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Free CMA Exam Braindumps (page: 50)

Page 50 of 336
PDF with 1336 Questions
View Related Case Study

The proper discount rate to use in calculating certainty equivalent net present value is the

  1. Risk-adjusted discount rate.
  2. Cost of capital.
  3. Risk-free rate.
  4. Cost of equity capital.

Answer(s): C

Explanation:

Rational investors choose projects that yield the best return given some level of risk. If an investor desires no risk, that is, an absolutely certain rate of return, the risk4ree rate is used in calculating net present value. The risk-free rate is the return on a risk-free investment such as government bonds. Certainty equivalent adjustments involve a technique directly drawn from utility theory. It forces the decision maker to specify at what point the firm is indifferent to the choice between a sum of money that is certain and the expected value of a risky sum.



View Related Case Study

When the risks of the individual components of a project's cash flows are different, an acceptable procedure to evaluate these cash flows is to

  1. Divide each cash flow by the payback period.
  2. Compute the net present value of each cash flow using the firm's cost of capital.
  3. Compare the internal rate of return from each cash flow to its risk.
  4. Discount each cash flow using a discount rate that reflects the degree of risk.

Answer(s): D

Explanation:

Risk-adjusted discount rates can be used to evaluate capital investment options. If risks differ among various elements of the cash flows, then different discount rates can be used for different flows.



View Related Case Study

A manager wants to know the effect of a possible change in cash flows on the net present value of a project. The technique used for this purpose is

  1. Sensitivity analysis.
  2. Risk analysis.
  3. Cost behavior analysis.
  4. Return on investment analysis.

Answer(s): A

Explanation:

Sensitivity analysis is a technique to evaluate a model in terms of the effect of changing the values of the parameters. It answers "what if" questions. In capital budgeting models, sensitivity analysis is the examination of alternative outcomes under different assumptions.



View Related Case Study

A widely used approach that is used to recognize uncertainly about individual economic variables while obtaining an immediate financial estimate of the consequences of possible prediction errors is

  1. Expected value analysis.
  2. Learning curve analysis.
  3. Sensitivity analysis.
  4. Regression analysis.

Answer(s): C

Explanation:

Sensitivity analysis recognizes uncertainly about estimates by making several calculations using varying estimates. For instance, several forecasts of net present value (NPV) might be calculated under various assumptions to determine the sensitivity of the NPV to changing conditions or prediction errors. Changing or relaxing the assumptions about a certain variable or group of variables may drastically alter the NPV, resulting in a much riskier asset than was originally forecast.



Page 50 of 336



Post your Comments and Discuss Financial CMA exam with other Community members:

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INDIA
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Georgodino commented on April 29, 2021
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Amer Alnajjar commented on March 11, 2019
Still the test is under process
Anonymous
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