Corporate Finance
Chapter Exam Questions
Course Introduction
Corporate Finance explores the fundamental principles and practices involved in managing a corporations financial resources. Topics include capital budgeting, risk analysis, cost of capital, capital structure, dividend policy, working capital management, and financial planning. The course emphasizes analytical tools and techniques for evaluating investment opportunities, financing options, and corporate strategies to maximize firm value. Real-world case studies and financial modeling exercises are used to reinforce concepts and develop decision-making skills relevant to financial managers in todays dynamic business environment.
Recommended Textbook Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Due to the Internet,institutional investors have gained in importance.
A)True
B)False
Answer: False
Q2) Briefly explain the difference between expected returns and realized returns and between ex ante returns and ex post returns.
Answer: Expected returns are mean returns based on probability distributions dealing with the future.Realized returns are the returns that actually occurred in the past.Ex ante returns are in the future.Ex post returns are in the past.
Q3) One reason for the declining importance of pension funds is the:
A)decrease in pension benefits for workers.
B)downsizing of U.S.companies.
C)large number of conversions into self-directed plans.
D)increasing number of federal regulations that restrict pension fund portfolios.
Answer: C
Q4) Define risk in the context of investments.
Answer: Risk is the chance that the actual return on an investment will differ from its expected return.
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3
Chapter 2: Investment Alternatives
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Q1) If a preferred stock issue is cumulative,this means:
A)unpaid preferred stock dividends are paid at the end of the year.
B)unpaid preferred stock dividends are legally binding on the corporation.
C)unpaid preferred stock dividends must be paid in the future before common stock dividends can be paid.
D)unpaid preferred stock dividends are never repaid.
Answer: C
Q2) The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the payout ratio.
Answer: Payout rate = $1/$4 = 0.25 = 25%
Q3) Treasury bonds generally have maturities of:
A)5 to 15 years.
B)5 to 30 years.
C)10 to 20 years.
D)10 to 30 years.
Answer: D
Q4) What are some advantages of asset-backed securities to investors?
Answer: High yields with manageable risk.
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Page 4
Chapter 3: Indirect Investing
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Q1) A group of mutual funds with a common management are known as:
A)fund syndicates.
B)fund conglomerates.
C)fund families.
D)fund complexes.
Answer: D
Q2) The ___________________________________ requires most investment companies to register with the Securities and Exchange Commission (SEC),the primary federal agency regulating investment companies.
Answer: Investment Company Act of 1940
Q3) If NAV > market price of a fund,then the fund:
A)is selling at a discount.
B)is selling at a premium.
C)is an index fund.
D)is an ETF.
Answer: A
Q4) The net asset value of a mutual fund does not consider unrealized capital gains.
A)True
B)False
Answer: False
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Chapter 4: Securities Markets and Market Indexes
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Q1) The difference between the bid and the ask price is known as the: A)commission.
B)premium.
C)quote.
D)spread.
Q2) What is the difference between a seasoned issue and an IPO?
Q3) The S&P 500 Index is a:
A)price-weighted index that is adjusted for free float.
B)price-weighted index that is not adjusted for free float.
C)capitalization-weighted index that is adjusted for free float.
D)capitalization-weighted index that is not adjusted for free float.
Q4) Normal stock exchange hours in the U.S.are 9:30a.m.to 4 p.m.Eastern Standard Time. A)True
B)False
Q5) Most trading of bonds in the secondary market takes place on:
A)the NYSE.
B)the American Stock Exchange.
C)the OTC.
D)the CME.
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Chapter 5: How Securities Are Traded
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Q1) Which of the following institutions has helped to eliminate the use of stock certificates by placing stock transactions on computers?
A)Federal Reserve
B)Securities Exchange Commission
C)Depository Trust Company
D)Federal Depository Insurance Corporation
Q2) Insider trading often occurs when mergers and takeovers are imminent.
A)True
B)False
Q3) The short interest ratio indicates the number of days it would take for short sellers to cover all the shares sold short.
A)True
B)False
Q4) Buying Treasury securities through the Treasury Direct Program eliminates all brokerage commissions and other fees.
A)True
B)False
Q5) What are two methods of investing in stocks without a broker?
Q6) What is the chief advantage of a market order?
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Chapter 6: The Risks and Returns From Investing
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Q1) Bond prices and interest rates are inversely related.
A)True
B)False
Q2) Return and risk are inversely related.
A)True
B)False
Q3) Assume an investor purchases a bond when the Euro is quoted at $0.96 per Euro and sells the bond when the Euro is quoted at $1.12 per Euro.Relative to the dollar,the Euro has:
A)appreciated,and the investor has gained from the currency move.
B)appreciated,and the investor has lost from the currency move.
C)depreciated,and the investor has gained from the currency move.
D)depreciated,and the investor has lost from the currency move.
Q4) International mutual funds offer investors global diversification without exchange rate risk.
A)True
B)False
Q5) What is the best measure of risk for a sole proprietorship?
Q6) What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?
Page 8
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Chapter 7: Portfolio Theory
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Q1) A probability distribution shows the likely outcomes that may occur and the probabilities associated with these likely outcomes.
A)True
B)False
Q2) Portfolio risk is most often measured by professional investors using the: A)expected value.
B)portfolio's beta.
C)weighted average of the individual asset's risk.
D)portfolio's standard deviation.
Q3) In a portfolio consisting of two perfectly negatively correlated securities,the highest attainable expected return will consist of a portfolio containing 100% of the asset with the highest expected return.
A)True
B)False
Q4) Portfolio risk is a weighted average of the individual security risks.
A)True
B)False
Q5) The number of covariances in the Markowitz model is ________ ;the number of unique covariances is [n (n-1)]/2.
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Chapter 8: Portfolio Selection
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Q1) Which of the following is not an assumption of Markowitz portfolio theory?
A)A single investment period
B)Investor preferences are based only on expected return and risk
C)Low transactions costs
D)The availability of a risk-free asset
Q2) Gordon holds a portfolio of U.S.equities and is considering adding several alternative ETFs that are tied to different asset classes.Adding which of the following ETFs would produce the largest reduction in the risk of Gordon's portfolio?
A)A real estate ETF
B)An emerging markets ETF
C)An EAFE ETF
D)A U.S.bond ETF
Q3) When using the Markowitz model,aggressive investors would select portfolios on the left end of the efficient frontier.
A)True
B)False
Q4) Distinguish between systematic and unsystematic risk.What are two other names for each?Give examples of each.
Q5) Explain what is efficient about the efficient frontier.
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Chapter 9: Asset Pricing Models
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Q1) With the APT,risk is defined in terms of a stock's sensitivity to basic economic factors.
A)True
B)False
Q2) What is the formula for the slope of the CML?What does it represent?
Q3) The most volatile stocks have betas near zero.
A)True
B)False
Q4) What does it mean when the CAPM is called "robust?"
A)The CAPM requires no assumptions.
B)Even if the CAPM's major assumptions are relaxed,most of its conclusions still hold.
C)The CAPM is based on realistic assumptions.
D)No other model can represent stock returns better than the CAPM.
Q5) Which of the following is generally used as a proxy for the risk-free rate of return?
A)Savings account
B)Certificate of deposit
C)Treasury security
D)AAA-rated bond
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Chapter 10: Common Stock Valuation
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Q1) Sometimes analysts use other ratios such as price-to-book or price-to-sales ratio.Which of the following is a weakness of the use of these ratios?
A)Some companies are structured very differently,especially across industries.
B)A price-to-book value less than one cannot be assessed.
C)A high price-to-sales ratio cannot be assessed.
D)The price-to-sales ratio cannot be used for companies that report a net loss.
Q2) Which of the following is frequently used as a measure of cash flow in the P/CF ratio?
A)Revenue
B)Gross Profit
C)EBITDA
D)Income from continuing operations
Q3) Tanex Inc.has a return on assets (ROA)of 12%,a return on equity (ROE)of 15%,and a dividend payout ratio of 60%.Based on the sustainable growth formula,Tanex's estimated growth is:
A)4.8%.
B)6.0%.
C)7.2%.
D)9.0%.
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Chapter 11: Common Stocks: Analysis and Strategy
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Q1) Due to advances in technology and better understanding of stocks and financial markets,security analysts' estimates have become more accurate.
A)True
B)False
Q2) The Coffeehouse Portfolio suggests investors hold:
A)50% bonds,50% equities (including the S&P 500,Large Cap Value,International,Small Cap,and Small Cap Value stocks).
B)40% bonds,60% equities (including the S&P 500,Large Cap Value,International,Small Cap,Small Cap Value,and REITs).
C)60% bonds,40% equities (in two index funds).
D)40% bonds,60% equities (in two index funds).
Q3) Buy-side analysts will more likely have a potential conflict of interest in a stock than a sell-side analyst.
A)True
B)False
Q4) As evidence about the efficiency of stock markets has grown,so have index funds.
A)True
B)False
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Chapter 12: Market Efficiency
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Q1) The SEC has laws to punish insider trading,which implies that the SEC believes in the strong form of the Efficient Market Hypothesis.
A)True
B)False
Q2) What is the most important determinant of stock price in an efficient market?
A)Information about past events and beliefs about future events
B)The trading system that connects buyers and sellers within the market
C)The number of traders participating in the market
D)The ability of investors to perfectly adjust prices based on new information
Q3) Which of the following best describes the so-called size effect?
A)On average,small cap stocks return more than large cap stocks.
B)On average,large cap stocks return more than small cap stocks.
C)On average,small cap stocks earn abnormal returns.
D)Small cap stocks tend to perform exceptionally well during bull markets.
Q4) Research suggests that low P/E stocks outperform high P/E stocks.Why is this finding an anomaly?
A)Low P/E stocks tend to have higher risk than high P/E stocks.
B)Low P/E stocks are temporarily out of favor but may have strong prospects.
C)The low P/E effect contradicts the Efficient Market Hypothesis.
D)Low P/E stocks are often weak companies.
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Chapter 13: Economy Market Analysis
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Q1) Assuming a constant P/E ratio,the growth in stock prices should equal the growth in earnings.
A)True
B)False
Q2) Current stock prices reflect:
A)investors' confidence in the current economy.
B)investors' confidence in the current administration.
C)investors' expectations of the future.
D)investors' attitudes about the past market.
Q3) Many investors view an inverted yield curve as a precursor to:
A)an accelerating economy.
B)a slowing economy.
C)a recession.
D)rising inflation.
Q4) The financial news reports that the market is overvalued at a near record high based on the earnings multiplier.What does that mean to you?
Q5) The longest peacetime expansion ran from 1991 to 2000.
A)True B)False
Q6) Why do stock investors pay attention to the bond market?
Page 15
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Chapter 14: Industry Analysis
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Q1) Which of the following has 10 economic sectors,24 industry groupings,64 industries and 139 sub-industries?
A)SIC
B)NAICS
C)GICS
D)Value Line Investment Survey
Q2) Based on past evidence,if an industry has the number one ranking on price performance,which of the following statements is most accurate?The investor should:
A)not expect that same industry to be ranked number one again next year.
B)expect that industry to maintain its top ranking for five years or more.
C)expect that industry to do well over the next 10 to 20 years.
D)expect that industry to drop out of the top ten rankings within five years.
Q3) Which industry has been devastated by changes in EPA regulations since 2010?
A)Telecom
B)Coal
C)Chemicals
D)Oil
Q4) When should companies in cyclical industries be bought?
Q5) Give several examples of government effects on industries.
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Chapter 15: Company Analysis
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Q1) In modern investment analysis,the market risk of a stock is measured by its:
A)beta.
B)standard deviation.
C)leverage.
D)coefficient of variation.
Q2) What is the relationship of the Financial Accounting Standards Board and the Securities and Exchange Commission?
Q3) What are "earnings surprises?"How do they affect stock prices?
Q4) If a company's net income margin decreases,a company can maintain its ROA by increasing its asset turnover.
A)True
B)False
Q5) Investors interested in buying stocks that report bad news and suffer a sharp decline should buy the first day bad news is reported.
A)True
B)False
Q6) Can an investor that wants to use the approach of projected earnings and P/Es find help in Value Line?
Q7) Should an investor seek companies with low P/Es or high P/Es?
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Chapter 16: Technical Analysis
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Q1) Technical analysis focuses on timing and on the short run.
A)True
B)False
Q2) How is relative strength calculated and used?
Q3) A bar chart is the simplest type of chart used in technical analysis.
A)True
B)False
Q4) Which of the following is generally viewed as a bearish indicator for a stock?
A)It has a relatively high short-interest ratio.
B)Its 50-day moving average price has penetrated the 200-day average from above.
C)Following a price drop,the price penetrates the moving average from below.
D)It has an increasing relative strength ratio.
Q5) The cash position of mutual funds is a contrarian indicator.
A)True
B)False
Q6) The two primary tools of a technical analyst are:
A)level of the market index and volume.
B)economic indicators and level of the market index.
C)price and earnings.
D)price and volume.
Page 18
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Chapter 17: Bond Yields
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Q1) The three most prominent theories proposed to explain the term structure of interest rates are:
Q2) An investor has three sources of dollar returns from a bond investment.Which of the following is not included among the three sources?
A)The semi-annual coupon payments
B)The interest earned on reinvesting the coupon payments
C)The principal paid at maturity
D)The interest earned on reinvesting the last coupon and the principal
Q3) In finding a bond's value,the rate used to discount the bond's future cash flows is:
A)the bond's required rate of return.
B)the firm's weighted average cost of capital.
C)the firm's after-tax cost of debt.
D)the bond's coupon rate
Q4) Which of the following is included in the "realized compound yield"?
A)The bond coupon payments,only.
B)The bond coupon and principal payments,only.
C)The bond principal payment,only.
D)The bond coupon and principal payments and the reinvestment income.
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Chapter 18: Bonds: Analysis and Strategy
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Q1) The size of yield spreads tends to remain constant over time.
A)True
B)False
Q2) Which form of interest rate forecasting involves evaluating bonds to determine which will perform best over a selected holding period?
A)Horizon analysis
B)Yield-to-maturity analysis
C)Yield curve analysis
D)Bond immunization analysis
Q3) Bond investors expecting interest rates to rise should shift their portfolios toward:
A)shorter term bonds.
B)longer term bonds.
C)higher quality bonds.
D)lower quality bonds.
Q4) During recessions,yield spreads tend to:
A)narrow,whereas they generally widen during economic expansions.
B)widen,whereas they generally narrow during economic expansions.
C)narrow,and they also generally narrow during economic expansions.
D)widen,and they also generally widen during economic expansions.
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Chapter 19: Options
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Q1) What type of equity derivatives are created by corporations?
Q2) Which of the following statements is true regarding the writer of a call contract?
A)The call writer expects the stock to move upward.
B)The call writer expects the stock to remain the same or move down.
C)The call writer expects the stock to split.
D)The call writer expects to sell the stock prior to expiration of the option.
Q3) How could an investor create 100 shares of artificial stock (i.e. ,a portfolio with the same payoffs as 100 shares of common stock)?
Q4) Which of the following statements is true regarding American and European options?
A)American options can be exercised only at expiration.
B)American options can be exercised only in the last week prior to expiration.
C)European options can be exercised only at expiration.
D)European options can be exercised any time prior to expiration.
Q5) The writer of a naked call faces:
A)an unlimited potential loss.
B)a specified potential loss.
C)no chance of loss because this is a conservative strategy.
D)an unlimited potential gain.
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Chapter 20: Futures
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Q1) Compare the obligation entered into in a futures contract to the obligation in an options contract.
Q2) The calendar or time spread is also known as the intramarket spread,and involves contracts for two different settlement months,such as buying a March contract and selling a June contract.
A)True
B)False
Q3) Which of the following variables is not established on a futures contract?
A)Contract size
B)Contract premium
C)Delivery date
D)Specified grade
Q4) The National Futures Association is the federal agency which regulates the futures markets.
A)True B)False
Q5) Futures contracts are handled by specialists on futures exchanges. A)True
B)False
Q6) Briefly discuss the concept of margin in futures trading.
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Chapter 21: Portfolio Management
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Q1) Investors following a constant proportion portfolio insurance (CPPI)investment strategy:
A)increase their allocation to stocks after stock prices rise.
B)increase their allocation to bonds after stock prices rise.
C)increase their allocation to cash after stock prices rise.
D)hedge their portfolio after stock prices rise.
Q2) According to the life-cycle approach,investors normally assume a moderate trade-off between risk and return in the:
A)accumulation phase.
B)consolidation phase.
C)spending phase.
D)gifting phase.
Q3) Relative to their holdings in their early careers,conservative retirees likely have greater holdings of:
A)small-cap stocks.
B)international stocks.
C)cyclical stocks.
D)low-beta stocks.
Q4) What is the difference between strategic asset allocation and tactical asset allocation?
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Chapter 22: Evaluation of Investment Performance
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Q1) Assume Portfolio A and Portfolio B are well-diversified;however,Portfolio A has a higher standard deviation than Portfolio B.Based on this information,the Sharpe ratio will give Portfolio A:
A)the higher rank,and the Treynor ratio will give Portfolio B the higher rank.
B)the lower rank,and the Treynor ratio will give Portfolio B the lower rank.
C)the same rank as the rank assigned by the Treynor ratio.
D)a rank that varies directly based on the overall market risk.
Q2) Which of the funds has the most market risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
Q3) Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure.
A)True
B)False
Q4) Sharpe's ratio measures the slope of the line between RF and the portfolio being evaluated.If the line is plotted between RF and a market index,where would superior portfolios lie?Inferior portfolios?
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