Advanced Financial Analysis Practice Exam
Course Introduction
Advanced Financial Analysis delves into the sophisticated methods and tools used to assess and interpret financial data within corporate and investment contexts. The course covers topics such as financial statement analysis, cash flow evaluation, forecasting, valuation techniques, and the identification of financial risks and opportunities. Emphasis is placed on applying quantitative and qualitative analysis to real-world scenarios, enabling students to make informed decisions regarding investment, financing, and strategic planning. By integrating both theoretical frameworks and practical case studies, students gain the expertise needed to analyze complex financial situations and communicate findings effectively to stakeholders.
Recommended Textbook Valuation Measuring and Managing the Value of Companies 6th Edition by McKinsey
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Chapter 1: Why Value Value
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Q1) Which of the following was most responsible for the Internet boom and bust?
A)The Y2K bug.
B)Increased foreign competition.
C)A misapplication of the principle of leverage.
D)A single-minded focus on growth at any cost.
Answer: D
Q2) Explain the challenge competition plays in creating value in the long run and what this means for the firm that wishes to create value in the long run.
Answer: Competition tends to erode competitive advantages and,with them,returns on invested capital.Therefore,companies must continually seek and exploit new sources of competitive advantage if they are to create long-term value.To that end,managers must resist short-term pressure to take actions that create illusory value quickly at the expense of the real thing in the long term.
Q3) Which one of the following actions would help a company create long-term value?
A)Focus on keeping costs at a minimum.
B)Find the optimal debt-to-equity ratio.
C)Seek and exploit new sources of competitive advantage.
D)Monitor and follow macroeconomic trends.
Answer: C
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Chapter 2: Fundamental Principles of Value Creation
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Q1) Since value is based on discounted cash flows,a company or an investor need not analyze growth and return on invested capital (ROIC).
A)True
B)False
Answer: False
Q2) When ROIC equals the cost of capital,there is no relationship between growth and value.
A)True
B)False
Answer: True
Q3) For a given company,next year's NOPLAT is $50.For the foreseeable future,the growth rate will be 3 percent,the ROIC will be 12 percent,and the weighted average cost of capital (WACC )will be 10 percent.Using the key driver formula,calculate the value of the company.
A)$536
B)$1,667
C)$714
D)$500
Answer: A
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Page 4
Chapter 3: Conservation of Value and the Role of Risk
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Q1) The primary way that financial engineering can create value is by lowering firm taxes.
A)True
B)False
Answer: True
Q2) Investors demand returns for nondiversifiable risks only.
A)True
B)False Answer: True
Q3) Firms should engage in share repurchases only if they do not have available investments with sufficiently high ROIC.
A)True
B)False Answer: True
Q4) Multiple expansion is one way that firms can create value through acquisitions. A)True
B)False
Answer: False
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Page 5
Chapter 4: The Alchemy of Stock Market Performance
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Q1) What is the dividend yield?
A)2.0 percent.
B)4.4 percent.
C)5.0 percent.
D)7.0 percent.
Q2) Which of the following are frequently observed detrimental activities of managers on the "expectations treadmill"?
I.Increasing leverage.
II.Decreasing the weighted average cost of capital (WACC).
III.Pursuing risky major acquisitions.
IV.Pursuing unrealistic earnings growth.?
A)I and II only.
B)I,III,and IV only.
C)II and IV only.
D)II,III,and IV only.
Q3) The traditional approach to analyzing TRS treats the key components as if they were independent of each other,and this does not link TRS to the true underlying sources of value creation.
A)True
B)False
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Chapter 5: The Stock Market Is Smarter Than You Think
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Q1) Which of the following are ways the managers of firms may try to meet earnings forecasts and have been proven to have an impact on share price?
I.Deferring divestments.
II.Gradually providing new information to lead analysts.
III.Offering customer incentives without immediate costs.
IV.Accounting adjustments such as capitalizing costs and R&D.
A)I and II only.
B)I and III only.
C)II and IV only.
D)III and IV only.
Q2) Empirical research shows that goodwill impairments have no impact on a company's share price at the time of the impairment.
A)True
B)False
Q3) Changes in expectations will rarely have a larger impact on realized total returns to shareholders (TRS )than actual performance over periods longer than a year or one operating cycle.
A)True
B)False
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Chapter 6: Return on Invested Capital
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Q1) Given that a company charges $3.40 per unit,has a cost per unit of $1.80 and a tax rate of 32 percent,and requires $16 of invested capital per unit,what is the ROIC?
A)6.8 percent.
B)10.2 percent.
C)15.6 percent.
D)30.3 percent.
Q2) Both ROIC including goodwill and ROIC excluding goodwill have been increasing at a similar rate.
A)True
B)False
Q3) List and briefly explain the five sources of price premiums.
Q4) Cost efficiencies offer any business the greatest scope for achieving an attractive ROIC,but they are usually more difficult to achieve than price premiums.
A)True
B)False
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Chapter 7: Growth
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Q1) Which of the following is LEAST likely to result in above-average,long-run value creation?
A)Create new markets through new products.
B)Attract new customers into the market.
C)Convince existing customers to buy more of a product.
D)Gain market share from rivals through product promotion.
Q2) Average industry revenue growth varies considerably across industries,but the growth rates among companies in the same industry are fairly uniform.
A)True
B)False
Q3) Companies that grow more slowly than 0 percent in one year generally within five years see their growth increase to:
A)About 4 percent and then up to 4.5 percent within 10 years.
B)About 1 percent and then up to 2 percent within 10 years.
C)About 6 percent and then up to 8 percent within 10 years.
D)About 8 percent and then up to 10 percent within 10 years.
Q4) Explain the "portfolio treadmill" effect and what it means for a firm that wishes to sustain growth.
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Chapter 8: Frameworks for Valuation
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Q1) Use the following information to find the NOPLAT in year t+1 that yields the continuing value expressed below. NOPLATt = ?
NOPLAT growth rate = 1.5%
Return on new invested capital = 9%
Weighted average cost of capital = 6.8%
Continuing value = $1,750
A)$111m
B)$95m
C)$105m
D)$184m
Q2) List the four basic steps in valuing a company's common equity using the enterprise discounted cash flow methodology.
Q3) Which of the following is best to use when valuing a financial institution?
A)Enterprise discounted cash flow model.
B)Adjusted present value (APV).
C)Equity cash flow model.
D)Capital cash flow model.
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10
Chapter 9: Reorganizing the Financial Statements
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Q1) Which of the following would result in a change in operating deferred-tax assets or liabilities?
I.State income taxes.
II.Changes in goodwill.
III.Accrued self-insurance liabilities.
IV.Accelerated inventory deduction.
A)I and II only.
B)I,III,and IV only.
C)II,III,and IV only.
D)III and IV only.
Q2) Which of the following are included in operating current assets?
I.Inventory.
II.Prepaid expenses.
III.Marketable securities.
IV.Accounts receivable.
A)I,II,and III only.
B)I,II,and IV only.
C)II,III,and IV only.
D)I,II,III,and IV.
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11
Chapter 10: Analyzing Performance
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Q1) In order to get a more accurate forecast of revenue growth,an analyst should remove the effects of which of the following?
I.Deferred taxes.
II.Changes in currency values.
III.Mergers and acquisitions.
IV.Changes in accounting policies.
A)I and II only.
B)I and III only.
C)III and IV only.
D)II,III,and IV only.
Q2) What is SnackCo's operating margin in year 2?
A)13.4 percent.
B)16.8 percent.
C)24.0 percent.
D)35.3 percent.
Q3) SnackCo is creating value in year 2.
A)True
B)False
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Chapter 11: Forecasting Performance
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Q1) In industries where prices are changing or technology is advancing,forecasters should:
A)Use only financial drivers such as revenue.
B)Use only nonfinancial drivers such as productivity and volume.
C)Use both financial and nonfinancial drivers.
D)Use national real aggregates such as real GDP.
Q2) If a company forecasts that its capital expenditures will be smooth,then in forecasting depreciation,it is better to use the percentage of revenues approach than the percentage of property,plant,and equipment (PP&E )approach.
A)True
B)False
Q3) The recommended approach for forecasting cash flows of a parent company arising from investments in subsidiaries where the parent owns less than 20 percent of the subsidiary is to use the relationship between income from these subsidiaries and overall firm revenues.
A)True B)False
Q4) List the three steps in making a top-down forecast of revenue and the three inputs for making a bottom-up forecast of revenue.
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Chapter 12: Estimating Continuing Value
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Q1) Which of the following are common pitfalls or mistakes in estimating continuing value?
I.Naive base-year extrapolation.
II.Naive overconservatism.
III.Purposeful overconservatism.
IV.Liquidation value overconservatism.
A)I and II only.
B)I,II,and III only.
C)II,III,and IV only.
D)III and IV only.
Q2) In making forecasts to estimate the value of a company,at the point where competition has eliminated abnormal returns,then it is appropriate to set RONIC equal to WACC.
A)True B)False
Q3) Describe the best estimate to use for a company's growth rate in the steady state and why it is the best.
Q4) Using today's P/E multiples to estimate continuing value is recommended. A)True B)False
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Chapter 13: Estimating the Cost of Capital
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Q1) Which of the following are true concerning the index recommended for use in the CAPM?
I.It should include both traded and untraded investments.
II.The S&P 500 is the most common proxy for U.S.stocks.
III.The S&P 500 and the
A) I and II.
B) I and IV.
C) II and III.
D) III and IV.
Q2) You are analyzing a distressed bond with one year to maturity.If the probability of default rises for this bond,the yield to maturity will likely increase,while the cost of debt will likely decrease.
A)True
B)False
Q3) Briefly explain the two methods of estimating market returns.
Q4) The weights to use in the WACC should reflect the:
A)Current book values.
B)Current market values.
C)Target-market-based values.
D)Book values in the case of bonds and market values in the case of equity.
Page 15
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Chapter 14: Moving From Enterprise Value to Value Per Share
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Q1) Indicate in which cases book value is a reasonable approximation for evaluating the asset or liability.Answer "Yes" if book value is a reasonable approximation and "No" if it is not.
A.Floating-rate debt.
B.Outstanding bonds that are secure and actively traded.
C.Discontinued operations.
D.Stake in a publicly traded subsidiary.
E.Excess real estate.
F.Loans to nonconsolidated subsidiaries and other companies (assume interest rates and credit risk have not changed).
G.An outstanding convertible bond deep in the money.
H.Employee stock options.
Q2) In evaluating employee stock options,the exercise value approach provides:
A)A lower bound of valuation,and using it can undervalue the firm.
B)An upper bound of valuation,and using it can undervalue the firm.
C)A lower bound of valuation,and using it can overvalue the firm.
D)An upper bound of valuation,and using it can overvalue the firm.
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Page 16
Chapter 15: Analyzing the Results
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Q1) Adjustments in the dividend payout ratio should be used to ensure that the model is technically correct.
A)True
B)False
Q2) To prioritize strategic actions,the analyst should:
A)Take a vote from the major players.
B)Build a sensitivity analysis that tests multiple changes at a time.
C)Follow the priorities of leaders in the industry.
D)Follow Porter's five forces analysis.
Q3) List the criteria for assessing whether a model is technically robust with respect to the following three perspectives: unadjusted financial statements,rearranged financial statements,and statement of cash flows.
Q4) A colleague recommends a shortcut to value the company in the preceding question.Rather than compute each scenario separately,the colleague recommends averaging each input,such that growth equals 5 percent and ROIC equals 15 percent.This will lead to the same enterprise value as found in that question.
A)True
B)False
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Chapter 16: Using Multiples
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Q1) Given the following inputs,compute the value-to-EBITA ratio: tax rate = 34%,growth rate = 5%,ROIC = 12%,and WACC = 8%.
A)3.14×
B)9.17×
C)12.83×
D)17.00×
Q2) Assuming the tax rate remains constant,what will be the effect on the value-to-EBITA ratio of doubling the following inputs: growth,ROIC,and WACC?
A)The value-to-EBITA ratio will fall,but the amount is uncertain.
B)The value-to-EBITA ratio will decrease by 50 percent.
C)The value-to-EBITA ratio will increase,but the amount is uncertain.
D)The value-to-EBITA ratio will double.
Q3) The enterprise value (EV)-to-revenue multiple is useful in valuing most companies.
A)True
B)False
Q4) List the three requirements for carrying out a useful analysis of comparable multiples.
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18
Chapter 17: Valuation by Parts
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Q1) Which of these are best practices for testing valuation by parts based on multiples of peers?
I.Eliminating outliers.
II.Using means of all peers.
III.Using medians of close peers.
IV.Using NOPLAT instead of EBITA.
A)I and II only.
B)I and III only.
C)III and IV only.
D)I,III,and IV only.
Q2) Which of the following are issues an analyst typically encounters when creating financial statements for business units?
I.Allocating corporate overhead costs.
II.Dealing with intercompany transactions.
III.Understanding financial subsidiaries.
IV.Processing overwhelming amounts of public information.
A)I and II only.
B)II and III only.
C)I,II,and III only.
D)I,II,III,and IV.
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Chapter 18: Taxes
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Q1) Usually,a company will record a DTL during the year of an acquisition and then draw down the DTL as the intangible amortizes.
A)True
B)False
Q2) With respect to deferred taxes,which of the following is an operating entry?
A)Tax loss carryforwards.
B)Accelerated depreciation.
C)Nondeductible intangibles.
D)Pension and postretirement benefits.
Q3) Multinational Co.(MNC )generated $1,000 million in domestic earnings before interest,taxes,and amortization (EBITA).MNC amortizes intangible assets at $200 million per year and takes a $300 million interest expense.MNC's statutory (domestic )tax rate is 34 percent on earnings before taxes,but only 24 percent on foreign operations.MNC had $100 million of pretax foreign income and generates $20 million in ongoing research and development (R&D )tax credits.What is its effective tax rate on pretax profits?
A)26.7 percent.
B)29.0 percent.
C)31.5 percent.
D)33.3 percent.
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Page 20
Chapter 19: Non-operating Items, Provisions, and Reserves
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Q1) The size of a nonoperating expense or one-time charge mentioned in a management discussion and analysis (MD&A )note might determine if it should be included in the adjustment to NOPLAT.
A)True
B)False
Q2) Provisions for the sole purpose of income smoothing should be treated as an equity equivalent.
A)True
B)False
Q3) If litigation charges recur frequently and grow with revenue,the analyst should treat the charges as operating.
A)True
B)False
Q4) List the three recommended steps in assessing the impact of nonoperating expenses and incorporating their information in cash flow forecasts.
Q5) Product returns and warranties are nonoperating provisions that do not affect NOPLAT.
A)True
B)False
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Chapter 20: Leases and Retirement Obligations
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Q1) In making adjustments for leases,an analyst will have to get the information on rental expenses from the company's footnotes and estimate the value of the asset.
A)True
B)False
Q2) When computing cash flows for a company with operating leases,an analyst should add back the lease depreciation to NOPLAT.
A)True
B)False
Q3) Only expected returns (and not actual returns )on pension investments flow through the income statement,and the rate of expected returns is selected at the discretion of company management.
A)True
B)False
Q4) With respect to operating leases,adjusting the financial statements makes ROIC and free cash flow independent of capital structure choices,specifically whether to lease,own,or borrow.
A)True
B)False
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Chapter 21: Alternative Ways to Measure Return on Capital
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Q1) According to U.S.Generally Accepted Accounting Principles (GAAP),which of the following must be expensed?
I.A patent developed by the firm.
II.A building.
III.Equipment.
IV.A distribution network.
A)I and II only.
B)I and IV only.
C)II and III only.
D)III and IV only.
Q2) If growth of a company is falling,expensing R&D will lead to an overestimation of the resulting drop in true performance.
A)True
B)False
Q3) A firm that capitalizes R&D has more opportunity to manipulate short-term earnings compared to a firm that expenses R&D.
A)True
B)False
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23
Chapter 22: Inflation
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Q1) A firm begins with nominal net working capital NWC t- = 200 and then increases it to NWC t = 250.The price index increases from IXt- = 144 to IXt = 166.Based on this information,what is the real investment in NWC in year t?
A)9.51
B)10.84
C)30.12
D)49.73
Q2) Inflation is often persistent and difficult to fix,stretching out over several years as in the 1970s and 1980s,because suppressing it requires strict and unpopular government measures.
A)True
B)False
Q3) With respect to growth and operating margins,which is/are likely to be overstated in times of high inflation?
A)Growth only.
B)Operating margins only.
C)Both growth and operating margins.
D)Neither growth nor operating margins.
Q4) What are the two indirect cash flow effects of inflation that depress value?
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Chapter 23: Cross-Border Valuation
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Q1) Market data across countries do show differences in realized premiums,and this is mainly because the markets have distinct systematic risk factors.
A)True
B)False
Q2) Which of the following are reasons the forward-rate method is more complex than the spot-rate method in estimating the value?
I.Incomplete data.
II.Extra calculations.
III.The possibility of multiple solutions.
IV.The use of more than one currency in the estimation process.
A)I and II only.
B)I and IV only.
C)II and III only.
D)III and IV only.
Q3) It is generally accepted practice to make ad hoc adjustments to the discount rate to reflect political risk,foreign-investment risk,or foreign-currency risk.
A)True
B)False
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25
Chapter 24: Case Study: Heineken
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Q1) Which of the following are NOT recommended in the treatment of depreciation,amortization,and impairments in the calculation of NOPLAT?
A)Separate any impairments from income on nonconsolidated investments.
B)Combine depreciation of property,plant,and equipment (PP&E )with impairments.
C)Separate the depreciation of property,plant,and equipment (PP&E )from amortization.
D)Within amortization,separate amortization of acquired intangibles from operating amortization.
Q2) When computing investment cash flows,all impairments should be subtracted to decrease property,plant,and equipment (PP&E),operating intangibles,and nonconsolidated investments.
A)True
B)False
Q3) Tax loss carryforwards are unrelated to any other balance sheet item and are treated as a separate nonoperating asset in invested-capital calculations.They do not affect NOPLAT.
A)True
B)False
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Chapter 25: Corporate Portfolio Strategy
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Q1) Which of the following are true concerning diversification and/or diversified firms?
I.Diversified firms have higher levels of debt.
II.There is strong evidence that diversification adds value.
III.Investors can diversify their portfolios at lower cost than companies can.
IV.There is strong evidence that diversified firms have smoother cash flows.
A)I and II only.
B)I,II,and IV only.
C)III only.
D)I,II,III,and IV.
Q2) With respect to owning and adding value to a consumer packaged-goods business,a firm with great manufacturing skills would probably be a better owner than a firm with distinctive skills in developing and marketing brands.
A)True
B)False
Q3) The type of owner that qualifies as best for a business may change over the course of the business's life cycle and will probably vary with its geography.
A)True
B)False
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Chapter 26: Performance Management
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Q1) List and describe the three categories of short-term value drivers.
Q2) Assessing the ability to exploit new growth areas and potential new threats is the focus of short-term value drivers as opposed to long-term value drivers.
A)True
B)False
Q3) Which of the following are properties of internal benchmarks that businesses use to gauge their productivity and health?
I.They do not provide learning opportunities.
II.The data are likely to be more readily available.
III.They are more challenging because of their specificity.
IV.Unearthing the causes of differences in performance is much easier.
A)I,II,and III only.
B)II and IV only.
C)III and IV only.
D)I,II,III,and IV.
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Chapter 27: Mergers and Acquisitions
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Q1) When an acquiring firm is making the decision to offer either cash or stock for a target,it should be more inclined to offer cash if the stock market is in a bubble.
A)True
B)False
Q2) Which of the following are usual costs associated with pursuing synergies from an acquisition?
I.Severance pay.
II.Rebranding campaigns.
III.Decommissioning a plant.
IV.Information technology integration costs.
A)I and II only.
B)I and III only.
C)II,III,and IV only.
D)I,II,III,and IV.
Q3) About one-third of all acquisitions create value,about one-third destroy value,and for the remaining third it is not clear whether value is created or destroyed.
A)True
B)False
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29
Chapter 28: Divestitures
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Q1) According to data on more than 200 carve-outs announced before 1998,carve-out entities do not last.The majority of the subsidiaries were spun off further,acquired,or merged with other players.
A)True
B)False
Q2) Whether or not a spin-off is part of a focus-improving strategy can be important with respect to how much value it creates.
A)True
B)False
Q3) Executives seem to shy away from divestitures and usually delay them too long.
A)True
B)False
Q4) Explain the reasons that a parent company may not want to give up control over a business unit it wants to divest and the preferred method of divestment in this case.
Q5) The liquidity of the assets of the divested company does not play a role in the amount of value created.
A)True
B)False
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Chapter 29: Capital Structure, Dividends, and Share
Repurchases
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Q1) Leverage and coverage measure the same thing but over different time horizons.
A)True
B)False
Q2) Although academic researchers have investigated the issue for decades,there is still no clear model for deciding a company's optimal leverage ratio (i.e. ,the leverage that would create most value for shareholders).
A)True
B)False
Q3) Which of the following is the most important factor in determining a company's credit rating?
A)Size.
B)Coverage.
C)Tax bracket.
D)Use of a complex capital structure.
Q4) Business erosion is a result of too little leverage and the resulting stagnation and loss of customers.
A)True
B)False
Page 31
Q5) Describe how leverage can cause business erosion.
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Chapter 30: Investor Communications
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Q1) With respect to the type of information managers should reveal,which of the following is/are true?
I.Managers should provide specific point goals rather than ranges.
II.Multinational companies should discuss their targets using constant currency rates.
III.Managers across industries should strive to provide information on a common set of value drivers.
IV.Managers of conglomerates should reveal aggregate numbers rather than business-by-business numbers.
A)I and II only.
B)II and III only.
C)II only.
D)III and IV only.
Q2) The objective of investor relations should be the alignment of share price and intrinsic value.It should not focus on trying to maximize the share price.
A)True
B)False
Q3) Describe the basic goal of good investor communications.
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Chapter 31: Emerging Markets
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Q1) For emerging markets,the recommended market input for computing beta is:
A)A small-cap index.
B)A median-cap index.
C)A global market index.
D)An index of non-investment-grade bonds.
Q2) For emerging markets,the recommended input for the risk-free rate for computing beta is:
A)The domestic government bond rate.
B)The average of the inflation rates of developed nations.
C)The average of the government bond rates of developed nations.
D)The U.S.Treasury bond rate plus the local inflation rate minus the U.S.inflation rate.
Q3) In applying the CAPM in estimating the cost of capital in an emerging market,explain the three problems in estimating an appropriate risk-free rate and the recommended solution.
Q4) For estimating the cost of capital in emerging markets,other models are superior to the capital asset pricing model (CAPM).
A)True
B)False
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Chapter 32: Valuing High-Growth Companies
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Q1) Which of the following is the recommended method for dealing with the uncertainty of high-growth companies?
A)Real options.
B)Risk premium approach.
C)Monte Carlo simulation.
D)Probability-weighted scenarios.
Q2) When looking into the future,the analyst should define a point in the future where the company's performance is likely to stabilize.The conditions at that point should be defined and bounded by measures of operating performance.Which of the following are those measures of operating performance?
I.Amortization.
II.Penetration rates.
III.Sustainable gross margins.
IV.Average revenue per customer.
A)I and II only.
B)I and IV only.
C)II and III only.
D)II,III,and IV only.
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Chapter 33: Cyclical Companies
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Q1) A pessimistic forecast from an analyst may damage the relationships of the analyst with both the managers of the analyzed firm and the analyst's employer.
A)True
B)False
Q2) According to the empirical evidence,which of the following is most accurate concerning the relative importance of demand and supply in determining cyclical profitability?
A)Fluctuations in customer demand and producer supply are not important.
B)Fluctuations in customer demand are more important than fluctuations in producer supply.
C)Fluctuations in producer supply are more important than fluctuations in customer demand.
D)Fluctuations in customer demand and producer supply are equally important.
Q3) A cyclical company is one whose earnings demonstrate a repeating pattern of significant increases and decreases,and the historical performance must be assessed in the context of the cycle.
A)True
B)False
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Chapter 34: Banks
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Q1) Which of the following will change the cost of equity?
I.Asset composition.
II.Liability composition.
III.The expected market return.
IV.The risk-free rate.
A)I and II only.
B)I,III,and IV only.
C)III and IV only.
D)I,II,III,and IV.
Q2) Since the financial crisis ended in 2010,which of the following has been the usual ordering of the absolute values of the types of loan losses to banks?
A)Credit card losses > mortgage losses > business loan losses.
B)Mortgage losses > business loan losses > credit card losses.
C)Credit card losses > business loan losses > mortgage losses.
D)Mortgage losses > credit card losses > business loan losses.
Q3) Economic spread analysis allows for understanding how much value a bank is creating in its different product lines.
A)True
B)False
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Chapter 35: Flexibility
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Q1) Which of the following most accurately lists the steps in the four-step process for valuing flexibility in the correct order?
A)1.Estimate NPV without flexibility.2.Model uncertainty in event tree.3.Model flexibility in decision tree.4.Estimate contingent NPV.
B)1.Estimate NPV without flexibility.2.Model flexibility in decision tree.3.Model uncertainty in event tree.4.Estimate contingent NPV.
C)1.Model uncertainty using real-option valuation.2.Model flexibility using decision tree analysis.3.Estimate NPV without flexibility.4.Arithmetically weight the three results to estimate contingent NPV.
D)1.Model uncertainty using real-option valuation.2.Model flexibility using decision tree analysis.3.Estimate NPV without flexibility.4.Geometrically weight the three results to estimate contingent NPV.
Q2) List the three approaches that managers can take when flexibility is neither expected nor required to value assets or projects and the level of uncertainty under which each works best.
Q3) How can managers decide which type of contingent valuation works best based on the types of risk they face?
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