Question: Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by the variability of the project’s expected returns?

Answer Choices: A. Market, or beta, risk B. Corporate, or within-firm, risk C. Stand-alone risk

Answer: C. Stand-alone risk

Question: Using the _______ depreciation method will result in the highest NPV for the project.

Answer Choices: bonus straight-line

Answer: bonus

Question: Which of the following statements about these projects’ risk is correct?

Answer Choices: Project A has more market risk than Project B. Project B has more stand-alone risk than Project A. Project A has more corporate risk than Project B. Project B has more market risk than Project A.

Answer: Project A has more market risk than Project B. Project B has more stand-alone risk than Project A.

Question: Using the _______ depreciation method will result in the highest NPV for the project.

Answer Choices: bonus straight-line

Answer: bonus

Question: If Yatta Net International does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time?

Answer Choices: The firm will accept too many relatively safe projects. The firm will accept too many relatively risky projects. The firm will become less valuable.

Answer: The firm will accept too many relatively risky projects. The firm will become less valuable.

Question: When dealing with __________ , diversification is totally ignored.

Answer Choices: (Answer to fill in the blank)

Answer: Stand-alone risk

Question: Using the _______ depreciation method will result in the highest NPV for the project.

Answer Choices: bonus straight-line

Answer: bonus

Question: What should Yeatman do about the $9,000 truck it could sell if the project is rejected?

Answer Choices: Increase the NPV of the project by $9,000. The company does not need to do anything with the value of the truck because the truck is a sunk cost. Increase the amount of the initial investment by $9,000.

Answer: Increase the amount of the initial investment by $9,000.

Question: McFann spent $2,750 on a marketing study to estimate the number of units that it can sell each year. What should McFann do to take this information into account?

Answer Choices: Increase the NPV of the project $2,750. Increase the amount of the initial investment by $2,750. The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

Answer: The company does not need to do anything with the cost of the marketing study because the marketing study is a sunk cost.

Question: Based on the information given, determine which of the statements is correct.

Answer Choices: A. The company’s CFO conducted a sensitivity analysis to evaluate the project’s financial model. B. The company’s CFO used a Monte Carlo simulation to evaluate the project’s financial model.

Answer: B. The company’s CFO used a Monte Carlo simulation to evaluate the project’s financial model.

Question: How do managers typically deal with within-firm risk and beta risk when they are evaluating a potential project?

Answer Choices: A. Quantitatively B. Subjectively

Answer: B. Subjectively

Question: Preferred stock is a hybrid—a cross between a common stock and a bond—in the sense that it pays dividends that normally increase annually (like a stock), but its payments are contractually guaranteed (like interest on a bond).

Answer Choices: a. True b. False

Answer: b. False