5. A firm has determined that the net present values (NPVs) for three projects a

Question

5. A firm has determined that the net present values (NPVs) for three projects are $10,000, $15,000 and negative $5,000, respectively. The projects have the same risk. Which of the following is the best course of action for the firm?

a. Pursue only the second project with an NPV of $15,000. This is the best project and thus the only one we want.

b. Pursue only the first project with an NPV of $10,000. This is the safest project.

c. Do not pursue any of these projects. Look for other projects.

d. Pursue all three projects. The increased value from the first two outweigh the losses from the third.

e. Pursue the first two projects, but not the third, assuming the projects are not mutually exclusive.

6. The value of a bond:

a. Does not depend on the risk-level of the bond.

b. Is the sum of the present values of the promised cash flows for the bond, which are typically coupon payments and a face value payment, discounted at the yield to maturity.

c. Does not change over time.

d. Always increases in value over time.

e. Does not depend on when the bond matures.

7. A company’s free cash flow, which is also called total cash flow or cash flow from assets, can be determined in which of the following ways.

a. Add the company’s operating cash flow to the uses of cash, which are net capital spending and changes in net working capital.

b. Find a company’s cash flow to creditors and subtract the company’s cash flow to shareholders.

c. Find the change in the cash balance on the Balance Sheet from the beginning of the period to the end of the period.

d. Subtract the company’s uses of cash, which are net capital spending and changes in net working capital, from the company’s operating cash flow.

e. None of the above determine free cash flow.

8. Based on the principle of diversification, which of the following statements is true?

a. Adding additional stocks to your portfolio will reduce the portfolio’s systematic risk.

b. Adding additional stocks to your portfolio will reduce the portfolio’s beta.

c. Adding additional stocks to your portfolio will increase the portfolio’s overall risk.

d. Adding additional stocks to your portfolio will reduce the portfolio’s unsystematic risk.

e. None of the above.

Explanation / Answer

5. This question is related to Capital Budgeting. NPV or Net present Value is a method of evaluating the projects. The project with the highhest positive NPV is always choosen.

In this case Project A's NPV is $10000,Project B's NPV is $ 15000 & Project C's NPV is ($5000)

So project C is rejected since it is having negative NPV. But Project A & B both are having Positive NPV with the same amount of risk. So project B would be choosen as it is having negative NPV if they are mutually exclusive projects. Mutually exclusive projects mean Acceptance of one will lead to rejection of another. But if we assume that both the projects are not mutually exclusive then both the projects can be performed at the same time.

So answer is option (e)

6)answer option(b) Bond is a security or capital investment. An appropriate discount rate is used for bond valuation

The value of a Bond: Is the sum of the present values of the promised cash flows for the bond, which are typically coupon payments and a face value payment, discounted at the yield to maturity.

7) Free cash Flow is a measure of financial performance of the company. It is the difference between the operating cash flow and the capital expenditure

Operating Cash flow-Change in Net Working Capital-Capital Expenditure

It represents the left out cash free for use after meeting the working capital base and the capital expenditure.

So answer is option(d)Subtract the company’s uses of cash, which are net capital spending and changes in net working capital, from the company’s operating cash flow.

8) Principle of Diversification is principle of Portfolio Investment. Portfolio investment means its a basket of investments in different stocks with different risks. According to the priciple of investment a large portfolio is less risk the a small portfolio. There are two types of risks: Systematic and Unsystematic

Systematic risk means the risk which affects the entire market not just a particular stock or industry. Also called Market Risk , Volatile Risk and Undiversifiable Risk

Unsytematic risk is the risk which is related to a particular stock or Industry.

So when we are choosing a portfolio of investment it may consists of several stocks with different risks

So the risk which is related to a particular stock is offset by another less volatile stock.

The Priniciple of Diversitfication says Potfolio investments only reduces the Unsystematic Risks while the systematic risk is difficult to reduce.

So larger the portfolio the less is the unsystematic risk.

So answer is option (d) Adding additional stocks to your portfolio will reduce the portfolio’s unsystematic risk.

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.