Question 1

It has been found that the value of the stock of corporations whose shares are traded publicly in anefficient marketplace is

Accepted Answer

A)  generally negatively affected by diversification, because of the increase in risk. 
B)  generally not affected by diversification, unless greater returns are expected. 
C)  generally positively affected by diversification, because of the reduction in risk. 
D)  generally negatively affected by diversification, because of the increase in the required rate of return. 
A)  generally negatively affected by diversification, because of the increase in risk. 
B)  generally not affected by diversification, unless greater returns are expected. 
C)  generally positively affected by diversification, because of the reduction in risk. 
D)  generally negatively affected by diversification, because of the increase in the required rate of return. B

Question 2

If a firm has a project with an IRR_________RADR, the project should be

Accepted Answer

A)  greater than; accepted. 
B)  less than; accepted. 
C)  greater than; rejected. 
D)  Cannot be determined with the information provided. 
A)  greater than; accepted. 
B)  less than; accepted. 
C)  greater than; rejected. 
D)  Cannot be determined with the information provided. A

Question 3

The ___________reflects the return that must be earned on the given project to compensate the firm's owners adequately according to the project's variability of cash flows.

Accepted Answer

A)  average rate of return 
B)  risk-adjusted discount rate 
C)  internal rate of return 
D)  cost of capital 
A)  average rate of return 
B)  risk-adjusted discount rate 
C)  internal rate of return 
D)  cost of capital B

Question 4

Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate(RADR) approach implicitly assumes that risk is an increasing function of time.

Accepted Answer

A) True 
 B)False

Question 5

The breakeven cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.

Accepted Answer

A) True 
 B)False

Question 6

International capital budgeting differs from the domestic version because (1) cash inflows and outflows occur in a foreign currency, and (2) foreign investments potentially face significant political risk.

Accepted Answer

A) True 
 B)False

Question 7

The preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is

Accepted Answer

A)  sensitivity analysis. 
B)  simulation. 
C)  risk-adjusted discount rates. 
D)  certainty equivalents. 
A)  sensitivity analysis. 
B)  simulation. 
C)  risk-adjusted discount rates. 
D)  certainty equivalents.

Question 8

Which of the following is an example of diversifiable risk.

Accepted Answer

A)  An economic downturn due to overcapacity in many industries worldwide. 
B)  Geopolitical uncertainty caused by differing government policies. 
C)  The global threat of terrorism and war. 
D)  The insider trading activities of the company's executives. 
A)  An economic downturn due to overcapacity in many industries worldwide. 
B)  Geopolitical uncertainty caused by differing government policies. 
C)  The global threat of terrorism and war. 
D)  The insider trading activities of the company's executives.

Question 9

If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

Accepted Answer

A)  constrained capital. 
B)  capital rationing. 
C)  wealth optimization. 
D)  profitability. 
A)  constrained capital. 
B)  capital rationing. 
C)  wealth optimization. 
D)  profitability.

Question 10

The risk-adjusted discount rate (RADR) is the rate of return that must be earned on a given projectto compensate the firm's owners adequately, thereby resulting in the maintenance or improvementof share price.

Accepted Answer

A) True 
 B)False

Question 11

The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks.

Accepted Answer

A) True 
 B)False

Question 12

The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

Accepted Answer

A) True 
 B)False

Question 13

The objective of___________ is to select the group of projects that provides the highest overall netpresent value and does not require more dollars than are budgeted.

Accepted Answer

A)  certainty equivalents 
B)  scenario analysis 
C)  sensitivity analysis 
D)  capital rationing 
A)  certainty equivalents 
B)  scenario analysis 
C)  sensitivity analysis 
D)  capital rationing

Question 14

A project which has a coefficient of variation of zero is considered

Accepted Answer

A)  a bad investment. 
B)  very risky. 
C)  risk free. 
D)  slightly risky. 
A)  a bad investment. 
B)  very risky. 
C)  risk free. 
D)  slightly risky.

Question 15

A financial goal of the firm is to

Accepted Answer

A)  accept projects that have negative NPVs. 
B)  accept all projects that can be funded internally. 
C)  accept projects that have a cost of capital greater than the IRR. 
D)  none of the above 
A)  accept projects that have negative NPVs. 
B)  accept all projects that can be funded internally. 
C)  accept projects that have a cost of capital greater than the IRR. 
D)  none of the above

Question 16

Sensitivity analysis is a behavioral approach that uses a number of possible values for a given variable to assess its impact on a firm's return.

Accepted Answer

A) True 
 B)False

Question 17

Generally, the market value of a firm's stock, whose shares are traded publicly in an efficient market, is not affected by diversification.

Accepted Answer

A) True 
 B)False

Question 18

A firm is evaluating the relative riskiness of two capital budgeting projects.  The following table summarizes the net present values and associated probabilities for various outcomes for the two projects.
$\text { Net Present Value }$

$\begin{array}{rrr}\text { Probability }&\text { Project A }&\text { Project B }\
\hline 0.25 & -\$ 5,000 & 0 \
0.50 & 4,000 & \$ 2,000 \
0.25 & 10,000 & 8,000
\end{array}$
-The expected net present value for projects A and B are

Accepted Answer

A)  $4,000 and $1,500, respectively. 
B)  $2,000 and $1,000, respectively. 
C)  $3,000 and $3,300, respectively. 
D)  $3,250 and $3,000, respectively. 
A)  $4,000 and $1,500, respectively. 
B)  $2,000 and $1,000, respectively. 
C)  $3,000 and $3,300, respectively. 
D)  $3,250 and $3,000, respectively.

Question 19

A firm is evaluating the relative riskiness of two capital budgeting projects.  The following table summarizes the net present values and associated probabilities for various outcomes for the two projects.
$\text { Net Present Value }$
$\begin{array}{rrr}\text { Probability }&\text { Project A }&\text { Project B }\
0.25 & -\$ 5,000 & 0 \
0.50 & 4,000 & \$ 2,000 \
0.25 & 10,000 & 8,000
\end{array}$
-The standard deviation for projects A and B are

Accepted Answer

A)  $4,210 and $2,104, respectively. 
B)  $3,000 and $5,000, respectively. 
C)  $5,356 and $3,000, respectively. 
D)  $2,106 and $0, respectively. 
A)  $4,210 and $2,104, respectively. 
B)  $3,000 and $5,000, respectively. 
C)  $5,356 and $3,000, respectively. 
D)  $2,106 and $0, respectively.

Question 20

Forecasting the future with accuracy is problematic in valuation; this creates

Accepted Answer

A)  a need to adjust discount rates downwards. 
B)  a tendency to avoid valuation when buying capital assets. 
C)  a need to spend more on software to get it right. 
D)  problems in predicting future cash inflows from a project. 
A)  a need to adjust discount rates downwards. 
B)  a tendency to avoid valuation when buying capital assets. 
C)  a need to spend more on software to get it right. 
D)  problems in predicting future cash inflows from a project.

It has been found that the value of the stock of corporations whose shares are traded publicly in anefficient marketplace is

If a firm has a project with an IRR_________RADR, the project should be

The ___________reflects the return that must be earned on the given project to compensate the firm's owners adequately according to the project's variability of cash flows.

Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate(RADR) approach implicitly assumes that risk is an increasing function of time.

The breakeven cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.

International capital budgeting differs from the domestic version because (1) cash inflows and outflows occur in a foreign currency, and (2) foreign investments potentially face significant political risk.

The preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is

Which of the following is an example of diversifiable risk.

If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

The risk-adjusted discount rate (RADR) is the rate of return that must be earned on a given projectto compensate the firm's owners adequately, thereby resulting in the maintenance or improvementof share price.

The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks.

The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

The objective of___________ is to select the group of projects that provides the highest overall netpresent value and does not require more dollars than are budgeted.

A project which has a coefficient of variation of zero is considered

A financial goal of the firm is to

Sensitivity analysis is a behavioral approach that uses a number of possible values for a given variable to assess its impact on a firm's return.

Generally, the market value of a firm's stock, whose shares are traded publicly in an efficient market, is not affected by diversification.

Forecasting the future with accuracy is problematic in valuation; this creates

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

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International Corporate Finance

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Exam 13: Dealing With Project Risk and Other Topics in Capital Budgeting

It has been found that the value of the stock of corporations whose shares are traded publicly in anefficient marketplace is

If a firm has a project with an IRR_________RADR, the project should be

The ___________reflects the return that must be earned on the given project to compensate the firm's owners adequately according to the project's variability of cash flows.

Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate(RADR) approach implicitly assumes that risk is an increasing function of time.

The breakeven cash inflow is the minimum level of cash inflow necessary for a project to be acceptable.

International capital budgeting differs from the domestic version because (1) cash inflows and outflows occur in a foreign currency, and (2) foreign investments potentially face significant political risk.

The preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is

Which of the following is an example of diversifiable risk.

If a firm has a limited capital budget and too many good capital projects to fund them all, it is said to be facing the problem of

The risk-adjusted discount rate (RADR) is the rate of return that must be earned on a given projectto compensate the firm's owners adequately, thereby resulting in the maintenance or improvementof share price.

The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks.

The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

The objective of___________ is to select the group of projects that provides the highest overall netpresent value and does not require more dollars than are budgeted.

A project which has a coefficient of variation of zero is considered

A financial goal of the firm is to

Sensitivity analysis is a behavioral approach that uses a number of possible values for a given variable to assess its impact on a firm's return.

Generally, the market value of a firm's stock, whose shares are traded publicly in an efficient market, is not affected by diversification.

Forecasting the future with accuracy is problematic in valuation; this creates

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Capital Budgeting: Principles and Techniques

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

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