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ALC 5.2 Questions and Answers
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ALC 5.2 Questions and Answers
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ALC 5.2.docx1. Which of the following assets is the most liquid?
a. Stock
b. Treasury bills
c. Corporate bonds
d. Cash
2. The ____ premium is compensation for the possibility that the borrower will not be able
to pay the debt’s interest and principal on time.
a. inflation risk
b. maturity risk
c. liquidity risk
d. default risk
3. Which of the following statements is correct?
a. Large costs occur at the end of nuclear power plants' lives because these plants
have to be closed down, and shutdown costs are high due to the difficulty of
handling radioactive materials. For this reason, it is possible that a nuclear plant
project could have two IRRs.
b. If the Federal Reserve Board lowered interest rates, this would, other things held
constant, tend to favor short-term as opposed to long-term projects.
c. For NPV versus IRR ranking conflicts to occur, the projects under consideration
must have NPV profiles which cross one another. Crossing profiles can occur only
if the two projects differ in the size of the required investment outlay.
d. All of the above statements are false.
4. Which of the following methods involves calculating an average beta for firms in a
similar business and then applying that beta to determine the beta of its own project?
a. Risk premium method.
b. Pure play method.
c. Accounting beta method.
d. CAPM method.
5. ____ projects are a set of projects where the acceptance of one project means that
other projects cannot be accepted.
a. Mutually exclusive
b. Independent
c. Replacement
d. Expansion
6. Which of the following capital budgeting techniques does not adjust for the riskiness of
the cash flows?
a. IRR
b. NPV
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