Chapter 12, End of Chapter, Self-Test Questions and Problems, Exercise ST-1
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Define the following terms:


a.  Incremental cash flow; sunk cost; opportunity cost; externality; cannibalization

b.  Stand-alone risk; corporate (within-firm) risk; market (beta) risk

c.  Risk-adjusted cost of capital

d.  Sensitivity analysis; base-case NPV

e.  Scenario analysis; base-case scenario; worst-case scenario; best-case scenario

f.   Monte Carlo simulation

g.  Replacement chain (common life) approach; equivalent annual annuity (EAA) method

Here is a tip:

Congress felt there was a need for additional investor protections against inaccurate information from companies. 


In 2002, Congress passed this act to protect shareholders, employees and the public from accounting errors and fraudulent financial practices. There were 3 key provisions:

  1. Overhauling incentives and independence in the audit process.
  2. Providing harsher penalties for providing false information.
  3. Requiring companies to validate their internal financial control processes.

Verified Answer

The Sarbanes-Oxley act, passed by Congress in 2002, is intended to improve the accuracy of information which is made public by both board members and shareholders of public companies.

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