Question
1. In theory, the risk-free rate is more appropriate for the NPV calculation in the certainty equivalent approach since: a. certainty equivalents consider unsystematic risk
1. In theory, the risk-free rate is more appropriate for the NPV calculation in the certainty equivalent approach since:
a. | certainty equivalents consider unsystematic risk only. | |
b. | it is assumed that there is no business-specific risk associated with the projects. | |
c. | certainty equivalents imply zero risk. | |
d. | certainty equivalent factors cannot take negative values. |
2. The certainty equivalent factor can take any value:
a. | between -1 and 1. | |
b. | between -100 and 0. | |
c. | between 0 and 1. | |
d. | between 0 and 100. |
3. Riskier projects should be harder to accept than others with similar cash flows. This is accomplished by:
a. | Using higher discount rates which will lower the NPV of the project. | |
b. | Using lower discount rates which will lower the NPV of the project. | |
c. | Using higher discount rates which will increase the NPV of the project. | |
d. | Using lower discount rates which will increase the NPV of the project. |
4. Average stocks are yielding 7.0%, while short term treasuries return 3.0%. Marshall Inc. has a beta of 1.3 and is considering a new venture into an industry with direct competitors who have betas that average 1.8. What discount rate should Marshall use in evaluating the cash flows from this project?
a. | 10.0% | |
b. | 10.2% | |
c. | 8.2% | |
d. | 4.8% |
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