Corporate Finance
Midterm Exam
Course Introduction
Corporate Finance explores the fundamental principles and techniques used to manage a corporations financial resources effectively. The course covers key topics such as capital budgeting, valuation, risk and return, capital structure, dividend policy, working capital management, and financial planning. Students will gain insights into how managers make investment and financing decisions that maximize firm value, as well as the impact of financial markets and institutions on corporate strategy. Emphasis is placed on analytical tools and real-world case studies to develop decision-making skills relevant to contemporary business environments.
Recommended Textbook Investment Analysis and Portfolio Management 1st Canadian Edition by Frank
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Page 2
K. Reilly
Chapter 1: The Investment Setting
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Q1) The holding period return (HPR) is equal to the holding period yield (HPY) stated as a percentage.
A)True
B)False
Answer: False
Q2) The coefficient of variation is the expected return divided by the standard deviation of the expected return.
A)True
B)False
Answer: False
Q3) The rate of exchange between future consumption and current consumption is
A) The nominal risk-free rate.
B) The coefficient of investment exchange.
C) The pure rate of interest.
D) The consumption/investment paradigm.
E) The expected rate of return.
Answer: C
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Chapter 2: The Asset Allocation Decision
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Q1) Refer to Exhibit 2-2. Calculate the tax savings generated by the RRSP contribution at the time of investment.
A) $300
B) $750
C) $700
D) $100
E) $200
Answer: B
Q2) The gifting phase is similar to, and may be concurrent with, the spending phase.
A)True
B)False
Answer: True
Q3) For an investor with a time horizon of 6 to 10 years and lower risk tolerance, an appropriate asset allocation strategy would be
A) 100% stocks
B) 100% cash
C) 30% cash, 50% bonds, and 20% stocks
D) 10% cash, 30% bonds, and 60% stocks
E) 100% bonds
Answer: C
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Chapter 3: Selecting Investments in a Global Market
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Sample Questions
Q1) What is the original maturity of a Canadian Treasury note?
A) Zero years to five years.
B) Six months to ten years.
C) One year or less.
D) Over one year to ten years.
E) Over ten years.
Answer: D
Q2) An investor who purchases a call option:
A) Has the right to buy a given stock at a specified price during a designated time period.
B) Has the right to sell a given stock at a specified price during a designated time period.
C) Has the obligation to buy a given stock at a specified price during a designated time period.
D) Has the obligation to sell a given stock at a specified price during a designated time period.
E) None of the above.
Answer: A
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Chapter 4: Securities Markets and the Economy
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Sample Questions
Q1) Which of the following is not a characteristic of Short Form Prospectus Distribution system?
A) All large firms to borrow money for short period of time.
B) Allow large firms to file their annual and interim financial statements on a continuous basis.
C) Provide flexibility and reduce registration fees and expenses.
D) Are typically used for the sale of straight debentures rather than common stock or convertible issues.
E) All of the above are characteristics of Short Form Prospectus Distribution system.
Q2) Which of the following is not a secondary equity market?
A) Treasury market
B) Toronto stock exchange
C) Regional exchanges
D) Over-the-counter market
E) All of the above are secondary equity markets.
Q3) A continuous market that has price continuity requires depth of buyers and sellers.
A)True
B)False
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Chapter 5: Efficient Capital Markets
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Q1) There is little evidence from studies examining initial public offerings (IPOs) that suggest markets are semi-strong form efficient.
A)True
B)False
Q2) Evidence supporting the strong form efficient market hypothesis (EMH) resulted from examining
A) Value Line rankings.
B) Corporate insiders.
C) Stock exchange specialists.
D) Choices b and c
E) All of the above.
Q3) Which of the following assumptions imply capital markets will be efficient?
A) A large number of independent profit-maximizing participants analyze securities.
B) New information regarding securities comes to the market in a random fashion.
C) Investors adjust security prices rapidly to reflect the effect of new information.
D) Both b and c only.
E) All of the above are assumptions that imply a market will be efficient.
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Chapter 6: An Introduction to Portfolio Management
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Sample Questions
Q1) A positive relationship between expected return and expected risk is consistent with A) investors being risk seekers.
B) investors being risk avoiders.
C) investors being risk averse.
D) all of the above.
E) none of the above.
Q2) The purpose of calculating the covariance between two stocks is to provide a(n) ____ measure of their movement together.
A) Absolute
B) Relative
C) Indexed
D) Loglinear
E) Squared
Q3) Refer to Exhibit 6-13. Calculate the expected return for Magnum Oil.
A) 5.0
B) 10.3%
C) 13.7%
D) 17.5%
E) 20.0%
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Page 8
Chapter 7: Asset Pricing Models: Capm and Apt
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Sample Questions
Q1) The Efficient Frontier refers to a set of portfolios that
A) Have the highest expected return for a given level of risk.
B) Have the lowest risk for a given level of return.
C) Are dominant to all other portfolios.
D) All of the above.
E) None of the above.
Q2) The APT assumes that security returns are normally distributed.
A)True
B)False
Q3) Calculate the expected return for A Industries which has a beta of 1.75 when the risk free rate is 0.03 and you expect the market return to be 0.11.
A) 11.13%
B) 14.97%
C) 16.25%
D) 22.25%
E) 17.0%
Q4) Beta is a measure of unsystematic risk.
A)True
B)False
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Chapter 8: Economic and Industry Analysis
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Sample Questions
Q1) Which of the following statements concerning the competitive environment is true?
A) High fixed costs encourage firms to produce at a low level of capacity, in order to minimize fixed cost per unit produced.
B) Low current prices relative to costs in an industry indicate low barriers to entry.
C) Substantial economies of scale do not give a current industry member an advantage over a new firm.
D) The ability to substitute another product limits the industry's profit potential.
E) Buyers and suppliers do not influence the profitability of an industry.
Q2) What might cause an industry's sales to decline?
A) Changes in consumer tastes
B) Product obsolescence
C) Growth of substitute products
D) Sluggish economic growth
E) All of the above.
Q3) Structural changes do have a cyclical pattern.
A)True
B)False
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Chapter 9: Company Analysis and Stock Valuation
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Q1) In Berkshire Hathoway annual reports Warren Buffet highlights business tenants that he believes are important. Which of the following is not a business tenant of Warren Buffet?
A) Is the business unique and technologically advanced?
B) Does the business have a consistent operating history?
C) Does the business have favourable long-term prospects?
D) a and b above.
E) All of the above are business tenants of Warren Buffet.
Q2) A set of performance measures called ___________ are directly related to the capital budgeting techniques used in corporate finance.
A) Dividend discount model
B) Aggressive growth indexes
C) Growth indexes
D) Value added
E) Profit sensitization
Q3) The constant growth dividend growth model is not appropriate for the valuation of growth companies.
A)True
B)False
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Chapter 10: Technical Analysis
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Sample Questions
Q1) The ratio of the price of a stock or an industry group to the value of the market index is called the
A) Company to market ratio.
B) Composite stock ratio.
C) Relational proportion ratio.
D) Stock to market ratio.
E) Relative strength ratio.
Q2) What might a technical analyst consider a bearish signal?
A) The percentage of speculators in stock index futures exceeds 70%.
B) The percentage of speculators in stock index futures exceeds 30%.
C) The percentage of speculators in stock index futures falls to 30%.
D) The percentage of speculators in stock index futures remains flat.
E) None of the above.
Q3) Technicians believe that an industry or stock that is outperforming the market will tend to
A) Continue to outperform the market.
B) Return to normal.
C) Reverse trend.
D) Meet a resistance level.
E) Form head and shoulder patterns.
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Chapter 11: Bond Fundamentals
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Sample Questions
Q1) Institutional investors typically account for about
A) 90 to 95% of bond market trading.
B) 40 to 50% of bond market trading.
C) 10 to 15% of bond market trading.
D) Less than 5% of bond market trading.
E) None of the above.
Q2) Inflation-indexed bonds ensure that investors will received the promised yield in real terms by indexing bond principal and interest payments to the stock market.
A)True
B)False
Q3) In the case of a bond, the only contractual factor is the amount of interest payments, since beginning and ending bond prices are determined by market forces.
A)True
B)False
Q4) The coupon of a bond indicates the income that the bond investor will receive over the life of the bond.
A)True
B)False
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Chapter 12: The Analysis and Valuation of Bonds
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Q1) According to the segmented-market hypothesis a downward sloping yield curve indicates that
A) demand for long term bonds has fallen and demand for short term bonds has fallen.
B) demand for long term bonds has risen and demand for short term bonds has fallen.
C) demand for long term bonds has fallen and demand for short term bonds has risen.
D) demand for long term bonds has risen and demand for short term bonds has risen.
E) None of the above.
Q2) If the price before yields changed was $975, what is the resulting price?
A) $937.46
B) $918.66
C) $965.55
D) $898.62
E) $1012.45
Q3) The lower a bond's yield to maturity, the greater its duration.
A)True
B)False
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Chapter 13: An Introduction to Derivative Markets and Securities
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Q1) An equity portfolio manager can neutralize the risk of falling stock prices by entering into a hedge position where the payoffs are
A) Not correlated with the existing exposure.
B) Positively correlated with the existing exposure.
C) Negatively correlated with the existing exposure.
D) Any of the above.
E) None of the above.
Q2) A one year call option has a strike price of 70, expires in 3 months, and has a price of $7.34. If the risk free rate is 6%, and the current stock price is $62, what should the corresponding put be worth?
A) $5.34
B) $8.00
C) $10.68
D) $14.33
E) $13.33
Q3) The buyer of a straddle expects stock prices to move strongly in either direction. A)True B)False
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Chapter 14: Derivatives: Analysis and Valuation
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Q1) If interest rates fall, an interest rate cap would expire unexercised.
A)True
B)False
Q2) The intrinsic value of a warrant is calculated as:
A) (Market price of common stock + Warrant exercise price) ´ Number of shares specified by warrant.
B) (Market price of common stock - Warrant exercise price) ´ Number of shares specified by warrant.
C) (Market price of common stock + Warrant exercise price) / Number of shares specified by warrant.
D) (Market price of common stock - Warrant exercise price) / Number of shares specified by warrant.
E) None of the above.
Q3) Convertibles provide the upside potential of common stock and the downside protection of a bond.
A)True B)False
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Chapter 15: Equity Portfolio Management Strategies
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Sample Questions
Q1) Sharpe (1991) study reveals that active managers typically outperform passive managers even after transaction costs and fees.
A)True
B)False
Q2) Refer to Exhibit 15-1. The recommended portfolio for Tom Luck is
A) Portfolio A because it has expected utility of 9.95
B) Portfolio A because it has expected utility of 4.5
C) Portfolio B because it has expected utility of 5.33
D) Portfolio B because it has expected utility of 7.27
E) Portfolio C because it has expected utility of 6.75
Q3) Growth oriented investors focus on the price component of the Price/Earnings ratio. A)True B)False
Q4) Active equity portfolio management is a long-term buy-and-hold strategy.
A)True B)False
Q5) The goal of a passive portfolio is to track the index as closely as possible. A)True B)False
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Chapter 16: Bond Portfolio Management Strategies
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Sample Questions
Q1) Refer to Exhibit 16-6. The realized compound yield on the current bond is
A) 10.00%
B) 11.9985%
C) 12.9397%
D) 13.9399%
E) 12.3585%
Q2) Refer to Exhibit 16-4. The realized compound yield on the current bond is
A) 6.00%
B) 7.00%
C) 8.00%
D) 10.00%
E) 12.00%
Q3) The active strategies for bond management include all of the following, except A) Interest rate anticipation.
B) Credit analysis.
C) Spread analysis.
D) Classical immunization.
E) Bond swaps.
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Chapter 17: Professional Money Management, Alternative
Assets, and Industry Ethics
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Sample Questions
Q1) A no-load fund imposes a substantial sales charge and sells shares at their NAV.
A)True
B)False
Q2) In the case of investment companies
A) Investors deal with a fund company and do not have separate accounts tailored to their specific needs.
B) Investors deal with a fund company and have separate accounts tailored to their specific needs.
C) Investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
D) Investors deal with an asset manager have separate accounts tailored to their specific needs.
E) None of the above.
Q3) The returns received by the average individual investor on funds managed by investment companies will probably be superior to the average results for a specific U.S. or international market.
A)True
B)False
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Chapter 18: Evaluation of Portfolio Performance
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Q1) The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in duration.
A)True
B)False
Q2) Which of the following statements concerning performance measures is false?
A) The Sharpe measure examines both unsystematic and systematic risk.
B) The Treynor measure examines systematic risk.
C) The Jensen measure examines systematic risk.
D) All three measures examine both unsystematic and systematic risk.
E) None of the above (that is, all statements are true)
Q3) What is the Sharpe measure for the S&P 500 over the last ten years if the standard deviation was 8% and the return was 14%?
A) 1.55
B) 1.69
C) 1.75
D) 1.99
E) 2.09
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Chapter 19: Analysis of Financial Statements
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Sample Questions
Q1) Which of the following statements regarding financial risk and business risk is true?
A) The acceptable level of financial risk for a firm depends on its business risk.
B) A firm with a greater degree of business risk has the ability to take on more debt.
C) A firm with a greater degree of financial risk typically takes on less business risk.
D) Financial risk and business risk are both important but they are not related in anyway.
E) Financial risk is more important for small firms and business risk is more important for large firms.
Q2) A cross-sectional analysis compares a firm to a subset of industry firms comparable in size or characteristics.
A)True B)False
Q3) Financial ratios are used in stock and bond valuation models.
A)True
B)False
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Chapter 20: An Introduction to Security Valuation
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Q1) A bond typically pays interest payments every six months equal to the coupon rate times the face value of the bond.
A)True B)False
Q2) Fundamentalists typically use the "Bottom-Up Approach" whereas technicians use the "Top-Down Approach" to the valuation process.
A)True
B)False
Q3) XCEL Corporation paid a dividend yesterday for $1.50. They expect to pay dividends annually at a constant 6% annual growth rate indefinitely. If the required rate of return on this investment is 12%, what is the current value of this common stock?
A) $1.50
B) $12.50
C) $13.25
D) $25.00
E) $26.50
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Chapter 21: Web Appendix: A Review of Statistics and the
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Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
Q3) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
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Chapter
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Q1) The expected return from this investment is
A) -0.0752
B) -0.0040
C) 0.00
D) 0.0075
E) 0.4545
Q2) The coefficient of variation of this investment is
A) -0.06
B) -0.65
C) 6.60
D) 16.53
E) 165.10
Q3) The standard deviation of your expected return from this investment is
A) 0.001
B) 0.004
C) 0.124
D) 1.240
E) None of the above
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Chapter 23: Appendix: Objectives and Constraints of Institutional Investors
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Q1) Banks have high liquidity needs and therefore, have a short time horizon.
A)True
B)False
Q2) The retirement plan that promises to pay a specific benefit to its beneficiaries is
A) A defined contribution plan.
B) A defined benefit pension plan.
C) A non-contribution pension plan.
D) An actuarial pension plan.
E) Choices a and c.
Q3) Banks face regulatory constraints at both the state and federal level.
A)True
B)False
Q4) Banks typically
A) Have low liquidity needs.
B) Face very few federal and state regulatory constraints.
C) Don't have to compete for funds.
D) Have high liquidity needs and a short time horizons constraint.
E) Low investment risk.
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