Answer Choices:
a. True
b. False
Answer:
a. True
Question: Capital rationing is the situation in which a firm can raise only a specified, limited amount of capital regardless of how many good projects it has.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: If a firm practices capital rationing, this means that it is accepting fewer projects than would be theoretically optimal; hence, it is not maximizing its theoretical value.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Gleason Research regularly takes real options into account when evaluating its proposed projects. Specifically, it considers the option to abandon a project whenever it turns out to be unsuccessful (the abandonment option), and it evaluates whether it is better to invest in a project today or to wait and collect more information (the investment timing option). Assume the proposed projects can be abandoned at any time without penalty. Which of the following statements is CORRECT?
Answer Choices:
a. The abandonment option tends to reduce a project’s NPV.
b. The abandonment option tends to reduce a project’s risk.
c. If there are important first-mover advantages, this tends to increase the value of waiting a year to collect more information before proceeding with a proposed project.
d. A project can either have an abandonment option or an investment timing option, but never both.
e. Investment timing options always increase the value of a project.
Answer:
b
Question: Which of the following statements is CORRECT?
Answer Choices:
a. In general, the more uncertainty there is about market conditions, the more attractive it may be to wait before making an investment.
b. In general, the greater the strategic advantages of being the first competitor to enter a given market, the more attractive it probably is to wait before making an investment.
c. In general, the higher the discount rate, the more attractive it probably is to wait before making an investment.
d. In general, investment timing options are more valuable than abandonment options.
e. In general, abandonment options are rarely seen in the real world.
Answer:
a
Question: It is not possible for abandonment options to decrease a project’s risk as measured by the project’s coefficient of variation.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Which one of the following will NOT increase the value of a real option?
Answer Choices:
a. Lengthening the time during which a real option must be exercised.
b. An increase in the volatility of the underlying source of risk.
c. An increase in the risk-free rate.
d. An increase in the cost of obtaining the real option.
e. A decrease in the probability that a competitor will enter the market of the project in question.
Answer:
d
Question: Real options are valuable, and that value is correctly captured by a traditional NPV analysis. Therefore, there is no reason to consider real options separately from the NPV analysis.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Real options are most valuable when the underlying source of risk—such as uncertainty about unit sales, or the sales price, or input costs—is very low.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: An important part of the capital budgeting process is the post-audit, which involves comparing the actual results with those predicted by the project’s sponsors and explaining why any differences occurred.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: The true expected value of a project with a growth option is the expected NPV of the project (including the value of the option) less the cost of obtaining that option.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: Which one of the following statements is most CORRECT?
Answer Choices:
a. Real options change the size, but not the risk, of projects’ expected NPVs.
b. Real options change the risk, but not the size, of projects’ expected NPVs.
c. Real options can reduce the cost of capital that should be used to discount a project’s expected cash flows.
d. Very few projects actually have real options. They are theoretically interesting but of little practical importance.
e. Real options are more valuable when there is very little uncertainty about the true values of future sales and costs.
Answer:
c
Question: The optimal capital budget is the size of the capital budget where the rate of return on the marginal project is equal to the marginal cost of capital.
Answer Choices:
a. True
b. False
Answer:
a. True