Using the WACC as the discount rate for future cash flows is appropriate only when the proposed investment is Blank______ the firm's existing activities. Multiple choice question. riskier than different from less risky than similar to
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Using the WACC as the discount rate for future cash flows is appropriate only when the proposed investment is Blank______ the firm's existing activities.
riskier than
different from
less risky than
similar to
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- Which is least likely correct about security valuation?a. The calculated or determined value considers the stream of future cash flows.b. The calculated or determined value equals the market price.c. The calculated or determined value considers the risks involved and the opportunity cost.d. The calculated or determined value allows the investors to evaluate whether a security isovervalued or undervalued.e. All of the aboveWhich of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rateWhich one of the following could be considered as an advantage of using the payback method of investment appraisal? Select one: O A. Cash flows rising after the payback period is reached are ignored O B. It is easy to understand and simple to calculate O C. Does not take risk fully into account O D. Not related to wealth maximisation objective
- When comparing NPV and IRR, which is incorrect? With NPV, the discount rate can be adjusted to take into account increased risk and the uncertainty of cash flows With IRR, cash flows can be adjusted to account for risk NPV can be used to compare investments of various size or magnitude Both NPV and IRR can be used for screening decisionsBased on the capital asset pricing model (CAPM), there is generally Blank______. Multiple choice question. a negative relationship between beta and the expected return on a security no relationship between beta and the expected return on a security a positive relationship between beta and the expected return on a securityExplain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.
- A disadvantage of using the payback period to compare investmentalternatives is that it;Which of the following contributes positively to the value of a real option to delay investment? First-mover competitive advantages It lowers idiosyncratic risk, and thus the firm's cost of capital Delaying project revenues, due to TVM The likely resolution of some uncertaintyFinancial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?
- Firms will take investments only when expected risks are remunerated by expected profit. * a. Incremental cash flows b. Efficient capital markets c. Risk-return trade-off d. All risks are not equalIf you have a project combined with above-average market risk, which one of the following decisions should you make? Accept if the IRR is greater than the WACC. Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate. Accept if the cash flows discounted at the WACC have a positive NPV. Discount the cash flows at the IRR and accept if NPV is positive.Which of the following is a disadvantage of the internal rate of return (IRR) rule? Multiple choice question. It always leads to a decision that conflicts with the decision of the NPV method. It results in multiple answers for conventional cash flows. It may lead to incorrect decisions when comparing mutually exclusive investments. It needs more input data than the NPV method.
