Question 1

Which of the following statements is false?

Accepted Answer

A)  Decision nodes are nodes in which uncertainty is involved that is out of the control of the decision maker. 
B)  Most investment projects allow for the possibility of reevaluating the decision to invest at a later point in time. 
C)  A decision tree is a graphical representation of future decisions and uncertainty resolution. 
D)  With binomial trees the uncertainty is not under the control of the decision maker. 
A)  Decision nodes are nodes in which uncertainty is involved that is out of the control of the decision maker. 
B)  Most investment projects allow for the possibility of reevaluating the decision to invest at a later point in time. 
C)  A decision tree is a graphical representation of future decisions and uncertainty resolution. 
D)  With binomial trees the uncertainty is not under the control of the decision maker. A

Question 2

List three kinds of real options that are most frequently encountered in practice.

Accepted Answer

(1)The option to delay an investment opportunity,(2)the option to grow,and (3)the option to abandon an investment opportunity.

Question 3

Which of the following statements is false?

Accepted Answer

A)  Because real options allow a decision maker to choose the most attractive alternative after new information has been learned, the presence of real options adds value to an investment opportunity. 
B)  To make an investment decision correctly, the value of embedded real options must be included in the decision-making process. 
C)  A key distinction between a real option and a financial option is that real options, and the underlying assets on which they are based, are often traded in competitive markets. 
D)  We can compute the value of the real option by comparing the expected profit without the real option to the value with the option. 
A)  Because real options allow a decision maker to choose the most attractive alternative after new information has been learned, the presence of real options adds value to an investment opportunity. 
B)  To make an investment decision correctly, the value of embedded real options must be included in the decision-making process. 
C)  A key distinction between a real option and a financial option is that real options, and the underlying assets on which they are based, are often traded in competitive markets. 
D)  We can compute the value of the real option by comparing the expected profit without the real option to the value with the option. C

Question 4

Luther Industries is considering launching a new toy just in time for the Christmas season.They estimate that if Luther launches the new toy this year it will have an NPV of $25 million.Luther has the option to wait one year until the next Christmas season to launch the toy,however,the demand next year will depend upon what new toys Luther's competitors introduce and therefore there is greater uncertainty about next year's demand.Launching the new toy today will involve a total capital expenditure of $100 million.If the risk-free rate is 5%,N(d1)is .62 and N(d2)is .65,then what is the value of the option to wait until next year to launch the new toy?

Accepted Answer

C = S × N(d₁)- PV(K)×

Question 5

Even if an investment opportunity currently has ________ NPV,it does not imply that the opportunity is ________.

Accepted Answer

A)  negative; worthless 
B)  positive; worthless 
C)  negative; worth more 
D)  positive; worth more 
A)  negative; worthless 
B)  positive; worthless 
C)  negative; worth more 
D)  positive; worth more

Question 6

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high or low demand would still be 50%.What is the value of the the option to do pilot production and test marketing?

Accepted Answer

The NPV of going ahead and building toda

Question 7

The value today of the investment opportunity is ________ of the expected cash flows discounted at ________.

Accepted Answer

A)  the future value; the risk-free rate 
B)  the present value; the required rate of return 
C)  the future value; the nominal interest rate 
D)  the present value; the risk-free rate 
A)  the future value; the risk-free rate 
B)  the present value; the required rate of return 
C)  the future value; the nominal interest rate 
D)  the present value; the risk-free rate

Question 8

Because most growth options are likely to be ________,the growth component of firm value is likely to be ________ than the ongoing assets of the firm.

Accepted Answer

A)  out-of-the-money; riskier 
B)  in-the-money; riskier 
C)  out-of-the-money; more certain 
D)  in-the-money; more certain 
A)  out-of-the-money; riskier 
B)  in-the-money; riskier 
C)  out-of-the-money; more certain 
D)  in-the-money; more certain

Question 9

________ need not be exercised immediately.

Accepted Answer

A)  Out-of-the money real options 
B)  At-the-money real options 
C)  Real options 
D)  In-the-money real options 
A)  Out-of-the money real options 
B)  At-the-money real options 
C)  Real options 
D)  In-the-money real options

Question 10

Which of the following statements is false?

Accepted Answer

A)  If there is a lot of uncertainty, the benefit of waiting is diminished. 
B)  In the real option context, the dividends correspond to any value from the investment that we give up by waiting. 
C)  By delaying an investment, we can base our decision on additional information. 
D)  Given the option to wait, an investment that currently has a negative-NPV can have a positive value. 
A)  If there is a lot of uncertainty, the benefit of waiting is diminished. 
B)  In the real option context, the dividends correspond to any value from the investment that we give up by waiting. 
C)  By delaying an investment, we can base our decision on additional information. 
D)  Given the option to wait, an investment that currently has a negative-NPV can have a positive value.

Question 11

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 Canadian 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 Canadian 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.

Question 12

When the investment cannot be delayed,the optimal rule is to invest whenever ________ is greater than zero.

Accepted Answer

A)  the profitability index 
B)  the payback period 
C)  the internal rate of return 
D)  the discounted payback period 
A)  the profitability index 
B)  the payback period 
C)  the internal rate of return 
D)  the discounted payback period

Question 13

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 14

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 15

In addition to the value of the current NPV of the investment,what other two factors affect the value of an investment and the decision to wait?

Accepted Answer

A)  Financing sources and capital decision procedures 
B)  Uncertainty and future cash inflows 
C)  Financing sources and risks 
D)  Uncertainty and the capital budgeting process 
A)  Financing sources and capital decision procedures 
B)  Uncertainty and future cash inflows 
C)  Financing sources and risks 
D)  Uncertainty and the capital budgeting process

Question 16

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 17

Assume that it will cost you $1 million to shut down the plant,but you are able to sell the plant for $5 million at any time.The value of the option to sell the plant will be closest to:

Accepted Answer

A)  $3.0 million 
B)  $6.0 million 
C)  $5.0 million 
D)  $0.5 million 
A)  $3.0 million 
B)  $6.0 million 
C)  $5.0 million 
D)  $0.5 million

Question 18

One of the major differences between decision trees and binomial trees is that in binomial trees ________.

Accepted Answer

A)  the certainty is not under the control of the decision maker 
B)  the uncertainty is under the control of the decision maker 
C)  the uncertainty is not under the control of the decision maker 
D)  the certainty is under the control of the decision maker 
A)  the certainty is not under the control of the decision maker 
B)  the uncertainty is under the control of the decision maker 
C)  the uncertainty is not under the control of the decision maker 
D)  the certainty is under the control of the decision maker

Question 19

As most homeowners know,in Canada mortgage interest rates are ________ than comparable risk-free rates like the yield on the 5-year ________.

Accepted Answer

A)  higher; Canada Saving bonds 
B)  higher; Canadian corporate bonds 
C)  lower; Government of Canada bond 
D)  higher; Government of Canada bond 
A)  higher; Canada Saving bonds 
B)  higher; Canadian corporate bonds 
C)  lower; Government of Canada bond 
D)  higher; Government of Canada bond

Question 20

In the example of Canada Motors on p.571 of the text,it presents that if the future costs (benefits)are uncertain,we must use ________ approach to determine the correct decision.

Accepted Answer

A)  a real options 
B)  an abandonment option 
C)  a financial option 
D)  a growth option 
A)  a real options 
B)  an abandonment option 
C)  a financial option 
D)  a growth option

Exam 16: Real Options

Which of the following statements is false?

List three kinds of real options that are most frequently encountered in practice.

Which of the following statements is false?

Even if an investment opportunity currently has ________ NPV,it does not imply that the opportunity is ________.

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high or low demand would still be 50%.What is the value of the the option to do pilot production and test marketing?

The value today of the investment opportunity is ________ of the expected cash flows discounted at ________.

Because most growth options are likely to be ________,the growth component of firm value is likely to be ________ than the ongoing assets of the firm.

________ need not be exercised immediately.

Which of the following statements is false?

Which of the following statements is false?

When the investment cannot be delayed,the optimal rule is to invest whenever ________ is greater than zero.

Which of the following is NOT a real option?

The equivalent annual benefit of project B is closest to:

In addition to the value of the current NPV of the investment,what other two factors affect the value of an investment and the decision to wait?

Which of the following statements is false?

Assume that it will cost you $1 million to shut down the plant,but you are able to sell the plant for $5 million at any time.The value of the option to sell the plant will be closest to:

One of the major differences between decision trees and binomial trees is that in binomial trees ________.

As most homeowners know,in Canada mortgage interest rates are ________ than comparable risk-free rates like the yield on the 5-year ________.

In the example of Canada Motors on p.571 of the text,it presents that if the future costs (benefits)are uncertain,we must use ________ approach to determine the correct decision.

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Even if an investment opportunity currently has NPV,it does not imply that the opportunity is .

The value today of the investment opportunity is of the expected cash flows discounted at .

Because most growth options are likely to be ,the growth component of firm value is likely to be than the ongoing assets of the firm.

As most homeowners know,in Canada mortgage interest rates are than comparable risk-free rates like the yield on the 5-year .