Multiple Choice Questions Sensitivity and scenario analysis

Multiple Choice Questions:

Sensitivity and scenario analysis aid the capital budgeting decision process by changing the underlying assumptions on which the decision is based.

True

False

1.00000 points

QUESTION 2

In the present-value break-even the EAC is used to allocate the initial investment at its opportunity cost over the life of the project.

True

False

1.00000 points

QUESTION 3

The slope of the capital market line is the equilibrium price of risk in terms of expected return, (E(RM) - RF) / ?_M .

True

False

1.00000 points

QUESTION 4

The two-fund separation in the CAPM equilibrium means that every investor holds a combination of the well-diversified market portfolio and therisk-free asset.

True

False

1.00000 points

QUESTION 5

The SML is a graphical presentation of the relationship between a security\'s expected return and its standard deviation.

True

False

1.00000 points

QUESTION 6

If other things remain the same, the higher the standard deviation, the lower the beta of a security.

True

False

1.00000 points

QUESTION 7

The beta of a security is estimated as the slope of the regression equation, where the dependent variable (vertical axis) is the (excess) return on the security and the independent variable (horizontal axis) is the (excess) return on the market portfolio.

True

False

1.00000 points

QUESTION 8

If a security is below the SML, a mean-variance investor would buy the security because it is undervalued.

True

False

1.00000 points

QUESTION 9

The cost of debt of a firm is equal to one plus the marginal corporate tax rate (1 + tC) multiplied by the yield to maturity of its outstanding debt.

True

False

1.00000 points

QUESTION 10

The adjusted beta is always lower than the unadjusted beta.

True

False

1.00000 points

QUESTION 11

One method of estimating the growth rate of a company is to use the retention growth model, where the growth rate (=g) is estimated as the ROEmultiplied by the plowback ratio.

True

False

1.00000 points

QUESTION 12

The operating leverage is the extent to which fixed-income securities are used in a firm\'s capital structure.

True

False

1.00000 points

QUESTION 13

As the debt ratio of a firm increases, its equity beta increases because of the added financial risk.

True

False

1.00000 points

QUESTION 14

MM\'s proposition I under no taxes implies that the cost of equity of a firm remains the same as the firm uses more debt because of the no-tax assumption.

True

False

1.00000 points

QUESTION 15

MM\'s proposition I under no taxes implies that an issue of debt increases both the expected earnings per share (EPS) and the risk of the EPS. As a result, the stock price remains the same.

True

False

1.00000 points

QUESTION 16

_____ evaluates the NPV of a project with respect to changes in one variable while holding others constant.

Sensitivity analysis

Scenario analysis

Simulation

Mean Variance model

1.00000 points

QUESTION 17

The present value (PV) break-even point is better than the accounting break-even point because

PV break-even point is the same as the sensitivity analysis.

PV break-even point covers the economic opportunity costs of the investment.

PV break-even point covers the fixed costs of production, which the accounting break-point does not.

PV break-even point covers the variable costs of production, which the accounting break-even point does not.

1.00000 points

QUESTION 18

An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Market Line has to

lend some of her money at the risk-free rate and invest the rest in the optimal risky portfolio.

borrow some money at the risk-free rate and invest it in the optimal risky portfolio

invest only in the risky securities.

hold a portfolio which is not diversified.

1.00000 points

QUESTION 19

If other things remain the same, diversification is more effective when

securities returns are positively correlated.

securities returns are uncorrelated.

securities returns are negatively correlated.

securities returns are high.

1.00000 points

QUESTION 20

A measure of how much the returns of two risky assets move together is

variance

standard deviation

covariance

semi-variance

1.00000 points

QUESTION 21

The optimal risky portfolio can be identified by finding ______ .

the minimum variance point on the efficient frontier

the maximum return point on the efficient frontier

the tangency point of the capital market line and the efficient frontier

none of the above answers is correct.

1.00000 points

QUESTION 22

Which one of the following is not a determinant of beta of the equity of a company?

cyclicality of revenues

operating leverage

financial leverage

All of the above are determinants of beta.

1.00000 points

QUESTION 23

When the SML is written in the following form, the last tem in the equation represents ______________:
RS,L = RF + ?S,U (RM - RF) + ?S,U (B/S) (RM - RF)

total risk premium

business risk premium

financial risk premium

non-systematic risk premium

1.00000 points

QUESTION 24

When we consider the corporate taxes, the value of a levered firm can be shown as the next equation: V L = V U + tc B.
The last tem (=tc B) in the equation above represents _______.

present value of taxes

present value of tax shields

present value of financial risk premium

present value of bankruptcy costs