Question 1

The use of sensitivity analysis will generally result in

Accepted Answer

A) the calculation of a certainty equivalent NPV. 
B) the calculation of a best case,a base case and a worst case. 
C) the calculation of the coefficient of variation. 
D) the calculation of the probability of the maximum profit.

Question 2

The difference between sensitivity analysis and scenario analysis is

Accepted Answer

A) sensitivity analysis is a method for evaluating risk while scenario analysis is not. 
B) sensitivity analysis is based on regression analysis while scenario analysis is not. 
C) sensitivity analysis examines the impact on the overall results of a change in one variable while scenario analysis examines the impacts on overall results of changes in several variables at the same time. 
D) None of the above

Question 3

If,at the end of the project life,a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale,and the income tax rate is 40%,how much will be the cash flow?

Accepted Answer

A) $2,800 
B) $3,000 
C) $3,400 
D) $4,000

Question 4

You deposit $10,000 in a savings account today.If the interest rate is 3%,what is the value in 20 years?

Accepted Answer

The answer of You deposit $10,000 in a savings account...

Question 5

Usually,the cost of capital for newly issued stock is ________ the cost of retained earnings.

Accepted Answer

A) lower than 
B) higher than 
C) same as 
D) either higher or lower than

Question 6

An increase in net working capital required at the beginning of an expansion project must be considered to be

Accepted Answer

A) a cash inflow. 
B) a reallocation of assets. 
C) a cash outflow. 
D) None of the above

Question 7

The cost of capital is best described as the

Accepted Answer

A) opportunity cost of financing a capital outlay. 
B) funds that must be acquired to finance a capital outlay. 
C) decrease in stockholder equity due to a capital outlay. 
D) All of the above

Question 8

The term capital budgeting refers to decisions

Accepted Answer

A) which are made in the short run. 
B) which concern the spreading of expenditures over a period lasting less than one year. 
C) where expenditures and receipts for a particular undertaking will continue over a relatively long period of time. 
D) where a receipt of cash will occur simultaneously with an outflow of cash.

Question 9

The use of real options in capital budgeting

Accepted Answer

A) may raise the NPV of a capital project. 
B) makes the analysis of the project considerably easier. 
C) allows management to make decisions more quickly. 
D) eliminates the need for calculating the project's risk adjusted discount rate.

Question 10

Net present value and internal rate of return capital budgeting decisions can differ because

Accepted Answer

A) the initial costs of the capital outlays differ. 
B) the cash flow streams differ. 
C) the discount rates differ for different time periods. 
D) All of the above

Question 11

When future events cannot be assigned probabilities,we are talking about

Accepted Answer

A) risk. 
B) uncertainty. 
C) a clouded future. 
D) financial risk.

Question 12

The internal rate of return of a project can be found by

Accepted Answer

A) discounting all cash flows at the cost of capital. 
B) averaging all cash inflows,and calculating the interest rate,which will make them equal to the average investment. 
C) calculating the interest rate,which will equate the present value of all cash inflows to the present value of all cash outflows. 
D) None of the above

Question 13

When analyzing a capital budgeting project,the analyst must include in his calculation all of the following except

Accepted Answer

A) all revenues and costs in terms of cash flows. 
B) only those cash flows that will change if the proposal is accepted (i.e.,incremental cash flows). 
C) interest payments on debt financing connected with the project. 
D) any effect (impact)the acceptance of the project under consideration will have on other projects now in operation.

Question 14

What additional sources of risk come from international investments?

Accepted Answer

The answer of What additional sources of risk come from...

Question 15

The Widget Company has estimated the following revenue possibilities for the year:
$\begin{array} { l l } 
\text { Sales } & \text { Probability } \
100 & 0.15 \
150 & 0.20 \
220 & 0.30 \
290 & 0.20 \
310 & 0.15
\end{array}$
a.Find expected revenue.
b.Find the standard deviation.
c.Find the coefficient of variation.

Accepted Answer

The answer of The Widget Company has estimated the following...

Question 16

Describe the Capital Asset Pricing Model (CAPM)and how it is used in capital budgeting decisions.

Accepted Answer

The answer of Describe the Capital Asset Pricing Model (CAPM)and...

Question 17

The XYZ Company has estimated expected cash flows for 1996 to be as follows:
 $$\begin{array} { | c | r | } 
\hline \text { Probability } & \text { Cash flow } \
\hline .10 & \$ 120,000 \
\hline .15 & 140,000 \
\hline .50 & 150,000 \
\hline .15 & 180,000 \
\hline .10 & 210,000 \
\hline
\end{array}$$ Calculate:
a.expected value
b.standard deviation
c.coefficient of variation
d.the probability that the cash flow will be less than $100,000

Accepted Answer

The answer of The XYZ Company has estimated expected cash...

Question 18

Inc.'s stock is currently $50.The last dividend that they paid was $1.If dividends are expected to increase at a 10% annual rate,what is the firm's equity cost of capital?

Accepted Answer

The answer of Inc.'s stock is currently $50.The last dividend...

Question 19

An advantage of the decision tree is that

Accepted Answer

A) it eliminates the need for calculating the cost of capital. 
B) it eliminates the need for calculating probabilities. 
C) it causes the analyst to consider important events that may occur in the course of the project,and decisions and actions that may have to be undertaken. 
D) All of the above

Question 20

Simulation analysis

Accepted Answer

A) permits the calculation of expected value and standard deviation. 
B) does not permit the calculation of expected value and standard deviation. 
C) is too complex to ever be used in actual business situations. 
D) does not consider probabilities.

Exam 12: Capital Budgeting and Risk