Mejorar (Silva, Oliveira, & Silva, 2017) Definir:

Type: Medium

43. In a highly competitive market, how will a firm most likely produce positive economic rents?

A. A new marketing plan that will gain market share from competitors B. Renegotiation of financing terms with the firm's funding sources

C. The introduction of new technology that creates manufacturing efficiencies D. All of the above

Type: Medium

44. What is the NPV of a project in a perfectly competitive environment?

A. Positive B. Negative C. Zero

D. Cannot be determined

Type: Medium

True / False Questions

45. If an asset is worth more to others than it is to you, you should always attempt to buy it from them.

FALSE

Type: Medium

46. Frequently the financial manager can observe market values for real assets e.g. real estate values, values of precious metals etc. However, they have no place in the capital budgeting analysis. For that purpose discounted cash flow is the only proper tool.

FALSE

Type: Medium

47. Since gold is held as an investment but pays no cash dividends, today's price equals the present value of its forecasted future price.

TRUE

Type: Medium

48. The expected rise in the price of a mineral less extraction costs should equal the cost of capital.

TRUE

Type: Difficult

49. For a stock that pays no dividends, today's price is the present value of next year's price.

TRUE

Type: Easy

50. The NPV of an investment is the discounted value of the economic rents that it is expected to produce.

TRUE

Type: Medium

51. In order to generate a positive NPV project, a firm must have competitive advantage.

TRUE

Type: Medium

52. The cash forecasts for positive NPV projects are more reliable, if the managers of the firm are able to identify the economic rents associated with the projects.

TRUE

Type: Difficult

53. According to Michael Porter, managers can secure a competitive advantage for their firm within its industry in three ways. They are: by cost leadership, by product differentiation, and by focusing on a particular market niche.

TRUE

Type: Medium

54. In evaluating a project, it is necessary to consider its effect upon the sales of the firm's existing products.

TRUE

Type: Easy

55. If a firm expects long-run economic rents from a particular project, the company is considering the effects of competition.

FALSE

Type: Medium

56. Sometimes the losses on existing plants may completely offset the gains from new technology.

TRUE

Type: Easy

57. The total NPV of a new plant is equal to the NPV of the new plant plus the change in the present value of the existing plant.

TRUE

Type: Medium

58. In a competitive market, a firm can earn high economic rents.

FALSE

Type: Medium

59. Stealing market share is the best way to create economic rents in a competitive market.

FALSE

Type: Medium

60. Price cutting in a competitive market will never lead to the creation of economic rents.

TRUE

Type: Medium

61. Briefly explain how investing in gold is like investing in a stock that pays no dividends?

The current price of a stock is given by: P0 = (D1 + P1)/(1 + r). But for gold D1 = 0. Hence, P0

= (P1)/(1 + r). But P1 = (P2)/(1 + r) and so on. Therefore, P0 = (Pt)/(1 + r)^t. In other words, Current price is the present value of future price. This holds good for any asset which pays no dividends, is traded in a competitive market, and costs nothing to store.

Type: Medium

62. Briefly explain the concept of "economic rent."

Profits that are in excess of the opportunity cost of capital are called economic rents. These rents may be either temporary or persistent. The NPV of a project is the discounted value of the economic rents that it will produce. In order to generate economic rents, a firm should have some degree of competitive advantage or monopoly power. In a purely competitive world, there are no economic rents.

Type: Medium

63. Briefly explain the two ways in which PVs of cash flows can be estimated.

There two ways in which firms can estimate the present value of cash flows. First, estimate the expected cash flows and discount these cash flows at a rate that is appropriate for the risk of the cash flows. Second, estimate the certainty-equivalent cash flows and discount these cash flows using the risk-free interest rate.

Type: Medium

64. Why are economic rents important to a manager?

All positive NPV projects should be analyzed for sources of economic rents. Otherwise, the forecast or positive NPV for the project may be spurious or erroneous. Only when the

manager is convinced of the sources of economic rents should he/she accept the positive NPV project.

Type: Difficult

65. Briefly explain the main difference between the capital budgeting process and the strategic planning process.

The capital budgeting process is a bottom-up process. That ideas bubble up from the

departments to the top management through project proposals. The strategic planning process is a top-down process through which the top management provides its vision of the future.

These two processes should match with each other for optimal performance.

Type: Difficult

66. Discuss how you would react if you were presented with a project that had a high positive NPV.

The basic question to ask is, why is the net present value positive? Is it because of some forecast error or because of the company's competitive advantage? One should proceed with the project only if there are sources of economic rents that satisfactorily explain the high NPV of the project.

Type: Medium

67. Briefly explain the effect of building new manufacturing plants on the existing plants.

Generally, building new plants reduces the value of existing plants. This factor should be incorporated into the calculation of the NPV of the new plant.

[NPVtotal = NPVnew plant + ∆PVexisting plant]

Type: Medium

68. What is the total net present value (NPV) of an expansion plan?

The total NPV of an expansion plan is the sum of the NPV of new plant and the change in the PV of existing plan. [NPVtotal = NPVnew plant + ∆PVexisting plant]

Type: Difficult

69. Briefly explain the effect of competition on economic rents

Competition drives down the value of economic rents to zero. In a purely competitive industry economic rents are zero. Therefore firms have to be always on the lookout for opportunities that offer economic rents.

Type: Medium

70. Briefly explain the advantage and the disadvantage of a high salvage value for a project.

A high salvage value provides a firm with an option to abandon the project if the outcome from the project poor. On the other hand, if the competitors know that they can bail out easily, they are more likely to enter the market and thereby making it more competitive. This will reduce economic rent and hence the NPV off the project.

Type: Medium

71. State the difference between capital budgeting and strategic planning.

Generally capital budgeting is a bottom-up process, that is, ideas and proposals start at the lower levels of the firm and move upwards for approval. Strategic planning is a top-down process where ideas and proposals start at the highest level of management and filter down to the lowest levels. A firm's capital investment choices should reflect both for successful implementation.

Type: Easy

72. Explain the economic concept that prevents economic rents from occurring.

Economic rents are generated from the creation of value. These value added creations earn profits in excess of the firm's opportunity cost of capital. Under a perfectly competitive market, all products clear the market at the market price. In such situations, firms can sell all the product they wish at the market price cannot produce profits since the markets are competitively perfect. Prices will be bid down so as to eliminate any profits.

Type: Difficult