Corporate Finance
Exam Bank
Course Introduction
Corporate Finance explores the fundamental concepts and analytical tools necessary for effective financial management within corporations. The course covers topics such as financial statement analysis, time value of money, capital budgeting, risk assessment, cost of capital, capital structure, dividend policy, and working capital management. Through case studies and practical applications, students learn how financial decisions impact firm value and are equipped to evaluate investment opportunities, optimize resource allocation, and understand the interplay between financial strategies and corporate objectives. The course aims to develop critical thinking and decision-making skills essential for careers in finance, banking, consulting, and corporate management.
Recommended Textbook Fundamentals of Investments 3rd Canadian Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) The total dollar return on an equity investment is defined as:
A) All cash flows and gains from an investment, excluding any losses.
B) All cash inflows such as dividends and capital gains or losses.
C) The increase in the price of an asset.
D) Capital gains received.
E) Only the capital gains received, not including capital gains not realized.
Answer: B
Q2) An asset has annual returns of 11 percent, 17 percent, - 21 percent, 3 percent and 18 percent. What is the variance?
A) .01210
B) .01329
C) .02568
D) .02748
E) .01964
Answer: C
Q3) What are the two most important lessons from capital market history?
Answer: First, risky assets earn a risk premium on average. This is the reward for bearing risk. Second, the greater the potential reward from a risky investment, the greater is the risk.
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Page 3
Chapter 2: Diversification and Risky Asset Allocation
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Sample Questions
Q1) The portfolio risk that decreases as the number of securities in the portfolio increases is referred to as the __________ risk.
A) Market
B) Diversifiable
C) Non-diversifiable
D) Inefficient
E) Efficient
Answer: B
Q2) __________ is a statistical measure of the degree to which two variables (e.g. securities' returns) move together.
A) Covariance
B) Variance
C) Skewness
D) Coefficient of variation
E) Tangency
Answer: A
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4
Chapter 3: The Investment Process
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Sample Questions
Q1) Your investment strategy consists of holding 70 percent stocks and 30 percent bonds. You research stocks and bonds in order to find the best performers. You have a(n) _____ asset allocation strategy and a(n) _____ security selection strategy.
A) active; active
B) active; passive
C) passive; passive
D) passive; active
E) none of the above.
Answer: D
Q2) You own 500 shares of XYZ stock but your brokerage firm is listed as the registered owner of the securities. Under this arrangement, the securities are said to be held in:
A) brokers call registration.
B) street name registration.
C) hypothecation.
D) a margin agreement.
E) a shorts sale agreement.
Answer: B
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Chapter 4: Overview of Security Types
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Sample Questions
Q1) ABC Jewels issues some unsecured debt with a 6-month maturity. This debt is classified as a
A) Call option
B) Futures contract
C) Money market instrument
D) Fixed-income securities
E) Derive security
Q2) What was the dollar value of the change in the March contract on this day?
A) $796.75
B) $810.00
C) $836.50
D) $764.25
E) $718.75
Q3) What was the closing price on the prior trading day for Distracted's stock?
A) $37.98
B) $38.10
C) $38.16
D) $38.22
E) $38.32
Q4) How do commodity and financial futures differ with respect to carrying costs?
Page 6
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Chapter 5: Mutual Funds
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Sample Questions
Q1) A mutual fund has a NAV of $46.20 at the beginning of the year. The fund distributes a dividend of $0.32 and a capital gain of $0.87 at the end of the year. If you purchased 2,000 shares at the beginning of the year and the end of year NAV was $49.10, what was your return for the year?
A) 6.97%
B) 8.85%
C) 8.16%
D) 6.28%
E) 8.34%
Q2) A mutual fund has 10,000 shares of Stock D at a price of $34 and 15,000 shares of Stock E at a price of $41. The fund has liabilities of $87,000 and a NAV of $41.05. How many shares of the fund are outstanding?
A) 20,612
B) 23,246
C) 24,324
D) 21,145
E) 18,306
Q3) Why do the performance fees of hedge fund managers often have a "high water mark" constraint?
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Page 7
Chapter 6: The Stock Market
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Sample Questions
Q1) Which of the following is not a consideration when establishing a market index?
A) What market is covered.
B) How the index is calculated.
C) How to increase the index returns.
D) What types of stocks are included.
E) How many stocks to include.
Q2) The fourth market usually involves
A) Large-block activities between institutional investors
B) Transaction in unlisted securities
C) Small trades between individual buyers and sellers
D) Transaction between broker and dealers
E) Only TSX members
Q3) A preliminary prospectus not yet approved by the OSC is referred to as a(n)
A) Primary prospectus
B) Red herring
C) Best effort document
D) Initial prospectus
E) Draft
Q4) Describe how a stop-limit sell order is executed.
Page 8
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Chapter 7: Common Stock Valuation
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Sample Questions
Q1) A company has a retention ratio of 80 percent. If the company's return on assets is 9.2 percent and the return on equity is 16.4 percent, what is the sustainable growth rate?
A) 1.84%
B) 13.12%
C) 16.40%
D) 7.36%
E) 3.28%
Q2) The increase in dividends that can be supported and maintained by a company's earnings is the:
A) capital growth.
B) earnings growth potential.
C) sustainable growth rate.
D) required return.
E) beta.
Q3) Dividend discount models use three basic variables to arrive at a stock price. What are these variables, and how can an analyst arrive at values for these variables?
Q4) Why is the residual income model sometimes referred to as "economic value added"?
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9
Chapter 8: Stock Price Behaviour and Market Efficiency
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Sample Questions
Q1) List and discuss the three forms of market efficiency.
Q2) You discover that if you purchase a stock after it has declined for three days in a row you will make a profit. If this is true, the market is not __________ -form efficient.
A) weak
B) semistrong
C) technical
D) strong
E) semiweak
Q3) Rational investors
A) Cause stocks with similar risks to have similar expected returns
B) Always tend to undervalue stocks
C) Tend to be either overly optimistic or overly pessimistic
D) Are all arbitrage traders
E) Must include all investors if the market is to be efficient
Q4) You invest $10,000 in the market at the beginning of the year, and by the end of the year your account is worth $15,000. During the year the market return was 10%. Does this mean that the market is inefficient?
Q5) Describe an example of a market which is weak-form but not strong-form efficient.
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Chapter 9: Behavioural Finance and the Psychology of Investing
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Sample Questions
Q1) Yesterday, there were 1,408 stocks that advanced and 1,897 stocks that declined. What is the value of the market sentiment index based on this information?
A) 0.43
B) 0.57
C) 0.74
D) 1.02
E) 1.34
Q2) The Dow theory describes stock prices are moving in trends analogous to the movement of water. Which of the following is incorrect?
A) major trends resemble tides.
B) intermediate trends resemble waves.
C) short-run movements are like ripples.
D) waves are the most important.
E) none of the above.
Q3) What is behavioral finance and how does investor behavior affect the markets according to those who support behavioral finance?
Q4) Give some examples of how overconfidence affects investor behaviour along with the results that might be expected based on that behaviour.
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Chapter 10: Interest Rates
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Sample Questions
Q1) A Treasury bill with 39 days to maturity and a $1 million face value is quoted at a price of $996,100. What is the bond equivalent yield?
A) 3.60%
B) 3.57%
C) 3.64%
D) 3.69%
E) 3.66%
Q2) Suppose the one-year interest rate is 5.30% and the two-year interest rate is 6.08%. What is the one-year interest rate one year from now? Assume the rates are effective annual rates.
A) 6.14%
B) 7.05%
C) 6.53%
D) 7.32%
E) 6.87%
Q3) What are the differences between the bank discount yield, the bond equivalent yield, and the effective annual rate?Which one is most relevant? Why?
Q4) What is the yield curve?Why is it important?
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Chapter 11: Bond Prices and Yields
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Sample Questions
Q1) You had created a bond portfolio last year that had a portfolio duration of 12 years, which was your target date. Today, you revise your portfolio such that it now has a duration of 11 years. You are following a strategy known as
A) Portfolio matching
B) Maturity reduction
C) Dynamic immunization
D) Yield reduction
E) Call protection
Q2) Immunization works by offsetting ________ risk and ________ risk.
A) market; interest rate
B) reinvestment; interest rate
C) default; reinvestment
D) interest rate; credit
E) credit; default
Q3) A discount bond
A) Has a coupon rate that is greater than the yield-to-maturity
B) Has a coupon rate that is less than the market rate of interest
C) Has a par value that is less than the market value
D) Is selling for more than face value
E) Is the name given to a bond that has been called prior to maturity
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Chapter 12: Return, Risk and Security Management
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Sample Questions
Q1) Which of the following is the best example of systematic risk?
A) The president of a firm suddenly resigns
B) Income taxes are suddenly increased
C) A warehouse burns to the ground
D) A product has to be recalled for safety reason
E) The employees of a firm walk out on strike
Q2) The expected return of the market is 12.90 percent. A stock has an expected return of 14.90 percent and a beta of 1.25. What is the risk-free rate?
A) 6.3%
B) 5.4%
C) 4.9%
D) 5.8%
E) 6.1%
Q3) The unexpected return of an asset is the:
A) expected return minus the risk-free rate.
B) realized return minus the expected return.
C) risk-free rate minus the realized return.
D) expected return minus the risk premium.
E) expected return minus the realized rate.
Q4) Explain what beta is and why it is important.
Page 14
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Chapter 13: Performance Evaluation and Risk Management
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Sample Questions
Q1) Floyd Corp. stock has an annual standard deviation of 37 percent and an expected return of 12 percent. What is the smallest expected loss over the next month with a probability of 2.5 percent? Note: The corresponding "Z" value is 1, 96.
A) -19.93%
B) -21.08%
C) -18.35%
D) -25.43%
E) -23.67%
Q2) The Sharpe ratio is best utilized for evaluating
A) Bonds
B) Low-risk stocks
C) High-risk stocks
D) Government securities
E) Well-diversified portfolios
Q3) The performance metric that measures how much a portfolio "beat the market" is:
A) the Treynor ratio.
B) the raw return.
C) the Jensen-Treynor alpha.
D) the Jensen's alpha.
E) the Sharpe ratio.
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Chapter 14: Options
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Sample Questions
Q1) Options granted to workers allowing them to purchase shares of the company's stock at a specified price are called a(n):
A) leveraged buyout.
B) employee put.
C) employee stock option.
D) worker's compensation.
E) restruck option.
Q2) The price at which an option will be exercised is called the:
A) premium.
B) option chain.
C) call date.
D) strike price.
E) writing date.
Q3) Explain how a credit default swap is used to manage risk.
Q4) An example of a straddle is:
A) Buying a Jan 25 put and a Jan 30 call
B) Buying a Jan 30 put and selling a Jan 30 call
C) Buying a Jan 30 put and a Feb 30 call
D) Buying a Jan 30 put and a Jan 25 call
E) Selling a Jan 30 put and a Jan 30 call
Page 16
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Chapter 15: Option Valuation
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Sample Questions
Q1) What happens to the price of an option using a binomial option pricing model with many periods as the numbers of periods increases?
A) The model because useless for calculating the price of an option.
B) The value of a put and a call option are less divergent.
C) The put option price gets closer to zero and the call option price gets closer to infinity.
D) The option price converges towards the option price from the Black-Scholes model.
E) The time value of the option decreases exponentially with the number of periods.
Q2) Which of the following will produce the highest call price, all else constant? Assume that the options are all in-the-money.
A) $40 exercise price; 30 days to option expiration.
B) $40 exercise price; 40 days to option expiration.
C) $45 exercise price; 30 days to option expiration.
D) $45 exercise price; 40 days to option expiration.
E) Insufficient information to answer this question.
Q3) Why does the value of an option increase as the volatility of the underlying asset increases?
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Chapter 16: Futures Contracts
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Sample Questions
Q1) A futures trader who bets on the future direction of prices by taking either a long or a short position is called a _________.
A) Dealer
B) Speculator
C) market maker
D) Hedger
E) Specialist
Q2) You purchased eight February silver contracts at the low price for the day, and sold them at the closing price. What was your profit on this transaction?
A) $4,312
B) $4,905
C) $4,614
D) $4,840
E) $4,496
Q3) What are the differences between a futures contract and a forward contract? Would you ever want to use a forward contract rather than a futures contract?
Q4) What is the difference between hedging and speculating? Who are the hedgers? Who are the speculators?
Q5) Compare the pros and cons of a futures hedge with an option hedge.
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) A key reason why firms must file financial reports with various prudential regulators and also meet the fair disclosure requirements is the need to
A) Minimize the amount of company information that is made public.
B) Limit the release of information related to publicly-owned firms.
C) Provide information to financial analysts prior to any release to the general public.
D) Regulate the type of information provided and guarantee the accuracy of that information.
E) Provide information to the general public in a fair, timely and accurate manner.
Q2) Gross profit is equal to
A) Total revenue minus total expenses.
B) Total sales minus sales returns.
C) Sales minus cost of goods sold.
D) Total revenue minus cost of goods sold and depreciation.
E) Total revenue minus cost of goods sold plus depreciation.
Q3) Why is the expected rate of sales growth so critical to pro forma statements?
Q4) Why is it so critical that you review the cash flows of a firm rather than rely strictly on balance sheet and income statement analysis?
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Chapter 18: Corporate Bonds
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Sample Questions
Q1) An assessment of the financial status of the company for repayment of the bond principal plus any interest is indicated by the ________.
A) credit rating
B) protective covenants
C) call provisions
D) conversion price
E) Indenture
Q2) The lowest investment grade for corporate bonds with Standard & Poor's credit ratings is
A) BBB
B) BB
C) A-
D) BBB-
E) BB+
Q3) The conversion price is
A) $79.50
B) $80.00
C) $84.80
D) $86.66
E) None of the above
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Chapter 19: Government Bonds and Mortgaged-Backed Securities
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Sample Questions
Q1) The gross profit generated for the dealer in a Treasury security transaction is measured by the:
A) ask YTM.
B) commission.
C) bid YTM.
D) bid-ask spread.
E) Coupon rate.
Q2) Why are CMHC mortgages said to be "fully modified mortgage" pools?
A) CMHC backing insures bondholders against prepayment risk.
B) The CMHC modifies to mortgage pool to prevent it against interest rate risk.
C) CMHC backing allows for mortgages to be modified so they have longer terms and less chance of default.
D) The CMHC guarantees the payments of interest and principal even if the mortgages default.
E) The CMHC insures the higher risk mortgages in the pool against default.
Q3) Evaluate this claim: "Treasury bonds have no risk."
Q4) Explain how the CMHC plays a role in the creation of a mortgage-backed security.
Q5) What are the pros and cons of investing in municipal bonds?
Page 21
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Chapter 20: International Portfolio Investment
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Sample Questions
Q1) While you are looking for the spot exchange rates for the British pound (\(\le\)), the Japanese yen (\(\times\)), and the Canadian dollar ($), you find the following quotes: \(\le\) 0.4230 = $1 and \(\times\)84.26 = $1. What is the cross-rate for British pound per Japanese yen (\(\le\)/\(\times\))?
A) 0.0050
B) 199.19
C) 0.0119
D) 109.11
E) Undetermined
Q2) The spot and 12-month forward rates in dollar per yen are C$0.011868 = \(\times\)1 and C$0.012185, respectively. The forward rate for the Canadian dollar is selling at a _________ to the spot rate.
A) Premium of 2.67%
B) Premium of 7.62%
C) Discount of 2.67%
D) Discount of 7.62
E) None of the above
Q3) Discuss how different accounting practices can distort the analysis for international investing.
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Page 22