Corporate Finance
Exam Review
Course Introduction
Corporate Finance explores the foundational principles and advanced concepts that govern financial decision-making within corporations. The course examines topics such as capital budgeting, capital structure, cost of capital, dividend policy, working capital management, and financial analysis. Students gain insight into how firms assess investment opportunities, manage resources, evaluate risks, and optimize value for shareholders. Emphasis is placed on real-world applications, strategic financial planning, and the ethical considerations in financial management, preparing students to critically analyze financial data and make informed decisions in a corporate environment.
Recommended Textbook
Fundamentals of Investment Management, 10e by Geoffrey A. Hirt
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24 Chapters
1585 Verified Questions
1585 Flashcards
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Page 2
Chapter 1: The Investment Setting
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90 Verified Questions
90 Flashcards
Source URL: https://quizplus.com/quiz/56001
Sample Questions
Q1) In general, inflation results in a loss of purchasing power to the investor.
A)True
B)False
Answer: True
Q2) When comparing returns by decade, the Ibbotson study shows that small company stocks outperformed large company stocks in every decade since the 1920s.
A)True
B)False
Answer: True
Q3) In the financial world, risk is defined as variability of returns.
A)True
B)False
Answer: True
Q4) Real estate may be favored by investors in high tax brackets.
A)True
B)False
Answer: True
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Chapter 2: Security Markets
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Sample Questions
Q1) Creating prices for securities and allowing for liquidity are functions of:
A)the primary market.
B)the secondary market.
C)the third market.
D)the fourth market.
E)the real estate market.
Answer: B
Q2) The major exchange for warrants, options, and commodity futures is the:
A)American Stock Exchange.
B)New York Stock Exchange.
C)NASDAQ.
D)None of the above
Answer: D
Q3) The Securities and Exchange Commission was created by the:
A)Securities Act of 1933.
B)Securities Exchange Act of 1934.
C)Investment Advisor Act of 1940.
D)None of the above
Answer: B
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Page 4
Chapter 3: Participating in the Market
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Sample Questions
Q1) The following are all value-weighted indexes, except:
A)the S&P 500.
B)the Dow Jones Industrial Average.
C)midcap 400.
D)the S&P Industrials (400 stocks).
E)wilshire 5000.
Answer: B
Q2) If you short a stock and the price goes up, your net equity value will go up.
A)True
B)False
Answer: False
Q3) A limit order can ensure that you will not pay above a given price in purchasing a stock or sell below a given price in selling a stock.
A)True
B)False
Answer: True
Q4) The Value Line Average is an equal-weighted index.
A)True
B)False
Answer: True
Page 5
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Funds, and Unit
Investment Trusts
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Sample Questions
Q1) On average, mutual funds tend to outperform the market over the long run.
A)True
B)False
Q2) Most common stock mutual funds trade at a discount from the net asset value (NAV).
A)True
B)False
Q3) Which is not an advantage of exchange-traded funds (ETFs)?
A)Their expense ratios are lower than mutual funds
B)Because they imitate an index, there are no real research costs
C)They can be bought and sold all day long at a price that is almost exactly the net asset value of the stocks in the index
D)The assets in the portfolio are marked to market continuously
E)They are open-ended funds that have reasonably low sales expenses
Q4) Load mutual funds outperform no-load funds.
A)True
B)False
Page 6
Q5) The sale of mutual fund shares is a taxable event.
A)True
B)False
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Page 7
Chapter 5: Economic Activity
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Sample Questions
Q1) If the Fed buys securities, the money supply goes down, along with interest rates.
A)True
B)False
Q2) Economic analysis is important for investors, because they need to anticipate
A)changes in corporate profits due to business cycle impacts.
B)growth in various industry segments based on changing economic trends.
C)how foreign trade might affect U.S. companies.
D)All of the above
Q3) Fundamental analysis relies on forecasts of economic, industry, and company variables.
A)True
B)False
Q4) Surpluses have a tendency to reduce economic growth.
A)True
B)False
Q5) During recessions, it is common for imports to increase because people buy more cheap foreign goods.
A)True
B)False
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Chapter 6: Industry Analysis
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Sample Questions
Q1) Why do industries usually enter the decline stage?
A)Product innovation has not increased the product base over the years
B)Low dividend payout ratios have kept spending in research and development down
C)Economic recessions have lowered sales
D)Competition from foreign producers has limited profits
Q2) Analysis of various industries gives the investor insights into the comparative performance of the entire economy.
A)True
B)False
Q3) The impact of intense rivalry within industries is similar to the threat of new entrants.
A)True
B)False
Q4) The S&P 500 Index and Gross Domestic Product (GDP) seem to have similar long-term growth paths.
A)True
B)False
Q5) Pure competition in manufacturing is common in the United States. A)True
B)False
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Chapter 7: Valuation of the Individual Firm
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Sample Questions
Q1) Under the constant dividend growth model, it is possible for a negative stock value to result.
A)True
B)False
Q2) The use of many valuation models provides the analyst with A)one model that gives the right answer.
B)multiple models of how the market might value the firm's stock price.
C)a confusing array of answers.
D)the ability to choose the best model that matches his or her previous judgment.
Q3) Least squares trend analysis involves fitting a straight line through a series of data, which, by definition:
A)minimizes the distance of each data point from the line, and minimizes the squared area above and below the trendline.
B)minimizes the distance between each data point.
C)must include at least one peak and at least one trough.
D)must include a minimum of 20 points to get a usable trendline.
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Chapter 8: Financial Statement Analysis
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Sample Questions
Q1) The tax ratio for forest product companies may be low because of the tax treatment given timber cuttings.
A)True
B)False
Q2) Industry trend analysis provides a method of comparing industry performance throughout the economy, and of identifying the potential winning and losing companies within an industry.
A)True
B)False
Q3) A firm with an average return on assets, but a high return on equity, was probably able to achieve this by keeping debt down to a very low level.
A)True
B)False
Q4) Which of the following is not an Asset-utilization ratio:
A)Receivable turnover
B)Fixed-asset turnover
C)Quick ratio
D)Total assets turnover
E)All of the above are Asset-utilization ratios
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Chapter 9: Efficient Markets and Anomalies
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Sample Questions
Q1) Research on the strong form shows that _______ are able to achieve superior returns.
A)members of the SEC
B)corporate insiders and public officials
C)market specialists and corporate insiders
D)the majority of professional mutual fund managers
Q2) One reason a firm may repurchase its own shares is:
A)that management views the firm's future prospects to be bright.
B)to go public.
C)to qualify for an exchange listing.
D)to adhere to SEC requirements on number of shares outstanding.
Q3) A stock split has no effect on the par value of a stock.
A)True
B)False
Q4) In the bull market of the 1990s, many firms repurchasing their own shares were among the strongest and most respected companies on Wall Street.
A)True
B)False
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Chapter 10: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) Technical analysis is based on all of the following assumptions except:
A)that market value is determined by the interaction of demand and supply.
B)that stocks with strong earnings gains will outperform the market.
C)the assumption that, though there are minor fluctuations in the market, stock prices tend to move in trends that persist for long periods of time.
D)that shifts in demand and supply can be detected sooner or later.
E)that reversals of trends are caused by shifts in demand and supply.
Q2) A high ratio of specialist short sales compared to exchange short sales is interpreted as bearish.
A)True
B)False
Q3) A breadth of the market indicator attempts to measure what a broad range of securities is doing as opposed to merely examining a market average.
A)True
B)False
Q4) Technical analysis assumes that many chart patterns tend to repeat themselves. A)True
B)False
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13
Chapter 11: Bond and Fixed-Income Fundamentals
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Sample Questions
Q1) Income bonds are highly favored by corporations, because they provide the benefits of tax-deductible interest payments, without the contractual obligations of most debt instruments.
A)True
B)False
Q2) Assume a $1,000 Treasury bill is quoted to pay 6% interest over a three-month period. What will be the price of the Treasury bill?
A)$940
B)$970
C)$980
D)$985
E)$990
Q3) Changes in the market rate of interest are reflected in the semiannual interest payments of a variable rate note, while the price remains stable.
A)True
B)False
Q4) The bond market is dominated by institutional investors.
A)True
B)False
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Chapter 12: Principles of Bond Valuation and Investment
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Sample Questions
Q1) An ascending term structure reflects the view that rates will increase in the future.
A)True
B)False
Q2) Yield to maturity considers annual interest, difference between current price and maturity value, and years to maturity.
A)True
B)False
Q3) Yield to maturity takes into account everything except: A)annual interest received.
B)the difference between the current bond price and its maturity value.
C)the number of years to maturity.
D)the number of years since the bond's purchase.
Q4) Yield to maturity is equivalent to market rate of interest.
A)True
B)False
Q5) The price of a lower coupon rate bond is more sensitive to interest rate changes than higher coupon rate bonds.
A)True
B)False
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Chapter 13: Convertible Securities and Warrants
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Sample Questions
Q1) A convertible bond's price is usually the same as the stock price times the conversion ratio.
A)True
B)False
Q2) What factor(s) would cause the pure bond value to go up?
A)A decrease in the market interest rate
B)An increase in stock price
C)A change in the conversion ratio
D)More than one of the above
Q3) Assume that a firm has warrants outstanding that allow the holder to buy one share of stock at $22 per share. Also assume the stock is selling at $28 per share and warrants are now selling at $10 per warrant. You can invest $1,000 in the stock or the warrants. Assume the stock goes to $44 and the warrants trade at their intrinsic value when the stock is at $44. Would you have a larger total dollar profit by initially investing in the stock or the warrants? Compute the leverage.
Q4) Conversion ratio is the face value divided by the conversion price.
A)True
B)False
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Page 16
Chapter 14: Put and Call Options
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Sample Questions
Q1) The difference between a put and a call option is that:
A)a put is an option to sell common stock at a specified price while a call is an option to buy common stock at a specified price.
B)a call is an option to sell common stock at a specified price while a put is an option to buy common stock at a specified price.
C)a call is an option to buy common stock at a specified price while a put is the option to buy preferred stock at a specified price.
D)a call is an option to sell common stock at a specified price while a put is the option to sell preferred stock at a specified price.
Q2) A stock is selling for $35. You buy an April 30 call option for 3.75 and short (write) an April 30 call option for 1.25. You have entered into a vertical spread. If the stock is $43 at expiration, what will be your profit or loss on the spread?
Q3) Option writers must own common stock in order to write call options on that particular stock.
A)True
B)False
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Page 17
Chapter 15: Commodities and Financial Futures
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Sample Questions
Q1) A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the percentage of profit?
A)252.8%
B)264.4%
C)51.2%
D)63.2%
E)66.1%
Q2) In what city are the two largest commodities exchanges?
A)Chicago
B)New York
C)Kansas City
D)Minneapolis
Q3) As opposed to a farmer, a miller (processor of wheat) is likely to go __________ in the futures market.
A)long
B)short
C)long and short
D)around in circles
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Page 18
Chapter 16: Stock Index Futures and Options
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Sample Questions
Q1) Which of the following statements about hedging a stock portfolio with stock index futures is NOT true?
A)Futures contracts magnify gains (or losses) on the stock portfolio
B)In a declining market, futures contracts help offset losses on the portfolio
C)A risk-taker would probably not hedge the entire portfolio with stock index futures
D)All of the above are true
Q2) Stock index futures and options are sometimes referred to as derivatives. A)True
B)False
Q3) Stock index futures contracts are limited to the Dow Jones Industrial Average. A)True
B)False
Q4) Stock index futures provide the portfolio manager a realistic alternative to selling either a part or the entirety of a portfolio in a declining market.
A)True B)False
Q5) You buy an S&P 500 Index Call Option for $15. The strike price is $1,250. If the index closes at $1,290, what is your total profit?
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Chapter 17: A Basic Look at Portfolio Management and Capital Market Theory
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Sample Questions
Q1) The essence of the capital market line is that the only way to earn greater returns is to take increasingly greater risks.
A)True
B)False
Q2) Unlike the capital market line, the security market line is unique for each investor.
A)True
B)False
Q3) Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with likelihood of 20%, 30%, 25%, and 25%, respectively. The expected value of the portfolio is:
A)10.0%.
B)9.0%.
C)9.3%.
D)9.25%.
E)None of the above
Q4) By picking stocks that are not perfectly correlated, unsystematic risk may be eliminated.
A)True
B)False
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Chapter 18: Duration and Bond Portfolio Management
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Sample Questions
Q1) High coupon bonds will usually have higher durations than low coupon bonds of the same maturity.
A)True
B)False
Q2) Under terminal wealth analysis, the greater the period to maturity,
A)the greater the shift in interest rates.
B)the greater the effect of a decrease in interest rates.
C)the greater the effect of any shift in interest rates.
D)None of the above
Q3) The actual yield to maturity an investor receives becomes more of a function of the reinvestment rate the shorter the maturity of the bond.
A)True
B)False
Q4) Immunization is the process of ________ to ensure an outcome.
A)measuring bond price sensitivity to interest rates
B)tying all investment decisions to a particular market interest rate
C)tying all investment decisions to a duration period
D)none of the above
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21
Chapter 19: International Securities Markets
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Sample Questions
Q1) Due to the lessened risk exposure through effective international portfolio diversification, yield tends to be somewhat lower than on portfolios composed entirely of United States securities.
A)True
B)False
Q2) American depository receipts allow foreign stocks to be traded in the United States markets very similarly to U.S. stocks.
A)True
B)False
Q3) The main advantage of international investment is that foreign markets may be negatively correlated with U.S. and other foreign markets.
A)True
B)False
Q4) The market capitalization of General Electric, Microsoft, and Exxon combined would rank ahead of any emerging market's capitalization, including China in 2005.
A)True
B)False
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Chapter 20: Investments in Real Assets
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Sample Questions
Q1) While providing an effective hedge against inflation, real assets do not have particularly efficient liquid markets.
A)True
B)False
Q2) Advantages of real assets over other types of investments include that:
A)they provide a good hedge against inflation.
B)they tend to be negatively correlated with other types of investments.
C)they provide personal pleasure to the investor.
D)More than one of the above
Q3) Real assets often increase in value when:
A)higher levels of inflation are anticipated.
B)the stock market is advancing.
C)the public is confident about world events.
D)bond prices are advancing.
Q4) A real estate loan that brings in a new lender is the:
A)adjustable rate mortgage.
B)graduate payment mortgage.
C)second mortgage.
D)None of the above
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Chapter 21: Alternative Investments: Private Equity and Hedge Funds
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Sample Questions
Q1) One exit strategy for venture capitalists is:
A)to pull their money out when the company first makes a profit.
B)the company goes public.
C)to stop funding the venture.
D)None of the above
Q2) Relative to other asset classes, hedge funds are:
A)not highly correlated.
B)negatively correlated.
C)not correlated at all.
D)related only to the currencies.
Q3) A fund that always has a negative bias and can be 100% short or a blend of short and long is:
A)a no-bias fund.
B)an event-driven fund.
C)a short-bias fund.
D)a long-bias funD.
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24
Chapter 22: Measuring Risks and Returns of Portfolio Managers
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Sample Questions
Q1) The Brinson, Hood, and Beebower (BHB) study indicated that asset managers are more likely to lose their jobs because of poor _____________ rather than poor
A)asset allocation; stock selection
B)stock selection; asset allocation
C)customer relations; performance
D)performance; customer relations
Q2) Under the _____ approach, excess returns on a portfolio are compared to the total risk of the portfolio.
A)Sharpe
B)Treynor
C)Jensen
D)More than one of the above
Q3) Studies by Ippolito and Goodwin indicate that mutual fund managers are superior performers.
A)True
B)False
Q4) The wise money manager will generally adhere strictly to stated objectives.
A)True
B)False
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Chapter 23: A Comprehensive Analysis for Real Estate
Investment Decisions
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Sample Questions
Q1) A duplex was purchased for $120,000, and depreciation of $3,300 has been taken for the last seven years. The net proceeds from the sale of the property were $135,000.
A) Assuming the property qualifies for capital gains treatment at a 15% rate, what is the tax owed?
B) What are the net funds from the sale?
Q2) An apartment complex has net operating income of $15,000, depreciation of $8,000, and interest expense of $13,000. The tax rate is 30%. a) What is taxable income or loss?
B) What is the tax shield benefit or tax owed?
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26
Chapter 24: The Makeup of Institutional Investors
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Sample Questions
Q1) Organizations responsible for bringing together large pools of capital for purposes of reinvestment are called:
A)individual investors.
B)institutional investors.
C)social security clubs.
D)B and C
Q2) ___________ represent permanent capital funds that are donated to universities, churches, or civic organizations.
A)Trusts
B)Endowments
C)Commingled funds
D)Annuities
Q3) The largest category of institutional investors is:
A)foundations.
B)personal trusts.
C)mutual savings banks.
D)pension funds.
Q4) Pension funds represent a declining segment of the institutional market.
A)True
B)False
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