Test Bank for Financial Management
Theory and Practice 4th Canadian
Edition By Eugene Brigham, Michael
Ehrhardt, Jerome Gessaroli, Richard
Nason (All Chapters 1-24, 100%
Original Verified, A+ Garde)
All Chapters Arranged Reverse: 24-1
Chapter Wise (1-24) Download Link
is Added at the End of PDF File.
This is The Only Original and
Complete Test Bank for 4th
Canadian Edition, All Other Files in
The Market are Fake/Old/Wrong
Edition.
,Name Clas Dat
: s: e:
CHAPTER 24 - DECISION TREES, REAL OPTIONS AND OTHER CAPITAL BUDGETING TECHNIQUES
Indicate whether the statement is true or false.
1. Real options are options to buy real assets, such as stocks, rather than interest-bearing assets, such as bonds.
a. True
b. Fals
e
2. Real options are most valuable when the underlying source of risk is very low.
a. True
b. Fals
e
3. Real options affect the size, but not the risk, of a project’s expected cash flows.
a. True
b. Fals
e
4. A real timing option resembles a call option in that the company has the right but not the obligation to defer investment
in a project and invest in it at a later date when more information is available and its NPV is positive.
a. True
b. Fals
e
5. Financial engineering is a process by which a new derivative instrument such as options is designed and brought to
market.
a. True
b. Fals
e
6. The high valuations of Yahoo and Amazon at the beginning of the 21st century were primarily due to the immense real
growth options and riskiness inherent in their businesses.
a. True
b. Fals
e
7. At the present time, very few companies are using real option valuation techniques to evaluate projects as the models
do not produce useful estimates.
a. True
b. Fals
e
8. As the valuation of real options involves judgment on both the model and inputs, its outputs are purely speculative and
therefore not useful for business decision making.
a. True
b. Fals
e
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CHAPTER 24 - DECISION TREES, REAL OPTIONS AND OTHER CAPITAL BUDGETING TECHNIQUES
9. In a qualitative assessment of a project’s investment timing option, the strike price of the option is the project’s cost.
a. True
b. Fals
e
10. The variance on a company’s stock returns is typically lower than the variance on its individual projects due to
diversification effects.
a. True
b. Fals
e
11. Decision trees can be used to evaluate real option values, as long as the project’s original cost of capital is used
throughout the process.
a. True
b. Fals
e
Indicate the answer choice that best completes the statement or answers the question.
12. Under what circumstances does a “real option” exist?
a. When managers have the opportunity, before a project has been implemented, to make
operating changes in response to changed conditions that do not modify the project’s
cash flows.
b.When managers have the opportunity, after a project has been implemented, to make
operating changes in response to changed conditions that do not modify the project’s
cash flows.
c. 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.
d.When managers have the opportunity, after a project has been implemented, to make
financing changes in response to changed conditions that modify the project’s cash
flows.
13. Which of the following is an example of a real option?
a. the option to abandon a project
b. a call option to abandon a project
c. a put option to sell a common stock
d. an employee’s stock option
14. A project has an expected NPV of –$250, based on the traditional DCF analysis. However, the real option valuation
shows that the expected NPV is $750. What is the value of the option?
a. $250
b. $500
c. $750
d. $1,000
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, Name Clas Dat
: s: e:
CHAPTER 24 - DECISION TREES, REAL OPTIONS AND OTHER CAPITAL BUDGETING TECHNIQUES
15. 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
issues should Commodore consider most seriously when making this investment decision?
a. The more uncertainty about the future cash flows, the more logical it is for
Commodore to go ahead with this project today.
b.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.
c. Since the project has a positive expected NPV today, this means that it should be
accepted in order to lock in that NPV.
d.Waiting would probably reduce the project’s risk.
16. 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 abandon 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.
17. Which of the following is an example of a real growth 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 abandon 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.
18. Which circumstance will increase the value of a real option?
a. shortening the time in which a real option must be
exercised
b. an increase in the volatility of the underlying source of risk
c. a decrease in the risk-free rate
d. an increase in the cost of obtaining the real option
19. Which of the following best describes real options?
a. Real options change the size, but not the risk, of projects’ expected cash flows.
b.Real options change the risk, but not the size, of projects’ expected cash flows.
c. Real options are likely to reduce the cost of capital that should be used to discount a
project’s expected cash flows.
d.Very few projects actually have real options.
20. XYZ Co. has a 2-year project with a cost of $2 million and 2 years of $2 million in cash inflows. After the second year
of operation, the company can decide to reinvest in the project for another 2 years. This second-generation project will
still cost $2 million and yield another 2 years of $2 million in cash inflows. Using the decision tree technique to evaluate
this real growth option, XYZ’s managers have calculated the present value at Year 0 of the cash inflows from the second-
Copyright Cengage Learning. Powered by Cognero. Page 3
Theory and Practice 4th Canadian
Edition By Eugene Brigham, Michael
Ehrhardt, Jerome Gessaroli, Richard
Nason (All Chapters 1-24, 100%
Original Verified, A+ Garde)
All Chapters Arranged Reverse: 24-1
Chapter Wise (1-24) Download Link
is Added at the End of PDF File.
This is The Only Original and
Complete Test Bank for 4th
Canadian Edition, All Other Files in
The Market are Fake/Old/Wrong
Edition.
,Name Clas Dat
: s: e:
CHAPTER 24 - DECISION TREES, REAL OPTIONS AND OTHER CAPITAL BUDGETING TECHNIQUES
Indicate whether the statement is true or false.
1. Real options are options to buy real assets, such as stocks, rather than interest-bearing assets, such as bonds.
a. True
b. Fals
e
2. Real options are most valuable when the underlying source of risk is very low.
a. True
b. Fals
e
3. Real options affect the size, but not the risk, of a project’s expected cash flows.
a. True
b. Fals
e
4. A real timing option resembles a call option in that the company has the right but not the obligation to defer investment
in a project and invest in it at a later date when more information is available and its NPV is positive.
a. True
b. Fals
e
5. Financial engineering is a process by which a new derivative instrument such as options is designed and brought to
market.
a. True
b. Fals
e
6. The high valuations of Yahoo and Amazon at the beginning of the 21st century were primarily due to the immense real
growth options and riskiness inherent in their businesses.
a. True
b. Fals
e
7. At the present time, very few companies are using real option valuation techniques to evaluate projects as the models
do not produce useful estimates.
a. True
b. Fals
e
8. As the valuation of real options involves judgment on both the model and inputs, its outputs are purely speculative and
therefore not useful for business decision making.
a. True
b. Fals
e
Copyright Cengage Learning. Powered by Cognero. Page 1
,Name Clas Dat
: s: e:
CHAPTER 24 - DECISION TREES, REAL OPTIONS AND OTHER CAPITAL BUDGETING TECHNIQUES
9. In a qualitative assessment of a project’s investment timing option, the strike price of the option is the project’s cost.
a. True
b. Fals
e
10. The variance on a company’s stock returns is typically lower than the variance on its individual projects due to
diversification effects.
a. True
b. Fals
e
11. Decision trees can be used to evaluate real option values, as long as the project’s original cost of capital is used
throughout the process.
a. True
b. Fals
e
Indicate the answer choice that best completes the statement or answers the question.
12. Under what circumstances does a “real option” exist?
a. When managers have the opportunity, before a project has been implemented, to make
operating changes in response to changed conditions that do not modify the project’s
cash flows.
b.When managers have the opportunity, after a project has been implemented, to make
operating changes in response to changed conditions that do not modify the project’s
cash flows.
c. 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.
d.When managers have the opportunity, after a project has been implemented, to make
financing changes in response to changed conditions that modify the project’s cash
flows.
13. Which of the following is an example of a real option?
a. the option to abandon a project
b. a call option to abandon a project
c. a put option to sell a common stock
d. an employee’s stock option
14. A project has an expected NPV of –$250, based on the traditional DCF analysis. However, the real option valuation
shows that the expected NPV is $750. What is the value of the option?
a. $250
b. $500
c. $750
d. $1,000
Copyright Cengage Learning. Powered by Cognero. Page 2
, Name Clas Dat
: s: e:
CHAPTER 24 - DECISION TREES, REAL OPTIONS AND OTHER CAPITAL BUDGETING TECHNIQUES
15. 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
issues should Commodore consider most seriously when making this investment decision?
a. The more uncertainty about the future cash flows, the more logical it is for
Commodore to go ahead with this project today.
b.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.
c. Since the project has a positive expected NPV today, this means that it should be
accepted in order to lock in that NPV.
d.Waiting would probably reduce the project’s risk.
16. 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 abandon 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.
17. Which of the following is an example of a real growth 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 abandon 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.
18. Which circumstance will increase the value of a real option?
a. shortening the time in which a real option must be
exercised
b. an increase in the volatility of the underlying source of risk
c. a decrease in the risk-free rate
d. an increase in the cost of obtaining the real option
19. Which of the following best describes real options?
a. Real options change the size, but not the risk, of projects’ expected cash flows.
b.Real options change the risk, but not the size, of projects’ expected cash flows.
c. Real options are likely to reduce the cost of capital that should be used to discount a
project’s expected cash flows.
d.Very few projects actually have real options.
20. XYZ Co. has a 2-year project with a cost of $2 million and 2 years of $2 million in cash inflows. After the second year
of operation, the company can decide to reinvest in the project for another 2 years. This second-generation project will
still cost $2 million and yield another 2 years of $2 million in cash inflows. Using the decision tree technique to evaluate
this real growth option, XYZ’s managers have calculated the present value at Year 0 of the cash inflows from the second-
Copyright Cengage Learning. Powered by Cognero. Page 3
