Question 1

In finance,risk is most commonly measured by

Accepted Answer

A) the probability distribution. 
B) the standard deviation. 
C) the average deviation. 
D) the square root of the standard deviation. 
A) the probability distribution. 
B) the standard deviation. 
C) the average deviation. 
D) the square root of the standard deviation.

Question 2

When two mutually exclusive projects are considered,the NPV calculations and the IRR calculations may,under certain circumstances,give conflicting recommendations as to which project to accept.The reason for this result is that in the NPV calculation,cash inflows are assumed to be reinvested at the cost of capital,while in the IRR solution,reinvestment takes place at

Accepted Answer

A) the hurdle rate. 
B) the accounting rate of return. 
C) the prime rate. 
D) the project's internal rate of return. 
A) the hurdle rate. 
B) the accounting rate of return. 
C) the prime rate. 
D) the project's internal rate of return.

Question 3

Other things being equal,the higher the cost of capital

Accepted Answer

A) the higher the NPV of a project. 
B) the higher the IRR of the project. 
C) the lower the NPV of the project. 
D) The cost of capital has no effect on the NPV of the project. 
A) the higher the NPV of a project. 
B) the higher the IRR of the project. 
C) the lower the NPV of the project. 
D) The cost of capital has no effect on the NPV of the project.

Question 4

An aircraft company has signed a contract to deliver a plane 3 years from now.The price they will receive at the end of 3 years is $20 million.If the firm's cost of capital is 6%,what is the present value of this payment?

Accepted Answer

PV = 20/(1

Question 5

Two projects have the following NPVs and standard deviations: $$\begin{array} { | r | c | c | } 
\hline & \text { Project } A & \text { Project } B \
\hline \text { NPV } & 200 & 200 \
\hline \text { Standard deviation } & 75 & 100 \
\hline
\end{array}$$ A person who selects project A over project B is

Accepted Answer

A) risk seeking. 
B) risk indifferent. 
C) risk averse. 
D) None of the above 
A) risk seeking. 
B) risk indifferent. 
C) risk averse. 
D) None of the above

Question 6

Project C has an expected value of $500 and a standard deviation of 50.Project D has an expected value of $300 and a standard deviation of 10.Comment on the desirability of these projects.

Accepted Answer

CVC = 50/500 = 0.10 CVD = 10/300 = 0.03

Question 7

The payback period for a project,requiring an initial outlay of $10,000 and producing ten uniform annual cash inflows of $1,500,is

Accepted Answer

A) six years. 
B) six years and eight months. 
C) six years and six months. 
D) seven years. 
A) six years. 
B) six years and eight months. 
C) six years and six months. 
D) seven years.

Question 8

If the risk adjusted discount rate method and the certainty equivalent methods are to give the same results,then the certainty equivalent factor (at)must equal (where rf is the risk-free interest rate,and "k" is the risk adjusted cost of capital)

Accepted Answer

A) (1 + rf)t times (1 + k)t. 
B) (1 + k)t divided by (1 + rf)t. 
C) (1 + rf)t divided by (1 + k)t. 
D) (1 + k)t minus (1 + rf)t. 
A) (1 + rf)t times (1 + k)t. 
B) (1 + k)t divided by (1 + rf)t. 
C) (1 + rf)t divided by (1 + k)t. 
D) (1 + k)t minus (1 + rf)t.

Question 9

A drawback in using the payback approach to capital budgeting decisions is

Accepted Answer

A) it doesn't account for the time value of money. 
B) it ignores cash flows beyond the payback period. 
C) it doesn't adjust for differences in the stream of cash flows. 
D) All of the above 
A) it doesn't account for the time value of money. 
B) it ignores cash flows beyond the payback period. 
C) it doesn't adjust for differences in the stream of cash flows. 
D) All of the above

Question 10

The risk adjusted discount rate

Accepted Answer

A) is the sum of the risk-free rate and the risk premium. 
B) includes risk in the denominator of the present value calculation. 
C) includes risk in the numerator of the present value calculation. 
D) All of the above 
A) is the sum of the risk-free rate and the risk premium. 
B) includes risk in the denominator of the present value calculation. 
C) includes risk in the numerator of the present value calculation. 
D) All of the above

Question 11

A proposed project should be accepted if the net present value is

Accepted Answer

A) positive. 
B) negative. 
C) larger than the internal rate of return. 
D) smaller than the internal rate of return. 
A) positive. 
B) negative. 
C) larger than the internal rate of return. 
D) smaller than the internal rate of return.

Question 12

Probabilities,which are based on past data or experience,are called

Accepted Answer

A) a priori. 
B) objective. 
C) uncertain. 
D) statistical. 
A) a priori. 
B) objective. 
C) uncertain. 
D) statistical.

Question 13

A source of business risk is a change in

Accepted Answer

A) technology. 
B) consumer preferences. 
C) input prices. 
D) All of the above 
A) technology. 
B) consumer preferences. 
C) input prices. 
D) All of the above

Question 14

You win the $20 million state lottery,and you have a choice of taking an amount of money per year for the next 20 years or a flat payment now.The flat payment that the state offers you is $9.82 million.
a.What discount rate is the state using?
b.Should you take the money or the annuity?

Accepted Answer

a.8% (This is essentially the internal r

Question 15

An aircraft company has signed a contract to sell a plane for $20 million.The firm buying the plane will pay for it in 5 annual payments (at year end)of $4 million.If the firm's cost of capital is 6%,what is the net present value of this payment?

Accepted Answer

The answer of An aircraft company has signed a contract...

Question 16

If an expansion proposal is accepted,allowing an otherwise idle (and useless)machine with a market value and book value of $2,000 to be utilized,should it be recorded as a cash outflow,and if so,how much?

Accepted Answer

The answer of If an expansion proposal is accepted,allowing an...

Question 17

A project whose acceptance eliminates another project from consideration is called

Accepted Answer

A) independent. 
B) mutually exclusive. 
C) replacement. 
D) complementary. 
A) independent. 
B) mutually exclusive. 
C) replacement. 
D) complementary.

Question 18

What are the major sources of risk for the firm?

Accepted Answer

Economic uncertainty,competiti

Question 19

The internal rate of return equals the cost of capital when

Accepted Answer

A) NPV = 0. B) NPV > 0. C) NPV < 0. D) None of the above A) NPV = 0. B) NPV > 0. C) NPV < 0. D) None of the above

Question 20

In terms of capital budgeting,explain the difference between risk and uncertainty.

Accepted Answer

Uncertainty involves possible future eve

In finance,risk is most commonly measured by

Other things being equal,the higher the cost of capital

An aircraft company has signed a contract to deliver a plane 3 years from now.The price they will receive at the end of 3 years is $20 million.If the firm's cost of capital is 6%,what is the present value of this payment?

Two projects have the following NPVs and standard deviations: Project A Project B NPV 200 200 Standard deviation 75 100 A person who selects project A over project B is

Project C has an expected value of $500 and a standard deviation of 50.Project D has an expected value of $300 and a standard deviation of 10.Comment on the desirability of these projects.

The payback period for a project,requiring an initial outlay of $10,000 and producing ten uniform annual cash inflows of $1,500,is

If the risk adjusted discount rate method and the certainty equivalent methods are to give the same results,then the certainty equivalent factor (at)must equal (where rf is the risk-free interest rate,and "k" is the risk adjusted cost of capital)

A drawback in using the payback approach to capital budgeting decisions is

The risk adjusted discount rate

A proposed project should be accepted if the net present value is

Probabilities,which are based on past data or experience,are called

A source of business risk is a change in

You win the $20 million state lottery,and you have a choice of taking an amount of money per year for the next 20 years or a flat payment now.The flat payment that the state offers you is $9.82 million. a.What discount rate is the state using? b.Should you take the money or the annuity?

An aircraft company has signed a contract to sell a plane for $20 million.The firm buying the plane will pay for it in 5 annual payments (at year end)of $4 million.If the firm's cost of capital is 6%,what is the net present value of this payment?

If an expansion proposal is accepted,allowing an otherwise idle (and useless)machine with a market value and book value of $2,000 to be utilized,should it be recorded as a cash outflow,and if so,how much?

A project whose acceptance eliminates another project from consideration is called

What are the major sources of risk for the firm?

The internal rate of return equals the cost of capital when

In terms of capital budgeting,explain the difference between risk and uncertainty.

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

In finance,risk is most commonly measured by

Other things being equal,the higher the cost of capital

An aircraft company has signed a contract to deliver a plane 3 years from now.The price they will receive at the end of 3 years is $20 million.If the firm's cost of capital is 6%,what is the present value of this payment?

Two projects have the following NPVs and standard deviations: Project A Project B NPV 200 200 Standard deviation 75 100 A person who selects project A over project B is

Project C has an expected value of $500 and a standard deviation of 50.Project D has an expected value of $300 and a standard deviation of 10.Comment on the desirability of these projects.

The payback period for a project,requiring an initial outlay of $10,000 and producing ten uniform annual cash inflows of $1,500,is

If the risk adjusted discount rate method and the certainty equivalent methods are to give the same results,then the certainty equivalent factor (at)must equal (where rf is the risk-free interest rate,and "k" is the risk adjusted cost of capital)

A drawback in using the payback approach to capital budgeting decisions is

The risk adjusted discount rate

A proposed project should be accepted if the net present value is

Probabilities,which are based on past data or experience,are called

A source of business risk is a change in

You win the $20 million state lottery,and you have a choice of taking an amount of money per year for the next 20 years or a flat payment now.The flat payment that the state offers you is $9.82 million. a.What discount rate is the state using? b.Should you take the money or the annuity?

An aircraft company has signed a contract to sell a plane for $20 million.The firm buying the plane will pay for it in 5 annual payments (at year end)of $4 million.If the firm's cost of capital is 6%,what is the net present value of this payment?

If an expansion proposal is accepted,allowing an otherwise idle (and useless)machine with a market value and book value of $2,000 to be utilized,should it be recorded as a cash outflow,and if so,how much?

A project whose acceptance eliminates another project from consideration is called

What are the major sources of risk for the firm?

The internal rate of return equals the cost of capital when

In terms of capital budgeting,explain the difference between risk and uncertainty.

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