Question
PRACTICE QUESTION 1 A ____ is a course of action that can be made available, usually at a cost, which improves financial results under certain
PRACTICE
QUESTION 1
A ____ is a course of action that can be made available, usually at a cost, which improves financial results under certain conditions.
a. | risk-adjusted option | |
b. | probability distribution | |
c. | real option | |
d. | decision tree |
5 points
QUESTION 2
A company's cost of capital is the most appropriate discount rate to use when analyzing which type of project(s)?
a. | Expansion and new venture projects | |
b. | Replacement and expansion projects | |
c. | Expansion projects | |
d. | Replacement projects | |
e. | New venture projects |
5 points
QUESTION 3
Decision tree analysis:
a. | provides a relatively quick and easy way to get a rough idea of the probability distribution of NPV outcomes in a capital budgeting project. | |
b. | may prompt management to reject a project with a positive NPV (point estimate). | |
c. | does not apply to IRR analysis. | |
d. | a and b are both correct. |
5 points
QUESTION 4
In theory, the risk-free rate is more appropriate for the NPV calculation in the certainty equivalent approach since:
a. | certainty equivalent factors cannot take negative values. | |
b. | certainty equivalents imply zero risk. | |
c. | it is assumed that there is no business-specific risk associated with the projects. | |
d. | certainty equivalents consider unsystematic risk only. |
5 points
QUESTION 5
Scenario/sensitivity analysis is a procedure that can be used in the capital budgeting process to indicate how sensitive the ____ is to changes in a particular variable.
a. | probability | |
b. | return distribution | |
c. | net present value | |
d. | standard deviation |
5 points
QUESTION 6
The ____ makes risky projects less acceptable by simply lowering the cash flow estimates themselves.
a. | overlay approach | |
b. | accounting beta method | |
c. | pure play method | |
d. | certainty equivalent approach |
5 points
QUESTION 7
The NPV and IRR of any capital budgeting project are random variables with means that represent their most likely values and variances that reflect:
a. | variations in profit. | |
b. | value inconsistencies. | |
c. | risk. | |
d. | unstable expectancies. |
5 points
QUESTION 8
The Monte Carlo simulation:
a. | is a computer simulation which calculates NPV based on random observations for each of a project's cash flows. | |
b. | Is an approach that involves the use of numbers drawn randomly from probability distributions. | |
c. | All of the above | |
d. | Involves making assumptions that specify the shapes of the probability distributions for each future cash flow in a capital budgeting project. |
5 points
QUESTION 9
A _____________________ is a graphic representation of a business project in which multiple events can have multiple outcomes.
a. | Decision Tree | |
b. | Probability distribution | |
c. | Simulation | |
d. | Timeline |
5 points
QUESTION 10
In capital budgeting:
a. | Projects are thought to be incremental to the normal business of the firm. | |
b. | All of the above. | |
c. | Risk is important and should be included in the analysis but often isn't. | |
d. | If a firm accepts projects without regard for risk, then the company can change its overall risk profile firm as perceived by investors. |
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