Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
In which type of cash flow are all future cash flows expressed in the prices expected to rule when
the cash flow occurs?
1)
A)
Inflation–linked cash flow
B)
Money cash flow
C)
Real cash flow
D)
Money rate of cash flow
2)
Which statement best describes the relationship between the two types of profits?
2)
A)
Taxable profits are smaller than accounting profits.
B)
Taxable profits are larger than accounting profits.
C)
Taxable profits are the same as accounting profits.
D)
Taxable profits are not the same as accounting profits.
3)
The objective of ________ is to select the group of projects that provides the highest overall net
present value and does not require more dollars than are budgeted.
3)
A)
certainty equivalents
B)
capital rationing
C)
sensitivity analysis
D)
scenario analysis
4)
Management may impose internal limits on investment expenditure despite the availability of
positive NPV projects. What term is used for these limits?
4)
A)
Soft capital rationing
B)
Divisible one–period rationing
C)
Indivisible one–period rationing
D)
Hard capital rationing
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5)
Which approach should be taken to adjust for inflation when calculating net present value?
5)
A)
Estimate the future cash flows by multiplying by the specific inflation of each cash inflow and
outflow item, and then discount using the real rate of return
B)
Estimate the cash flows in money terms and use a real discount rate
C)
Estimate the cash flows in real terms and use a real discount rate
D)
Estimate the cash flows in real terms and use a money discount rate
6)
Which of the following is a key rule for analysing indivisible one–period capital rationing
problems?
6)
A)
Examine all the feasible alternative combinations
B)
Make tax reduction a primary aim
C)
Focus on initial outlay
D)
Focus on maintaining present value
7)
Which three of the following factors appear in Fisher’s equation?
7)
A)
Internal rate of return
B)
Anticipated rate of inflation
C)
Real rate of return
D)
Money rate of return
8)
Which two of the following are possible approaches to adjusting for inflation in project appraisal?
8)
A)
Estimate the cash flow in money terms and use a real discount rate
B)
Estimate the cash flow in real terms and use a real discount rate
C)
Estimate the cash flow in real terms and use a money discount rate
D)
Estimate the cash flow in money terms and use a money discount rate
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9)
If a firm has a limited capital budget and too many good capital projects to fund them all, it is said
to be facing the problem of
9)
A)
profitability.
B)
wealth optimization.
C)
capital rationing.
D)
constrained capital.
10)
Which three of the following accurately describe a post–completion audit?
10)
A)
It is the monitoring and evaluation of the progress of a capital investment project.
B)
It focuses primarily on the differences between predicted and actual profits.
C)
It involves analysis of cash flows and other costs and benefits that were forecast at the time of
authorization.
D)
It involves analysis of actual cash flows and other costs and benefits.
11)
Which of the following best describes a divisible project?
11)
A)
One where it is impossible to undertake a fraction of the project
B)
One which may be identified with a particular division
C)
One where the initial investment funds have to be divided into very small amounts
D)
One where it is possible to undertake a fraction of the project
12)
Which three of the following may be reasons for soft capital rationing?
12)
A)
Senior managers are aware that to undertake all positive NPV projects may place a strain on
available managerial talent or other resources.
B)
Senior management retains control over divisions by placing limits on the amount any
particular division can spend on a set of projects.
C)
Managerial unwillingness to borrow.
D)
Agencies external to the firm will not supply finance for all positive NPV projects.
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13)
Which two of the following are rules that should be followed when taking taxation into account?
13)
A)
Include incremental tax effects of a project as a cash outflow
B)
Focus primarily on incremental cash flows
C)
Get the timing right
D)
Focus on maintaining present value
14)
When calculating the benefit–cost ratio, which ratio would you use (using the definitions in Arnold
’s textbook)?
14)
A)
Net present value/Initial outlay
B)
Initial outlay/Net initial value
C)
Initial outlay/Net present value
D)
Net initial value/Present outlay
15)
When calculating the profitability index, which ratio would you use (using the definitions in
Arnold’s textbook)?
15)
A)
Initial outlay/Gross present value
B)
Initial outlay/Gross present value
C)
Gross present value/Initial outlay
D)
Gross present value/Net present value
16)
How is benefit–cost ratio calculated?
16)
A)
Net present value divided by Total outlay
B)
Net present value divided by Initial outlay
C)
Gross present value divided by Total outlay
D)
Gross present value divided by Initial outlay
17)
Which option correctly show Fisher’s equation?
17)
A)
(1+m) = (1+h) x (1+ i)
B)
(1+m) x (1+h) = (1+ i)
C)
(1+h) = (1+i) x (1+ m)
D)
(1+h) = (1+i) x (1–m)
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18)
What term is used to describe price changes in an individual good or service over time?
18)
A)
Specific inflation
B)
General inflation
C)
Value inflation
D)
Future value
19)
Consider the following projects:
Project NPV (£m) Initial
investment (£m)
A 2 0.6
B 6 7
C10 5
D 6 1
E20 20
A capital constraint of £32m has been imposed on the total initial investment. The projects are
divisible and each may be undertaken only once.
What is the maximum NPV available from the projects?
19)
A)
£37.4m
B)
£34.8m
C)
B £32.6m
D)
£40.6m
20)
Which option best describes the calculation of money cash flows?
20)
A)
Future cash flows are expressed in the prices expected to rule when the cash flow occurs.
B)
All present cash flows are expressed in the prices expected to rule when the cash flow occurs.
C)
Future cash flows are expressed in constant purchasing power.
D)
Present cash flows are expressed in constant purchasing power.
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21)
Which of the following best describes capital rationing?
21)
A)
When the financial markets are told by government not to lend beyond imposed limits
B)
When wealth is destroyed because capital repayments on loans have to be made earlier than
anticipated
C)
When funds are not available to undertake all the projects put forward by divisional
management teams
D)
When funds are not available to finance all wealth–enhancing projects
22)
Which option best describes the use of real cash flows?
22)
A)
All future cash flows are expressed in the prices expected to rule when the cash flow occurs.
B)
Present cash flows are expressed in constant purchasing power.
C)
All present cash flows are expressed in the prices expected to rule when the cash flow occurs.
D)
Future cash flows are expressed in constant purchasing power.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
23)
A firm with limited funds for investment in capital assets must ration those funds by allocating
them to projects that will maximize share value.
23)
24)
The ranking approach involves the ranking of capital expenditure projects on the basis of some
predetermined measure such as the profitability index or rate of return.
24)
25)
The objective of capital rationing is to select the group of projects that provides the quickest overall
payback and does not require more euros than are budgeted.
25)
26)
Mutually exclusive projects are projects whose cash flows are unrelated to one another; the
acceptance of one does not eliminate the others from further consideration.
26)
27)
The objective of capital rationing is to select the group of projects that provides the highest overall
net present value and does not require more euros than are budgeted.
27)
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28)
If a firm has unlimited funds to invest in capital assets, all independent projects that meet its
minimum investment criteria should be implemented.
28)
29)
If a firm is subject to capital rationing, it is able to accept all independent projects that provide an
acceptable return.
29)
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Answer Key
Testname: C5
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