Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
15th Edition
ISBN: 9781337130295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Question
Chapter 11, Problem 8MC
Summary Introduction
To discuss: Risk in capital budgeting and to what extend and when the risks are quantified and whether the quantification is based primarily on the subjective, judgmental estimates or statistical analysis.
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What does the term “risk” mean in the context of capital budgeting; to what extent can risk be quantified; and when risk is quantified, is the quantification based primarily on statistical analysis of historical data or on subjective, judgmental estimates?
h. What does the term “risk” mean in the context of capital budgeting; to what extent can risk be quantified; and, when risk is quantified, is the quantification based primarily on a statistical analysis of historical data or on subjective, judgmental estimates?
i.
1. What are the three types of risk that are relevant in capital budgeting?
2. How is each of these risk types measured, and how do they relate to one another?
3. How is each type of risk used in the capital budgeting process?
j.
1. What is sensitivity analysis?
2. Perform a sensitivity analysis on the cost per unit, unit sales, and salvage value. Assume each of these variables can vary from its base-case, or expected, value by plus or minus 10%, 20%, and 30%. Include a sensitivity graph, and discuss the results.
3. What is the primary weakness of sensitivity analysis? What is its primary usefulness?
Which of the following is not a method for incorporating risk analysis into capital budgeting?
a.
Positive/Negative analysis
b.
Monte Carlo simulations
c.
Scenario analysis
d.
Sensitivity analysis
e.
Decision tree models
Chapter 11 Solutions
Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
Ch. 11 - Why is it true, in general, that a failure to...Ch. 11 - Prob. 4QCh. 11 - Explain how net operating working capital is...Ch. 11 - How do simulation analysis and scenario analysis...Ch. 11 - Why are interest charges not deducted when a...Ch. 11 - Most firms generate cash inflows every day, not...Ch. 11 - What are some differences in the analysis for a...Ch. 11 - Distinguish among beta (or market) risk,...Ch. 11 - Prob. 11QCh. 11 - Prob. 1P
Ch. 11 - Prob. 2PCh. 11 - Prob. 3PCh. 11 - Prob. 4PCh. 11 - Prob. 5PCh. 11 - Prob. 6PCh. 11 - Prob. 7PCh. 11 - Prob. 10PCh. 11 - Shao Industries is considering a proposed project...Ch. 11 - The Everly Equipment Company’s flange-lipping...Ch. 11 - The Bartram-Pulley Company (BPC) must decide...Ch. 11 - The Yoran Yacht Company (YYC), a prominent...Ch. 11 - Prob. 1MCCh. 11 - Prob. 2MCCh. 11 - Prob. 3MCCh. 11 - Prob. 4MCCh. 11 - Prob. 5MCCh. 11 - Prob. 6MCCh. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 14MC
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Similar questions
- How do an investment's required rate of return vary with perceived risk? Explain with an example?arrow_forwardHow is capital budgeting similar to security valuation? How is it different?arrow_forwardDefine and explain the agency problem in terms of differences in ability to diversify risk by finance and human capital. Why does it arise? What are the mechanisms available to ameliorate the agency problem?arrow_forward
- When is the financial risk by far the most critical element to consider?arrow_forward(1) What are the three types of risk that are relevant in capital budgeting? (2) How is each of these risk types measured, and how do they relate to one another? (3) How is each type of risk used in the capital budgeting process?arrow_forwardAre the financial projections realistic and healthy?arrow_forward
- The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for an individual security. Which is the relevant risk variable and why is it relevant? Why is the other risk variable not relevant?arrow_forwardIn the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is A. standard deviation of returns. B. beta. C. variance of returns. D. unique risk.arrow_forwardWhich of the following is not a reason for risk and uncertainty in capital budgeting? a. Decisions are based on expected cash flows b. All decisions are based on forecasts c. Decisions are based on past cash flows d. All forecasts are subject to uncertainty Clear my choicearrow_forward
- Which capital budgeting technique defines returns in terms of income instead of cash flows? a) The payback period b) The internal rate of return technique c) The net present value technique d) The unadjusted rate of return methodarrow_forwardexplain why it is important to understand that capital budgeting is subject to the validity of the forecasted data. Additionally, explain whether this reduces the reliability of these types of tools. Are there any other alternatives, or are these tools some of the most reliable that currently exist?arrow_forward
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