Advanced Corporate Finance Quiz

Which of the following best describes 'systematic risk' in capital budgeting?

• Risk unique to a firm

• Risk that can be diversified away

• Market-related risk affecting all firms

• Operational risk due to management decisions

The certainty equivalent approach in project evaluation adjusts the project's cash flows to:

• Reflect inflation only

• Remove risk so they can be discounted at the risk-free rate

• Increase the discount rate

• Account for sunk costs

Which technique is used to examine how the NPV changes when one variable is changed at a time?

• Sensitivity analysis

• Scenario analysis

• Simulation analysis

• Break-even analysis

In decision tree analysis, a 'chance node' represents:

• A deterministic outcome

• A point where managerial choice is made

• A probabilistic event or uncertainty

• The final payoff

Using a risk-adjusted discount rate for a risky project generally:

• Lowers the discount rate

• Raises the PV of future cash flows

• Uses the risk-free rate only

• Increases the discount rate to reflect risk

Standard deviation as a measure of risk indicates:

• The average return

• The variability of possible outcomes around the mean

• The maximum possible loss

• The probability-weighted cash flow

Which of the following statements about coefficient of variation (CV) is correct?

• CV = mean / standard deviation

• CV helps compare risk across projects with different expected returns

• CV is only used for normally distributed returns

• CV gives the absolute amount of risk

Scenario analysis in capital budgeting typically involves:

• Changing one variable at a time

• Creating optimistic, pessimistic and most likely cases

• Using historical averages only

• Ignoring probabilities

The main purpose of a sensitivity analysis is to:

• Provide exact future cash flows

• Identify which variables have the greatest impact on project viability

• Replace the need for probabilistic models

• Determine tax effects

A project's NPV increases when the discount rate decreases because:

• Future cash flows are discounted less heavily

• Future cash flows become larger

• Taxes decrease

• Initial investment decreases