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WorksheetsProject Cash Flow and Financial Perspectives Worksheet
Total questions: 150
Worksheet time: 1hrs 15mins
Incremental cash flow is defined as:
All of the above
The investor’s cash flow with a replacement investment project compared to without a replacement project
The investor’s cash flow with an expansion project compared to without an expansion project
The investor’s cash flow with a new project compared to without a new project
Cash flows from which of the following perspectives can be prepared using the indirect method?
Net cash flow from the Equity Perspective (EPV)
Net cash flow from the All Equity Perspective (AEPV)
All of the above
Net cash flow from the Total Investment Perspective (TIPV)
The timing of project cash flows is:
None of the above
At the beginning of the period
At any point during the period
At the end of the period
Cash flows from which of the following perspectives can be prepared using the direct method?
Net cash flow from the All Equity Perspective (AEPV)
All of the above
Net cash flow from the Total Investment Perspective (TIPV)
Net cash flow from the Equity Perspective (EPV)
Characteristics of profit flow include:
All of the above
Nominal profit recorded in accounting books
Actual profits attracted by investors
Accurately measures the project’s debt repayment ability
The time interval of project cash flows is usually:
Month
Year
Day
Quarter
Characteristics of project cash flows include:
Accurately assesses the project’s ability to meet debt obligations
Shows the actual cash held or shortfall of the project investors
Accurately measures the timing of cash outflows and inflows
All of the above
Which of the following is a financial appraisal perspective?
All Equity Perspective (AEPV)
Equity Perspective (EPV)
All of the above
Total Investment Perspective (TIPV)
The salvage value of factories and equipment is determined based on:
Market value at liquidation estimated by experts, if market valuation is possible
Remaining value of factories and equipment at the end of the final operating year, if market valuation is not possible
All of the above
Remaining value of factories and equipment at the beginning of the liquidation year, if market valuation is not possible
If EBIT is earnings before interest and taxes; NOPAT is net operating profit after tax; EAT is net income after tax; Dep is depreciation; Int is interest expense; TS is tax shield from borrowing; and ΔWC is change in working capital, which of the following formulas determines project operating cash flow (without tax shield) from interest?
EBIT × (1 − t%) + Dep + TS + Int − ΔWC
EAT + Dep + Int − ΔWC
NOPAT + Dep − ΔWC
All of the above
The purpose of preparing project cash flow planning tables is to:
Assess the project’s debt repayment capacity
Calculate annual income tax
Estimate the project’s working capital requirements
Establish the project’s cash flows
The purpose of project cash flow planning is to determine:
The project’s capital needs and funding sources
The financial efficiency of the project
All of the above
The debt repayment ability and loan repayment schedule of the project
Why should the project’s construction completion date be used as the starting point for dividing project cash flows?
Both A and B are incorrect
To conveniently determine annual expenditures and revenues
To separate investment cash flows from project operation cash flows
Both A and B are correct
Which of the following statements is NOT correct about project cash flows?
Calculation of the project’s incremental cash flows
Including sunk costs
Including side effects from undertaking or not undertaking other projects
Including opportunity costs
Which item in the project’s working capital needs is current assets?
All of the above
Minimum required cash balances
Minimum raw materials, fuel, and spare parts inventory
Finished goods inventory
Changes in depreciation time and method will:
Indirectly affect project cash flows
Directly and indirectly affect project cash flows
Directly affect project cash flows
Not directly or indirectly affect project cash flows
The liquidation value of fixed assets is determined as:
All of the above
Operating cash flow
Investment cash flow
Financing cash flow
Consider the following items: i. Project construction costs ii. Workers’ wages during production iii. Depreciation expenses iv. Sales revenue v. Construction expenses of project works Which of these are not included in the project’s cash inflows and outflows?
ii, iii, v
i, ii, iii, v
iii, iv, v
i, iii, v
Equity contributions to the project are considered as which type of cash flow?
Investment cash flow
Financing cash flow
Operating cash flow
All of the above are incorrect
If EBIT is earnings before interest and taxes; NOPAT is net operating profit after tax; EAT is net income after tax; Dep is depreciation; Int is interest expense; TS is tax shield from borrowing; and ΔWC is change in working capital, which of the following formulas determines project operating cash flow (with tax shield) from interest?
EBIT × (1 − t%) + Dep + TS + Int − ΔWC
NOPAT + Dep − ΔWC
EAT + Dep + Int − ΔWC
All of the above are incorrect
Project cash flow from the Equity Perspective (EPV) is defined as project cash flow in the case of:
The project has capital and uses it effectively
All of the above
The project has no debt
After subtracting debt repayment and adding financing
Which of the following changes will reduce the project’s net operating cash flow?
Increase in minimum cash balance
Decrease in inventory
Decrease in accounts receivable
Increase in accounts payable
Choose the correct statement:
Cash flow (AEPV) includes the tax shield benefit from interest, while cash flow (TIPV) does not
Cash flow (AEPV) does not include the tax shield benefit from interest, while cash flow (TIPV) does
Both cash flows (AEPV) and (TIPV) exclude the tax shield benefit from interest
Both cash flows (AEPV) and (TIPV) include the tax shield benefit from interest
Project cash flow from the Equity Perspective (EPV) measures the financial return to:
Shareholders
Investors
Shareholders and banks
Banks
Investment cash flow consists of inflows and outflows for:
The project’s fixed asset investment activities
The project’s asset investment activities
The project’s tangible asset investment activities
The project’s financial asset investment activities
Which type of cash flow can be prepared using the indirect method?
Investment cash flow
All of the above
Operating cash flow
Financing cash flow
Project cash flow from the All Equity Perspective (AEPV) represents the project’s cash flow in the case of:
The project has no debt
The project has debt and equity
The project after repaying debt to lenders
All of the above are incorrect
Project financing cash flow includes inflows and outflows for:
Raising project equity capital
Raising project debt capital
Raising internal funds for the project
Raising external funds for the project
Project cash flow from the Total Investment Perspective (TIPV) represents the project’s cash flow in the case of:
The project after repaying debt to lenders
All of the above are incorrect
The project has debt and equity
The project has no debt
What is the effect of depreciation expense on the project’s cash flow or income?
Decreases project cash flow by the amount of annual depreciation
Increases taxable income by the amount of annual depreciation
Increases project cash flow by the amount of annual depreciation
D. Decreases taxable income by the amount of annual depreciation
Which type of cash flow can be prepared using the direct method?
Investment cash flow
All of the above
Operating cash flow
Financing cash flow
Net cash flow from the All Equity Perspective (AEPV) is determined as:
Operating cash flow (without tax shield) + Investment cash flow
Net cash flow from TIPV − Tax savings from interest
Net cash flow from EPV + Tax savings from interest − Financing cash flow
All of the above
Net cash flow from the Total Investment Perspective (TIPV) is determined as:
Operating cash flow (with tax shield) + Investment cash flow
All of the above
Net cash flow from AEPV + Tax savings from interest
Net cash flow from EPV − Financing cash flow
Which of the following items is included in project cash flow under the Equity Perspective (EPV)?
Equity issuance
Dividend payments
Project preparation and appraisal costs
Land opportunity cost
Project cash flows include:
Investment cash flow
Financing cash flow
Operating cash flow
All of the above
Operating cash flow consists of inflows and outflows from:
Production and supply of project outputs
The project's investment activities
The project's capital-raising activities
The project's financing activities
Payments to suppliers of raw materials are included in:
None of the above
Financing cash flow
Operating cash flow
Investment cash flow
Net cash flow from the Equity Perspective (EPV) is determined as:
Operating cash flow (with tax shield) + Investment cash flow + Financing cash flow
All of the above
Net cash flow from TIPV + Financing cash flow
Operating cash flow (without tax shield) + Investment cash flow + Tax shield + Financing cash flow
Project cash flow from the All Equity Perspective (AEPV) measures the financial return to:
Investors
Banks
Shareholders and banks
Shareholders
Project cash flow from the Total Investment Perspective (TIPV) measures the financial return to:
Shareholders and banks
Banks
Shareholders
Investors
Incremental cash flow is defined as:
The investor's cash flow in the case of an expansion project compared to without an expansion project
The investor's cash flow in the case of a replacement project compared to without a replacement project
The investor's cash flow in the case of a new project compared to without a new project
All of the above are correct
Which of the following items is included in project cash flow under the Equity Perspective (EPV)?
Land opportunity cost
Equity issuance
Project preparation and appraisal costs
Dividend payments
Characteristics of profit streams include:
Nominal profit recorded in accounting books
Accurately measures the project's debt repayment ability
All of the above are correct
Actual profit earned by investors
Characteristics of project cash flows include:
Accurately measures the timing of cash outflows and inflows
Accurately assesses the project's ability to meet debt obligations
All of the above are correct
Shows the actual cash held or deficit of project investors
Cash flow from which of the following perspectives can be prepared using the direct method?
All of the above are correct
Net cash flow from the Total Investment Perspective (TIPV)
Net cash flow from the All Equity Perspective (AEPV)
Net cash flow from the Equity Perspective (EPV)
Cash flow from which of the following perspectives can be prepared using the indirect method?
Net cash flow from EPV
Net cash flow from TIPV
Net cash flow from AEPV
All of the above are correct
Which of the following is considered a sunk cost of the project?
Project preparation costs
Project company establishment costs
Design and construction costs
Groundbreaking costs
When preparing project operating cash flows, opportunity costs at market rental rates will:
Be recorded as an outflow under the direct method and adjusted upward in net income under the indirect method
Not be recorded under the direct method and adjusted downward in net income under the indirect method
Not be recorded under the direct method and adjusted upward in net income under the indirect method
Be recorded as an outflow under the direct method and adjusted downward in net income under the indirect method
Choose the correct statement:
If the land is leased with annual rent, the project has no salvage value from land
If the land is purchased, its salvage value is the market price at the year of purchase
If land use rights (long-term) are contributed as capital, the salvage value is treated the same as purchased land
All of the above are correct
When a project incurs opportunity costs at market rental rates, these costs will:
Not be recorded as outflows and not recorded in project operating costs
Recorded as outflows and recorded in project operating costs
Recorded as outflows
Recorded as project operating costs
Which of the following can be considered sunk costs of the project?
Expenditures during the investment preparation stage
Costs not relevant to the investment decision
All of the above are correct
Non-recoverable costs if the project is not undertaken
Which depreciation method increases project operating cash flows if tax effects are excluded?
Straight-line
Declining balance
Units-of-production
None of the above
Which of the following are positive side effects that increase cash flows of other projects?
Yogurt project and fermented yogurt drink project
Oral medicine project and injectable medicine project
Coffee shop & billiards project and office lunch project
Gas stove project and electric stove project
When should sunk costs be included in project cash flows?
When sunk costs are borne by the investor
When sunk costs are relatively large
Sunk costs should not be included in project cash flows
When sunk costs are project preparation and appraisal costs
Which of the following costs is considered a sunk cost of the project?
Project preparation costs
Project company establishment costs
Design and construction costs
Groundbreaking costs
Which depreciation method increases project operating cash flows if tax effects are excluded?
Straight-line
Declining balance
Units-of-production
None of the above
Which of the following are positive side effects that increase cash flows of other projects?
Yogurt project and fermented yogurt drink project
Oral medicine project and injectable medicine project
Coffee shop & billiards project and office lunch project
Gas stove project and electric stove project
When should sunk costs be considered in project cash flows?
When sunk costs are borne by the investor
When sunk costs are relatively large
Sunk costs should not be included in project cash flows
When sunk costs are project preparation and appraisal costs
A company is considering a new project. It currently owns a piece of land that can be used for the project, but the existing building on the land must be demolished. Which of the following costs should NOT be included in the project's cash flows?
Demolition and site clearance costs
Road construction costs incurred last year
Opportunity cost of reallocating equipment from another project
Market value of the existing building
A company is considering investing in an expansion project. It currently owns a piece of land with a market value of VND 120 billion and intends to use it for the project. If the project is implemented, the land cost is:
Zero because the project does not need to purchase land
Historical purchase price of the land
Current market value of the land (VND 120 billion)
Book value of the land on the balance sheet
Opportunity cost is defined as:
The lowest next-best return forgone
The best return forgone
The lowest return forgone
The next-best return forgone
The cost of preparing the project's environmental impact assessment report:
Is considered a pre-operating expense
Is considered an opportunity cost
Is recorded in the project's investment cash flows
Is included in the total investment but not in the project's investment cash flows
The principle of recognizing sunk costs of the project is:
Considered a cash operating expense of the project
All of the above are correct
Included in the project's total investment
Counted as part of the project's initial investment outflows
The opportunity cost of land used in the project is determined by:
Government rental price
Market rental price
Valuation agreed upon by capital contributors
Market transfer price
Which of the following are negative side effects that reduce the cash flows of other projects?
Pig farming project and catfish farming project
Apple Watch project and iPhone project
Gas station project and rest-stop project
Walking shoes project and running shoes project
Which of the following statements about the salvage value of land is correct?
All of the above are incorrect
The value at the beginning of liquidation always equals the market value at the year of liquidation
All gains or losses related to land are recorded as cash inflows from project liquidation
The value at the beginning of liquidation always equals the original purchase cost
Which of the following statements about NPV is correct?
Choosing projects based on the NPV criterion gives better results than other criteria when projects are mutually exclusive with the same lifespan
NPV > 0 means the project's annual net cash flows are all > 0
NPV > 0 means the project's annual net profit is all > 0
NPV is not affected by the project's discount rate
Which of the following criteria does not take into account the time value of money?
IRR
NPV
PI
PP (Payback Period)
Which of the following is correct about the payback period (PP) criterion?
Payback period accounts for all cash flows over the project's life
Payback period accounts for all cash flows before the payback time
Payback period accounts for the time value of money
Payback period accounts for all cash flows after the payback time
The total present value of project operating cash flows in the PI (Profitability Index) criterion:
Cannot be determined
Always positive
Always negative
May be positive or negative
Which of the following statements is correct?
If project A has a higher IRR than project B, then project A has a higher NPV than B
All of the above statements are incorrect
For two mutually exclusive projects, investors should choose the one with the highest IRR
If project A has a higher IRR than project B, then project A has a lower NPV than B
If the NPV of a project is greater than zero, which of the following is true?
PP < DPP < Project life
DPP > PP > Project life
PP > DPP > Project life
DPP < PP < Project life
If an investment project has NPV = 0, this means:
The project breaks even
The present value of total income equals the present value of total investment costs
The project's rate of return equals its cost of capital
All of the above are correct
What is the implication if two projects both have the same positive NPV value?
Both projects increase the investor's value by the same amount
Both projects have the same internal rate of return (IRR)
Both projects have equal profitability
Both projects have the same payback period
In which case will the project be accepted?
NPV = 0 at the discount rate equal to the expected rate of return
NPV = 50 at the discount rate equal to the loan interest rate
NPV = 100 at the discount rate equal to the 12-month savings rate
All of the above cases are accepted
Given a certain cash flow stream, how does MIRR compare to IRR?
It depends on the discount rate and the project's internal rate of return
MIRR = IRR
MIRR < IRR
MIRR > IRR
Which of the following statements about the payback period (PP) is incorrect?
Payback period does not consider cash flows after payback is reached
The payback criterion usually provides an accurate conclusion about the project's financial efficiency
Investors should accept projects with a payback period shorter than the one they set
Payback period does not consider the time value of money
The principle of using IRR to evaluate a project: A project is only accepted when IRR:
≥ Term deposit interest rate plus risk premium
≥ Medium- and long-term lending rate
≥ ROE
≥ WACC
Which of the following statements about payback period is incorrect?
Payback period does not consider cash flows after payback is reached
Investors should accept projects with a payback period shorter than their expected payback period
Payback period criterion usually provides accurate conclusions
Payback period does not account for the time value of money
If two projects A and B have the same lifespan and project A's annual cash flow is twice that of project B, which of the following is correct?
PP(A) = 2 × PP(B)
NPV(A) = 2 × NPV(B)
IRR(A) = 2 × IRR(B)
MIRR(A) = 2 × MIRR(B)
The NPV of an investment project is $1,000, discounted at a rate of 15%. This can be interpreted as:
The project yields 15% return on total invested capital
The project increases the company's value by $1,000
The project yields 15% per year plus $1,000 in present terms
The project earns exactly $1,000
Which of the following statements is incorrect?
NPV is a multivalued function of the discount rate
NPV is positively correlated with the discount rate
NPV depends on the project's lifespan
NPV always has a unique value
NPV is defined as:
All of the above definitions are correct
Net Present Value
Present value of operating cash flows minus present value of initial investment costs
Present value of discounted cash flows after the payback period
A project has a lifespan of 10 years and a non-discounted payback period of 10 years. Which of the following is correct?
DPP < 10 years
IRR < r
PI > 1
NPV < 0
Given 0 < r1 < r2 and the project's NPV values as follows: NPV(r1) > 0 > NPV(r2). Which expression is correct?
IRR > r1 > r2
r1 < IRR < r2
IRR < r1 < r2
r1 < r2 < IRR
Which of the following is a disadvantage of the NPV criterion?
Sensitive to the discount rate
A project may have multiple NPVs or no NPV at all
All of the above are disadvantages of NPV
NPV can only be calculated if net cash flows have at least one negative value
When choosing mutually exclusive projects with different lifespans, which criterion should be used?
Individual project IRR
Individual project EAA (Equivalent Annual Annuity)
Individual project NPV
Individual project PP or DPP
For a project whose NPV is inversely related to the discount rate, what happens if the project's IRR is 15%?
NPV is negative if the discount rate is 20%
NPV is negative if the discount rate is 10%
NPV is positive if the discount rate is 15%
NPV is positive if the discount rate is 20%
The discount rate at which the project's NPV equals zero is:
Re
IRR
WACC
MIRR
A project with NPV = 0 at a discount rate equal to the expected rate of return will not be accepted because:
The project only just covers its cost of capital
The project does not increase net assets
None of the above reasons is correct
The project only just achieves the expected return
For a project to be accepted, the IRR of net cash flows (EPV) must be:
≥ the minimum expected return on equity (ROE)
≥ the maximum expected return on equity (ROE)
≥ 12-month savings deposit rate
≥ average long-term market lending rate
Which of the following statements is incorrect?
NPV and IRR may give conflicting decisions when choosing independent projects
All else equal, projects with shorter payback periods are less risky than those with longer payback periods
To reflect the project’s financial feasibility, land must be liquidated at market value in the year of liquidation
One disadvantage of NPV is that it depends on the chosen discount rate
The Profitability Index (PI) explains:
None of the above is correct
How many units of income are obtained per unit of initial capital after deducting cost of capital
How many units of present income are obtained per unit of initial capital after deducting cost of capital
How many units of income are obtained per unit of initial capital
A project has IRR = 20% and cost of capital = 15%. This can be interpreted as:
The project’s return is higher than its required rate of return
The project yields 20% on total invested capital
The project covers its cost of capital
All of the above interpretations are correct
Project A has NPV(A) = 389 and IRR(A) = 25%. Project B has the same lifespan as Project A and has annual cash flows double those of Project A. The NPV and IRR of Project B are:
NPV(B) = 778 and IRR(B) = 50%
NPV(B) = 389 and IRR(B) = 25%
NPV(B) = 389 and IRR(B) = 50%
NPV(B) = 778 and IRR(B) = 25%
Which of the following changes will increase the NPV of a project, assuming other factors remain constant?
Annual operating net cash flows decrease
Discount rate decreases
Project lifespan increases
Initial investment increases
A project has a negative net cash flow in year 0 and positive net cash flows in subsequent years. Given that the project’s DPP is 3 years and 6 months, which expression is correct?
DPP ≥ PP
DPP < Project lifespan
All of the above expressions are correct
NPV ≥ 0
A project has two internal rates of return: IRR1 = 20% and IRR2 = 30%. If the project’s cost of capital is 25%, the evaluator will:
Use the MIRR criterion to evaluate the project
Never be able to evaluate the project
Accept the project
Reject the project
Which of the following statements is correct?
A project with a 1-year payback period always has NPV > 0
NPV > 0 indicates that the project generates profit every year
NPV and IRR may give conflicting decisions when selecting mutually exclusive projects
If IRR < WACC, then NPV > 0
MIRR is used to overcome which of the following shortcomings of IRR?
IRR assumes cash flows generated annually are reinvested at the IRR
Multiple IRRs may exist
No IRR exists in some cases
To overcome all three shortcomings of IRR
For a project to be accepted, the IRR of net cash flows (AEPV) must be:
≥ WACCAT
≥ WACCBT
≥ Average market lending rate
= Savings deposit rate
The difference between the present value of cash inflows and the present value of cash outflows throughout the project is:
IRR
NPV
PP/DPP
B/C
For a project to be accepted, the IRR of net cash flows (TIPV) must be:
≥ Average market lending rate
≥ WACCBT
≥ Savings deposit rate
≥ WACCAT
Company X is considering two investment projects. Both projects require the same capital outlay and have similar cash flow patterns. The first project has a lifespan of 10 years, the second 20 years. Which criterion is most appropriate for ranking these projects?
Net Present Value (NPV)
None of the above criteria is correct
Profitability Index (PI)
Internal Rate of Return (IRR)
Which of the following statements is correct?
When the lifespan of a project increases, NPV always increases
B/C is calculated by comparing benefits with investment and operating costs
DPP is positively correlated with the discount rate
IRR is the project’s minimum rate of return
A project has a negative net cash flow in year 0 and positive net cash flows in subsequent years. If the project cannot achieve discounted payback (DPP), then the project has:
PP > DPP
IRR > r
NPV < 0
PI > 1
Regarding construction-period interest, which of the following statements is correct?
Construction-period interest is the interest payable on construction financing
Deferred construction-period interest is not included in total investment
Deferred construction-period interest is not capitalized into the initial cost of fixed assets formed after investment
Construction-period interest is not included in investment cash flows
The ability of a project to repay debt is assessed based on:
Changes in project working capital
Annual after-tax profit of the project
Annual depreciation expense of the project
Net operating cash flows of the project
A project has pre-tax debt cost of 10% and cost of equity 15%. Its capital structure is 60% debt and 40% equity. Corporate tax rate is 20%. The project’s discount rate for AEPV cash flows is:
12%
All of the above are incorrect
10.8% = 40% × 15% + 60% × 10% × (1 − 20%)
15%
If WACCBT denotes pre-tax cost of capital, WACCAT post-tax cost of capital, kd the borrowing rate, ke the expected return on equity, %D the weight of debt, %E the weight of equity, and t the corporate income tax rate, then the discount rate for EPV cash flows is:
All of the above are incorrect
WACCBT = %D·kd + %E·ke + …
ke
WACCAT = %D·kd(1 − t) + %E·ke + …
Compared to debt cost, the cost of preferred equity is:
Depends on the project
Equivalent
Lower
Higher
If WACCBT denotes pre-tax cost of capital, WACCAT post-tax cost of capital, kd the borrowing rate, ke the expected return on equity, %D the weight of debt, %E the weight of equity, and t the corporate income tax rate, then the discount rate for TIPV cash flows is:
WACCAT = %D·kd(1 − t) + %E·ke + …
WACCBT = %D·kd + %E·ke + …
All of the above are incorrect
ke
A project has pre-tax debt cost of 10% and cost of equity 15%. Its capital structure is 60% debt and 40% equity. Corporate tax rate is 20%. The project’s discount rate for TIPV cash flows is:
All of the above are incorrect
12% = 40% × 15% + 60% × 10%
10.8%
15%
A project has pre-tax debt cost of 10% and cost of equity 15%. Its capital structure is 60% debt and 40% equity. Corporate tax rate is 20%. The project’s discount rate for EPV cash flows is:
12%
All of the above are incorrect
10.8%
15%
A company plans to use debt financing for a project. The current long-term borrowing rate is 12% per year, with interest calculated on the outstanding loan balance. Loan interest is tax-deductible at a tax rate of 20%. The loan issuance cost is 2% of the loan amount. The cost of debt capital is:
9.8%
12.24%
All of the above are incorrect
12%
A company issues bonds to finance a project. The bonds have a maturity of 3 years, issued at face value of 1,000,000 VND. The nominal coupon rate is 12% per year, with annual interest payments. The tax rate is 20%. Issuance costs are 6% of the total proceeds. The cost of debt capital from bonds is:
All of the above are incorrect
11.69%
12%
14.61%
Estimating the cost of equity capital of the project using the CAPM model, the market risk premium is measured by:
All of the above are incorrect
The timing difference between the average return of the market portfolio and the average return of Treasury bonds
The expected difference between the average return of the market portfolio and the average return of Treasury bonds
The present difference between the average return of the market portfolio and the average return of Treasury bonds
CAPM = Rf + β(Rm − Rf). Market risk premium = E(Rm) − Rf. A company plans to invest in a new project to expand its market share. The company finds two comparable firms in the same industry, with unlevered betas of 0.6 and 0.8. The project's unlevered beta is
0.8
0.7
0.6
All of the above are incorrect β_asset = (0.6 + 0.8) / 2 = 0.7
Estimating the cost of equity capital of the project using CAPM, the risk-free rate is represented by the parameter
βi (Rm − Rf)
βi
Rf
(Rm − Rf)
Which of the following statements is correct when referring to WACCAT
Increasing the level of debt usage always reduces the project's WACCAT
The higher the project risk, the higher the project's WACCAT
The level of debt usage does not affect the project's WACCAT in a taxable environment
The WACCAT function is not a linear function
In the Capital Asset Pricing Model (CAPM), the project's risk relative to the market portfolio is expressed in the parameter
Rf
Rm
βi
(Rm − Rf)
Estimating the cost of equity capital of the project using CAPM, the asset beta is estimated by calculating
The beta of a comparable single-industry firm
The average beta of comparable single-industry firms
The beta of a comparable multi-industry firm
The average beta of comparable multi-industry firms
If WACCBT denotes the pre-tax cost of capital; WACCAT denotes the after-tax cost of capital; and ke denotes the cost of equity, which of the following expressions is correct
ke ≥ WACCAT ≥ WACCBT
ke ≥ WACCBT ≥ WACCAT
WACCAT ≥ WACCBT ≥ ke
WACCBT ≥ WACCAT ≥ ke
If WACCBT denotes the pre-tax cost of capital; WACCAT denotes the after-tax cost of capital; kd is the borrowing rate; ke is the expected return on equity; %D is the weight of debt and %E is the weight of equity; and t is the corporate income tax rate, then the net cash flow under the All Equity Perspective (AEPV) will be discounted at the rate
All of the above are incorrect
ke
WACCAT = %D·kd(1 − t) + %E·ke + …
WACCBT = %D·kd + %E·ke + …
The expected return of project owners is always higher than the required return of creditors because
The proportion of owners' equity is higher than that of borrowed capital
Owners bear higher risk compared to creditors
Owners receive the tax shield benefit from debt
The impact of inflation
Estimating the cost of equity capital of the project using CAPM, the market risk premium is represented by the parameter
Rf
(Rm − Rf)
βi
βi (Rm − Rf)
Estimating the cost of equity capital of the project using CAPM, the asset risk premium is represented by the parameter
βi (Rm − Rf)
(Rm − Rf)
βi
Rf + βi (Rm − Rf)
Which of the following statements is correct about the project's discount rate
All are correct
The discount rate is adjusted according to project risk
The discount rate is the opportunity cost of financial resources funding the project
The discount rate is a rate used to convert future project cash flows into present value
The difference between the cost of retained earnings and the cost of newly issued common stock is
Tax deduction
All are incorrect
Issuance cost and tax deduction
Issuance cost
The cost of capital of a project depends on
The risk of other projects of the company implementing the project
The risk of similar projects in the market
The risk of the assets being financed
The risk of the company implementing the project
The cost of preferred equity
All of the above are incorrect
Is tax-deductible
Is not tax-deductible
Has no specific regulation
The expected return of investors reflects the factor
Real interest rate
Expected inflation
Risk premium
All are correct
The cost of equity capital of the project includes
All of the above are correct
The cost of preferred stock
The cost of common stock
The cost of retained earnings
The capital structure of the project includes
Short-term and long-term interest-bearing sources of funds used in the project
All of the above are incorrect
Long-term interest-bearing sources of funds used in the project
Interest-bearing sources of funds and non-interest-bearing sources used in the project
The asset beta when there is a tax shield on interest is calculated using the formula
βe[1+(1·t)D/E]
βe(1+D/E)
βe/[1+(1·t)D/E]
βe/(1+D/E)
The cost of capital of the project is also called
The discount rate of the project
The hurdle rate of the project
All of the above are correct
The expected rate of return of the project's capital providers
The cost of any source of capital used in the project will be
The required rate of return of investors
The required rate of return of investors adjusted for issuance cost
The required rate of return of investors adjusted for issuance cost and income tax
All of the above are correct
When applying CAPM to estimate the expected return on equity in underdeveloped financial markets, it may
Not be possible to find a company operating in the same sector
All of the above are correct
Data is short and incomplete
The selected stock portfolio does not reflect the market fluctuations
A company plans to use retained earnings to carry out an expansion investment project. The yield to maturity of treasury bonds is 6% per year, the equity beta is 1.5, and the market risk premium is 7%. The cost of equity capital of this project is
10.5%
14.5%
7.5%
16.5% (6% + 1.5*7%)
A company plans to use retained earnings to carry out an expansion investment project. This project has a risk level similar to that of a company in the same industry with an asset beta (no debt) of 1.2. The debt-to-equity structure of the project is 6:4. If the income tax rate is 20%, then the equity beta of the project is
0.78
2.64 (1.2*[1+(1-20%)*6/4])
1.84
0.55
When applying the Capital Asset Pricing Model (CAPM) to estimate the expected return on equity in projects, the risk-free bond yield should be chosen as
The yield to maturity of newly issued government bonds
The average yield to maturity of treasury bonds with the same maturity as the project
The average yield to maturity of currently circulating treasury bonds
The historical average yield to maturity of government bonds
The debt cost of the project includes
Both A and B are correct
The cost of debt from bond issuance
The cost of debt from bank loans
Both A and B are incorrect
The cost of equity is 13% for the oil project and 14% for the gas project. The after-tax cost of debt for both units is 10%. The capital structure of the gas project is 60% debt and 40% equity, and the capital structure of the oil project is 80% debt and 20% equity. The WACC of these two business units is
10.6% and 10.8%
10.6% and 11.6% (10%*80%+13%*20% and 10%*60%+14%*40%)
10.6% and 11.2%
All of the above are incorrect
Point out the disadvantage of using the industry average return to estimate the expected return on equity for the project
It does not reflect the risk from the company’s capital structure
It can only be used in a limited number of important industries
The data is fragmented and difficult to compile over the years
All of the above are correct
The cost of capital of the project consists of
The cost of debt
The cost of equity
The cost of debt and equity
All of the above are correct
The reason why project cash flows must be discounted with the cost of capital is
Due to the impact of inflation
All of the above are correct
Due to the uncertainty of cash flows
Because money has a time value
The equity beta of the project when there is a tax shield on interest is calculated using the formula
βa[1+(1−t)D/E]
βa(1+D/E)
βa/[1+(1−t)D/E]
βa/(1+D/E)
Point out the disadvantage of sensitivity analysis
It does not identify which variable is the main one
All of the above are correct
It does not consider the change of each variable
It does not consider the probability distribution of each variable
Choose the correct statements
Scenario analysis cannot compare the risk of two different projects
Sensitivity analysis evaluates the importance of variables to project performance
All of the above are correct
Simulation analysis reflects the potential of high-risk projects
When analyzing risk using simulation, the deviation of the probability of NPV ≥ 0 between two trials of 10,000 runs is +/- 10%. The analyst considers this deviation too large and wants to reduce it. The most reasonable option is
Increase the number of trials to 1,000,000
Reduce the number of trials to 1,000
Change the declared probability distribution of the input variable
Increase the number of trials to 100,000
