Corporate Finance

The possibility that errors in projected cash flows will lead to incorrect decisions is known as:

forecasting risk estimation risk

Which of the following is true relative to capital rationing?

hard rationing implies the firm is unable to raise funds for projects soft rationing is typically internal in that the firm allocates funds to divisions for capital projects

An option on a real asset rather than a financial asset is known as a:

managerial option real option

Capital rationing exists when a company has identified positive NPV projects but cannot (or will not) find:

the necessary financing

The basic approach to evaluating cash flow and NPV estimates involves asking:

what if questionsss

Estimates of which of the following are needed to prepare pro forma income statements?

variable costs selling price per unit unit sales

Broadband, Inc., has estimated preliminary cash flows for a project and found that the NPV for those cash flows is $400,000. The company now plans to perform a scenario analysis on the cash flow and NPV estimates. It will use an NPV of _____ as the base case.

400,000

A positive NPV exists when the market value of a project exceeds its cost. Which of these two values is the most difficult to establish?

Market VALUE!!!!!!!!!

What is scenario analysis?

Scenario analysis determines the impact on NPV of a set of events relating to a specific scenario.

Which of the following statements regarding the relationship between book value, sales price, and taxes are true when a firm sells a fixed asset?

Taxes are based on the difference between the book value and the sales price. Book value represents the purchase price minus the accumulated depreciation. There will be a tax savings if the book value exceeds the sales price.

A manager has estimated a positive NPV for a project. What could drive this result?

The cash flow estimations are inaccurate. The project is a good investment. Overly optimistic management

Which of the following qualify as "managerial options"?

The option to abandon The option to expand The option to wait

To prepare proforma financial statements, estimates of quantities such as unit sales, selling price per unit, variable cost per unit, and total fixed costs are required.

True

When we estimate the best-case, worst-case, and base-case cash flows and calculate the corresponding NPVs, we are engaging in:

asking what-if questions scenario analysis

The goals of risk analysis in capital budgeting include:

assessing the degree of financing risk identifying critical components