Question 1

Behavioral approaches ________.

Accepted Answer

A)  are used to explicitly recognize project risk 
B)  are used to get a feel for project risk 
C)  are not used by rational financial managers 
D)  are used to quantify the risk 
A)  are used to explicitly recognize project risk 
B)  are used to get a feel for project risk 
C)  are not used by rational financial managers 
D)  are used to quantify the risk

Question 2

One type of simulation program made popular by the widespread use of personal computers is called ________.

Accepted Answer

A)  Monaco Simulation 
B)  Lemans Simulation 
C)  Cannes Simulation 
D)  Monte Carlo Simulation 
A)  Monaco Simulation 
B)  Lemans Simulation 
C)  Cannes Simulation 
D)  Monte Carlo Simulation

Question 3

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.  
-Which project should be chosen using the Annualized NPV approach? (See Table 12.6)

Accepted Answer

A)  Project A because its annualized NPV is higher 
B)  Project B because its NPV is higher 
C)  Project A because its IRR is higher 
D)  Project B because its annualized NPV is higher 
A)  Project A because its annualized NPV is higher 
B)  Project B because its NPV is higher 
C)  Project A because its IRR is higher 
D)  Project B because its annualized NPV is higher

Question 4

Table 12.1
A corporation is assessing the risk of two capital budgeting proposals. The financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows which are given in the following table. The firm's cost of capital is 10 percent.  
-If the projects have five-year lives, the range of the net present value for Project B is approximately ________. (See Table 12.1)

Accepted Answer

A)  $80,563 
B)  $201,000 
C)  $255,444 
D)  $303,263 
A)  $80,563 
B)  $201,000 
C)  $255,444 
D)  $303,263

Question 5

Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the project is ________.

Accepted Answer

A)  $1,000,000 
B)  $131,474 
C)  $100,000 
D)  $66,667 
A)  $1,000,000 
B)  $131,474 
C)  $100,000 
D)  $66,667

Question 6

Scenario analysis is a behavioral approach that uses a number of possible outcomes to asses the variability of returns.

Accepted Answer

A) True 
 B)False

Question 7

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

Accepted Answer

A) True 
 B)False

Question 8

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 NPV for Project M is ________. (See Table 12.3)

Accepted Answer

A)  $156,494 
B)  $122,970 
C)  $85,732 
D)  $500,000 
A)  $156,494 
B)  $122,970 
C)  $85,732 
D)  $500,000

Question 9

Behavioral approaches for dealing with risk include annualized net present values and risk-adjusted discount rates.

Accepted Answer

A) True 
 B)False

Question 10

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.

Accepted Answer

A) True 
 B)False

Question 11

Behavioral approaches for dealing with risk include scenario analysis and simulation.

Accepted Answer

A) True 
 B)False

Question 12

In international trade, transfer prices are prices that subsidiaries charge each other for the goods and services traded between them.

Accepted Answer

A) True 
 B)False

Question 13

Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate (RADR) approach implicitly assumes that risk is an increasing function of time.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following strategies will help in minimizing political risk in international capital budgeting decisions?

Accepted Answer

A)  by hedging the cash flows using currency futures and options 
B)  structuring the financing of such investments as equity rather than as debt 
C)  structuring the financing of such investments as debt rather than as equity 
D)  financing the project, in whole or in part, in domestic currency 
A)  by hedging the cash flows using currency futures and options 
B)  structuring the financing of such investments as equity rather than as debt 
C)  structuring the financing of such investments as debt rather than as equity 
D)  financing the project, in whole or in part, in domestic currency

Question 15

Firms do not usually get rewarded by diversifying investments in different lines of business because ________.

Accepted Answer

A)  the capital markets are efficient and they quickly respond to change in economic conditions 
B)  cash flows from such projects tend to respond less to changing economic conditions 
C)  investors themselves can diversify by holding securities in a variety of firms; they do not need the firm to do it for them 
D)  it is not possible for a firm to diversify its risk as the inflation premium is different for different projects 
A)  the capital markets are efficient and they quickly respond to change in economic conditions 
B)  cash flows from such projects tend to respond less to changing economic conditions 
C)  investors themselves can diversify by holding securities in a variety of firms; they do not need the firm to do it for them 
D)  it is not possible for a firm to diversify its risk as the inflation premium is different for different projects

Question 16

In capital budgeting, one of the most common scenario approaches is to estimate the NPVs associated with pessimistic (worst), most likely (expected), and optimistic (best) estimates of cash inflow.

Accepted Answer

A) True 
 B)False

Question 17

The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.

Accepted Answer

A) True 
 B)False

Question 18

Different projects have different levels of risk. As a result, the acceptance of a particular project generally has an impact on a firm's overall risk.

Accepted Answer

A) True 
 B)False

Question 19

The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is an important type of risk in an international capital budgeting context?

Accepted Answer

A)  business cycle risk 
B)  political risk 
C)  appropriation risk 
D)  default risk 
A)  business cycle risk 
B)  political risk 
C)  appropriation risk 
D)  default risk

Behavioral approaches ________.

One type of simulation program made popular by the widespread use of personal computers is called ________.

Scenario analysis is a behavioral approach that uses a number of possible outcomes to asses the variability of returns.

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

Behavioral approaches for dealing with risk include annualized net present values and risk-adjusted discount rates.

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.

Behavioral approaches for dealing with risk include scenario analysis and simulation.

In international trade, transfer prices are prices that subsidiaries charge each other for the goods and services traded between them.

Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate (RADR) approach implicitly assumes that risk is an increasing function of time.

Which of the following strategies will help in minimizing political risk in international capital budgeting decisions?

Firms do not usually get rewarded by diversifying investments in different lines of business because ________.

In capital budgeting, one of the most common scenario approaches is to estimate the NPVs associated with pessimistic (worst), most likely (expected), and optimistic (best) estimates of cash inflow.

The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.

Different projects have different levels of risk. As a result, the acceptance of a particular project generally has an impact on a firm's overall risk.

The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

Which of the following is an important type of risk in an international capital budgeting context?

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

Behavioral approaches ________.

One type of simulation program made popular by the widespread use of personal computers is called ________.

Scenario analysis is a behavioral approach that uses a number of possible outcomes to asses the variability of returns.

When unequal-lived projects are independent, the impact of differing lives must be considered because the projects do not provide service over comparable time periods.

Behavioral approaches for dealing with risk include annualized net present values and risk-adjusted discount rates.

The objective of capital rationing is to select the group of projects that provides the quickest overall payback and does not require more dollars than are budgeted.

Behavioral approaches for dealing with risk include scenario analysis and simulation.

In international trade, transfer prices are prices that subsidiaries charge each other for the goods and services traded between them.

Because of the basic mathematics of compounding and discounting, the risk-adjusted discount rate (RADR) approach implicitly assumes that risk is an increasing function of time.

Which of the following strategies will help in minimizing political risk in international capital budgeting decisions?

Firms do not usually get rewarded by diversifying investments in different lines of business because ________.

In capital budgeting, one of the most common scenario approaches is to estimate the NPVs associated with pessimistic (worst), most likely (expected), and optimistic (best) estimates of cash inflow.

The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows.

Different projects have different levels of risk. As a result, the acceptance of a particular project generally has an impact on a firm's overall risk.

The risk-adjusted discount rate (RADR) is the risk-adjustment factor that represents the percent of estimated cash inflows that investors would be satisfied to receive for certain rather than the cash inflows that are possible for each year.

Which of the following is an important type of risk in an international capital budgeting context?

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