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The appropriate interest rate to use in capital budgeting

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Reference no: EM133402547

Questions

1. A(n) ____ is a graphic representation of a business project in which events have multiple outcomes, each of which is assigned a probability.

a. decision tree

b. real option

c. NPV profile

d. probability distribution

2. The most difficult part of the capital budgeting process is:

a. application of evaluation techniques such as NPV or IRR.

b. interpreting the results of the application of NPV or IRR.

c. estimation of the incremental project cash flows.

d. None of the above

3. "Mr. Stone, I must say you are making a mistake. I know you have spent $6,000 on research and development to develop this project, but that money must not be used as a negative cash flow of the project." Apparently, Mr. Stone does not understand the concept of:

a. opportunity costs.

b. sunk costs.

c. side-effect costs.

d. variable costs.

e. depreciation not taken.

4. A firm's cost of capital:

a. is the rate at which it borrows from its bank.

b. is the average rate it pays investors for the use of their money (capital).

c. is the cost the facility housing its executive offices.

d. is the rate earned by its stockholders.

5. The sensitivity/scenario analysis:

a. provides a quantitative measure of project risk.

b. requires as input a probability distribution for each variable affecting project NPV.

c. indicates the variability of project NPV with fluctuations in the value of variables.

d. All of the above

e. None of the above

6. The term "financial leverage" originated from the notion that there is a multiplicative effect on financial performance measured at ____ when borrowed money is used to support the firm.

a. return on assets

b. return on equity

c. earnings per share

d. Both b and c

7. A bank's ____ is the rate it charges its largest and most creditworthy corporate customers.

a. nominal rate

b. commitment fee

c. prime rate

d. risk-free rate

8. The appropriate interest rate to use in capital budgeting is:

a. always the company's cost of capital.

b. is the company's cost of capital if the project's risk is about the same as the company's.

c. the cost of capital plus any additional risk premium required to compensate for the project's higher risk.

d. b and c.

Reference no: EM133402547

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