|
LOS b: Discuss the effects of inflation on capital budgeting analysis.
Q1. Which of the following statements regarding inflation is TRUE? Inflation:
A) causes the WACC to increase and the present value of the cash flows to increase.
B) is built into the weighted average cost of capital (WACC) and thus the net present value (NPV) is adjusted for expected inflation.
C) is already present in the future cash flows therefore they need no further adjustment.
Q2. With respect to capital budgeting, expected inflation is incorporated into the weighted average cost of capital (WACC) by:
A) none of these since inflation is not related to the WACC.
B) adjusting the separate component for inflation in the WACC.
C) adjusting expected returns in response to changes in inflation.
Q3. With respect to capital budgeting and measuring net present value, to avoid biases from an increase in expected inflation, an analyst should revise:
A) weighted average cost of capital (WACC) up and cash flows down.
B) both weighted average cost of capital (WACC) and cash flows up.
C) weighted average cost of capital (WACC) down and cash flows up.
Q4. An increase in expected inflation will generally:
A) leave weighted average cost of capital (WACC) unchanged.
B) decrease the weighted average cost of capital (WACC).
C) increase the weighted average cost of capital (WACC).
Q5. Norine Benson is studying for the Level I CFA examination and is having difficulty with the broader concepts of capital budgeting. Her study partner, Henri Manz, tests her understanding by asking her to identify which of the following statements is most accurate?
A) An analyst can ignore inflation since price level expectations are built into the weighted average cost of capital (WACC).
B) For mutually exclusive projects, the decision rule is to pick the project that has the highest net present value (NPV).
C) Replacement decisions involve mutually exclusive projects. | 
发表于 2009-3-4 09:19
| 