Question

1. Which of the following criteria should be used to choose a project if there is a conflict between two mutually exclusive projects?

	A.	The project whose payback period is equal to the expected years required to recover the original investment should be chosen.
	B.	The project whose internal rate of return is higher than its modified internal rate of return should be chosen.
	C.	The project whose discounted payback period is longer than its traditional payback period should be chosen.
	D.	The project with a higher net present value (NPV) should be chosen.

5 points   

QUESTION 2

1. Depreciation must be considered when evaluating the incremental operating cash flows associated with a capital budgeting project because:

	A.	it represents a tax-deductible cash expense.
	B.	the firm has a cash outflow equal to the depreciation expense each year.
	C.	depreciation is a cash flow that doesn't change.
	D.	depreciation has an impact on the taxes paid by the firm, which is a cash flow.
	E.	depreciation is a sunk cost.

5 points   

QUESTION 3

1. Diversifiable risk includes _____.

	A.	liquidity risk
	B.	business risk
	C.	maturity risk
	D.	political risk
	E.	interest rate risk

5 points   

QUESTION 4

1. Which of the following statements is correct?

	A.	A relatively risky future cash outflow should be evaluated using a relatively high discount rate.
	B.	Project risk estimation is independent of the beta coefficient.
	C.	If a firm's managers want to maximize the value of the stock, they should concentrate exclusively on the projects' market, or beta, risk.
	D.	If a firm has a beta that is less than 1.0, say 0.9, this would suggest that its assets' returns are negatively correlated with the returns of most other firms' assets.
	E.	If a firm evaluates all projects using the same required rate of return to determine NPVs, then the riskiness of the firm as measured by its beta will probably decline over time.

5 points   

QUESTION 5

1. When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.

	A.	Externalities
	B.	feasibility study cost
	C.	opportunity costs
	D.	initial investment outlay
	E.	sunk costs

5 points   

QUESTION 6

1. _____ is the uncertainty associated with the price at which the currency from one country can be converted into the currency of another country.

	A.	Beta risk
	B.	Exchange rate risk
	C.	Market risk
	D.	Political risk
	E.	Pure play risk

5 points   

QUESTION 7

1. Which of the following rules is essential for successful cash flow estimates, and ultimately, to successful capital budgeting?

	A.	Total cash flows are relevant to capital budgeting analysis and the accept/reject decision.
	B.	Only incremental cash flows are relevant to the accept/reject decision.
	C.	Inflation is considered while estimating incremental cash flows.
	D.	The return on invested capital is the only relevant cash flow.
	E.	Shipping and installation costs are included in cash flow estimation.

5 points   

QUESTION 8

1. Which of the following is a measure of the extent to which the returns on a given stock move with the stock market?

	A.	Standard deviation
	B.	Correlation coefficient
	C.	Coefficient of variation
	D.	Beta coefficient
	E.	Probability distribution of expected returns

5 points   

QUESTION 9

1. With the improvement in the technology and understanding of discounting techniques, both NPV and IRR methods of capital budgeting became more popular because _____.

	A.	these techniques provide correct decisions with respect to payback period minimization
	B.	these techniques provide correct decisions with respect to the maximization of the initial capital investment
	C.	these techniques provide correct decisions with respect to value maximization
	D.	these techniques provide correct decisions with respect to the minimization of the number of IRRs for every project
	E.	these techniques provide correct decisions with respect to the maximization of the required rate of return

5 points   

QUESTION 10

1. The primary function of the capital budget is to forecast _____.

	A.	the terminal value of the cash flows from different projects
	B.	the projects' multiple internal rates of return
	C.	the target payback periods of the projects undertaken by a firm
	D.	the funds required for future projects
	E.	the discounted cash inflow from various projects

5 points   

QUESTION 11

1. If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

	A.	If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
	B.	If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta.
	C.	If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
	D.	If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
	E.	If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.

Answer 1