrence, and then calculate the arithmetic average of the weighted outcomes 
B)  Calculate the mean of the various possible outcomes 
C)  Calculate the weighted mean of all the possible outcomes 
D)  Identify the outcome that is most likely to occur 
A)  Weight each of the possible outcomes by the probability of occurrence, and then calculate the arithmetic average of the weighted outcomes 
B)  Calculate the mean of the various possible outcomes 
C)  Calculate the weighted mean of all the possible outcomes 
D)  Identify the outcome that is most likely to occur

Question 12

At the break- even point which of the following expressions applies?

Accepted Answer

A) NPV > 0 B) NPV = IRR C) NPV = 0 D) NPV < 0 A) NPV > 0 B) NPV = IRR C) NPV = 0 D) NPV < 0

Question 13

Which of the following statements correctly relates to the concept of risk?

Accepted Answer

A)  A subjective probability can only be established mathematically or from historical data. 
B)  An objective probability can be established mathematically or from historical data. 
C)  Uncertainty only applies when it is possible to assign probabilities. 
D)  Risk only applies when it is possible to assign probabilities. 
A)  A subjective probability can only be established mathematically or from historical data. 
B)  An objective probability can be established mathematically or from historical data. 
C)  Uncertainty only applies when it is possible to assign probabilities. 
D)  Risk only applies when it is possible to assign probabilities.

Question 14

Which three of the following accurately relate to the real options approach?

Accepted Answer

A)  It takes future managerial flexibility into account. 
B)  It allows managers to amend decisions in the light of future events. 
C)  It differs from the NPV approach, which does not offer future flexibility. 
D)  It does not allow managers to expand the plans in future. 
A)  It takes future managerial flexibility into account. 
B)  It allows managers to amend decisions in the light of future events. 
C)  It differs from the NPV approach, which does not offer future flexibility. 
D)  It does not allow managers to expand the plans in future.

Question 15

What is meant by the term 'standard deviation'?

Accepted Answer

A)  The square of the variance 
B)  The dispersion around the expected value 
C)  The square root of the sum of the probabilities 
D)  The square root of the sum of the probabilities of each outcome 
A)  The square of the variance 
B)  The dispersion around the expected value 
C)  The square root of the sum of the probabilities 
D)  The square root of the sum of the probabilities of each outcome

Question 16

Which statement best describes the concept of risk?

Accepted Answer

A)  Risk describes a situation where there is not just one possible outcome, but an array of potential returns. 
B)  Under risk situations there can only be one possible outcome, but with array of potential returns. 
C)  Under uncertain situations, future outcomes can be expected to have only one value. 
D)  Under a situation of risk, future outcomes can be expected to have only one value. 
A)  Risk describes a situation where there is not just one possible outcome, but an array of potential returns. 
B)  Under risk situations there can only be one possible outcome, but with array of potential returns. 
C)  Under uncertain situations, future outcomes can be expected to have only one value. 
D)  Under a situation of risk, future outcomes can be expected to have only one value.

Question 17

What is shown by the Z statistic?

Accepted Answer

A)  The probability of all outcomes 
B)  The number of standard deviations from the maximum value to the value that interests you 
C)  The number of standard deviations from the mean to the value that interests you 
D)  The probability of the outcome 
A)  The probability of all outcomes 
B)  The number of standard deviations from the maximum value to the value that interests you 
C)  The number of standard deviations from the mean to the value that interests you 
D)  The probability of the outcome

Question 18

Which three the following steps would you complete when adjusting for risk through the discount rate?

Accepted Answer

A)  Add a premium to the risk- free discount rate 
B)  Calculate net present value, based solely on the premium adjustment 
C)  Use the risk- adjusted discount rate to calculate net present value 
D)  Make decisions, based on a subjective judgement of the risk 
A)  Add a premium to the risk- free discount rate 
B)  Calculate net present value, based solely on the premium adjustment 
C)  Use the risk- adjusted discount rate to calculate net present value 
D)  Make decisions, based on a subjective judgement of the risk

Question 19

How is a rate of return calculated on the basis of the risk premium and the risk- free rate?

Accepted Answer

A)  A premium is subtracted from the risk- free discount rate. 
B)  A risk premium is added to the risk- free discount rate. 
C)  The risk- free rate is discounted to create a premium. 
D)  The premium rate is discounted to minimise risk. 
A)  A premium is subtracted from the risk- free discount rate. 
B)  A risk premium is added to the risk- free discount rate. 
C)  The risk- free rate is discounted to create a premium. 
D)  The premium rate is discounted to minimise risk.

Question 20

What is represented by the term xi in the expression x = Σ (xipi) ? i=1

Accepted Answer

A)  The mean outcome 
B)  The value of an outcome 
C)  The dispersion of the outcome 
D)  The probability of the outcome 
A)  The mean outcome 
B)  The value of an outcome 
C)  The dispersion of the outcome 
D)  The probability of the outcome

Exam 6: Risk and Project Appraisal

Which three of the statements are advantages of using sensitivity analysis?

What is meant by the term 'sensitivity analysis'?

The NewProduct project involves an initial investment of £400,000. The predicted annual cash flow is £150,000 for a four year period, after which the product will be replaced. The required rate of return is 15 per cent. What is the net present value?

Which two methods do firms have for allowing for different levels of risk?

A project is predicted to have a return of - £16m in a recession, and the probability of a recession is estimated to be 0.25. In a growth period the return would be 16m (with probability 0.50) and in a boom the return would be £24m (with probability 0.25). What is the expected return?

Which three following statements are correct?

Evaluation of two projects has shown for Project X a return of £10m with a 0.8 probability and a return of 0 with probability 0.2, while Project Y has a return of £20m with a probability of 0.5 and a return of 0 with the same probability. What is the expected return?

Which three of the following problems is most likely to result from using probability analysis?

What term is used for the concept that "The additional utility from consumption diminishes as consumption increases."

Which of the following options highlights a key benefit of scenario analysis when compared with sensitivity analysis?

In probability analysis, what technique is used to calculate the expected return?

At the break- even point which of the following expressions applies?

Which of the following statements correctly relates to the concept of risk?

Which three of the following accurately relate to the real options approach?

What is meant by the term 'standard deviation'?

Which statement best describes the concept of risk?

What is shown by the Z statistic?

Which three the following steps would you complete when adjusting for risk through the discount rate?

How is a rate of return calculated on the basis of the risk premium and the risk- free rate?

What is represented by the term xi in the expression x = Σ (xipi) ? i=1

The Financial World

Project Appraisal: Net Present Value and Internal Rate of Return

Project Appraisal: Cash Flow and Applications

The Decision-Making Process for Investment Appraisal

Project Appraisal: Capital Rationing, Taxation and Inflation

Portfolio Theory

The Capital Asset Pricing Model and Multi-Factor Models

Stock Markets

Raising Equity Capital

Long-Term Debt Finance

Short-Term and Medium-Term Finance

Stock Market Efficiency

Value-Based Management

Value-Creation Metrics

The Cost of Capital

Valuing Shares

Capital Structure

Dividend Policy

Mergers

Derivatives

Managing Exchange-Rate Risk

Future Value of 1 at Compound Interest

Present Value of 1 at Compound Interest

Present Value of an Annuity of 1 at Compound Interest

Filters

What is represented by the term x_i in the expression x = Σ (xipi) ? i=1