9L for Shahimermaid FQ
blakli
9l_fq.docxQuestion 1
1.
All of the following are correct statements about a project s total risk EXCEPT:
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a. Undiversified investors are concerned about the company s future outlook. |
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b. It becomes the relevant risk when the project s returns are correlated to the returns from the firm as a whole. |
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c. Total project risk can be measured by calculating standard deviation |
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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.
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a. certainty |
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b. size |
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c. variability |
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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 ____.
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a. sensitivity analysis |
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b. simultaneous equations |
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c. scenario analysis |
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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.
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a. I only |
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b. II only |
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c. Both I and II |
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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?
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a. 14.9% |
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b. 15.4% |
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c. 14.0% |
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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
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a. accepting project C |
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b. rejecting project C |
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c. reestimating the risk premiums for class II projects |
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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.
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a. larger, larger |
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b. smaller, larger |
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c. larger, smaller |
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d. smaller, smaller |
0.4 points
Question 8
1.
A major disadvantage of the risk-adjusted discount rate approach is that it
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a. can lead to selecting only above-average risk projects |
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b. provides the decision maker with a range of numbers |
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c. can lead to selecting only below-average risk projects |
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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?
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a. Yes, NPV = $10,096 |
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b. Yes, NPV = $ 9,896 |
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c. No, NPV = -$5,276 |
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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?
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a. 25.6% |
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b. 14.9% |
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c. 10.4% |
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d. 19.9% |
0.4 points
Question 11
1.
A weakness of the net present value/payback method is:
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a. It is a complicated calculation |
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b. It is subjective |
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c. It is directly related to the variability of returns from a project |
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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
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a. the beta value for the firm |
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b. the firm's weighted cost of capital |
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c. the firm's required rate of return |
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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
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a. it is easy and inexpensive to apply |
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b. it considers a project's liquidity |
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c. it considers a project's liquidity |
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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.
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a. probability |
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b. return distribution |
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c. net present value |
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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:
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a. scenario |
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b. sensitivity |
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c. simulation |
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d. net present value/payback approach |
