Strategic Management
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Course Introduction
Strategic Management explores the formulation, implementation, and evaluation of cross-functional decisions that enable an organization to achieve its long-term objectives. This course examines tools and concepts for analyzing both the external environment and internal capabilities, helping students understand how organizations develop competitive advantages. Topics include mission and vision development, strategic analysis, decision-making processes, and the integration of functional areas such as marketing, finance, and operations. Through case studies and real-world examples, students learn to apply strategic frameworks, evaluate business scenarios, and craft strategies that address the complexities and dynamics of global markets.
Recommended Textbook
Valuation Measuring and Managing the Value of Companies 6th Edition by McKinsey
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Chapter 1: Why Value Value
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Q1) Data from Europe and the United States found that the correlation between value creation and employment in the company has been:
A)Positive.
B)Negative.
C)Essentially zero.
Answer: A
Q2) Paying attention to which of the following tends to lead to a company doing well in the stock market?
I.Growth.
II.Price-to-earnings ratio.
III.Earnings per share.
IV.Return on invested capital.
A)I and II only.
B)II and III only.
C)I and IV only.
D)II,III,and IV only.
Answer: C
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Page 3
Chapter 2: Fundamental Principles of Value Creation
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Q1) For a given company,next year's NOPLAT is $50.For the foreseeable future,the growth rate will be 3 percent,the ROIC will be 12 percent,and the weighted average cost of capital (WACC )will be 10 percent.Using the key driver formula,calculate the value of the company.
A)$536
B)$1,667
C)$714
D)$500
Answer: A
Q2) Focusing on improving earnings and short-term cash flow will consequently lead to value creation.
A)True
B)False
Answer: False
Q3) When ROIC equals the cost of capital,there is no relationship between growth and value.
A)True
B)False
Answer: True
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Chapter 3: Conservation of Value and the Role of Risk
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Sample Questions
Q1) Multiple expansion is one way that firms can create value through acquisitions.
A)True
B)False
Answer: False
Q2) The conservation of value principle states that anything that does not increase cash flows does not increase value.
A)True
B)False
Answer: True
Q3) Because interest expense is tax deductible,share repurchases can have the beneficial effect of increasing earnings per share,which will definitely lead to a share price increase.
A)True
B)False
Answer: False
Q4) If one uses free cash flows to value a firm,then value may be created through a lower cost of capital.
A)True
B)False
Answer: True
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Chapter 4: The Alchemy of Stock Market Performance
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Sample Questions
Q1) What is the TRS from performance?
A)-2.0 percent.
B)0.0 percent.
C)1.4 percent.
D)7.0 percent.
Q2) What was the expected return on the investment as on January 1,2014?
A)110 percent.
B)10 percent.
C)20 percent.
Q3) What is the zero-growth return?
A)10.0 percent.
B)14.4 percent.
C)3.0 percent.
D)7.0 percent.
Q4) The enhanced TRS from performance is closest to:
A)-4.4 percent.
B)3.1 percent.
C)4.4 percent.
D)8.4 percent.
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Chapter 5: The Stock Market Is Smarter Than You Think
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Q1) Voluntary option expensing has been found to have which of the following effects?
A)A negative impact on share price.
B)A positive impact on share price.
C)No impact on share price.
D)A positive impact if LIFO accounting is used and a negative effect if FIFO accounting is used.
Q2) Which of the following is most accurate concerning the bounds on a stock's price set by informed investors and/or the volatility of the stock within those bounds?
A)As long as the price is within the bounds,the volatility will always be relatively low.
B)Share prices can be significantly volatile within the bounds but only when new information about a company has been revealed;otherwise,volatility will be relatively low.
C)The bounds are set by mechanical traders and are fairly constant over time.
D)Share prices can be significantly volatile within the bounds even at times when no new information about a company has been revealed.
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Chapter 6: Return on Invested Capital
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Q1) Which of the following are sources of competitive advantage that allow a firm to charge a price premium?
I.Quality.
II.Customer lock-in.
III.Innovative products.
IV.Rational price discipline.
A)I and II only.
B)I,III,and IV only.
C)II and III only.
D)I,II,III,and IV.
Q2) Which of the following is NOT one of Michael Porter's five forces?
A)Threat of entry.
B)Regulatory restrictions.
C)Bargaining power of buyers.
D)Bargaining power of suppliers.
Q3) Historically,the rates of growth of firms tend to be more stable than their ROICs.
A)True
B)False
Q4) List and briefly explain the five sources of price premiums.
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Chapter 7: Growth
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Q1) Incremental innovation will rarely create lasting value.
A)True
B)False
Q2) The strategy of making bolt-on acquisitions to accelerate product sales:
A)Has not been proven to create value.
B)Can create positive and about average value compared to other strategies.
C)Can create positive and above-average value compared to other strategies.
D)Can create positive but below-average value compared to other strategies.
Q3) Which of the following is true concerning an increase in market share that comes at the expense of established competitors?
A)It rarely creates much value for long,except when it results in pushing a competitor out of the market completely.
B)It generally creates value for a fairly long period,but it will decay after about 10 years.
C)It never creates any value over the long run because the effects are random across firms and net to zero for any given firm over time.
D)None of these.
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Chapter 8: Frameworks for Valuation
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Sample Questions
Q1) Given the following information,compute the estimated value per share.
\[\begin{array} { | l | r | }
\hline \text { Present value of cash flow: } & \$ 33 \mathrm {~m} \\
\hline \text { Midyear adjustment factor: } & \$ 1.2 \mathrm {~m} \\
\hline \text { Value of tax Ioss c amy-forwards: } & \$ 2.9 \mathrm {~m} \\
\hline \text { Value of debt: } & \$ 14.4 \mathrm {~m} \\
\hline \begin{array} { l }
\text { Value of capitalized operating } \\
\text { leases: }
\end{array} & \$ 5.2 \mathrm {~m} \\
\hline \text { Number of shares outstanding: } & 2.5 \mathrm {~m} \\
\hline \end{array}\]
A)$5.80
B)$6.04
C)$7.00
D).$7.92
Q2) List the four basic steps in valuing a company's common equity using the enterprise discounted cash flow methodology.
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Chapter 9: Reorganizing the Financial Statements
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Q1) Based on the above same table,what are the ROICs for Companiesy A,B,and C,respectively?
A)18 percent,12 percent,19 percent.
B)19 percent,17 percent,21 percent.
C)18 percent,16 percent,20 percent.
D)19 percent,17 percent,24 percent.
Q2) In calculating free cash flows,which of the following is/are not NOT an investment that should be subtracted from gross cash flows?
A)Change in operating working capital.
B)Change in debt outstanding.
C)Net capital expenditures.
D)Investment in goodwill and acquired intangibles.
Q3) How will an increase in invested capital (IC )in a given year affect free cash flow (FCF )and ROIC if all other things are kept equal?
A)It will decrease both FCF and ROIC.
B)It will increase both FCF and ROIC.
C)It will increase FCF but decrease ROIC.
D)It will decrease FCF but increase ROIC.
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11
Chapter 10: Analyzing Performance
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Sample Questions
Q1) ROIC excluding goodwill is useful when measuring underlying operating performance of the company and its businesses,and it is useful for comparing performance against peers and to analyze trends.
A)True
B)False
Q2) The company's ability to meet short-term obligations is measured with ratios that incorporate three measures of earnings.Which of the following is NOT one of those measures of earnings?
A)Earnings before interest,taxes,and amortization (EBITA).
B)Earnings before interest,taxes,depreciation,and amortization (EBITDA).
C)Earnings before interest,taxes,amortization,and preferred dividends (EBITAD).
D)Earnings before interest,taxes,depreciation,amortization,and rental expense (EBITDAR).
Q3) To evaluate leverage in the recent low-interest-rate environment,many analysts are now evaluating debt multiples such as debt to EBITDA or debt to EBITA.
A)True
B)False
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Chapter 11: Forecasting Performance
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Sample Questions
Q1) Changing the dividend payout ratio will change the value of the firm and the firm's equity.
A)True
B)False
Q2) Which of the following is the recommended approach to forecast COGS,and why?
A)Forecast COGS based on revenue growth,since it provides flexibility in the model.
B)Forecasting COGS based on the forecast ratio of COGS to sales allows for possible improvements in COGS relative to sales.
C)Forecast COGS based on revenue growth since COGS and revenues have a direct relationship.
D)Forecasting COGS based on inventory is recommended because inventory prices and COGS are correlated.
Q3) The explicit forecast period must be long enough for the company to reach a steady state.List the two characteristics that define that steady state.
Q4) List the three steps in making a top-down forecast of revenue and the three inputs for making a bottom-up forecast of revenue.
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Chapter 12: Estimating Continuing Value
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Q1) In making forecasts to estimate the value of a company,at the point where competition has eliminated abnormal returns,then it is appropriate to set RONIC equal to WACC.
A)True
B)False
Q2) Using today's P/E multiples to estimate continuing value is recommended.
A)True
B)False
Q3) Which of the following is NOT one of the ways whereby the value of a firm can be broken down into two or more subparts?
A)(1 )Nonoperating assets and (2 )operating assets plus the present value of the depreciation tax shield.
B)(1 )New product line and (2 )base business.
C)(1 )The present value of continuing-value cash flow and (2 )the present value of the cash flow from the explicit forecast period.
D)(1 )The present value of economic profit from continuing value,(2 )the present value of economic profit of the explicit forecast period,and (3 )invested capital.
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Page 14
Chapter 13: Estimating the Cost of Capital
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Q1) To estimate a company's beta,using an industry-derived unlevered beta relevered to the company's target capital structure is preferred to directly estimating a company-specific beta.
A)True
B)False
Q2) To estimate the risk-free rate in developed economies,the analyst should use:
A)Short-term commercial paper.
B)Short-term government discount instruments.
C)Long-term coupon-paying government bonds.
D)Long-term government zero-coupon bonds.
Q3) What challenges did the financial crisis of 2008 and its aftermath pose for estimating a firm's cost of capital? How should one handle these challenges?
Q4) Since the factors and their measurement for use in the arbitrage pricing theory (APT )model have become fairly standardized,the APT model is becoming a more popular alternative to the CAPM in estimating the market risk premium.
A)True
B)False
Q5) Briefly explain the two methods of estimating market returns.
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Chapter 14: Moving From Enterprise Value to Value Per Share
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Q1) Indicate in which cases book value is a reasonable approximation for evaluating the asset or liability.Answer "Yes" if book value is a reasonable approximation and "No" if it is not.
A.Floating-rate debt.
B.Outstanding bonds that are secure and actively traded.
C.Discontinued operations.
D.Stake in a publicly traded subsidiary.
E.Excess real estate.
F.Loans to nonconsolidated subsidiaries and other companies (assume interest rates and credit risk have not changed).
G.An outstanding convertible bond deep in the money.
H.Employee stock options.
Q2) The multiples valuation of a subsidiary is most appropriate when the subsidiary is publicly traded and the parent owns less than 20 percent of the subsidiary.
A)True
B)False
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Page 16
Chapter 15: Analyzing the Results
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Q1) Which of the following are questions an analyst should ask when assessing the economic consistency of a model?
I.Are the patterns chartable?
II.Are the patterns intended?
III.Are the patterns reasonable?
IV.Are the patterns consistent with industry dynamics?
A)I and II only.
B)I and IV only.
C)III and IV only.
D)II,III,and IV only.
Q2) When making forecasts,increasing one variable usually means decreasing another.Which of the following are possible common trade-offs that should be considered in making such forecasts?
I.Product volume and prices.
II.Lower inventory and higher sales.
III.Higher growth and lower margin.
A)I and II.
B)I and III.
C)II and III.
D)All of the above.
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Page 17
Chapter 16: Using Multiples
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Q1) Which of the following are reasons that the value-to-EBITA ratio is superior to the price-to-earnings ratio as a multiple to aid in valuation?
I.The P/E is distorted by capital structure.
II.The P/E is distorted by inflation.
III.The P/E is distorted by nonoperating gains and losses.
IV.The P/E is distorted by dividend payouts.
A)I and III only.
B)II and III only.
C)II and IV only.
D)I,III,and IV only.
Q2) Given that the value-to-EBITA ratio of a company is 11.2 and the projected EBITA growth is 4.2 percent,what is the P/E-to-growth (PEG )ratio?
A)2.67
B)4.70
C)3.75
D)6.86
Q3) The EV-to-revenue multiple is useful in valuing some companies.
A)True
B)False
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Page 18
Chapter 17: Valuation by Parts
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Q1) Which of the following are issues an analyst typically encounters when creating financial statements for business units?
I.Allocating corporate overhead costs.
II.Dealing with intercompany transactions.
III.Understanding financial subsidiaries.
IV.Processing overwhelming amounts of public information.
A)I and II only.
B)II and III only.
C)I,II,and III only.
D)I,II,III,and IV.
Q2) Which of the following correctly describes how to determine the beta for a business unit within a multiple-business corporation?
A)Use the average of the equity betas for the industry.
B)Use the beta of the multi-unit enterprise.
C)Relever the unlevered sector median beta using the capital structure of the unit.
D)Relever the unlevered sector median beta using the capital structure of the entire multiple-business corporation.
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19
Chapter 18: Taxes
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Q1) With respect to deferred taxes,which of the following is an operating entry?
A)Tax loss carryforwards.
B)Accelerated depreciation.
C)Nondeductible intangibles.
D)Pension and postretirement benefits.
Q2) Identify warranty reserves as operating or nonoperating and as an asset or a liability.Explain how the required treatment of warranty reserves determines the relationship between cash and accrual-based taxes.
Q3) Operating taxes are computed as if the company were financed entirely with equity.
A)True
B)False
Q4) As a general rule,deferred tax assets and deferred tax liabilities are considered part of invested capital.
A)True
B)False
Q5) The effects of research and development should be removed from operating taxes.
A)True B)False
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Chapter 19: Non-operating Items, Provisions, and Reserves
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Q1) Provisions for the sole purpose of income smoothing should be treated as an equity equivalent.
A)True
B)False
Q2) If litigation charges recur frequently and grow with revenue,the analyst should treat the charges as operating.
A)True
B)False
Q3) List the three recommended steps in assessing the impact of nonoperating expenses and incorporating their information in cash flow forecasts.
Q4) All of the following are related to the ongoing core business EXCEPT:
A)Royalty expense.
B)Restructuring charges.
C)Selling,general,and administrative (SG&A )expenses.
D)R&D expenses.
Q5) Product returns and warranties are nonoperating provisions that do not affect NOPLAT.
A)True
B)False
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Chapter 20: Leases and Retirement Obligations
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Q1) What are (1 )the WACC before adjustment for leases and (2 )the WACC after adjustment for leases?
A)WACC before adjustment for leases = 8.63 percent;WACC after adjustment for leases = 6.98 percent.
B)WACC before adjustment for leases = 6.63 percent;WACC after adjustment for leases = 6.98 percent.
C)WACC before adjustment for leases = 6.93 percent;WACC after adjustment for leases = 8.63 percent.
D)WACC before adjustment for leases = 8.63 percent;WACC after adjustment for leases = 8.98 percent.
Q2) Classification of amortization of prior service cost and curtailment (or settlement )loss (or gain )will depend on the purpose of analysis.
A)True
B)False
Q3) Over- or underfunded pension status must be incorporated into value as a nonoperating asset or as a debt equivalent.
A)True
B)False
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Chapter 21: Alternative Ways to Measure Return on Capital
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Q1) Expensing items with long-term benefits will usually mean that the accounting statements will overstate the company's historical investment,which can artificially lower ROIC in later years,making a business appear less attractive than it really is.
A)True
B)False
Q2) If growth of a company is falling,expensing R&D will lead to an overestimation of the resulting drop in true performance.
A)True
B)False
Q3) Will either measures of performance or valuation be affected by changing the accounting treatment of R&D?
A)Both measures of performance and valuation will be affected.
B)Neither measures of performance nor valuation will be affected.
C)Measures of performance will be affected,but valuation will not be affected.
D)Measures of performance will not be affected,but valuation will be affected.
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Chapter 22: Inflation
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Q1) Historical data shows that inflation leads to lower value creation in companies,because it erodes real-terms free cash flow (FCF )and increases the cost of capital.
A)True
B)False
Q2) Inflation is often persistent and difficult to fix,stretching out over several years as in the 1970s and 1980s,because suppressing it requires strict and unpopular government measures.
A)True
B)False
Q3) An analyst should make financial projections of income statements and balance sheets for a valuation in a high-inflation environment by simply projecting all items on a nominal basis.
A)True
B)False
Q4) What are the two indirect cash flow effects of inflation that depress value?
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Page 24
Chapter 23: Cross-Border Valuation
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Q1) The cost of capital is best estimated from the perspective of a global investor and using both the market risk premium and beta measured against a global market portfolio and not against a local (foreign or domestic )market portfolio.
A)True
B)False
Q2) Which of the following are reasons the forward-rate method is more complex than the spot-rate method in estimating the value?
I.Incomplete data.
II.Extra calculations.
III.The possibility of multiple solutions.
IV.The use of more than one currency in the estimation process.
A)I and II only.
B)I and IV only.
C)II and III only.
D)III and IV only.
Q3) List and describe the two methods for converting forecasted cash flows from one currency into another.
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Chapter 24: Case Study: Heineken
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Q1) Which of the following from the NOPLAT statement is NOT included in the amount of investments in goodwill and acquired intangibles?
A)The implied interest rate on the goodwill and acquired intangibles.
B)The annual change in the sum of goodwill and acquired intangibles.
C)The reversal of intangibles value adjustments in the invested-capital statement.
D)The sum of amortization of acquired intangibles and impairment of acquired intangibles and goodwill for the year.
Q2) Which of the following are NOT recommended in the treatment of depreciation,amortization,and impairments in the calculation of NOPLAT?
A)Separate any impairments from income on nonconsolidated investments.
B)Combine depreciation of property,plant,and equipment (PP&E )with impairments.
C)Separate the depreciation of property,plant,and equipment (PP&E )from amortization.
D)Within amortization,separate amortization of acquired intangibles from operating amortization.
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Chapter 25: Corporate Portfolio Strategy
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Q1) Which of the following are valid reasons a given firm might be the best owner of a particular business?
I.Unique links with other businesses (e.g. ,distribution lines).
II.Distinctive skills such as advertising.
III.Better governance.
IV.Better insight and foresight.
A)I and II only.
B)I,II,and III only.
C)II and IV only.
D)I,II,III,and IV.
Q2) The type of owner that qualifies as best for a business may change over the course of the business's life cycle and will probably vary with its geography.
A)True
B)False
Q3) With respect to owning and adding value to a consumer packaged-goods business,a firm with great manufacturing skills would probably be a better owner than a firm with distinctive skills in developing and marketing brands.
A)True
B)False
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Chapter 26: Performance Management
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Q1) Which of the following are aspects of the firm that diagnostics of organizational health typically measure?
I.Its culture and values.
II.The depth of management talent.
III.The skills and capabilities of the company.
IV.Its ability to retain employees and keep them satisfied.
A)I,II,and III only.
B)I,III,and IV only.
C)II,III,and IV only.
D)I,II,III,and IV.
Q2) List and describe the three categories of short-term value drivers.
Q3) Which of the following is a value driver associated with improving long-term growth as opposed to return on invested capital (ROIC)?
A)Asset health.
B)Commercial health.
C)Capital productivity.
D)Cost structure health.
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28
Chapter 27: Mergers and Acquisitions
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Q1) A large acquisition occurring is a good predictor of an increase in acquisitions.
A)True
B)False
Q2) List the four components that determine the value created for the acquirer in an acquisition and whether an increase in each increases or decreases that value.
Q3) When an acquiring firm is making the decision to offer either cash or stock for a target,it should be more inclined to offer cash if the stock market is in a bubble.
A)True
B)False
Q4) An all-equity firm worth $50 billion acquires for $4 billion cash a firm whose postacquisition value will be $6 billion.The acquiring firm had the cash and did not need to borrow.The current market value of the target is $3 billion.What is the estimated return to the shareholders of the acquiring firm?
A)2 percent.
B)4 percent.
C)6 percent.
D)8 percent.
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Chapter 28: Divestitures
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Q1) Whether or not a spin-off is part of a focus-improving strategy can be important with respect to how much value it creates.
A)True
B)False
Q2) With respect to their effect on divestures,which of the following is most accurate concerning legal,contractual,and regulatory barriers?
A)They are one of the reasons that divestitures are rarer than acquisitions.
B)They are typically not large enough to distort the value-creation potential of divestitures.
C)They are generally a problem only for larger divestitures,and smaller divestures are not affected by them.
D)They are an established hurdle that most companies address before the process to determine the viability of the divestiture.
Q3) Executives seem to shy away from divestitures and usually delay them too long.
A)True
B)False
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Chapter 29: Capital Structure, Dividends, and Share
Repurchases
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Q1) For a given firm,which of the following is most likely to be the result of lower leverage?
A)Corporate overinvestment.
B)Increased investor conflicts.
C)Tax savings for the firm.
D)Shareholders preferring higher-risk projects.
Q2) Business erosion is a result of too little leverage and the resulting stagnation and loss of customers.
A)True
B)False
Q3) Based on the observed distribution of credit ratings,which of the following ranges of debt ratings is an effective rating level,meaning it cannot clearly be improved upon in terms of creating value for shareholders?
A)From BB+ to BBB.
B)From BBB- to A+.
C)From A to AA-.
D)From AA- to AAA.
Q4) Describe how leverage can cause business erosion.
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Chapter 30: Investor Communications
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Q1) With respect to the type of information managers should reveal,which of the following is/are true?
I.Managers should provide specific point goals rather than ranges.
II.Multinational companies should discuss their targets using constant currency rates.
III.Managers across industries should strive to provide information on a common set of value drivers.
IV.Managers of conglomerates should reveal aggregate numbers rather than business-by-business numbers.
A)I and II only.
B)II and III only.
C)II only.
D)III and IV only.
Q2) In most industries,there is a fairly standardized level of transparency across firms.
A)True
B)False
Q3) Describe the basic goal of good investor communications.
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Chapter 31: Emerging Markets
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Q1) In a two-scenario model of an emerging market,it is recommended that the analyst create a base-case set of forecasts and a set of forecasts associated with a period of economic distress.Which of the following best represents the range of probability weights to assign the economic distress scenario?
A)5 to 10 percent.
B)10 to 20 percent.
C)20 to 30 percent.
D)30 to 40 percent.
Q2) Given the following information for a company in a developing market,estimate the value of the company.The cash for the next year is estimated to be either $200 in the business-as-usual scenario or $50 in the distress scenario.The probabilities of the scenarios are 80 percent and 20 percent,respectively.The expected perpetual growth rate in each case is 5 percent per year,and the cost of capital is 11 percent.The value of the company is closest to:
A)$1,654.55
B)$2,500.00
C)$2,833.33
D)$3,333.33
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Chapter 32: Valuing High-Growth Companies
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Q1) Which of the following are correct concerning the approach the analyst should take when evaluating a high-growth company?
I.Think in terms of probabilities.
II.Begin the process by starting from the future rather than the present.
III.Understand the economics of the business model compared with peers.
IV.Remember that the DCF approach is an essential tool for understanding the value of high-growth companies.
A)I and II only.
B)I,II,and III only.
C)I and IV only.
D)I,II,III,and IV.
Q2) Using the real-options approach to value a high-growth company has an advantage over the discounted cash flow method in that it requires fewer estimates (e.g. ,it does not require a long-term revenue growth rate).
A)True
B)False
Q3) Contrast the first step in the valuation process of an established company and a high-growth company.Explain the reason for the difference in approaches.
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Chapter 33: Cyclical Companies
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Q1) The four-step approach for valuing cyclical companies requires a minimum of two scenarios.If an analyst is using only two scenarios,how should they be constructed?
Q2) Given the following list of patterns of expenditure timing,indicate the correct ordering of their resulting internal rates of return (IRRs )from lowest to highest.
I.Typical spending pattern.
II.Spending evenly over cycle.
III.Optimally timed asset purchases.
IV.Optimally timed capital spending.
A)I,II,III,IV.
B)II,I,IV,III.
C)II,I,III,IV.
D)I,II,IV,III.
Q3) The discounted cash flow (DCF )valuations of companies with cyclical earnings tend to be more volatile than those of less cyclical companies.But their share prices are much more stable.
A)True
B)False
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Chapter 34: Banks
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Q1) Which of the following will change the cost of equity?
I.Asset composition.
II.Liability composition.
III.The expected market return.
IV.The risk-free rate.
A)I and II only.
B)I,III,and IV only.
C)III and IV only.
D)I,II,III,and IV.
Q2) Explain why analysts estimating the values of banks should not use the discounted cash flow from operations method.What method should an analyst use?
Q3) The best method for understanding how much value a bank is creating in its different product lines is:
A)Free cash flow analysis.
B)Ratio analysis.
C)Economic spread analysis.
D)Net income analysis.
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Chapter 35: Flexibility
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Q1) Which of the following is most accurate concerning how a change in interest rates can produce an increase in the value of a project with flexibility?
A)It increases the present value of the cash flows.
B)A higher interest rate increases the time value of the deferral of an investment.
C)There is not any set relationship between interest rates and the value of flexibility.
D)Higher interest rates are more stable than lower rates and produce more stable cash flows.
Q2) The option to abandon (or sell )a project,such as the right to abandon a coal mine,is most similar to:
A)A swap contract.
B)A put option on a stock.
C)A call option on a stock.
D)A futures contract on a bond.
Q3) The value of flexibility is greatest when uncertainty is high and managers can react to new information.
A)True
B)False
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