5. Risk analysis in capital budgeting Projects differ in risk, and risk analysis is a critical component of the capital budgeting process. Consider the case of United Recycling Inc.: United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company’s CFO has performed a detailed analysis of the proposed expansion. The selling price of recycled cardboard can fluctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all other inputs in the model the same, the CFO demonstrated the effect of fluctuations in the price of recycled cardboard. A. Based on the information given, determine which of the statements is correct. The company’s CFO performed a scenario analysis on the project’s financial model. The company’s CFO was conducting a sensitivity analysis on the project’s financial model. B. Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by its effect on the firm’s beta coefficient? Stand-alone risk Market, or beta, risk Risk-adjusted cost of capital Corporate, or within-firm, risk C. When dealing with , diversification is totally ignored.
5. Risk analysis in capital budgeting Projects differ in risk, and risk analysis is a critical component of the capital budgeting process. Consider the case of United Recycling Inc.: United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company’s CFO has performed a detailed analysis of the proposed expansion. The selling price of recycled cardboard can fluctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all other inputs in the model the same, the CFO demonstrated the effect of fluctuations in the price of recycled cardboard. A. Based on the information given, determine which of the statements is correct. The company’s CFO performed a scenario analysis on the project’s financial model. The company’s CFO was conducting a sensitivity analysis on the project’s financial model. B. Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by its effect on the firm’s beta coefficient? Stand-alone risk Market, or beta, risk Risk-adjusted cost of capital Corporate, or within-firm, risk C. When dealing with , diversification is totally ignored.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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5. Risk analysis in capital budgeting
Projects differ in risk, and risk analysis is a critical component of the capital budgeting process.
Consider the case of United Recycling Inc.:
United Recycling Inc. is one of the largest recyclers of glass and paper products in the United States. The company is looking into expanding into the cardboard recycling business. The company’s CFO has performed a detailed analysis of the proposed expansion.
The selling price of recycled cardboard can fluctuate dramatically, depending on the market conditions. By creating models that used different assumptions for the selling price of recycled cardboard but keeping all other inputs in the model the same, the CFO demonstrated the effect of fluctuations in the price of recycled cardboard.
A. Based on the information given, determine which of the statements is correct.
The company’s CFO performed a scenario analysis on the project’s financial model.
The company’s CFO was conducting a sensitivity analysis on the project’s financial model.
B. Evaluating risk is an important part of the capital budgeting process. Which of the following is measured by its effect on the firm’s beta coefficient?
Stand-alone risk
Market, or beta, risk
Risk-adjusted cost of capital
Corporate, or within-firm, risk
C. When dealing with , diversification is totally ignored.
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