Which of the following statements is INCORRECT?

When a project has the option to expand, we can choose to never exercise the option. Therefore, a project without the option to expand must have a value that is at least as high as the value of the same project with the option to expand.

The main shortcomings of the NPV rule are that it only considers whether to invest in a project at the current time or reject the project. It does not consider the decision to defer investment to a future time or the decision to expand or the decision to abandon the project in the future.

The cost of acquiring an option to expand is the cost that needs to be incurred so that capacity can be increased in the future without replacing the existing structure. For a shopping centre, it is the additional cost to make the foundation more solid so that new floors can be added in the future.

To determine whether to acquire the option to expand, we calculate the value of the option as the difference between the value of the project with the option and the value of the project without the option. If the value of the option is higher than the cost of acquiring the option, we should acquire the option to expand.

Which of the following statements is INCORRECT?

For a pharmaceutical R&D project, the risk that the drug developed by the project does not pass a clinical trial test does not affect the NPV of the project because it is a non-systematic risk.

To use the certainty equivalent approach, we find the certain payoff that can be exchanged for the risky cash flow in the market. We then discount the certain payoff at the risk-free rate.

For a pharmaceutical R&D project, the systematic risk of the project depends on the correlation between the payoff obtained from a successfully developed drug and the strength of the economy.

For a pharmaceutical R&D project, the risk that the drug developed by the project does not pass a clinical trial test is a non-systematic risk. This is because the outcome of the test is not correlated with the strength of the economy.

Which of the following statements is INCORRECT?

Lease rentals are payable at the end of each payment period during the lease term.

A higher interest rate will increase the cost of capital and increase lease payment. A higher tax rate will increase tax savings for the lessor and reduce the lease payment.

With a finance lease, the lessor owns the lease asset and receives tax savings from claiming the depreciation expense of the asset.

During the contract period, lessees can cancel an operating lease but cannot cancel a finance lease without paying penalty.

Which of the following statements is INCORRECT?

The main benefit of a conglomerate takeover is that the acquiring firm and the target firm are in the same supply chain and the takeover can help to reduce the cost of coordination and administration.

The main benefit of a horizontal takeover is that the acquiring firm is in the same industry as the target firm and knows how to manage the assets of the target firm more efficiently.

Takeover provides a mechanism to reduce the agency problem in the capital market. Acquiring firms look for underperforming firms that have low profits and low stock prices relative to their asset bases to takeover. The threat of takeover and losing jobs make corporate managers to work harder to improve the value of the firm.

It is possible to design a lease that is attractive to both the lessor and the lessee if the two parties have different marginal tax rates or if the lessor can purchase the asset with a quantity discount while the lessee cannot.

Which of the following statements is INCORRECT?

An acquiring firm usually prefers cash offer takeover to share exchange takeover because the cost of wrong estimation of synergy gain is shared between shareholders of the acquiring firm and shareholders of the target firm when cash offer method is used.

If the news on takeover intention is leaked before the takeover occurs, the share price of the target firm will increase, pushing the market value of the target firm to exceed the true value. Based on this market value, the premium will be understated and the NPV of the takeover is overstated.

A takeover would increase the value of the acquiring firm when the synergy gain exceeds the takeover premium.

The benefit of a takeover to an acquiring firm is the synergy gain. The cost of obtaining this synergy gain is called premium, which is the difference between the payment made by the acquiring firm and the market value of the target firm.

Lecture 12 Quiz | Quizalize

Q 1/5
Score 0
Which of the following statements is INCORRECT?
90
The main shortcomings of the NPV rule are that it only considers whether to invest in a project at the current time or reject the project. It does not consider the decision to defer investment to a future time or the decision to expand or the decision to abandon the project in the future.
The cost of acquiring an option to expand is the cost that needs to be incurred so that capacity can be increased in the future without replacing the existing structure. For a shopping centre, it is the additional cost to make the foundation more solid so that new floors can be added in the future.
When a project has the option to expand, we can choose to never exercise the option. Therefore, a project without the option to expand must have a value that is at least as high as the value of the same project with the option to expand.
To determine whether to acquire the option to expand, we calculate the value of the option as the difference between the value of the project with the option and the value of the project without the option. If the value of the option is higher than the cost of acquiring the option, we should acquire the option to expand.
Q 2/5
Score 0
Which of the following statements is INCORRECT?
90
To use the certainty equivalent approach, we find the certain payoff that can be exchanged for the risky cash flow in the market. We then discount the certain payoff at the risk-free rate.
For a pharmaceutical R&D project, the risk that the drug developed by the project does not pass a clinical trial test does not affect the NPV of the project because it is a non-systematic risk.
For a pharmaceutical R&D project, the systematic risk of the project depends on the correlation between the payoff obtained from a successfully developed drug and the strength of the economy.
For a pharmaceutical R&D project, the risk that the drug developed by the project does not pass a clinical trial test is a non-systematic risk. This is because the outcome of the test is not correlated with the strength of the economy.

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