Question

1. The internal rate of return identifies:

A. the minimum acceptable discount rate.

B. the cost-benefit ratio.

C. the average profit from a project.

D. none of the given answers.

2. The net present value rule states that you should accept a project if the NPV:

A. is equal to zero or negative.

B. exceeds the required rate.

C. is less than 1.0.

D. is positive.

3. A net present value of zero implies that an investment:

A. has an initial cost of zero.

B. has cash inflows which have a zero present value.

C. has no expected impact on shareholders.

D. does not pay back its initial cash outlay.

4. Which one of the following defines the internal rate of return for a project?

A. A discount rate that creates a zero cash flow from assets

B. A discount rate which results in a zero net present value for the project

C. A discount rate which results in a net present value equal to the project's initial cost

D. A rate of return required by the project's investors

5. Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

A. Mutually exclusive

B. Conventional

C. Multiple choice

D. Dual return

6. If an investment is producing a return that is equal to the required return, the investment's net present value will be:

A. positive.

B. greater than the project's initial investment.

C. zero.

D. equal to the project's net profit.

7. The net present value:

A. decreases as the required rate of return increases.

B. is equal to the initial investment when the internal rate of return is equal to the required return.

C. method of analysis cannot be applied to mutually exclusive projects.

D. is directly related to the discount rate.

8. A cost that has already been incurred and cannot be recouped is referred to as a(n) _____ cost.

A. sunk

B. relevant

C. opportunity

D. financial

9. The analysis of the effect that a single variable has on the net present value of a project is called analysis

A. sensitivity

B. erosion

C. cost reduction

D. scenario

10. The net working capital invested in a project is generally:

A. a sunk cost.

B. an opportunity cost.

C. recouped in the first year of the project.

D. recouped at the end of the project.

11. Which one of the following can be completely ignored when analysing a project?

A. Depreciation

B. Taxes

C. Net working capital

D. Sunk cost

12. Portfolio weight is defined as:

A. the percentage of a portfolio's total value in a particular asset

B. an investor always invests equally in a portfolio

C. weight less than 1.0, as cash could be one of the portfolio assets

D. none of the given answers

13. Total return is defined as R = E(R) + U where U is:

A. unsystematic return

B. unrealised return

C. unexpected return

D. unequal return

14. Risk that affects a large number of assets, each to a greater or lesser degree, is called:

A. non-systematic risk

B. systematic risk

C. micro risk

D. total risk

15. Non-systematic risk is also known as:

A. market risk

B. macro risk

C. systemic risk

D. unique risk

16. Total risk is defined as:

A. systematic risk - unsystematic risk

B. market risk + unique risk

C. systematic + unsystematic risk

D. both market risk + unique risk, and systematic + unsystematic risk

17. In a well-diversified portfolio, ________ is negligible.

A. unique risk

B. market risk

C. systematic risk

D. systemic risk

18. ________ tells us how much systematic risk a particular asset has, relative to an average risky asset.

A. gamma

B. beta

C. alpha

D. variance

19. The difference between the expected return on a market portfolio and the risk-free rate is known as:

A. market return

B. market risk premium

C. risk free premium

D. reward-to-risk premium: total return premium

20. The security market line displays the relationship between:

A. average returns and variance

B. expected return and beta

C. expected return and total risk

D. average return and total risk

21. The CML explains the expected return for:

A. all assets

B. efficient portfolios

C. all real assets

D. none of the given answers

22. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following?

A. Eroded cash flows

B. Deviated projections

C. Incremental cash flows

D. Directly impacted flows

23. Which one of the following is NOT a common method for capital budgeting?

A. Sensitivity analysis.

B. Scenario analysis.

C. Break-even analysis.

D. Tax shield approach.

24. Scenario analysis is best described as the determination of the:

A. most likely outcome for a project.

B. reasonable range of project outcomes.

C. variable that has the greatest effect on a project's outcome.

D. effect that a project's initial cost has on the project's net present value.

25. Which one of the following analysis methods is most similar to the analysis of net present value?

A. Payback period.

B. Internal rate of return.

C. Profitability index.

D. Average accounting return.

26. Stock 1 has a beta of 1.2 and stock 2 has a beta of 0.8. Stock 1 will:

A. always give a higher actual return

B. sometimes give a higher actual return

C. never give a higher actual return

D. none of the given answers

27. All else being equal, if the variance of the market increases:

A. beta increases

B. beta decreases

C. beta remains constant

D. none of the given answers

Answer 1

Part 1:

The internal rate of return identifies the rate at which the net present value of the project will become zero. It is the minimum acceptable discount rate.

Option A is correct

Part 2:

The net present value rule states that you should accept a project if the NPV is positive.

Option D is correct

Part 3:

A net present value of zero implies that an investment has initial cash outlay is equal to present value of all cash inflows, which implies it is neither increasing shareholders wealth nor decreasing it.

Option C is correct.

Part 4

Internal rate of return is the rate at which net present value of the project becomes 0

Option B is correct