Question 1

The most expensive method of adjusting for total project risk in the evaluation of capital budgeting projects is the _____.

Accepted Answer

A)  sensitivity analysis method 
B)  simulation approach 
C)  net present value/payback method 
D)  risk-adjusted discount rate approach 
A)  sensitivity analysis method 
B)  simulation approach 
C)  net present value/payback method 
D)  risk-adjusted discount rate approach

Question 2

The risk assessment technique that considers the impact of simultaneous changes in key variables on the desirability of an investment project is ____.

Accepted Answer

A)  sensitivity analysis 
B)  simultaneous equations 
C)  scenario analysis 
D)  RADR analysis 
A)  sensitivity analysis 
B)  simultaneous equations 
C)  scenario analysis 
D)  RADR analysis

Question 3

Portfolio risk is also known as _____.

Accepted Answer

A)  total project risk 
B)  beta risk 
C)  market risk 
D)  scenario risk 
A)  total project risk 
B)  beta risk 
C)  market risk 
D)  scenario risk

Question 4

All of the following are advantages of the NPV/payback approach to risk analysis EXCEPT it ______.

Accepted Answer

A)  is easy and inexpensive to apply 
B)  considers a project's liquidity 
C)  explicitly considers the variability of a project's return 
D)  is consistent with the notion that risk increases with futurity 
A)  is easy and inexpensive to apply 
B)  considers a project's liquidity 
C)  explicitly considers the variability of a project's return 
D)  is consistent with the notion that risk increases with futurity

Question 5

The hurdle rate is best described as the _____.

Accepted Answer

A)  required rate of return 
B)  risk adjusted discount rate 
C)  net present value 
D)  risk free rate 
A)  required rate of return 
B)  risk adjusted discount rate 
C)  net present value 
D)  risk free rate

Question 6

The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.6. The current risk-free rate is 9.5 percent, and the expected market return is 16 percent. What rate of return should Chris-Kraft require on a project of average risk?

Accepted Answer

A)  25.6% 
B)  14.9% 
C)  10.4% 
D)  19.9% 
A)  25.6% 
B)  14.9% 
C)  10.4% 
D)  19.9%

Question 7

The risk-adjusted discount rate approach is considered preferable to the weighted cost of capital approach in determining the net present value of a project when the projects under consideration differ significantly in _____.

Accepted Answer

A)  the number of cash flows generated by the projects 
B)  their total return 
C)  their cash inflows 
D)  their risk characteristics 
A)  the number of cash flows generated by the projects 
B)  their total return 
C)  their cash inflows 
D)  their risk characteristics

Question 8

SCAN is a multi-divisional utility company. SCAN has four divisions with the following betas and proportions of the firm's total assets: ? $\begin{array}{lcc}
\text { Division } & \text { Beta } & \% \text { of Assets } \
\text { Electric \& Gas } & 0.85 & 60 \
\text { Bus transportation } & 0.95 & 10 \
\text { Real estate } & 1.40 & 25 \
\text { Recreation } & 1.15 & 5
\end{array}$ ?
The risk-free rate is 8 percent, and the market risk premium is 5 percent. If SCAN is considering a residential development, what should the firm use as its cost of equity in evaluating this project?

Accepted Answer

A)  13.05% 
B)  16.20% 
C)  12.25% 
D)  15.00% 
A)  13.05% 
B)  16.20% 
C)  12.25% 
D)  15.00%

Question 9

When evaluating a capital expenditure to be made in a foreign country, the parent firm must be concerned with the _____.

Accepted Answer

A)  exchange rate risk 
B)  cash flows that can be expected to be received by the parent 
C)  greater uncertainty associated with tax rates in the host country 
D)  All of these are correct 
A)  exchange rate risk 
B)  cash flows that can be expected to be received by the parent 
C)  greater uncertainty associated with tax rates in the host country 
D)  All of these are correct

Question 10

Total project risk is ______.

Accepted Answer

A)  the contribution a project makes to the risk of the firm 
B)  measured by the correlation coefficient 
C)  the chance that a project will perform below expectations 
D)  measured by the project's beta 
A)  the contribution a project makes to the risk of the firm 
B)  measured by the correlation coefficient 
C)  the chance that a project will perform below expectations 
D)  measured by the project's beta

Question 11

All of the following are correct statements about a project's total risk EXCEPT _____.

Accepted Answer

A)  undiversified investors are concerned about the company's future outlook 
B)  it becomes the relevant risk when the project's returns are correlated to the returns from the firm as a whole 
C)  total project risk can be measured by calculating standard deviation 
D)  total project risk is irrelevant when forecasting a company's chance of bankruptcy 
A)  undiversified investors are concerned about the company's future outlook 
B)  it becomes the relevant risk when the project's returns are correlated to the returns from the firm as a whole 
C)  total project risk can be measured by calculating standard deviation 
D)  total project risk is irrelevant when forecasting a company's chance of bankruptcy

Question 12

When analyzing a sensitivity curve, the ____ the slope, the more sensitive the net present value is to a change in the computed variable.

Accepted Answer

A)  more negative 
B)  steeper 
C)  more general 
D)  smaller 
A)  more negative 
B)  steeper 
C)  more general 
D)  smaller

Question 13

The basic capital budgeting decision models (that is NPV and IRR) handle risk by _____.

Accepted Answer

A)  ignoring it 
B)  assuming all cash flows are known with certainty 
C)  assuming all projects are of average risk 
D)  using risk-adjusted discount rates to evaluate projects 
A)  ignoring it 
B)  assuming all cash flows are known with certainty 
C)  assuming all projects are of average risk 
D)  using risk-adjusted discount rates to evaluate projects

Question 14

The certainty equivalent factors used in capital budgeting analysis are equal to the ____ divided by ____.

Accepted Answer

A)  certain return; risky return 
B)  risky return; certain return 
C)  certain return; beta 
D)  beta, risky return 
A)  certain return; risky return 
B)  risky return; certain return 
C)  certain return; beta 
D)  beta, risky return

Question 15

Many firms combine net present value and payback when analyzing project risk. Which of the following statements is (are) correct? 
I. Both payback and net present value consider the frequency of cash flows.
II. Both payback and net present value can be adjusted for risk.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Exam 13: Capital Budgeting and Risk

The most expensive method of adjusting for total project risk in the evaluation of capital budgeting projects is the _____.

The risk assessment technique that considers the impact of simultaneous changes in key variables on the desirability of an investment project is ____.

Portfolio risk is also known as _____.

All of the following are advantages of the NPV/payback approach to risk analysis EXCEPT it ______.

The hurdle rate is best described as the _____.

The Chris-Kraft Co. is financed entirely with equity, and the firm has a beta of 1.6. The current risk-free rate is 9.5 percent, and the expected market return is 16 percent. What rate of return should Chris-Kraft require on a project of average risk?

The risk-adjusted discount rate approach is considered preferable to the weighted cost of capital approach in determining the net present value of a project when the projects under consideration differ significantly in _____.

When evaluating a capital expenditure to be made in a foreign country, the parent firm must be concerned with the _____.

Total project risk is ______.

All of the following are correct statements about a project's total risk EXCEPT _____.

When analyzing a sensitivity curve, the ____ the slope, the more sensitive the net present value is to a change in the computed variable.

The basic capital budgeting decision models (that is NPV and IRR) handle risk by _____.

The certainty equivalent factors used in capital budgeting analysis are equal to the ____ divided by ____.

Many firms combine net present value and payback when analyzing project risk. Which of the following statements is (are) correct? I. Both payback and net present value consider the frequency of cash flows. II. Both payback and net present value can be adjusted for risk.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

Filters

The certainty equivalent factors used in capital budgeting analysis are equal to the divided by .