Question 1

Behavioral approaches for dealing with risk include scenario analysis and simulation.

Accepted Answer

A) True 
 B)False

Question 2

Exchange rate risk is the the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.

Accepted Answer

A) True 
 B)False

Question 3

Table 12.4
Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects.  
-Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)

Accepted Answer

NPV_P = (15,000/.1)x[1

Question 4

The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).

Accepted Answer

A)  internal rate of return 
B)  investment opportunities schedule 
C)  risk-adjusted discount rate 
D)  annualized net present value 
A)  internal rate of return 
B)  investment opportunities schedule 
C)  risk-adjusted discount rate 
D)  annualized net present value

Question 5

Despite their focus on total risk, RADRs are often used in practice.

Accepted Answer

A) True 
 B)False

Question 6

As a top manager, you must decide firm which of the proposed projects should be accepted for the upcoming year since only $6 million is available for the next year's capital budget. What is the total NPV of the projects that should be accepted?

Accepted Answer

A)  A, B, & F; total cost = $5.5 million; Total NPV= $1.57 
B)  F, B, & D; total cost = $6 million; Total NPV= $1.72 
C)  E, F, & D; total cost = $65.5 milliom; Total NPV= $1.45 
D)  Can not be determined. 
A)  A, B, & F; total cost = $5.5 million; Total NPV= $1.57 
B)  F, B, & D; total cost = $6 million; Total NPV= $1.72 
C)  E, F, & D; total cost = $65.5 milliom; Total NPV= $1.45 
D)  Can not be determined.

Question 7

The output of simulation provides an excellent basis for decision making since it allows the decision maker to view a continuum of risk-return trade-offs rather than a single-point estimate.

Accepted Answer

A) True 
 B)False

Question 8

The annualized net present value approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

Accepted Answer

A) True 
 B)False

Question 9

The advantage of using simulation in the capital budgeting process is

Accepted Answer

A)  ease of calculation. 
B)  the availability of a continuum of risk-return trade-offs which may be used as the basis for decision-making. 
C)  dependability of predetermined probability distributions. 
D)  that it generates a continuum of risk-return trade-offs rather than a single-point estimate. 
A)  ease of calculation. 
B)  the availability of a continuum of risk-return trade-offs which may be used as the basis for decision-making. 
C)  dependability of predetermined probability distributions. 
D)  that it generates a continuum of risk-return trade-offs rather than a single-point estimate.

Question 10

In general, exchange rate risk is easier to protect against than political risk.

Accepted Answer

A) True 
 B)False

Question 11

In capital budgeting, risk refers to the chance that a project has a high degree of variability of the initial investment.

Accepted Answer

A) True 
 B)False

Question 12

In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a negative NPV and those falling below the SML would have a positive NPV.

Accepted Answer

A) True 
 B)False

Question 13

Because of their focus on total risk, RADRs are the best theoretical method for adjusting for project risk and are therefore used most often in practice.

Accepted Answer

A) True 
 B)False

Question 14

In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a positive NPV and those falling below the SML would have a negative NPV.

Accepted Answer

A) True 
 B)False

Question 15

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

Question 16

Table 12.2
A firm is considering investment in a capital project which is described below. The firm's cost of capital is 18 percent and the risk-free 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)  
-The net present value without adjusting the discount rate for risk is ________. (See Table 12.2)

Accepted Answer

A)  $336,000 
B)  $250,000 
C)  $179,400 
D)  $87,000 
A)  $336,000 
B)  $250,000 
C)  $179,400 
D)  $87,000

Question 17

A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and Projects 3, 4, and 5 are mutually exclusive. The projects are listed with their returns.   A ranking of the projects on the basis of their returns from the best to the worst according to their acceptability to the firm would be

Accepted Answer

A)  4, 1, 2 or 5, and 3. 
B)  4, 1, and 2. 
C)  3, 2 or 5, 1, and 4. 
D)  4, 1, 5, and 3. 
A)  4, 1, 2 or 5, and 3. 
B)  4, 1, and 2. 
C)  3, 2 or 5, 1, and 4. 
D)  4, 1, 5, and 3.

Question 18

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 19

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

Accepted Answer

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

Question 20

Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.  
-The Annualized NPV of project A is ________. (See Table 12.6)

Accepted Answer

A)  $22,673 
B)  $12,947 
C)  $38,227 
D)  $21,828 
A)  $22,673 
B)  $12,947 
C)  $38,227 
D)  $21,828

Behavioral approaches for dealing with risk include scenario analysis and simulation.

Exchange rate risk is the the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.

Table 12.4 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)

The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).

Despite their focus on total risk, RADRs are often used in practice.

As a top manager, you must decide firm which of the proposed projects should be accepted for the upcoming year since only $6 million is available for the next year's capital budget. What is the total NPV of the projects that should be accepted?

The output of simulation provides an excellent basis for decision making since it allows the decision maker to view a continuum of risk-return trade-offs rather than a single-point estimate.

The annualized net present value approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

The advantage of using simulation in the capital budgeting process is

In general, exchange rate risk is easier to protect against than political risk.

In capital budgeting, risk refers to the chance that a project has a high degree of variability of the initial investment.

In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a negative NPV and those falling below the SML would have a positive NPV.

Because of their focus on total risk, RADRs are the best theoretical method for adjusting for project risk and are therefore used most often in practice.

In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a positive NPV and those falling below the SML would have a negative NPV.

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

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

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

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

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Exam 12: Risk and Refinements in Capital Budgeting

Behavioral approaches for dealing with risk include scenario analysis and simulation.

Exchange rate risk is the the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.

Table 12.4 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Evaluate the projects using risk-adjusted discount rates. (See Table 12.4)

The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).

Despite their focus on total risk, RADRs are often used in practice.

As a top manager, you must decide firm which of the proposed projects should be accepted for the upcoming year since only $6 million is available for the next year's capital budget. What is the total NPV of the projects that should be accepted?

The output of simulation provides an excellent basis for decision making since it allows the decision maker to view a continuum of risk-return trade-offs rather than a single-point estimate.

The annualized net present value approach to evaluating projects with unequal lives converts the net present value of unequal-lived, mutually exclusive projects into an equivalent annual amount.

The advantage of using simulation in the capital budgeting process is

In general, exchange rate risk is easier to protect against than political risk.

In capital budgeting, risk refers to the chance that a project has a high degree of variability of the initial investment.

In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a negative NPV and those falling below the SML would have a positive NPV.

Because of their focus on total risk, RADRs are the best theoretical method for adjusting for project risk and are therefore used most often in practice.

In applying risk-adjusted discount rates to project selection, projects falling above the SML would have a positive NPV and those falling below the SML would have a negative NPV.

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

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

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

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters