Question

Relevant cash flows ate the specific set of cash flows that a firm can expect if it implements the project. If the firm doesn’t implement the project, the cash flows won’t exist. So it is the additional cash flows that the company can expect from the project.

True or False

If a firm adopts a residual distribution policy, distributions are determined as a residual item. Therefore, the better the firm's investment opportunities, the higher its distributions should be.

True

False

For a leveraged firm, the standard deviation of its Return on Invested Capital (σ_ROIC) is 1.8%, the standard deviation of its Return on Equity (σ_ROE) is 5.8%. So its calculated financial risk is: _____

		1.8%
		4.0%
		5.8%
		7.6%

Answer 1

1)

Yes it is true; it is an additional cash flow that arises from the project implemented because without this project the cash flows won’t exist.

2)

Yes it is true, if the organization has better investment opportunities then higher the distribution profit for distributions.

3)

For the leverage, the risk on their investment does not contain risk of return on equity, so our standard deviation on invested capital is 1.8% which is not affected by the standard deviation of return on equity 5.8%.

Hence, the financial risk is 1.8%