Corporate Finance
Final Test Solutions
Course Introduction
Corporate Finance explores the fundamental principles and practices related to financial management within a corporation. The course covers key topics such as capital budgeting, financial analysis, risk and return assessment, cost of capital, capital structure, dividend policy, and working capital management. Students will learn how corporate decisions affect firm value, gain insight into financial markets, and analyze real-world scenarios using financial theories and tools. By the end of the course, participants will be equipped to evaluate investment opportunities and make strategic financial decisions that maximize shareholder value.
Recommended Textbook
Valuation Measuring and Managing the Value of Companies 6th Edition by McKinsey
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Page 2
Chapter 1: Why Value Value
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Sample Questions
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) Relative to its ability to create value,managers tend to neglect changing capital structure.
A)True
B)False
Answer: False
Q3) The faster companies can increase their revenues and deploy more capital at attractive rates of return,the more value they create.
A)True
B)False
Answer: True
Q4) Aggressive use of leverage is the theme that links most major financial crises.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Fundamental Principles of Value Creation
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Q1) Focusing on improving earnings and short-term cash flow will consequently lead to value creation.
A)True
B)False
Answer: False
Q2) For a given company,next year's NOPLAT is $200.For the foreseeable future,the growth rate will be 5 percent,the ROIC will be 10 percent,and the WACC will be 8 percent.Using the key driver formula,calculate the value of the company.
A)$2,500
B)$4,000
C)$6,667
D)$3,333
Answer: D
Q3) 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
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4
Chapter 3: Conservation of Value and the Role of Risk
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Sample Questions
Q1) Changes in accounting techniques that decrease reported profits will necessarily decrease the value of a firm.
A)True
B)False
Answer: False
Q2) Studies of share repurchases have shown that companies are very good at timing share repurchases.
A)True
B)False Answer: False
Q3) Multiple expansion is one way that firms can create value through acquisitions. A)True
B)False Answer: False
Q4) Firms should engage in share repurchases only if they do not have available investments with sufficiently high ROIC. A)True
B)False Answer: True
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Chapter 4: The Alchemy of Stock Market Performance
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Sample Questions
Q1) What is the TRS from performance?
A)-2.0 percent.
B)0.0 percent.
C)1.4 percent.
D)7.0 percent.
Q2) What is the dividend yield?
A)2.0 percent.
B)4.4 percent.
C)5.0 percent.
D)7.0 percent.
Q3) Given that TRS is not a clear measure of management performance,which of the following metrics should be used to gauge a company's performance?
A)ROIC and growth.
B)ROIC,growth,and TRS performance relative to peers.
C)EPS and TRS.
D)None of the above.
Q4) List and describe the four-part decomposition of TRS that gives a clearer insight into how much of the measure derives from changes in operational performance.
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6
Chapter 5: The Stock Market Is Smarter Than You Think
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Sample Questions
Q1) Managers should focus on issuing guidance on their likely EPS in the next quarter because it leads to higher valuations,lower share price volatility,and improved liquidity.
A)True
B)False
Q2) In the 1999 stock bubble,most of the large-capitalization companies with high P/Es were clustered in all of the following sectors EXCEPT:
A)Utilities.
B)Technology.
C)Media.
D)Telecommunications.
Q3) Which of the following criteria do noise traders make bets on?
I.Short-term price movements.
II.Fundamental valuations.
III.Investing only in emerging markets.
A)I and II.
B)II and III.
C)I only.
D)II only.
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Chapter 6: Return on Invested Capital
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Q1) Compared to industries where firms produce generic products,firms in industries where they can brand their products generally earn higher ROICs.
A)True
B)False
Q2) Certain industries are biased toward earning either high,medium,or low returns,but there is still significant variation in the rates of return for individual companies within each industry.
A)True
B)False
Q3) Which of the following industries is most likely to have the lowest ROIC (where goodwill has been removed)?
A)Software.
B)IT services.
C)Pharmaceuticals.
D)Paper packaging.
Q4) Both ROIC including goodwill and ROIC excluding goodwill have been increasing at a similar rate.
A)True
B)False
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Chapter 7: Growth
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Sample Questions
Q1) Which of the following usually result in above-average value creation?
I.Make large acquisitions.
II.Attract new customers into the market.
III.Convince existing customers to buy more of a product.
IV.Make bolt-on acquisitions to accelerate product growth.
A)I and II only.
B)I,III,and IV only.
C)II and III only.
D)II,III,and IV only.
Q2) The strategy of making bolt-on acquisitions to accelerate product sales:
A)Has not been proven to create value.
B)Can create positive and about average value compared to other strategies.
C)Can create positive and above-average value compared to other strategies.
D)Can create positive but below-average value compared to other strategies.
Q3) 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.
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Chapter 8: Frameworks for Valuation
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Sample Questions
Q1) Use the following information below to answer the question. NOPLATt = $72.2m
NOPLAT growth rate = 3%
Return on new invested capital = 11.2%
Weighted average cost of capital = 7.4%
Which of the following is closest to the continuing value in year t?
A)$1,005m
B)$1,201m
C)$4,485m
D)$6,126m
Q2) 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.
Q3) List the four basic steps in valuing a company's common equity using the enterprise discounted cash flow methodology.
Q4) Preferred stock in well-established companies more closely resembles unsecured debt than equity.
A)True
B)False
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Chapter 9: Reorganizing the Financial Statements
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Sample Questions
Q1) Which of the following are sources of financing?
I.Equity equivalents.
II.Debt equivalents.
III.Hybrid securities.
IV.Noncontrolling interest.
A)I and II only.
B)I,II,and III only.
C)III and IV only.
D)I,II,III,and IV.
Q2) To measure a company's ability to create value after paying acquisition premiums,which of the following adjustments should be made?
I.Adjust reported goodwill upward to recapture historical amortization and impairments.
II.Adjust acquired intangibles upward to recapture historical amortization and impairments.
III.Add the hypothetical accrued interest of the notional goodwill principle.
A)I and II only.
B)II and III only.
C)I and III only.
D)I,II,and III only.
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11
Chapter 10: Analyzing Performance
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Sample Questions
Q1) ROIC excluding goodwill is useful when measuring underlying operating performance of the company and its businesses,and it is useful for comparing performance against peers and to analyze trends.
A)True
B)False
Q2) With regard to the interest coverage ratio,which of the following is the most accurate?
A)If near-term bankruptcy is an issue,EBITDA can be used to measure survival only over the short term.
B)EBITDA should be used to measure survival over both the short and the long term. C)EBITA should be used to measure survival only in the short term (vs.long term).
D)None of the above are true.
Q3) To evaluate leverage in the recent low-interest-rate environment,many analysts are now evaluating debt multiples such as debt to EBITDA or debt to EBITA.
A)True
B)False
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12
Chapter 11: Forecasting Performance
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Sample Questions
Q1) The top-down approach cannot be applied to companies in mature industries.
A)True
B)False
Q2) It is recommended in the financial modeling process to collect raw data on a separate worksheet and record the data as originally reported.
A)True
B)False
Q3) Which of the following is the recommended approach to forecast COGS,and why?
A)Forecast COGS based on revenue growth,since it provides flexibility in the model.
B)Forecasting COGS based on the forecast ratio of COGS to sales allows for possible improvements in COGS relative to sales.
C)Forecast COGS based on revenue growth since COGS and revenues have a direct relationship.
D)Forecasting COGS based on inventory is recommended because inventory prices and COGS are correlated.
Q4) The explicit forecast period must be long enough for the company to reach a steady state.List the two characteristics that define that steady state.
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13
Chapter 12: Estimating Continuing Value
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Sample Questions
Q1) Given the following inputs,compute the continuing value (CV )at time t in the economic-profit model.At time t invested capital equals $2,000 and ROIC equals 12 percent.The forecast for NOPLATt?? is $240.The growth rate equals 2 percent,RONIC is 10 percent,and the WACC is 7 percent.The continuing value at time t is closest to:
A)$1,840.0
B)$1,428.6
C)$822.8
D)$411.4
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) The liquidation values approach should be used only if liquidation is likely to happen at the end of the period.
A)True
B)False
Q4) Describe the best estimate to use for a company's growth rate in the steady state and why it is the best.
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Chapter 13: Estimating the Cost of Capital
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Sample Questions
Q1) Which of the following practices are appropriate in estimating a firm's cost of debt?
I.Use the coupon rate on outstanding debt that is investment grade.
II.Use the yield to maturity on outstanding debt that is investment grade.
III.Use the yield to maturity on outstanding debt that is below investment grade.
IV.Use the adjusted present value (APV )method to value firms that have debt that is below investment grade.
A)I and IV only.
B)III and IV only.
C)II and III only.
D)II and IV only.
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) What challenges did the financial crisis of 2008 and its aftermath pose for estimating a firm's cost of capital? How should one handle these challenges?
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Chapter 14: Moving From Enterprise Value to Value Per Share
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Sample Questions
Q1) In estimating value per share of common stock of a company,for which of the following is book value a reasonable approximation for evaluating the asset or liability?
I.Excess real estate.
II.Discontinued operations.
III.Floating rate debt.
IV.Employee stock options.
A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.
Q2) Which of the following approaches are methods for evaluating convertible debt?
I.Market value.
II.Multiples value.
III.Black-Scholes value.
IV.Conversion value.
A)I and II only.
B)I and III only.
C)I,III,and IV only.
D)II,III,and IV only.
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Chapter 15: Analyzing the Results
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Sample Questions
Q1) Adjustments in the dividend payout ratio should be used to ensure that the model is technically correct.
A)True
B)False
Q2) To ensure that the model is economically consistent,the continuing value formula should be applied when company operations are in a steady state.
A)True
B)False
Q3) 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.
Q4) When estimating a company's value,falling within a range of plus or minus 15 percent of the actual valuation is appropriate,as market valuations of this amount for individual stocks are fairly common.
A)True
B)False
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Chapter 16: Using Multiples
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Sample Questions
Q1) Which of the following is true in using EBIT,EBITA,or EBITDA when estimating a firm's value?
A)EBIT is superior to both EBITA and EBITDA.
B)EBITA is superior to both EBIT and EBITDA.
C)EBITDA is superior to both EBIT and EBITA.
D)There is not a clear superiority of one measure over the others.It depends on the type of firm being analyzed.
Q2) The EV-to-revenue multiple is useful in valuing some companies.
A)True
B)False
Q3) In estimating value creation,analysts should use EBITA rather than EBITDA,because depreciation is a noncash item whereas amortization is not.
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) For multibusiness units,consolidated corporate results:
A)Must eliminate internal revenues,costs,and profits.
B)Are not possible.
C)Are computed by summing the inputs for each accounting entry across units.
D)Are computed by top-down algorithms that give estimated values based on the economic profit or cost of each entry.
Q2) Using EBITA instead of NOPLAT is a best practice for testing the sum-of-the-parts valuation based on multiples of peers.
A)True
B)False
Q3) Which of the following correctly describes how to determine the beta for a business unit within a multiple-business corporation?
A)Use the average of the equity betas for the industry.
B)Use the beta of the multi-unit enterprise.
C)Relever the unlevered sector median beta using the capital structure of the unit.
D)Relever the unlevered sector median beta using the capital structure of the entire multiple-business corporation.
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Chapter 18: Taxes
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Q1) As a general rule,deferred tax assets and deferred tax liabilities are considered part of invested capital.
A)True
B)False
Q2) Which of the following concerning deferred taxes classified as nonoperating are true?
I.They will not be included in a discounted free cash flow (FCF )valuation. II.They can be valued as part of their corresponding accounts (as in the case of pensions).
III.They can be valued separately (as in the case of net operating loss carryforwards). IV.They can be ignored as accounting conventions (as in the case of nondeductible amortization).
A)I and II only.
B)II and III only.
C)II and IV only.
D)I,II,III,and IV.
Q3) The effects of research and development should be removed from operating taxes.
A)True
B)False
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Page 20
Chapter 19: Non-operating Items, Provisions, and Reserves
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Q1) Which of the following is most accurate concerning plant decommissioning costs and unfunded retirement plans?
A)They are both long-term operating provisions and should be treated as debt equivalents.
B)They are both short-term operating provisions and should be treated as short-term liabilities.
C)They are both long-term operating provisions.Plant decommissioning costs should be treated as a debt equivalent,and unfunded retirement plans should be treated as an equity equivalent.
D)Plant decommissioning costs are not an operating provision and should not be included in value estimation.Unfunded retirement plans are long-term operating provisions and should be treated as an asset.
Q2) Product returns and warranties are nonoperating provisions that do not affect NOPLAT.
A)True
B)False
Q3) List the three recommended steps in assessing the impact of nonoperating expenses and incorporating their information in cash flow forecasts.
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Chapter 20: Leases and Retirement Obligations
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Q1) When a firm uses operating leases,an analyst should determine the firm's equity value by subtracting traditional debt and the value of operating leases from enterprise value.
A)True
B)False
Q2) A profitable company has chosen to lease its assets.With respect to ROIC,capital productivity,and operating profits,which of those measures are likely to artificially rise?
A)Operating profits and ROIC only.
B)Capital productivity and ROIC only.
C)Operating profits and invested capital only.
D)None of them are likely to artificially increase.
Q3) Apex Industries expects to earn $25 million in operating profit next year.The company pays an operating tax rate of 30 percent.If the value of leased asset is $125 and the cost of debt is 10 percent,what is the approximate after-tax operating profit,adjusted for capitalized operating leases?
A)$24
B)$25
C)$26
D)$27
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Page 22
Chapter 21: Alternative Ways to Measure Return on Capital
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Q1) One benefit of capitalizing R&D is that reductions in current R&D will not affect current operating profits.
A)True
B)False
Q2) Will either measures of performance or valuation be affected by changing the accounting treatment of R&D?
A)Both measures of performance and valuation will be affected.
B)Neither measures of performance nor valuation will be affected.
C)Measures of performance will be affected,but valuation will not be affected.
D)Measures of performance will not be affected,but valuation will be affected.
Q3) 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.
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Chapter 22: Inflation
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Q1) What are the two indirect cash flow effects of inflation that depress value?
Q2) Given the following information,compute free cash flow (FCF )in real terms: real growth is 3 percent,real ROIC is 12 percent,real NOPLAT is $5,000,real net working capital from the previous year is $2,000,the inflation index last year was 164,and the inflation index this year is 192.
A)$770.83
B)$2,958.33
C)$2,229.17
D)$3,458.33
Q3) For which of the following is a nominal modeling application preferred to a real modeling application?
A)EBITDA.
B)Financial statements.
C)Investments in working capital.
D)Capital expenditures.
Q4) Historical data shows that inflation leads to lower value creation in companies,because it erodes real-terms free cash flow (FCF )and increases the cost of capital.
A)True
B)False
Page 24
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Chapter 23: Cross-Border Valuation
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Q1) An analyst is estimating the value of a subsidiary using International Financial Reporting Standards (IFRS),and the country of the subsidiary is experiencing moderate inflation.In this case,which of the following accounting techniques is recommended?
A)Current method.
B)Temporal method.
C)Autoregressive method.
D)Inflation-adjusted current method.
Q2) List and describe the two methods for converting forecasted cash flows from one currency into another.
Q3) 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.
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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) Which of the following would be the most likely change(s )to be included in NOPLAT?
A)Changes in deferred taxes from tax rate revisions.
B)Change in deferred taxes as a result of acquisitions.
C)Change in deferred taxes as a result of the sale of a discontinued division.
D)Changes in deferred taxes from depreciation differences in net property,plant,and equipment (NPPE).
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Chapter 25: Corporate Portfolio Strategy
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Q1) Traditional screening approaches are the best way to apply the best-owner principle.
A)True
B)False
Q2) 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.
Q3) Define corporate governance and describe the evidence of the role it can play in value creation from studies of the returns of private equity firms investing in companies.
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Chapter 26: Performance Management
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Q1) Which of the following are aspects of the firm that diagnostics of organizational health typically measure?
I.Its culture and values.
II.The depth of management talent.
III.The skills and capabilities of the company.
IV.Its ability to retain employees and keep them satisfied.
A)I,II,and III only.
B)I,III,and IV only.
C)II,III,and IV only.
D)I,II,III,and IV.
Q2) In performance management,because of potential conflicts of interest,operating managers should not be involved in the setting of targets and in reading the measures in pursuing targets.
A)True
B)False
Q3) Managers must regularly revisit the targets they set for each value driver.As their business environment changes,so will the limits of what they can achieve.
A)True
B)False
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Chapter 27: Mergers and Acquisitions
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Q1) A large acquisition occurring is a good predictor of an increase in acquisitions.
A)True
B)False
Q2) Which of the following are archetypical strategies that have a higher probability of creating value as opposed to being one of the more difficult strategies for creating value?
I.Using a roll-up strategy.
II.Consolidating to improve competitive behavior.
III.Consolidating to remove excess capacity from industry.
IV.Picking winners early and helping them develop their business.
A)I and II only.
B)I,III,and IV only.
C)II,III,and IV only.
D)III and IV only.
Q3) 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
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Chapter 28: Divestitures
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Q1) Which of the following are true concerning private transactions?
I.Most are done to financial buyers.
II.They tend to capture value more quickly.
III.Fiscal implications may affect the decision.
IV.They are usually a better choice if identifiable buyers exist.
A)I and II only.
B)I,II,and III only.
C)II,III,and IV only.
D)I,II,III,and IV.
Q2) Which of the following is the best name for a distribution of all shares in a subsidiary to existing shareholders of the parent company?
A)Carve-out.
B)Spin-off.
C)Split-off.
D)Tracking stock.
Q3) Acquisitions occur in waves,but divestitures occur randomly.
A)True
B)False
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30
Chapter 29: Capital Structure, Dividends, and Share
Repurchases
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Sample Questions
Q1) Which of the following is most likely to have a negative effect on share price?
A)Issuing debt.
B)Issuing equity.
C)Dividend increase.
D)Extraordinary dividend.
Q2) Option valuation models that determine default estimates of companies have longer time horizons and therefore produce "through the cycle" estimates.
A)True
B)False
Q3) For a given firm,which of the following is most likely to be the result of lower leverage?
A)Corporate overinvestment.
B)Increased investor conflicts.
C)Tax savings for the firm.
D)Shareholders preferring higher-risk projects.
Q4) Business erosion is a result of too little leverage and the resulting stagnation and loss of customers.
A)True
B)False
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Chapter 30: Investor Communications
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Sample Questions
Q1) 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
Q2) Which of the following are true about intrinsic investors?
I.They are sophisticated.
II.They want transparency about results.
III.They want management's candid assessment of the company's performance.
IV.Their role in determining stock prices is not important enough for management to accommodate their preferences.
A)I and II only.
B)I and III only.
C)I,II,and III only.
D)II,III,and IV only.
Q3) In most industries,there is a fairly standardized level of transparency across firms.
A)True
B)False
Q4) Describe the basic goal of good investor communications.
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Page 32
Chapter 31: Emerging Markets
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Q1) Which of the following best represents the relevance of purchasing power parity (PPP )when analyzing companies in emerging markets?
A)PPP does not hold between emerging and developed economies.
B)PPP holds over the long run,and exchange rates will adjust to inflation differentials.
C)PPP holds over the long run,but exchange rates will not adjust to inflation differentials.
D)It is not clear whether PPP holds,because there is not yet enough evidence one way or the other.
Q2) For estimating the cost of capital in emerging markets,other models are superior to the capital asset pricing model (CAPM).
A)True
B)False
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.
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33
Chapter 32: Valuing High-Growth Companies
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Q1) To estimate the size of a potential market for a high-growth company,start by assessing how the company fulfills a customer need.Then determine how the company generates (or plans to generate )revenue.
A)True
B)False
Q2) Which of the following are true concerning the use of price-to-earnings multiples to evaluate a high-growth company?
I.They cannot be used when earnings are negative.
II.They provide insight into what drives the company's valuation.
III.They generate imprecise results when earnings are highly volatile.
IV.They account for the unique characteristics of each company in a fast-changing environment.
A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.
Q3) Contrast the first step in the valuation process of an established company and a high-growth company.Explain the reason for the difference in approaches.
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Chapter 33: Cyclical Companies
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Q1) The discounted cash flow (DCF )valuations of companies with cyclical earnings tend to be more volatile than those of less cyclical companies.But their share prices are much more stable.
A)True
B)False
Q2) Which of the following are true concerning the properties of consensus earnings forecasts for cyclical companies?
I.They account for the cyclical nature of the firm.
II.Discounted cash flow (DCF )models are usually consistent with the facts.
III.The forecasts usually show an upward-sloping trend.
IV.The earnings and cash flow projections of the market are consistent with company performance.
A)I and II only.
B)I and III only.
C)II and III only.
D)II and IV only.
Q3) The four-step approach for valuing cyclical companies requires a minimum of two scenarios.If an analyst is using only two scenarios,how should they be constructed?
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Chapter 34: Banks
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Q1) The best method for understanding how much value a bank is creating in its different product lines is:
A)Free cash flow analysis.
B)Ratio analysis.
C)Economic spread analysis.
D)Net income analysis.
Q2) Explain why analysts estimating the values of banks should not use the discounted cash flow from operations method.What method should an analyst use?
Q3) For financial institutions,which of the following is NOT true concerning trading income?
A)It has been on the decline over the past 30 years.
B)It is typically fairly volatile from year to year.
C)It can be derived from the trading of stocks and bonds.
D)It can be derived from the trading of swaps and other derivatives.
Q4) The tax penalty on equity is a minor cost to a bank,and to simplify results,it can usually be left out of the valuation process.
A)True
B)False
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Chapter 35: Flexibility
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Q1) Which of the following is most accurate concerning how a change in interest rates can produce an increase in the value of a project with flexibility?
A)It increases the present value of the cash flows.
B)A higher interest rate increases the time value of the deferral of an investment.
C)There is not any set relationship between interest rates and the value of flexibility.
D)Higher interest rates are more stable than lower rates and produce more stable cash flows.
Q2) The value of flexibility is greatest when uncertainty is high and managers can react to new information.
A)True
B)False
Q3) The value of flexibility is lowest when:
A)Uncertainty is high and managers can react to new information.
B)Uncertainty is low and managers can react to new information.
C)Uncertainty is high and managers cannot react to new information.
D)Uncertainty is low and managers cannot react to new information.
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