Question 1

Two projects have the following NPVs and standard deviations:
$\begin{array} { l c c } 
& \text { Project } A & \text { Project } B \
\text { NPV } & 200 & 300 \
\text { Standard deviation } & 75 & 100
\end{array}$
Which of the two projects is more risky?

Accepted Answer

Since the two projects have different NPVs and different standard deviations,relative risk can be measured by the coefficient of variation.Project A has a CV of.375,project B .333.Thus,the relative risk of project B is less.

Question 2

Which of the following is an example of risk in capital budgeting on a global basis?

Accepted Answer

A) exchange rate changes 
B) tariff changes 
C) expropriation 
D) All of the above 
A) exchange rate changes 
B) tariff changes 
C) expropriation 
D) All of the above D

Question 3

You buy a lottery ticket for $1.If you win,you receive $3 million.The odds of your numbers coming up are 1:10,000,000.What is the expected value of this gamble?

Accepted Answer

Expected value = (3 million)(0.0000001)+ (-1)(0.9999999)= -$0.69,or you expect to lose 69 cents.

Question 4

If $1,000 is placed in an account earning 8% annually,the balance at the end of seven years will be

Accepted Answer

A) $1,080. 
B) $1,560. 
C) $2,000. 
D) $1,714. 
A) $1,080. 
B) $1,560. 
C) $2,000. 
D) $1,714.

Question 5

If a risky cash flow of $10,000 is equivalent to a riskless cash flow of $9,300,the certainty equivalent factor is

Accepted Answer

A) 0)93. 
B) 0)07. 
C) 1)07. 
D) 1)93. 
A) 0)93. 
B) 0)07. 
C) 1)07. 
D) 1)93.

Question 6

What additional complexities arise when multinational corporations consider capital projects on a global basis?

Accepted Answer

Considerations must be given to the impa

Question 7

Describe the real option approach to risk-adjusted capital budgeting.

Accepted Answer

Real options involve the contractional a

Question 8

A firm must spend $10 million today on a project that is expected to bring in annual revenues of $1.5 million for the next 10 years (beginning at the end of year 1).
a.If the firm's cost of capital is 5%,what is the NPV of this project?
b.If the firm's cost of capital is 10%,what is the NPV of this project?
c.What is the internal rate of return?

Accepted Answer

a.Present value of the revenue

Question 9

In evaluating the required rate of return for equity financing of a capital project,the Beta value is

Accepted Answer

A) the expected rate of growth in a firm's profits. 
B) the expected future value of a firm's stock. 
C) the volatility in the rate of return on a firm's stock compared with the volatility in the rate of return on a market portfolio of stocks. 
D) None of the above 
A) the expected rate of growth in a firm's profits. 
B) the expected future value of a firm's stock. 
C) the volatility in the rate of return on a firm's stock compared with the volatility in the rate of return on a market portfolio of stocks. 
D) None of the above

Question 10

Explain why risk can be insured against but uncertainty cannot.

Accepted Answer

The provider of insurance policies can a

Question 11

The certainty equivalent approach to accounting for risk in capital budgeting involves

Accepted Answer

A) adjusting the discount rate used to calculate net present values. 
B) adjusting the expected cash flows. 
C) estimating the coefficient of variation. 
D) estimating the standard deviation of the net present values. 
A) adjusting the discount rate used to calculate net present values. 
B) adjusting the expected cash flows. 
C) estimating the coefficient of variation. 
D) estimating the standard deviation of the net present values.

Question 12

The net present value of a project is calculated as

Accepted Answer

A) the future value of all cash inflows minus the present value of all outflows. 
B) the sum of all cash inflows minus the sum of all cash outflows. 
C) the present value of all cash inflows minus the present value of all cash outflows. 
D) None of the above 
A) the future value of all cash inflows minus the present value of all outflows. 
B) the sum of all cash inflows minus the sum of all cash outflows. 
C) the present value of all cash inflows minus the present value of all cash outflows. 
D) None of the above

Question 13

A stock whose rate of return fluctuates less than the rate of return of a market portfolio will have a beta that equals

Accepted Answer

A) 1) 
B) less than 1. 
C) more than 1. 
D) Either A or C above 
A) 1) 
B) less than 1. 
C) more than 1. 
D) Either A or C above

Question 14

A drawback in the use of sensitivity analysis in capital budgeting decisions is that it doesn't

Accepted Answer

A) permit evaluating alternative outcomes. 
B) provide estimates of net present values. 
C) assign probability values to outcomes. 
D) consider different possible rates of discount. 
A) permit evaluating alternative outcomes. 
B) provide estimates of net present values. 
C) assign probability values to outcomes. 
D) consider different possible rates of discount.

Question 15

Probabilities,which can be obtained by repetition or are based on general mathematical principles,are called

Accepted Answer

A) statistical. 
B) empirical. 
C) a priori. 
D) subjective. 
A) statistical. 
B) empirical. 
C) a priori. 
D) subjective.

Question 16

The expected value is

Accepted Answer

A) the total of all possible outcomes. 
B) the arithmetic average of all possible outcomes. 
C) the average of all possible outcomes weighted by their respective probabilities. 
D) the total of all possible outcomes divided by the number of different possible outcomes. 
A) the total of all possible outcomes. 
B) the arithmetic average of all possible outcomes. 
C) the average of all possible outcomes weighted by their respective probabilities. 
D) the total of all possible outcomes divided by the number of different possible outcomes.

Question 17

Capital rationing

Accepted Answer

A) exists when a company sets an arbitrary limit on the amount of investment it is willing to undertake,so that not all projects with an NPV higher than the cost of capital will be accepted. 
B) generally does not permit a company to achieve maximum value. 
C) seems to occur quite frequently among corporations. 
D) All of the above 
A) exists when a company sets an arbitrary limit on the amount of investment it is willing to undertake,so that not all projects with an NPV higher than the cost of capital will be accepted. 
B) generally does not permit a company to achieve maximum value. 
C) seems to occur quite frequently among corporations. 
D) All of the above

Question 18

Explain what is meant by the "weighted cost of capital" and how it is used in capital budgeting.

Accepted Answer

The proportion of each type of financing

Question 19

The use of the same cost of capital (risk adjusted discount rate)for all capital projects in a corporation

Accepted Answer

A) is usually the correct procedure. 
B) is incorrect since different divisions of the corporation may be faced with different levels of risk. 
C) is incorrect since different capital projects,even in the same division,may be faced with different levels of risk. 
D) Both B and C 
A) is usually the correct procedure. 
B) is incorrect since different divisions of the corporation may be faced with different levels of risk. 
C) is incorrect since different capital projects,even in the same division,may be faced with different levels of risk. 
D) Both B and C

Question 20

You start working at age 20 and you plan to deposit $5,000 in a savings account every year for the next 45 years.
a.At the end of this time,how much money will you have if the interest rate is 5%?
b.You decide that's not enough money.How much will you have to save every year if you wish to have $1,000,000 when you retire?

Accepted Answer

a.FV = 5,000 {((1 +

Two projects have the following NPVs and standard deviations: Project A Project B NPV 200 300 Standard deviation 75 100 Which of the two projects is more risky?

Which of the following is an example of risk in capital budgeting on a global basis?

You buy a lottery ticket for $1.If you win,you receive $3 million.The odds of your numbers coming up are 1:10,000,000.What is the expected value of this gamble?

If $1,000 is placed in an account earning 8% annually,the balance at the end of seven years will be

If a risky cash flow of $10,000 is equivalent to a riskless cash flow of $9,300,the certainty equivalent factor is

What additional complexities arise when multinational corporations consider capital projects on a global basis?

Describe the real option approach to risk-adjusted capital budgeting.

In evaluating the required rate of return for equity financing of a capital project,the Beta value is

Explain why risk can be insured against but uncertainty cannot.

The certainty equivalent approach to accounting for risk in capital budgeting involves

The net present value of a project is calculated as

A stock whose rate of return fluctuates less than the rate of return of a market portfolio will have a beta that equals

A drawback in the use of sensitivity analysis in capital budgeting decisions is that it doesn't

Probabilities,which can be obtained by repetition or are based on general mathematical principles,are called

The expected value is

Capital rationing

Explain what is meant by the "weighted cost of capital" and how it is used in capital budgeting.

The use of the same cost of capital (risk adjusted discount rate)for all capital projects in a corporation

Introduction

The Firm and Its Goals

Supply and Demand

Demand Elasticity

Demand Estimation and Forecasting Appendices 5A and 5B

The Theory and Estimation of Production Appendices 6A,6B,and 6C

The Theory and Estimation of Cost Appendices 7A,7B,and 7C

Pricing and Output Decisions: Perfect Competition and Monopoly Appendices 8A and 8B

Pricing and Output Decisions: Monopolistic Competition and Oligopoly

Special Pricing Practices

Game Theory and Asymmetric Information

The Multinational Corporation in a Global Setting

Government and Industry: Challenges and Opportunities for Todays Manager

The Global Soft Drink Industry

Filters

Exam 12: Capital Budgeting and Risk

Two projects have the following NPVs and standard deviations: Project A Project B NPV 200 300 Standard deviation 75 100 Which of the two projects is more risky?

Which of the following is an example of risk in capital budgeting on a global basis?

You buy a lottery ticket for $1.If you win,you receive $3 million.The odds of your numbers coming up are 1:10,000,000.What is the expected value of this gamble?

If $1,000 is placed in an account earning 8% annually,the balance at the end of seven years will be

If a risky cash flow of $10,000 is equivalent to a riskless cash flow of $9,300,the certainty equivalent factor is

What additional complexities arise when multinational corporations consider capital projects on a global basis?

Describe the real option approach to risk-adjusted capital budgeting.

In evaluating the required rate of return for equity financing of a capital project,the Beta value is

Explain why risk can be insured against but uncertainty cannot.

The certainty equivalent approach to accounting for risk in capital budgeting involves

The net present value of a project is calculated as

A stock whose rate of return fluctuates less than the rate of return of a market portfolio will have a beta that equals

A drawback in the use of sensitivity analysis in capital budgeting decisions is that it doesn't

Probabilities,which can be obtained by repetition or are based on general mathematical principles,are called

The expected value is

Capital rationing

Explain what is meant by the "weighted cost of capital" and how it is used in capital budgeting.

The use of the same cost of capital (risk adjusted discount rate)for all capital projects in a corporation

Introduction

The Firm and Its Goals

Supply and Demand

Demand Elasticity

Demand Estimation and Forecasting Appendices 5A and 5B

The Theory and Estimation of Production Appendices 6A,6B,and 6C

The Theory and Estimation of Cost Appendices 7A,7B,and 7C

Pricing and Output Decisions: Perfect Competition and Monopoly Appendices 8A and 8B

Pricing and Output Decisions: Monopolistic Competition and Oligopoly

Special Pricing Practices

Game Theory and Asymmetric Information

The Multinational Corporation in a Global Setting

Government and Industry: Challenges and Opportunities for Todays Manager

The Global Soft Drink Industry

Filters