Question Details

Which of the following would cause the investment to look better 



1.	The relative risk of a proposed project is best accounted for by
a)	Adjusting the discount rate upward if the project is judged to have above average risk.
b)	Adjusting the discount rate downward if the project is judged to have above average risk.
c)	Reducing the NPV by 10% for risky projects.
d)	Picking a risk factor equal to the average discount rate.
e)	Ignoring it because project risk cannot be measured accurately.
2.	A firm is considering the purchase of an asset whose risk is greater than the firm- current risk, based on all methods for assessing risk. In evaluating this asset, it would be reasonable for the decision maker to
a)	Increase the IRR of the asset to reflect its greater risk.
b)	Increase the NPV of the asset to reflect the greater risk.
c)	Reject the asset, since its acceptance would increase the firm- risk.
d)	Ignore the risk differential if the project would amount to only a small fraction of the firm- total assets.
e)	Increase the cost of capital used to evaluate the project to reflect the project- higher risk.
3. Brandi Co. has an unlevered beta of 1.10.  The firm currently has no debt, but is considering changing its capital structure to be 30% debt and 70% equity.  If its corporate tax rate is 40%, what is Brandi's levered beta?  
a)	1.2549
b)	1.3829
c)	1.5764
d)	1.6235
e)	1.7458
4. Ridgefield Enterprises has total assets of $300 million.  The company currently has no debt in its capital structure.  The company- basic earning power is 15%.  The company is contemplating a recapitalization where it will issue debt at 10% and use the proceeds to buy back shares of the company- common stock.  If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same.  Which of the following will occur as a result of the recapitalization?
a)	The company- ROA will increase.
b)	The company- ROA will remain unchanged
c)	The company- basic earning power will decline
d)	The company- basic earning power will increase
e)	The company- ROE will increase
5.You are analyzing the value of an investment by calculating the present value of its expected cash flows.  Which of the following would cause the investment to look better ?
a)	The discount rate decreases.
b)	The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same
c)	The discount rate increases.
d)	The riskiness of the project- cash flows increases.
e)	The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.




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