Question

1. The ________ considers the project's risk relative to the firm overall risk.

A. The Objective Approach

B. The Pure Pay Approach

C. The Subjective Approach

D. The Bottom-Up Approach

2. ________ are not tax deductible, so there is no tax impact on the cost of equity.

A. Interest expenses

B. Director's remuneration

C. Dividends

D. All of the above

3. ________ itself is a non-cash expense and it is only relevant because it affects taxes.

A. Depreciation expense

B. Interest expense

C. Capital gain

D. Both A and C

4. Which of the following is correct about Average Accounting Return

A. Reject the project if the ARR is less than a preset rate

B. Accept the project if the ARR is large than IRR

C. Accept the project if the ARR is greater than a preset rate

D. ARR must be equal to a preset rate for the acceptance of a project

5. What is the disadvantage of Payback method?

A. Difficult to understand

B. No adjustment for uncertainty of later cash flows

C. Ignores the time value of money

D. Biased again short-term project

6. Which of the following statement is true about Net Present Value decision rule?

A. If the NPV is negative, reject the project

B. A negative NPV mean the project will increase the wealth of the owners

C. If value of the NPV means the amount of value created for the firm

D NPV rule does not account for the time value of money

Answer 1

	1)
	Subject approach uses project's risk relative to the firms overall risks.
	If the project risk is higher than the firms risk than the discount rate for the project
	is higher than the firm's WACC.
	If the project risk is lower than the firms risk than the discount rate for the project
	is lower than the firm's WACC.
	Hence the option (C) is correct.
	2)
	Dividends are paid to shareholder's which are not tax deductible.
	Therefore there is no tax impact on the cost of equity
	Hence the option (C) is correct.
	3)
	Depreciation expense is a non cash expense which reduces the income from
	operations and hence the taxable income.
	Thus the option (A) is correct.
	4)
	Projects with accounting rate of return higher than the required rate of return should be accepted.
	Hence the option (C) is correct.
	5)
	Payback period is when the intial investment is fully recovered.
	The cash flows after the full recovery of cash flows donot affect the patback period.
	Hence the option (B) is correct.