Question 1

If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

Accepted Answer

A) True 
 B)False

Question 2

If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Accepted Answer

A) True 
 B)False

Question 3

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Accepted Answer

A)  Increase the estimated IRR of the project to reflect its greater risk. 
B)  Increase the estimated NPV of the project to reflect its greater risk. 
C)  Reject the project, since its acceptance would increase the firm's risk. 
D)  Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets. 
E)  Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk. 
A)  Increase the estimated IRR of the project to reflect its greater risk. 
B)  Increase the estimated NPV of the project to reflect its greater risk. 
C)  Reject the project, since its acceptance would increase the firm's risk. 
D)  Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets. 
E)  Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. 
B)  An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline. 
C)  The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. 
D)  Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. 
E)  Identifying an externality can never lead to an increase in the calculated NPV. 
A)  An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. 
B)  An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to decline. 
C)  The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. 
D)  Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. 
E)  Identifying an externality can never lead to an increase in the calculated NPV.

Question 5

The two cardinal rules that financial analysts should follow to avoid errors are: (1) in the NPV equation, the numerator should use income calculated in accordance with generally accepted accounting principles, and (2) all incremental cash flows should be considered when making accept/reject decisions for capital budgeting projects.

Accepted Answer

A) True 
 B)False

If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

Filters

Exam 12: Cash Flow Estimation and Risk Analysis

If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land.

If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

A firm is considering a new project whose risk is greater than the risk of the firm's average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

Which of the following statements is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

Filters