Question 1

A project which has a coefficient of variation greater than zero will have a risk-adjusted discount rate

Accepted Answer

A)  less than the risk-free rate of return. 
B)  greater than the risk-free rate of return. 
C)  equal to the risk-free rate of return. 
D)  not related to the risk-free rate of return. 
A)  less than the risk-free rate of return. 
B)  greater than the risk-free rate of return. 
C)  equal to the risk-free rate of return. 
D)  not related to the risk-free rate of return.

Question 2

Foreign direct investment is the transfer of capital, managerial, and technical assets to a foreign country.

Accepted Answer

A) True 
 B)False

Question 3

In international trade, transfer prices are prices that subsidiaries charge each other for the goods and services traded between them.

Accepted Answer

A) True 
 B)False

Question 4

A firm is considering investment in a capital project which is described below.  The firm's cost of capital is 18 percent and the riskfree rate is 6 percent.  The project has a risk index of 1.5.  The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project:   RADR = Rf + Risk Index (Cost of capital - Rf)
$$\begin{array} { l r } 
\text { Initial Investment } & \$ 1,000,000 \
\hline \text { Year } & \text { Cash Inflow } \
\hline 1 & \$ 500,000 \
2 & 500,000 \
3 & 500,000
\end{array}$$
-The net present value of the project when adjusting for risk is____________

Accepted Answer

A)  $105,000 
B)  $87,000 
C)  $0 
D)  -$9,500 
A)  $105,000 
B)  $87,000 
C)  $0 
D)  -$9,500

Question 5

A corporation is assessing the risk of two capital budgeting proposals.  The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table.  The firm's cost of capital is 10 percent.
$$\begin{array} { c c c } 
& { \text { Project A } } \
\hline \text { Initial Investment } & \text { Annual cash inflow } & \text { Outcome } \
\hline { \$ 20,000 } & \$ 5,000 & \text { Pessimistic } \
& 10,000 & \text { Most likely } \
& 15,000 & \text { Optimistic } \\
& \text { Project B } & \
\hline \text { Initial Investment } & \text { Annual cash inflow } & \text { Outcome } \
\hline  { \text { \$100,000 } } & \$ 20,000 & \text { Pessimistic } \
& 40,000 & \text { Most likely } \
& 100,000 & \text { Optimistic }
\end{array}$$
-If the projects have five-year lives, the range of the net present value for Project B is approximately. _____________

Accepted Answer

A)  $303,260 
B)  $255,410 
C)  $80,560 
D)  $201,000 
A)  $303,260 
B)  $255,410 
C)  $80,560 
D)  $201,000

Question 6

The importance and widespread use of transfer pricing in international trade makes capital budgeting in MNCs very difficult unless the transfer prices used accurately reflect actual costs and incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 7

The investment opportunities schedule (IOS) is the graphical presentation of IRRs in descending order against the total dollar investment.

Accepted Answer

A) True 
 B)False

Question 8

In the context of capital budgeting, risk refers to

Accepted Answer

A)  the chance that the internal rate of return will exceed the cost of capital. 
B)  the chance that the net present value will be greater than zero. 
C)  the degree of variability of the initial investment. 
D)  the degree of variability of the cash inflows. 
A)  the chance that the internal rate of return will exceed the cost of capital. 
B)  the chance that the net present value will be greater than zero. 
C)  the degree of variability of the initial investment. 
D)  the degree of variability of the cash inflows.

Question 9

A firm is considering investment in a capital project which is described below.  The firm's cost of capital is 18 percent and the riskfree rate is 6 percent.  The project has a risk index of 1.5.  The firm uses the following equation to determine the risk adjusted discount rate, RADR, for each project:   RADR = Rf + Risk Index (Cost of capital - Rf)
$$\begin{array} { l r } 
\text { Initial Investment } & \$ 1,000,000 \
\hline \text { Year } & \text { Cash Inflow } \
\hline 1 & \$ 500,000 \
2 & 500,000 \
3 & 500,000
\end{array}$$
-The discount rate that should be used in the net present value calculation to compensate for risk is(See Figure 13.3)

Accepted Answer

A)  24 percent. 
B)  18 percent. 
C)  15 percent. 
D)  6 percent. 
A)  24 percent. 
B)  18 percent. 
C)  15 percent. 
D)  6 percent.

Question 10

The market risk-return function is a graphical presentation of the discount rates associated with each level of project risk.

Accepted Answer

A) True 
 B)False

Question 11

Simulation is an approach that evaluates the impact on return of simultaneous changes in a number of variables.

Accepted Answer

A) True 
 B)False

Question 12

A firm buys a business with land that can be used for expansion in the future. This would beconsidered a ________option.

Accepted Answer

A)  abandonment 
B)  growth 
C)  tax 
D)  flexibility 
A)  abandonment 
B)  growth 
C)  tax 
D)  flexibility

Question 13

____________refers to the chance that the inputs into the analysis of an investment project will prove to be wrong.

Accepted Answer

A)  Forecasting 
B)  Data entry 
C)  RADRs 
D)  Risk 
A)  Forecasting 
B)  Data entry 
C)  RADRs 
D)  Risk

Question 14

An asset is priced to earned a 14% annual return; the asset has a beta of 1.4. The market risk premium is 7% and the risk free rate is 6%. The asset is

Accepted Answer

A)  underpriced. 
B)  correctly priced. 
C)  overpriced. 
D)  cannot be determined with the information provided 
A)  underpriced. 
B)  correctly priced. 
C)  overpriced. 
D)  cannot be determined with the information provided

Question 15

The IRR approach to capital rationing involves graphically plotting project IRR's in descendingorder against total dollar investment on _________graph.

Accepted Answer

A)  an ANPV 
B)  an IOS 
C)  an NPV 
D)  an RADR 
A)  an ANPV 
B)  an IOS 
C)  an NPV 
D)  an RADR

Question 16

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

Accepted Answer

A) True 
 B)False

Question 17

An asset is priced to earned a 10% annual return; the asset has a beta of 0.75. The market risk premium is 8% and the risk free rate is 4%. The asset is

Accepted Answer

A)  cannot be determined with the information provided 
B)  correctly priced. 
C)  underpriced. 
D)  overpriced. 
A)  cannot be determined with the information provided 
B)  correctly priced. 
C)  underpriced. 
D)  overpriced.

Question 18

When firms ignore real options in the capital budgeting process, they undervalue capital projects.

Accepted Answer

A) True 
 B)False

Question 19

Scenario analysis is an approach that uses a number of possible values for a given variable in order to assess its impact on a firm's return.

Accepted Answer

A) True 
 B)False

Question 20

The risk-adjusted discount rate (RADRs) are the risk-adjustment factors that represent 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

A project which has a coefficient of variation greater than zero will have a risk-adjusted discount rate

Foreign direct investment is the transfer of capital, managerial, and technical assets to a foreign country.

In international trade, transfer prices are prices that subsidiaries charge each other for the goods and services traded between them.

The importance and widespread use of transfer pricing in international trade makes capital budgeting in MNCs very difficult unless the transfer prices used accurately reflect actual costs and incremental cash flows.

The investment opportunities schedule (IOS) is the graphical presentation of IRRs in descending order against the total dollar investment.

In the context of capital budgeting, risk refers to

The market risk-return function is a graphical presentation of the discount rates associated with each level of project risk.

Simulation is an approach that evaluates the impact on return of simultaneous changes in a number of variables.

A firm buys a business with land that can be used for expansion in the future. This would beconsidered a ________option.

____________refers to the chance that the inputs into the analysis of an investment project will prove to be wrong.

An asset is priced to earned a 14% annual return; the asset has a beta of 1.4. The market risk premium is 7% and the risk free rate is 6%. The asset is

The IRR approach to capital rationing involves graphically plotting project IRR's in descendingorder against total dollar investment on _________graph.

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

An asset is priced to earned a 10% annual return; the asset has a beta of 0.75. The market risk premium is 8% and the risk free rate is 4%. The asset is

When firms ignore real options in the capital budgeting process, they undervalue capital projects.

Scenario analysis is an approach that uses a number of possible values for a given variable in order to assess its impact on a firm's return.

The risk-adjusted discount rate (RADRs) are the risk-adjustment factors that represent 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.

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

A project which has a coefficient of variation greater than zero will have a risk-adjusted discount rate

Foreign direct investment is the transfer of capital, managerial, and technical assets to a foreign country.

In international trade, transfer prices are prices that subsidiaries charge each other for the goods and services traded between them.

The importance and widespread use of transfer pricing in international trade makes capital budgeting in MNCs very difficult unless the transfer prices used accurately reflect actual costs and incremental cash flows.

The investment opportunities schedule (IOS) is the graphical presentation of IRRs in descending order against the total dollar investment.

In the context of capital budgeting, risk refers to

The market risk-return function is a graphical presentation of the discount rates associated with each level of project risk.

Simulation is an approach that evaluates the impact on return of simultaneous changes in a number of variables.

A firm buys a business with land that can be used for expansion in the future. This would beconsidered a ________option.

____________refers to the chance that the inputs into the analysis of an investment project will prove to be wrong.

An asset is priced to earned a 14% annual return; the asset has a beta of 1.4. The market risk premium is 7% and the risk free rate is 6%. The asset is

The IRR approach to capital rationing involves graphically plotting project IRR's in descendingorder against total dollar investment on _________graph.

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

An asset is priced to earned a 10% annual return; the asset has a beta of 0.75. The market risk premium is 8% and the risk free rate is 4%. The asset is

When firms ignore real options in the capital budgeting process, they undervalue capital projects.

Scenario analysis is an approach that uses a number of possible values for a given variable in order to assess its impact on a firm's return.

The risk-adjusted discount rate (RADRs) are the risk-adjustment factors that represent 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.

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

Filters