Read the following MCQs and rectify the errors:

Question 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

Question 2 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

Question 3 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

Question 4 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

Question 5 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%

Question 6 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

Question 7 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

Question 8 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

Question 9 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

Question 10 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. estimating the risk premiums for class II projects

d. none of the above

Question 11 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%

Question 12 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

Question 13 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

Question 14 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

Question 15 The risk of an investment project is defined in terms of the potential ____ of its returns.

a. Certainty

b. Size

c. Variability

d. Timing

Answer rating: 100% (QA)

Question 1 Calco is a multidivisional firm with a weighted cost of capital of 14 percent and a riskadjusted discount rate for its can division of 17 percent A planned expansion in the can division req... View the full answer