İŞLETME FİNANSI II

The outlay of funds by the firm that is expected to produce benefits over a period of time longer than one year is called capital expenditure. Capital budgeting is the process of evaluating and selecting long-term investments which are consistent with the firm’s main objective of maximizing shareholders’ wealth. Investment consists all kinds of spendings made for acquiring, sustaining, and increasing production factors. Economic profit refers to the risk-adjusted present value of revenue minus all costs, including the opportunity cost of capital. Net income is equal to net earnings (profit) calculated as sales less cost of goods, selling, general and administrative expenses, operating expenses, depreciation, interest, taxes and other expenses. The correct answer is A.

In many textbooks, capital budgeting activity is explained as a process, consisting of a number of stages. Megginson et al. (2010) briefly explain this process in three basic steps, all of which are critical in the process:

The correct answer is C.

Relative state of the investments regarding dependence on each other may be one of the following:

The correct answer is B.

Positive economic profits (or positive net present value projects) can stem from two sources: i) market imperfections, ii) creating competitive advantage. The correct answer is D.

Payback period (II) tells the length of time it takes to get initial cash outflow back, that is the period from the initial cash outflow to the time when the investment project’s cash inflows add up to the initial cash outflow. This technique is (III) a simple, easy to use and easy to understand technique. The assumption is that (IV) cash flow occurs at a constant rate throughout the year. The fact that projected cash flows are discounted at an appropriate discount rate and their present values are used to calculate payback period is in effect in discounted payback period technique. The correct answer is E.

NPV (Net Present Value) technique finds the sum of present value of all cash inflows and cash outflows of a project over its life. The correct answer is C.

Decision rule for internal rate of return technique is as follows: If a project is independent, approve the project(s) that provides IRR that is greater than the expected rate of return (discount rate used in NPV technique). If a project is mutually exclusive, choose the project that provides the highest IRR (that is greater than the expected rate of return (discount rate used in NPV technique)). The correct answer is A.

There are three kinds of risk sources when we talk about the risk of an investment project. The first one is (IV) stand-alone risks that a project exhibits when evaluated alone rather than as part of a combination or portfolio of assets. The second one is (III) within-firm risks that a project has on the total overall riskiness of the company. The third one is (II) market risks that a project has and assessed from the standpoint of a stockholder who has a portfolio of assets. The correct answer is E.

To measure a project’s risks coming from various sources rather than in general manner, further analysis is needed. Sensitivity, scenario and simulation and decision tree analyses are used for this purpose. Real options approach, however, refers to the options of managers about capital investment projects which can be priced by using stock option-pricing. The correct answer is B.

Real options are priced in a similar way like stock options which is called real option valuation (ROV). Peterson and Fabozzi (2002: 153) list five factors that are important in the valuation of a stock option. Then, they list the real option correspondent of each factor as follows.

The correct answer is D.