Course Name: Capital Budgeting – 2022 – CFM

Question Types: MCQ

Calculation Type: Equally weighted.
1 You are in a job interview. You are asked about the interest rate expectations in the US for the D
next year. You know that interest rates are vital to value future cash flows correctly. Which one
of the expectations is more viable for the United States Fed Funds Rate in 2023? (Lecture 1)

A. 0%
B. 0.25%
C. 2%
D. 4.5%

2 You are in a job interview. You are given the last 5 years of Free Cash Flow of McDonald’s B
company. You realize that there is a 20.88% decline from 2019 to 2020. Which one of the
options is the main candidate of the driving reason for this drop? (Lecture 1)

A. The subprime crisis

B. Covid-19
C. Increase in house prices
D. Qatar World Cup

3 You are in a job interview. You are asked to classify certain cash flows and how to use them in B
incremental analysis. Which one of the costs you will not include in your incremental cash flow
analysis? (Lecture 1)

A. Buying the new plant for the project

B. Marketing research before the project starts
C. Taxes paid in the next 3 years for the project
D. Salaries paid to the new engineering team for the project

4 You are in a job interview. You are asked to calculate the depreciation of certain capital of a C
firm. Which one of the following assets does not follow the standard depreciation calculation?
(Lecture 1)

A. The computer was bought 2 years ago

B. The printer was bought 2 months ago
C. The land was bought 1 year ago
D. The press machine was bought 3 years ago.

5 You are in a job interview in the US. The Modified Accelerated Cost Recovery System (MACRS) is D
the current tax depreciation system in the United States. They asked you to calculate the
depreciation rate of office furniture, which follows the 7-year MACRS. In which year does the
book value of the furniture become zero? (Lecture 1)

A. Year 5
B. Year 6
C. Year 7
D. Year 8
6 You are working on a project for your client. Your client has a large textile factory. They have D
trouble calculating the depreciation rate of their heat press machine. They bought the heat
press machine for 900 USD in 2018. The press machine depreciates in a straight line. The
salvage value of the machine will be 0 in 2024. What is the book value of the heat press
machine in the 2022 balance sheet? (Lecture 1)

A. 150
B. 180
C. 225
D. 300

7 You are on a project for your client. Your client would like to expand her business. She has 4 C
different projects. She is only interested in the first-year net income of the projects. She gives
you the following options (with EBIT and Tax) and asks you to choose “the best net income”
project. Which one of the options gives the highest net income? (Lecture 1)

A. EBIT: 100, Tax: 10%

B. EBIT: 200, Tax: 50%
C. EBIT: 150, Tax: 20%
D. EBIT: 150, Tax: 40%

8 You are running your own company. You would like to run a sensitivity analysis of a project that C
you are planning to start. You need to calculate how much the NPV of your project will change
if you increase sales by %20. When your sales increase, which one of the following items will
not change in the cash flow calculations? (Lecture 2)

A. Revenue
B. Variable Cost
C. Fixed Cost
D. Tax Paid

9 You are running your own company. Your company sells electronic chips. If you sell 0 chips, C
your NPV is -20$. If you sell 10 chips, your NPV is -6$. If you sell 20 chips, your NPV is +8$.
Which one of the following options can be your breakeven point? (Lecture 2)

A. 5
B. 10
C. 15
D. 20

10 You are in a job interview. You are given a project which requires a 10 million USD initial D
investment. With 30% probability you will earn 20 million USD, with 70% probability you will
earn 8 million USD. Assume that the interest rate is zero. What will be the expected NPV of this
project? (Lecture 2)

A. 16.2 million USD

B. 11.6 million USD
C. 6 million USD
D. 1.6 million USD
11 You are on a project for your client. Your client is a large beverage company. Their financial D
team prepares a baseline cash flow analysis and calculates the NPV. Your client asks you how
NPV changes if the unit sales and cost of production increases at the same time. You run your
scenario analysis. What can be the output of your analysis? (Lecture 2)

A. NPV goes up
B. NPV goes down
C. NPV does not change
D. All are possible

12 You have a research interview. You are asked to explain the relationships between households B
and firms. Which one of the following sentences is correct in this relationship? (Lecture 3)

A. Households supply products

B. Firms invest in productive assets
C. Firms supply labor
D. Households demand labor

13 You have an interview with a central clearing counterparty house. You are asked to give an D
example of financial institutions that are established in the 21 st century. Which one of the
following options that you need to choose to give as an example? (Lecture 3)

A. Credit unions
B. Pension funds
C. Hedge funds
D. NeoBanks

14 You have a job interview with a large corporate firm. You are asked to give an example of a safe B
financial product. You search on Google for the meaning of a safe financial product. The
definition is: “Safe asset must maintain its value (i.e. its purchasing power in a given currency) in
bad states of the world.” Which one of the following options can be considered a safe financial
product historically? (Lecture 3)

A. Equities
B. Treasury Bills
C. Commodities
D. Derivatives

15 You are working in a public company, called Pioneer Natural Resources Co (PXD). The PXD share B
was traded at 200 USD in December 2021. The PXD share is traded at 250 USD in December
2022. The PXD paid a 4 USD dividend in this period. What is the return of PXD? (Lecture 4)

A. 25 percent
B. 27 percent
C. 29 percent
D. 54 percent
16 You would like to invest in a stock called Symbotic Inc (SYM). There are only two financial A
analysts you are following, called Alice and Bob. You trust them equally. Alice predicts that the
stock of SYM increases by 5%. Bob predicts that the stock of SYM increases by 9%. In which of
the following cases, the expected return would be the highest? (Lecture 4)

A. Bob updates his prediction upward.

B. Alice updates her prediction downward.
C. Bob updates his prediction downward.
D. Alice and Bob keep their predictions unchanged.

17 You work in a public company. You need to use the capital asset pricing model (CAPM) to B
calculate the cost of equity of your next project. Which one of the following elements we do not
need when we calculate the cost of equity through CAPM? (Lecture 4)

A. Risk-free rate
B. Market volatility
C. Market return
D. Beta

18 You work in a public company. You need to use the capital asset pricing model (CAPM) to A
calculate the cost of equity of your next project. If the beta of your company is equal to 0, what
would be the cost of equity according to the CAPM? (Lecture 4)

A. Risk-free rate
B. Market volatility
C. Market return
D. 0

19 You are in a job interview. You are given a case study. The case study assumes that security C
prices reflect all available information in the market – private and public. What type of market
efficiency do we expect in this case? (Lecture 5)

A. Weak form market efficiency

B. Semi-strong form market efficiency
C. Strong market efficiency
D. Private and public market efficiency

20 You are in an interview for a research position. You are told that the efficient market hypothesis C
(EMH) holds under certain conditions. One of the conditions is investor rationality. In which of
the following cases, we can observe investor irrationality? (Lecture 5)

A. Investors buy stocks with high potential

B. Investors prefer stocks with low risk
C. Investors prefer stocks by their names
D. Investors sell stocks with low potential
21 You are working at your own company. You started a project a year ago. As of today, you C
realized that your return is significantly lower than your ex-ante calculation. Among which one
of the following reasons can be considered a behavioral bias that causes the suboptimal result?
(Lecture 6)

A. You make your scenario analysis

B. You run NPV analysis with the correct cost of capital
C. You overestimate your ability
D. Covid crisis hit

22 You are working in an insurance company. You create an insurance model. In your model, B
houses with gardens are safer. Then, you check real data. 90% of surveys show that houses with
gardens are robbed more often than houses without gardens. Only 10% of surveys show the
opposite. After checking this data, you do not update your model. What type of behavioral bias
do you suffer from? (Lecture 6)

A. Hindsight bias
B. Confirmation bias
C. Framing
D. Mental Accounting

23 You are working in your own company. You have a team of 10 people, and you run 4 projects. D
For each decision, you jump in and make the decision by yourself. You over-update project
needs. What type of behavioral bias do you suffer from? (Lecture 6)

A. Conservatism
B. Regret Aversion
C. Loss Aversion
D. Illusion of control

24 People tend to remember the negative news, unfortunately. This behavior sometimes is C
associated with availability bias. Namely, people are inclined to reach a shortcut from
available information in their minds. How can one person correct this bias? (Lecture 6)

A. Focusing on total output, rather than losses and gains.

B. Giving other people in their team to act.
C. Give the same weights to all information they receive.
D. Update project needs every year at least one time.

25 Before making a capital budgeting decision, which elements do we need to know about a D
project?

A. Risks and Returns

B. Cash Flows
C. Timeline
D. All the above. We surely need all of them.