9L for Shahimermaid FQ. Question 1
1.
All of the following are correct statements about a project s total risk EXCEPT:
| a. Undiversified investors are concerned about the company s future outlook. | ||
| b. It becomes the relevant risk when the project s returns are correlated to the returns from the firm as a whole. | ||
| c. Total project risk can be measured by calculating standard deviation | ||
| d. Total project risk is irrelevant when forecasting a company s chance of bankruptcy |
0.4 points
Question 2
1.
The risk of an investment project is defined in terms of the potential ____ of its returns.
| a. certainty | ||
| b. size | ||
| c. variability | ||
| d. timing |
0.4 points
Question 3
1.
The risk assessment technique that considers the impact of simultaneous changes in key variables on the desirability of an investment project is ____.
| a. sensitivity analysis | ||
| b. simultaneous equations | ||
| c. scenario analysis | ||
| d. RADR analysis |
0.4 points
Question 4
1.
Many firms combine net present value and payback when analyzing project risk. Which of the following statements is/are correct? I. Both payback and net present value consider the frequency of cash flows. II. Both payback and net present can be adjusted for risk.
| a. I only | ||
| b. II only | ||
| c. Both I and II | ||
| d. Neither I nor II |
0.4 points
Question 5
1.
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?
| a. 14.9% | ||
| b. 15.4% | ||
| c. 14.0% | ||
| d. 12.0% |
0.4 points
Question 6
1.
Project C has been classified into risk class II by the analyst of a major firm. The risk premium required for projects in this risk class is 8%. The current risk-free rate measured by the analyst is 10%. If the project has an estimated return of 20%, the analyst would recommend
| a. accepting project C | ||
| b. rejecting project C | ||
| c. reestimating the risk premiums for class II projects | ||
| d. none of the above |
0.4 points
Question 7
1.
The ____ the amount of debt in a firm’s capital structure, the ____ will be the firm’s beta.
| a. larger, larger | ||
| b. smaller, larger | ||
| c. larger, smaller | ||
| d. smaller, smaller |
0.4 points
Question 8
1.
A major disadvantage of the risk-adjusted discount rate approach is that it
| a. can lead to selecting only above-average risk projects | ||
| b. provides the decision maker with a range of numbers | ||
| c. can lead to selecting only below-average risk projects | ||
| d. is difficult to estimate the appropriate risk premium for a project |
0.4 points
Question 9
1.
Calco is a multi-divisional firm with a weighted cost of capital of 14 percent and a risk-adjusted discount rate for its can division of 17 percent. A planned expansion in the can division requires a net investment of $170,000 and results in expected cash inflows of $42,000 a year for seven years. Should Calco invest in this expansion?
| a. Yes, NPV = $10,096 | ||
| b. Yes, NPV = $ 9,896 | ||
| c. No, NPV = -$5,276 | ||
| d. No, NPV = -$9,896 |
0.4 points
Question 10
1.
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?
| a. 25.6% | ||
| b. 14.9% | ||
| c. 10.4% | ||
| d. 19.9% |
0.4 points
Question 11
1.
A weakness of the net present value/payback method is:
| a. It is a complicated calculation | ||
| b. It is subjective | ||
| c. It is directly related to the variability of returns from a project | ||
| d. Because it recognizes the riskiness of various projects, it can develop multiple outcomes |
0.4 points
Question 12
1.
A major problem with using the risk-adjusted discount rate approach is the determination of
| a. the beta value for the firm | ||
| b. the firm’s weighted cost of capital | ||
| c. the firm’s required rate of return | ||
| d. beta values for individual projects |
0.4 points
Question 13
1.
All of the following are advantages of the NPV-payback approach to risk analysis except
| a. it is easy and inexpensive to apply | ||
| b. it considers a project’s liquidity | ||
| c. it considers a project’s liquidity | ||
| d. it is consistent with the notion that risk increases with futurity |
0.4 points
Question 14
1.
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.
| a. probability | ||
| b. return distribution | ||
| c. net present value | ||
| d. standard deviation |
0.4 points
Question 15
1.
The type of analysis that models some event and requires that estimates be made of the probability distribution of each cash flow element is:
| a. scenario | ||
| b. sensitivity | ||
| c. simulation | ||
| d. net present value/payback approach |
