Corporate Finance
Final Test Solutions
Course Introduction
Corporate Finance is a foundational course that examines the financial decision-making processes within a corporation. Students explore topics such as capital budgeting, risk assessment, cost of capital, capital structure, and dividend policy. The course emphasizes the valuation of assets and investments, financial analysis, and planning, helping learners understand how financial managers optimize firm value and allocate resources effectively. Real-world case studies and quantitative tools are used to analyze financial scenarios, equipping students with skills essential for careers in finance, consulting, and corporate management.
Recommended Textbook
Fundamentals of Investments 3rd Canadian Edition by Bradford Jordan
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20 Chapters
2255 Verified Questions
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) An asset had returns of 14%, 26%, - 13%, 8%, and 12% over the past five years. What was the arithmetic average return of the asset?
A) 8.94%
B) 9.40%
C) 10.05%
D) 10.63%
E) 11.75%
Answer: B
Q2) You own a stock has produced an average geometric return of 9.7% and an average arithmetic return of 11.4% over the past 18 years. What annual rate of returns should you expect to earn on this security over the next 6 years?
A) 11.04%
B) 12.68%
C) 13.01%
D) 11.61%
E) 10.90%
Answer: E
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Chapter 2: Diversification and Risky Asset Allocation
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Sample Questions
Q1) If the risk-rate is 5.8 percent, what is the risk premium of Stock F?
A) 15.9%
B) 5.25%
C) 4.87%
D) 4.30%
E) 5.06%
Answer: D
Q2) The portfolio weight of an asset is the
A) Market value of that asset expressed as a percentage of the asset's initial cost
B) Market value of that asset expressed as a percentage of the total portfolio value
C) Cost invested in that asset expressed as a percentage of the total cost of the portfolio
D) Number of shares held in that asset divided by the total number of shares owned
E) Return on the asset as a fraction of the entire return on the portfolio
Answer: B
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Chapter 3: The Investment Process
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Sample Questions
Q1) The return on an investment expressed on an annualized basis is called the
A) Earned return
B) Leveraged return
C) Holding-period percentage return
D) Annual percentage rate
E) Effective annual return
Answer: E
Q2) You purchase 1,100 shares of stock at a price of $36 on an initial margin of 60 percent. If the stock price falls to $31, what is your margin now?
A) 53.55%
B) 51.07%
C) 48.32%
D) 56.21%
E) 52.06%
Answer: A
Q3) Why would a brokerage firm have different margin requirements on different securities?
Answer: The margin requirement can vary based on the type, the price and the volatility of the security.
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Page 5
Chapter 4: Overview of Security Types
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Sample
Questions
Q1) You sold 6 put options with a strike price of $95. If the stock price at expiration is $92.18, what is your profit? The premium of this put is $5.90.
A) $1,848
B) - $1,692
C) - 864
D) $3,240
E) $1,692
Q2) The price received when an option contract is sold is called the _______. A) premium
B) yield
C) coupon
D) strike
E) call price
Q3) Describe and contrast the primary two potential benefits and downsides to owning common stock?
Q4) What are the major differences between writing a call option, buying a call option, writing a put option and buying a put option?
Q5) Why would you purchase a put option and what is the maximum loss you can incur should you do so?
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Chapter 5: Mutual Funds
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Sample Questions
Q1) How do open-end and closed-end mutual funds differ? How do closed-end funds offer the potential for an 'extra' return?
Q2) Balanced funds aim to: I) broaden diversification II) provide current income III) conserve principal IV) maximize capital gains
A) I and IV.
B) II and III.
C) II, III and IV.
D) I, II and III.
E) I, II, III and IV.
Q3) What is the "high water mark" for a hedge fund manager to receive the portion of their fee based on performance?
A) The percentage by which the fund outperforms the Dow Jones Industrial Average.
B) The highest previous value of the fund.
C) The percentage ranking versus other fund managers that a hedge fund manager must achieve.
D) The legal limit that a fund manager can charge for a performance based fee.
E) The percentage return of the fund in the previous year.
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Page 7
Chapter 6: The Stock Market
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Sample Questions
Q1) Suppose all stocks in a value-weighted index increase by the same percentage one day. The stock that would affect the index the most would be the:
A) lowest priced stock.
B) highest priced stock.
C) smallest capitalization stock.
D) largest capitalization stock.
E) all of the stocks would change the index by the same amount.
Q2) Under the provisions of a general cash offer, shares of stock are offered to:
A) underwriters on a guaranteed sale basis only.
B) current shareholders prior to being offered to the general public.
C) institutional investors only.
D) the issuer's employees on a cash purchase basis only.
E) the general public on a "first-come" basis.
Q3) Which of the following is false regarding the NYSE and TSX?
A) The purpose of both exchanges is to attract order flow.
B) Both exchanges are operated as a not-for-profit business.
C) They are owned by their members.
D) Both exchanges have physical trading locations.
E) Membership on both exchanges can be traded or sold.
Q4) What are the major differences between NASDAQ and the NYSE?
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Chapter 7: Common Stock Valuation
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Sample Questions
Q1) Which of the following companies would be considered to have quality earnings?
A) The cash flow per share is not significantly larger than earnings per share.
B) The earnings per share show a consistent growth rate.
C) The company lists no unusual or extraordinary items in its income statement.
D) Earnings per share vary by no more than 10 percent per quarter.
E) Earnings per share are larger than the cash flow per share.
Q2) All else the same, an increase in the risk-free rate will cause a(n) _____ in stock price in all dividend valuation models.
A) increase
B) decease
C) no change
D) The effect will vary depending on the model used.
E) Insufficient information.
Q3) Stocks with a high P/E ratio are commonly referred to as ______ stocks.
A) Growth
B) Market
C) Value
D) Common
E) Fundamental
Q4) What is the process of fundamental analysis?
Page 9
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Chapter 8: Stock Price Behaviour and Market Efficiency
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Sample Questions
Q1) Martha Stewart in a famous US court case served jail time because she was found guilty of:
A) earning excess profits.
B) insider trading.
C) securities fraud.
D) obstructing justice.
E) being a tipper.
Q2) If the markets are efficient, then asset allocation is __________ and security selection is __________.
A) still important; less important
B) still important; still important
C) still important; extremely critical
D) not important; less important
E) not important; still important
Q3) Small stocks tend to have the largest returns in __________.
A) March
B) January
C) September
D) August
E) October
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Chapter 9: Behavioural Finance and the Psychology of Investing
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Sample Questions
Q1) What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions?
A) Logical
B) Economic
C) Behavioural
D) Rational
E) Personal
Q2) For the financial markets to be inefficient,:
A) arbitrage trading must be prohibited.
B) the collective irrational trading of some investors must exceed the corrective arbitrage trading of the remaining investors.
C) at least the majority of the investors must be overly optimistic.
D) each irrational investor must act independently of every other irrational investor.
E) irrational investors must become arbitrage traders.
Q3) Draw a basic Elliott Wave Pattern. Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".
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Chapter 10: Interest Rates
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Sample Questions
Q1) You find a two year STRIPS with and interest rate of 5.8 percent, and a three-year STRIPS with an interest rate of 6.3 percent. What is the implied one-year interest rate in two years? Assume the rates are effective annual rates.
A) 7.42%
B) 5.21%
C) 7.31%
D) 7.83%
E) 6.91%
Q2) A normal yield curve is:
A) upward sloping.
B) flat.
C) downward sloping.
D) humped.
E) U-shaped.
Q3) Which of the following is a monetary tool of the Bank of Canada?
A) STRIPS.
B) The bellwether rate.
C) The call money rate.
D) The bank rate.
E) The Treasury bill rate.
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Chapter 11: Bond Prices and Yields
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Sample Questions
Q1) You are buying a $1,000 face value bond from your dealer. The bond pays interest semiannually on February 1 and August 1. Assume that every month has 30 days only. Today is May 30. How many months of accrued interest must you pay when you make this purchase?
A) 1 month
B) 2 months
C) 3months
D) 4 months
E) 5 months
Q2) You own a bond that is callable in 3.5 years. The bond has a 7% coupon, paying interest semiannually, with a par value of 41,000. The yield-to-call is 5.6%. What is the call premium if the bond currently sells for $1,109.88%
A) $60
B) $70
C) $80
D) $90
E) $100
Q3) Discuss the possible impact of default risk on duration?
Q4) Explain the concept of duration and its role in bond portfolio management.
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Chapter 12: Return, Risk and Security Management
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Sample Questions
Q1) The slope of the security market line is:
A) greater for high beta stocks.
B) generally downward sloping.
C) always the same.
D) the same as the market risk premium.
E) similar to the yield curve.
Q2) The upper limit of covariance is __________, and the lower limit of covariance is
A) + 100; - 100
B) + 1; 0
C) 0; - 1
D) + 1; - 1
E) Positive infinity; negative infinity
Q3) Which of the following statements is false?
A) Systematic risk is rewarded, unsystematic risk is not.
B) Unsystematic risk can be diversified away.
C) Only systematic risk remains in a fully diversified portfolio.
D) Both systematic risk and unsystematic risk are rewarded.
E) The market portfolio has no unsystematic risk.
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) If you want to search for under-pricing assets, you should look for
A) Low betas
B) High betas
C) Low alphas
D) High alphas
E) Low standard deviations
Q2) The best performance measures of a market index fund would be
A) The Jensen's alpha
B) The TSX Composite index
C) The Treynor ratio
D) The Sharpe ratio
E) The M2 measure
Q3) A __________ portfolio has the highest reward-to-risk ratio over any possible combination of the investment opportunity set.
A) Jensen-optimal
B) Sharpe-optimal
C) Treynor-optimal
D) Credit-optimal
E) Default-optimal
Q4) What is the importance of value-at-risk?
Page 15
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Chapter 14: Options
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Sample Questions
Q1) A _________ is the party who has the obligation, not the right, to sell stock if the option is exercised.
A) call owner
B) call writer
C) Buyer
D) put writer
E) put owner
Q2) Which one of the following options is in-the-money?
A) call with a $45 strike and an underlying stock price of $42
B) put with a $35 strike and an underlying stock price of $36
C) call with a $15 strike and an underlying stock price of $15
D) put with a $45 strike and an underlying stock price of $42
E) call with a $30 strike and an underlying stock price of $29
Q3) The agency responsible for guaranteeing performance on options is the
A) Canadian Derivatives Clearing Corporation (CDCC)
B) Canadian Payments Association (CPA)
C) Canadian Deposit Insurance Corporation (CDIC)
D) Investment Funds Institute of Canada (IFIC)
E) Montreal Exchange (ME)
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Chapter 15: Option Valuation
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Sample Questions
Q1) Hedging a stock portfolio with stock options involves __________ options.
A) Buying call
B) Selling call
C) Buying put
D) Selling put
E) Buying both call and put
Q2) What is the delta of the put option?
A) -0.489
B) -0.315
C) -0.500
D) -0.388
E) -0.494
Q3) Which one of the following statements is correct
A) Both call and put option deltas are always positive.
B) Put option deltas are always positive.
C) Call option deltas are always positive.
D) Both call and put option deltas are always negative.
E) All deltas can be positive, negative, or equal to zero.
Q4) 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) Spot-futures parity defines the market situation that exists when
A) No arbitrage opportunities exist.
B) Futures prices equal spot prices.
C) Cash prices are higher than futures prices.
D) The number of potential buyers equals the number of potential sellers.
E) No marginal calls are required during a trading day.
Q2) If you take a futures position in a stock index futures to offset the risk of a market decline that affects your investment portfolio, you are
A) Doing am arbitrage trade
B) Doing a reserve trade
C) Creating a cross-hedge
D) Doing a close-out
E) Creating a "triple witch"
Q3) The largest volume of futures trading in the United States occurs on the
A) New York Mercantile Exchange.
B) NASDAQ Futures Exchange.
C) U.S. Commodities Futures Exchange.
D) Chicago Board of Trade.
E) Chicago Mercantile Exchange.
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) A company's stock sells for $62.50 per share. The price-earnings ratio is 22.5, and the company has 17,000 shares outstanding. What is the company's net income?
A) $43,819
B) $46,238
C) $43,124
D) $48,610
E) $47,222
Q2) A company can normally exempt _________ percent of dividend income received from a publicly traded Canadian company for income taxes.
A) 0
B) 30
C) 50
D) 70
E) 100
Q3) Why is the expected rate of sales growth so critical to pro forma statements?
Q4) Explain why an income statement and a statement of cash flows will differ for the same company.
Q5) When examining ROE and ROA, which is the most important? Why?
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Chapter 18: Corporate Bonds
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Sample Questions
Q1) Which of the following are negative protective covenants that can be found in a bond indenture?
I. Bond proceeds must be used to finance fixed assets
II. Bonds with senior status cannot be issued while this bond issue is outstanding
III. The issuer is prohibited from guaranteeing debt of another firm
IV. The issuer must furnish audited financial statements on an annual basis
A) I and IV
B) II and III
C) I, III and IV
D) II, III and IV
E) I, II, III and IV
Q2) The _________ is the difference between the promised yields of risky bond issues at a given time relative to yields on Treasury issues of equal maturity.
A) yield margin
B) bid-ask spread
C) yield spread
D) yield-to-worst
E) current yield
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Page 20
Chapter 19: Government Bonds and Mortgaged-Backed Securities
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Sample Questions
Q1) A STRIPS matures in 7 years having a face value of $5,000 and has a yield-to-maturity of 5.6%. What is the price?
A) $5,329.15
B) $3,396.77
C) $4,619.71
D) $3,686.04
E) $3,571.91
Q2) Any time a callable Treasury bond has a price greater than its par, the reported yield is
A) The current yield
B) The yield-to-call
C) The coupon rate
D) The discount rate
E) The yield-to-maturity
Q3) What are the pros and cons of investing in municipal bonds?
Q4) Explain how the CMHC plays a role in the creation of a mortgage-backed security.
Q5) Why would an investor buy government-issued inflation-indexed bonds when other government bonds pay a higher coupon rate?
Q6) Evaluate this claim: "Treasury bonds have no risk."
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Chapter 20: International Portfolio Investment
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Sample Questions
Q1) A _________ rate indicates the price of currency for delivery at some time in the future.
A) forward
B) bilateral
C) cross
D) net return
E) certified
Q2) If your Canadian dollars buy less of Japanese yen, yen _________.
A) depreciates
B) stays
C) rotates
D) floats
E) appreciates
Q3) An indirect exchange rate can be converted into a direct exchange rate by
A) Dividing the indirect rate by number of US dollars required to purchase one unit of the other currency.
B) Dividing the indirect rate by 100.
C) Multiplying the indirect rate by the spot rate.
D) Taking the inverse of the indirect rate.
E) Insufficient information.
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