Question 1

The amount by which the required discount rate exceeds the risk-free rate is called

Accepted Answer

A)  the opportunity cost. 
B)  the risk premium. 
C)  the risk equivalent. 
D)  the excess risk. 
A)  the opportunity cost. 
B)  the risk premium. 
C)  the risk equivalent. 
D)  the excess risk. B

Question 2

An approach to capital rationing that involves graphing project returns in descending order against the total dollar investment to determine the group of acceptable projects is called the

Accepted Answer

A)  net present value approach. 
B)  the internal rate of return approach. 
C)  the payback approach. 
D)  the profitability index approach. 
A)  net present value approach. 
B)  the internal rate of return approach. 
C)  the payback approach. 
D)  the profitability index approach. B

Question 3

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. D

Question 4

Table 11.4
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
   *Not applicable
-For Proposal 1, the annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 11.4)

Accepted Answer

A)  $60,000 
B)  $255,000 
C)  $300,000 
D)  $210,000 
A)  $60,000 
B)  $255,000 
C)  $300,000 
D)  $210,000

Question 5

Table 11.11
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40.  
-What potential biases exist in project selection if Nico Manufacturing did not adjust for the difference in risk between projects X and Y (See Table 12.5).

Accepted Answer

The danger of not accounting for differe

Question 6

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

Question 7

Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included as relevant in computing a project's incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 8

One type of simulation program made popular by the widespread use of personal computers is called

Accepted Answer

A)  Monaco Simulation. 
B)  Lemans Simulation. 
C)  Cannes Simulation. 
D)  Monte Carlo Simulation. 
A)  Monaco Simulation. 
B)  Lemans Simulation. 
C)  Cannes Simulation. 
D)  Monte Carlo Simulation.

Question 9

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 10

Table 11.8
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)  
-It has been found that the value of the stock of corporations whose shares are traded publicly in an efficient marketplace is

Accepted Answer

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

Question 11

Table 11.3
 
Fine Press is considering replacing the existing press with a more efficient press. The new press costs $55,000 and requires $5,000 in installation costs. The old press was purchased 2 years ago for an installed cost of $35,000 and can be sold for $20,000 net of any removal costs today. Both presses are depreciated under the MACRS 5-year recovery schedule. The firm is in 40 percent marginal tax rate.
-Calculate the initial investment of the new asset. (See Table 11.3)

Accepted Answer

The answer of Table 11.3
 
Fine Press is considering replacing...

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

A 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 14

Table 11.4
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
   *Not applicable
-For Proposal 2, the initial outlay equals ________. (See Table 11.4)

Accepted Answer

A)  $120,720 cash outflow 
B)  $164,560 cash outflow 
C)  $150,000 cash outflow 
D)  $167,520 cash outflow 
A)  $120,720 cash outflow 
B)  $164,560 cash outflow 
C)  $150,000 cash outflow 
D)  $167,520 cash outflow

Question 15

Table 11.12
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 B is ________. (See Table 11.12)

Accepted Answer

A)  $11,673 
B)  $12,947 
C)  $38,227 
D)  $21,828 
A)  $11,673 
B)  $12,947 
C)  $38,227 
D)  $21,828

Question 16

Table 11.7
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.  
-If the projects have five-year lives, the range of the net present value for Project B is approximately ________. (See Table 11.7)

Accepted Answer

A)  $80,560 
B)  $201,000 
C)  $255,410 
D)  $303,280 
A)  $80,560 
B)  $201,000 
C)  $255,410 
D)  $303,280

Question 17

The tax treatment regarding the sale of existing assets that are sold for less than the book value results in

Accepted Answer

A)  an ordinary tax benefit. 
B)  a capital loss tax benefit. 
C)  recaptured depreciation taxed as ordinary income. 
D)  a capital gain tax liability and recaptured depreciation taxed as ordinary income. 
A)  an ordinary tax benefit. 
B)  a capital loss tax benefit. 
C)  recaptured depreciation taxed as ordinary income. 
D)  a capital gain tax liability and recaptured depreciation taxed as ordinary income.

Question 18

Table 11.4
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
   *Not applicable
-For Proposal 3, the book value of the existing asset is ________. (See Table 11.4)

Accepted Answer

A)  $21,000 
B)  $43,000 
C)  $52,000 
D)  $80,000 
A)  $21,000 
B)  $43,000 
C)  $52,000 
D)  $80,000

Question 19

Table 11.11
Nico Manufacturing is considering investment in one of two mutually exclusive projects X and Y which are described below. Nico Manufacturing's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Nico estimates that the beta for project X is 1.20 and the beta for project Y is 1.40.  
-Using the risk-adjusted discount rate method of project evaluation, find the NPV for projects X and Y. Which project should Nico select using this method? (See Table 11.11)

Accepted Answer

The answer of Table 11.11
Nico Manufacturing is considering investment in...

Question 20

The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT

Accepted Answer

A)  incremental annual savings produced by the new asset. 
B)  cost of the new asset. 
C)  proceeds from the sale of the existing asset. 
D)  taxes on the sale of an existing asset. 
A)  incremental annual savings produced by the new asset. 
B)  cost of the new asset. 
C)  proceeds from the sale of the existing asset. 
D)  taxes on the sale of an existing asset.

The amount by which the required discount rate exceeds the risk-free rate is called

An approach to capital rationing that involves graphing project returns in descending order against the total dollar investment to determine the group of acceptable projects is called the

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

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.

Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included as relevant in computing a project's incremental cash flows.

One type of simulation program made popular by the widespread use of personal computers is called

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.

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.

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

The tax treatment regarding the sale of existing assets that are sold for less than the book value results in

The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT

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

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters

Exam 11: Capital Budgeting Cash Flows and Risk Refinements

The amount by which the required discount rate exceeds the risk-free rate is called

An approach to capital rationing that involves graphing project returns in descending order against the total dollar investment to determine the group of acceptable projects is called the

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

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.

Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included as relevant in computing a project's incremental cash flows.

One type of simulation program made popular by the widespread use of personal computers is called

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.

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.

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

The tax treatment regarding the sale of existing assets that are sold for less than the book value results in

The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT

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

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Filters