Question

1. Whenever there is a conflict between NPV and another decision rule, you should always use NPV.

A. True

B. False

2. ________ finds one or more companies that specialize in the product or service that we are considering.

A. The Objective Approach

B. The Pure Play Approach

C. The Subjective Approach

D. None of the above

3. The required return of bond is best estimated by computing the ________ on the bond.

A. Yield-to-maturity

B. market value

C. Risk

D. Both A and B

4. The return earned on assets depends on the ________ of those assets.

A. Book value

B. Net book value

C. Risk

D. Liquidity

5. Which of the following is/are correct?

A. If the salvage value is the same as the book value of the asset, then there is a tax effect.

B. Book value = initial cost - accumulated depreciation

C. After-tax salvage = salvage - Tax Rate x (salvage - book value)

D. Both B and C

6. ________ is the most important alternative to Net Present Value.

A. IRR

B. Payback Method

C. Average Accounting Return

D. Discounted Payback

7. The mean difference between Payback and Discounted Payback is:

A. Discounted Payback accounts for the time value of money and Payback does not

B. Discounted Payback accounts for the risk of the cash flows and Payback does not

C. Only Payback does not provide an indication about the increase in value

D. Both A and B

8. The ________ measures the time to get the initial cost back.

A. Internal Rate of Return

B. Net Present Value

C. Payback period

D. Profitability Index

9. Which of the following element/s should be considered when evaluating capital budgeting decision rules?

A. Time value of money

B. Adjustment for risk

C. Creating value for the firm

D. All of the above

Answer 1

(1) In case of conlfict between NPV and another decision rule, the NPV decision should always be preferred as the same measures the amount of positive value added to the company as result of undertaking a project.Hence, the statement is true.

(2) The Pureplay Approach finds one or more companies that specialize in the product or service under consideration. An average of asset betas of multiple such firms is considered to be a good measure of the overall business risk of firms in that particular product/service. Hence, the correct option is (B)

(3) Required Return of a bond in an equilibrium market is the bond's promised return if held to maturiy. This promised return is the bond's Yield to Maturity. Hence, the correct option is (A).

(4) Return on Assets is the firm's net income divided by its total average assets. The assets are taken at book value because return on assets is an accounting measure of performance. Hence, the correct option is (A).

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.