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 |