Question 1

Political risk is easier to protect as compared to exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 2

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

Accepted Answer

A) True 
 B)False

Question 3

The advantage of using simulation in the capital budgeting process is the ________.

Accepted Answer

A)  ease of calculation over scenario analysis 
B)  continuum of risk-return trade-offs for decision making 
C)  single point estimate that helps the decision maker to choose the most accurate alternative 
D)  use of several possible outcomes to asses risk 
A)  ease of calculation over scenario analysis 
B)  continuum of risk-return trade-offs for decision making 
C)  single point estimate that helps the decision maker to choose the most accurate alternative 
D)  use of several possible outcomes to asses risk

Question 4

Projects with a small chance of being acceptable and a broad range of possible cash flows are riskier than projects having a high chance of being acceptable and a narrow range of possible cash flows.

Accepted Answer

A) True 
 B)False

Question 5

If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________.

Accepted Answer

A)  constrained capital 
B)  wealth optimization 
C)  capital rationing 
D)  profitability 
A)  constrained capital 
B)  wealth optimization 
C)  capital rationing 
D)  profitability

Question 6

Table 12.6
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.  
-The annualized NPV of Project A is ________. (See Table 12.6)

Accepted Answer

A)  $22,674 
B)  $12,947 
C)  $38,227 
D)  $21,828 
A)  $22,674 
B)  $12,947 
C)  $38,227 
D)  $21,828

Question 7

In capital budgeting, risk refers to a high degree of variability of the initial investment of a project.

Accepted Answer

A) True 
 B)False

Question 8

Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintains a diversified portfolio of assets.

Accepted Answer

A) True 
 B)False

Question 9

Table 12.4
Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects.  
-Which project do you recommend? (See Table 12.4)

Accepted Answer

Project P has a negative net p

Question 10

Monte Carlo simulation programs usually build a histogram of the results.

Accepted Answer

A) True 
 B)False

Question 11

In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

Accepted Answer

A) True 
 B)False

Question 12

Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.  
-Using the risk-adjusted discount rate method of project evaluation, the better investment for Tangshan Mining is ________. (See Table 12.3)

Accepted Answer

A)  Project M because it has a higher NPV 
B)  Project N because it has a higher NPV 
C)  Project N because it has a higher IRR 
D)  Project M because it has a higher IRR 
A)  Project M because it has a higher NPV 
B)  Project N because it has a higher NPV 
C)  Project N because it has a higher IRR 
D)  Project M because it has a higher IRR

Question 13

By combining two projects with negatively correlated cash inflows, a firm reduces the combined cash inflow variability and its risk.

Accepted Answer

A) True 
 B)False

Question 14

In capital budgeting, risk refers to ________.

Accepted Answer

A)  the degree of variability of the cash inflows 
B)  the degree of variability of the initial investment 
C)  the chance that the net present value will be greater than zero 
D)  the chance that the internal rate of return will exceed the cost of capital 
A)  the degree of variability of the cash inflows 
B)  the degree of variability of the initial investment 
C)  the chance that the net present value will be greater than zero 
D)  the chance that the internal rate of return will exceed the cost of capital

Question 15

The shares traded publicly in an efficient market are ________.

Accepted Answer

A)  generally positively affected by diversification, because of the reduction in risk 
B)  generally negatively affected by diversification, because of the increase in risk 
C)  generally not affected by diversification, unless greater returns are expected 
D)  generally negatively affected by diversification, because of the increase in the required rate of return 
A)  generally positively affected by diversification, because of the reduction in risk 
B)  generally negatively affected by diversification, because of the increase in risk 
C)  generally not affected by diversification, unless greater returns are expected 
D)  generally negatively affected by diversification, because of the increase in the required rate of return

Question 16

The risk-adjusted discount rate can be computed as the risk free rate plus the product of a project's beta and the market risk premium.

Accepted Answer

A) True 
 B)False

Question 17

Exchange rate risk is the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.

Accepted Answer

A) True 
 B)False

Question 18

Simulation is a statistics-based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes.

Accepted Answer

A) True 
 B)False

Question 19

The higher the risk-adjusted net present, the more viable the project.

Accepted Answer

A) True 
 B)False

Question 20

Even though a business firm can be viewed as a portfolio of assets, firms are not rewarded for selecting a diversified portfolio of assets because investors can more efficiently diversify the risk on their own.

Accepted Answer

A) True 
 B)False

Political risk is easier to protect as compared to exchange rate risk.

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

The advantage of using simulation in the capital budgeting process is the ________.

Projects with a small chance of being acceptable and a broad range of possible cash flows are riskier than projects having a high chance of being acceptable and a narrow range of possible cash flows.

If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________.

In capital budgeting, risk refers to a high degree of variability of the initial investment of a project.

Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintains a diversified portfolio of assets.

Table 12.4 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Which project do you recommend? (See Table 12.4)

Monte Carlo simulation programs usually build a histogram of the results.

In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

By combining two projects with negatively correlated cash inflows, a firm reduces the combined cash inflow variability and its risk.

In capital budgeting, risk refers to ________.

The shares traded publicly in an efficient market are ________.

The risk-adjusted discount rate can be computed as the risk free rate plus the product of a project's beta and the market risk premium.

Exchange rate risk is the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.

Simulation is a statistics-based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes.

The higher the risk-adjusted net present, the more viable the project.

Even though a business firm can be viewed as a portfolio of assets, firms are not rewarded for selecting a diversified portfolio of assets because investors can more efficiently diversify the risk on their own.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters

Exam 12: Risk and Refinements in Capital Budgeting

Political risk is easier to protect as compared to exchange rate risk.

A firm with limited funds for investment in capital assets must ration those funds by allocating them to projects that will maximize share value.

The advantage of using simulation in the capital budgeting process is the ________.

Projects with a small chance of being acceptable and a broad range of possible cash flows are riskier than projects having a high chance of being acceptable and a narrow range of possible cash flows.

If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________.

In capital budgeting, risk refers to a high degree of variability of the initial investment of a project.

Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintains a diversified portfolio of assets.

Table 12.4 Johnson Farm Implement is faced with two mutually exclusive projects, P and Q. The following are the data about the two projects. -Which project do you recommend? (See Table 12.4)

Monte Carlo simulation programs usually build a histogram of the results.

In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical.

By combining two projects with negatively correlated cash inflows, a firm reduces the combined cash inflow variability and its risk.

In capital budgeting, risk refers to ________.

The shares traded publicly in an efficient market are ________.

The risk-adjusted discount rate can be computed as the risk free rate plus the product of a project's beta and the market risk premium.

Exchange rate risk is the risk that an unexpected change in exchange rates will reduce the market value of a project's cash flows.

Simulation is a statistics-based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes.

The higher the risk-adjusted net present, the more viable the project.

Even though a business firm can be viewed as a portfolio of assets, firms are not rewarded for selecting a diversified portfolio of assets because investors can more efficiently diversify the risk on their own.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Capital Budgeting Cash Flows

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters