IFM10 Ch 14 Test Bank

IFM10 Ch 14 Test Bank - CHAPTER 14 REAL OPTIONS...

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CHAPTER 14 REAL OPTIONS (Difficulty: E = Easy, M = Medium, and T = Tough) True/False Easy: (14.1) Real options Answer: a Diff: E 1 . Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the project’s cash flows. a. True b. False (14.1) Real options Answer: b Diff: E 2 . Real options are options to buy real assets, like stocks, rather than interest-bearing assets, like bonds. a. True b. False (14.1) Real options Answer: a Diff: E 3 . The option to abandon a project is a real option, but a call option on a stock is not a real option. a. True b. False (14.2) Real options Answer: b Diff: E 4 . Real options are most valuable when the underlying source of risk is very low. a. True b. False (14.2) Real options Answer: b Diff: E 5 . Real options affect the size, but not the risk, of a project’s expected cash flows. a. True b. False Chapter 14: Real Options Page 187
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Multiple Choice: Conceptual Easy: (14.2) Investment timing option Answer: e Diff: E 6 . Commodore Corporation is deciding whether to invest in a project today or to postpone the decision until next year. The project has a positive expected NPV, but its cash flows could be less than expected, in which case the NPV could be negative. No competitors are likely to invest in a similar project if Commodore decides to wait. Which of the following statements best describes the issues that Commodore faces when considering this investment timing option? a. The investment timing option does not affect the cash flows and will therefore have no impact on the project’s risk. b. The more uncertainty about the future cash flows, the more logical it is for Commodore to go ahead with this project today. c. Since the project has a positive expected NPV today, this means that its expected NPV will be even higher if it chooses to wait a year. d. Since the project has a positive expected NPV today, this means that it should be accepted in order to lock in that NPV. e. Waiting would probably reduce the project’s risk. (Comp: 14.1-14.4) Real options Answer: c Diff: E 7 . Which one of the following is an example of a “flexibility” option? a. A company has an option to invest in a project today or to wait a year. b. A company has an option to close down an operation if it turns out to be unprofitable. c. A company agrees to pay more to build a plant in order to be able to change the plant’s inputs and/or outputs at a later date if conditions change. d. A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date. e. A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly commercial. Medium:
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This note was uploaded on 02/02/2012 for the course FIN 516 taught by Professor None during the Spring '11 term at DeVry Fremont.

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IFM10 Ch 14 Test Bank - CHAPTER 14 REAL OPTIONS...

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