Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Often,the decision to abandon a project entails costs,which may be either positive or negative. 
B) Mortgage interest rates are higher than Treasury rates because mortgages have an abandonment option that Treasuries do not have: You can prepay your mortgage at any time,while the U.S.government can repay its debt only according to the schedule outlined in the bond contract. 
C) A popular option gives holders of the bond the option to convert the bond into equity.These kinds of bonds are termed callable bonds. 
D) More often than not,there is an opportunity cost of abandoning a project: If you shut down the project and later decide to start it up again,you have to pay the costs of restarting the project. 
A) Often,the decision to abandon a project entails costs,which may be either positive or negative. 
B) Mortgage interest rates are higher than Treasury rates because mortgages have an abandonment option that Treasuries do not have: You can prepay your mortgage at any time,while the U.S.government can repay its debt only according to the schedule outlined in the bond contract. 
C) A popular option gives holders of the bond the option to convert the bond into equity.These kinds of bonds are termed callable bonds. 
D) More often than not,there is an opportunity cost of abandoning a project: If you shut down the project and later decide to start it up again,you have to pay the costs of restarting the project. C

Question 2

Assuming you are able to see the plant,draw a decision tree detailing this problem.

Accepted Answer

The answer of Assuming you are able to see the...

Question 3

The callable annuity rate can be calculated as:

Accepted Answer

A)   
× Hurdle Rate 
B)   
× Hurdle Rate 
C)   
× Cost of Capital 
D)    
A)   
× Hurdle Rate 
B)   
× Hurdle Rate 
C)   
× Cost of Capital 
D)    B

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) When the investment cannot be delayed,the optimal rule is to invest whenever the profitability index is greater than zero. 
B) It is often better to wait too long (use a profitability index criterion that is too high)than to invest too soon (use a profitability index criterion that is too low). 
C) When the source of uncertainty that creates a motive to wait is interest rate uncertainty,the hurdle rate is relatively easy to calculate. 
D) When there is an option to delay,a good rule of thumb is to invest only when the profitability index is at least 1. 
A) When the investment cannot be delayed,the optimal rule is to invest whenever the profitability index is greater than zero. 
B) It is often better to wait too long (use a profitability index criterion that is too high)than to invest too soon (use a profitability index criterion that is too low). 
C) When the source of uncertainty that creates a motive to wait is interest rate uncertainty,the hurdle rate is relatively easy to calculate. 
D) When there is an option to delay,a good rule of thumb is to invest only when the profitability index is at least 1.

Question 5

Which of the following is NOT a real option?

Accepted Answer

A) A stock option 
B) An abandonment option 
C) An investment timing option 
D) An expansion option 
A) A stock option 
B) An abandonment option 
C) An investment timing option 
D) An expansion option

Question 6

If you are not awarded the government contract and your sales decrease by 25%,then the value of your plant will be closest to:

Accepted Answer

A) -$1 million 
B) $5 million 
C) $8 million 
D) $0 
A) -$1 million 
B) $5 million 
C) $8 million 
D) $0

Question 7

Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.The value of the option to abandon production will be closest to:

Accepted Answer

A) $1.0 million 
B) $0.5 million 
C) -$1.0 million 
D) $3.0 million 
A) $1.0 million 
B) $0.5 million 
C) -$1.0 million 
D) $3.0 million

Question 8

Describe the two factors that affect the value of an investment timing option?

Accepted Answer

Volatility: By delaying an investment,we

Question 9

Rylan Inc is considering a project that has an initial cost of $2 million.It is expected to generate cash flows for the firm of $500,000 per year for 6 years.Assuming a discount rate of 7%,what is the equivalent annual benefit?

Accepted Answer

A) $75,148 
B) $80,408 
C) $85,889 
D) $91,901 
A) $75,148 
B) $80,408 
C) $85,889 
D) $91,901

Question 10

Assuming that this project will provide Rearden with perpetual annual cash flows of $65,000,the NPV of investing in the project today is closest to:

Accepted Answer

A) -281,000 
B) -83,000 
C) +46,000 
D) +83,000 
E) +143,000 
A) -281,000 
B) -83,000 
C) +46,000 
D) +83,000 
E) +143,000

Question 11

Use the table for the question(s)below.
Consider the following mutually exclusive projects:  
-The NPV of project A is closest to:

Accepted Answer

A) $21.70 
B) $24.00 
C) $18.10 
D) $16.90 
A) $21.70 
B) $24.00 
C) $18.10 
D) $16.90

Question 12

Assuming that Kinston has the ability to sell the prototype in year one for $300,000,draw a decision tree detailing the Kinston Industries Mountain Bike Project.

Accepted Answer

The answer of Assuming that Kinston has the ability to...

Question 13

The NPV of project B is closest to:

Accepted Answer

A) $18.10 
B) $21.70 
C) $24.00 
D) $16.90 
A) $18.10 
B) $21.70 
C) $24.00 
D) $16.90

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) Abandonment options can add value to a project because a firm can drop a project if it turns out to be unsuccessful. 
B) Corporate bonds often contain embedded abandonment options: The issuing firm sometimes has the option to convert the bond-that is,to repay it. 
C) An abandonment option is the option to walk away. 
D) An important abandonment option that most people encounter at some point in their lives is the option to abandon their mortgage. 
A) Abandonment options can add value to a project because a firm can drop a project if it turns out to be unsuccessful. 
B) Corporate bonds often contain embedded abandonment options: The issuing firm sometimes has the option to convert the bond-that is,to repay it. 
C) An abandonment option is the option to walk away. 
D) An important abandonment option that most people encounter at some point in their lives is the option to abandon their mortgage.

Question 15

Do out-of-the-money real options have value?

Accepted Answer

Even if an investment opportunity curren

Question 16

The equivalent annual benefit of project B is closest to:

Accepted Answer

A) $5.05 
B) $5.75 
C) $3.45 
D) $3.40 
A) $5.05 
B) $5.75 
C) $3.45 
D) $3.40

Question 17

Assume the NPV of a project is $1.5 million.The project is expected to last five years.What is the equivalent annual benefit if the discount rate is 8%?

Accepted Answer

A) $375,685 
B) $300,000 
C) $347,856 
D) $324,000 
A) $375,685 
B) $300,000 
C) $347,856 
D) $324,000

Question 18

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Assuming that the probability of high or low demand is still 50%,the NPV of the Kinston Industries Mountain Bike Project is closest to:

Accepted Answer

A) $0 
B) $90,000 
C) -$45,000 
D) $1,000,000 
A) $0 
B) $90,000 
C) -$45,000 
D) $1,000,000

Question 19

The major principles to remember when considering real options include all of the following EXCEPT:

Accepted Answer

A) out-of-the-money real options have value. 
B) in-the-money real options need to be exercised immediately. 
C) waiting is valuable. 
D) create value by exploiting real options. 
A) out-of-the-money real options have value. 
B) in-the-money real options need to be exercised immediately. 
C) waiting is valuable. 
D) create value by exploiting real options.

Question 20

Assuming that this project will provide Rearden with perpetual annual cash flows of $65,000,Rearden should:

Accepted Answer

A) invest today since the NPV is positive. 
B) invest today since the NPV is negative. 
C) invest today since the NPV using the hurdle rate is positive. 
D) delay investing since the NPV using the hurdle rate is negative. 
E) delay investing since the NPV using the hurdle rate is positive. 
A) invest today since the NPV is positive. 
B) invest today since the NPV is negative. 
C) invest today since the NPV using the hurdle rate is positive. 
D) delay investing since the NPV using the hurdle rate is negative. 
E) delay investing since the NPV using the hurdle rate is positive.

Exam 22: Real Options

Which of the following statements is FALSE?

Assuming you are able to see the plant,draw a decision tree detailing this problem.

The callable annuity rate can be calculated as:

Which of the following statements is FALSE?

Which of the following is NOT a real option?

If you are not awarded the government contract and your sales decrease by 25%,then the value of your plant will be closest to:

Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.The value of the option to abandon production will be closest to:

Describe the two factors that affect the value of an investment timing option?

Rylan Inc is considering a project that has an initial cost of $2 million.It is expected to generate cash flows for the firm of $500,000 per year for 6 years.Assuming a discount rate of 7%,what is the equivalent annual benefit?

Assuming that this project will provide Rearden with perpetual annual cash flows of $65,000,the NPV of investing in the project today is closest to:

Use the table for the question(s)below. Consider the following mutually exclusive projects: -The NPV of project A is closest to:

Assuming that Kinston has the ability to sell the prototype in year one for $300,000,draw a decision tree detailing the Kinston Industries Mountain Bike Project.

The NPV of project B is closest to:

Which of the following statements is FALSE?

Do out-of-the-money real options have value?

The equivalent annual benefit of project B is closest to:

Assume the NPV of a project is $1.5 million.The project is expected to last five years.What is the equivalent annual benefit if the discount rate is 8%?

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Assuming that the probability of high or low demand is still 50%,the NPV of the Kinston Industries Mountain Bike Project is closest to:

The major principles to remember when considering real options include all of the following EXCEPT:

Assuming that this project will provide Rearden with perpetual annual cash flows of $65,000,Rearden should:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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