Question 1

How and when should firms consider employing additional risk analysis techniques in judging the suitability of large projects prior to implementation?

Accepted Answer

The decision to employ some risk analysi

Question 2

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 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

List the ways that a company's decision maker can adjust for total project risk in capital budegeting.

Accepted Answer

1. net present value/payback a

Question 5

The discount rate used in calculating the certainty equivalent net present value is the

Accepted Answer

A)  risk-adjusted discount rate 
B)  cost of capital 
C)  risk-free rate 
D)  cost of equity capital 
A)  risk-adjusted discount rate 
B)  cost of capital 
C)  risk-free rate 
D)  cost of equity capital

Question 6

When is the risk-adjusted discount rate approach considered preferable to the weighted cost of capital approach in determining the net present value of a project?

Accepted Answer

A)  It is preferable when the projects under consideration differ significantly in the number of cash flows generated by the projects. 
B)  It is preferable when the projects under consideration differ significantly in their total return. 
C)  It is preferable when the projects under consideration differ significantly in their cash inflows. 
D)  It is preferable when the projects under consideration differ significantly in their risk characteristics. 
A)  It is preferable when the projects under consideration differ significantly in the number of cash flows generated by the projects. 
B)  It is preferable when the projects under consideration differ significantly in their total return. 
C)  It is preferable when the projects under consideration differ significantly in their cash inflows. 
D)  It is preferable when the projects under consideration differ significantly in their risk characteristics.

Question 7

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 8

A project has an expected net present value of $50,000 with a standard deviation of the net present value of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a negative NPV?

Accepted Answer

A)  99.38% 
B)  0.62% 
C)  34.5% 
D)  49.38% 
A)  99.38% 
B)  0.62% 
C)  34.5% 
D)  49.38%

Question 9

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.

Accepted Answer

A)  probability 
B)  return distribution 
C)  net present value 
D)  standard deviation 
A)  probability 
B)  return distribution 
C)  net present value 
D)  standard deviation

Question 10

The hurdle rate is best described as:

Accepted Answer

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

Question 11

The hurdle rate approach in determining the acceptability of projects:

Accepted Answer

A)  is an improvement over the risk-adjusted discount rate approach because it provides for an objective basis to determine risk premiums for individual projects. 
B)  is a modification of the internal rate of return approach. 
C)  is inconsistent with the principle of project risk balancing. 
D)  is a method used with the certainty equivalent approach. 
A)  is an improvement over the risk-adjusted discount rate approach because it provides for an objective basis to determine risk premiums for individual projects. 
B)  is a modification of the internal rate of return approach. 
C)  is inconsistent with the principle of project risk balancing. 
D)  is a method used with the certainty equivalent approach.

Question 12

The certainty equivalent approach is a risk evaluation technique. Which of the following statements is/are correct?
I. Certainty equivalents adjust the cash flows in the numerator of the NPV equation.
II. Using the RADR involves adjustments to the denominator of the NPV equation.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 13

The DMT Company is financed entirely with equity. DMT has a beta of 1.20 and the current risk-free rate is 9.5 percent. If the expected market return is 14 percent, what rate of return should DMT require on a project of average risk?

Accepted Answer

A)  14.9% 
B)  15.4% 
C)  14.0% 
D)  12.0% 
A)  14.9% 
B)  15.4% 
C)  14.0% 
D)  12.0%

Question 14

The risk-adjusted discount rate approach is used in the analysis of projects for which ____ is the applicable risk measure.

Accepted Answer

A)  total project risk 
B)  beta (systematic) risk 
C)  unsystematic risk 
D)  both total project and beta risk 
A)  total project risk 
B)  beta (systematic) risk 
C)  unsystematic risk 
D)  both total project and beta risk

Question 15

The use of sensitivity analysis requires that

Accepted Answer

A)  a model of a project's cash flows be developed 
B)  probability distributions of the determinants of a project's cash flows be estimated 
C)  the firms have access to a very large computer 
D)  the firm is greatly interested in the portfolio risk reduction characteristics of a project 
A)  a model of a project's cash flows be developed 
B)  probability distributions of the determinants of a project's cash flows be estimated 
C)  the firms have access to a very large computer 
D)  the firm is greatly interested in the portfolio risk reduction characteristics of a project

Question 16

Simulation techniques are

Accepted Answer

A)  cheap to apply 
B)  widely used 
C)  mostly beneficial for large projects 
D)  identical to sensitivity analysis 
A)  cheap to apply 
B)  widely used 
C)  mostly beneficial for large projects 
D)  identical to sensitivity analysis

Question 17

All of the following are methods of adjusting a project for total risk EXCEPT:

Accepted Answer

A)  sensitivity analysis 
B)  carpe diem approach 
C)  certainty equivalent approach 
D)  simulation analysis 
A)  sensitivity analysis 
B)  carpe diem approach 
C)  certainty equivalent approach 
D)  simulation analysis

Question 18

The subjective approach to determining risk-adjusted discount rates

Accepted Answer

A)  uses the risk-free rate for average-risk projects 
B)  explicitly considers the probability distribution of a project's cash flows 
C)  always leads to the correct investment decisions 
D)  groups projects into risk classes and evaluates all projects in a particular risk class at the same risk- adjusted discount rate 
A)  uses the risk-free rate for average-risk projects 
B)  explicitly considers the probability distribution of a project's cash flows 
C)  always leads to the correct investment decisions 
D)  groups projects into risk classes and evaluates all projects in a particular risk class at the same risk- adjusted discount rate

Exam 11: Capital Budgeting and Risk

How and when should firms consider employing additional risk analysis techniques in judging the suitability of large projects prior to implementation?

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?

Portfolio risk is also known as:

List the ways that a company's decision maker can adjust for total project risk in capital budegeting.

The discount rate used in calculating the certainty equivalent net present value is the

When is the risk-adjusted discount rate approach considered preferable to the weighted cost of capital approach in determining the net present value of a project?

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

A project has an expected net present value of $50,000 with a standard deviation of the net present value of $20,000. Assume that NPV is normally distributed. What is the probability that the project will have a negative NPV?

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.

The hurdle rate is best described as:

The hurdle rate approach in determining the acceptability of projects:

The certainty equivalent approach is a risk evaluation technique. Which of the following statements is/are correct? I. Certainty equivalents adjust the cash flows in the numerator of the NPV equation. II. Using the RADR involves adjustments to the denominator of the NPV equation.

The DMT Company is financed entirely with equity. DMT has a beta of 1.20 and the current risk-free rate is 9.5 percent. If the expected market return is 14 percent, what rate of return should DMT require on a project of average risk?

The risk-adjusted discount rate approach is used in the analysis of projects for which ____ is the applicable risk measure.

The use of sensitivity analysis requires that

Simulation techniques are

All of the following are methods of adjusting a project for total risk EXCEPT:

The subjective approach to determining risk-adjusted discount rates

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

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

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