9L for Shahimermaid FQ. Question 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|
The risk of an investment project is defined in terms of the potential ____ of its returns.
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|
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|
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?
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|
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|
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|
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|
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 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|
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|
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|
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.
|b. return distribution|
|c. net present value|
|d. standard deviation|
The type of analysis that models some event and requires that estimates be made of the probability distribution of each cash flow element is:
|d. net present value/payback approach|