Corporate Finance
Practice Questions
Course Introduction
Corporate Finance explores the principles and practices involved in the financial management of corporations, focusing on how firms raise, allocate, and manage financial resources to maximize shareholder value. The course covers topics such as capital budgeting, cost of capital, financial analysis, working capital management, capital structure, dividend policy, risk assessment, and the valuation of investment opportunities. Students also learn about financial markets, mergers and acquisitions, and the impact of financial decisions on corporate strategy, equipping them with essential tools for making informed financial decisions in a corporate setting.
Recommended Textbook Essentials of Investments 8th Edition by Zvi Bodie
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22 Chapters
1830 Verified Questions
1830 Flashcards
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Page 2
Chapter 1: Investments: Background and Issues
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Sample Questions
Q1) Asset allocation refers to the _________.
A) allocation of the investment portfolio across broad asset classes
B) analysis of the value of securities
C) choice of specific assets within each asset class
D) none of the answers define asset allocation
Answer: A
Q2) Stone Harbor Products takes out a bank loan.It receives $100,000 and signs a promissory note to pay back the loan over 5 years.
A) A new financial asset was created in this transaction.
B) A financial asset was traded for a real asset in this transaction.
C) A financial asset was destroyed in this transaction.
D) A real asset was created in this transaction.
Answer: A
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Chapter 2: Asset Classes and Financial Instruments
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85 Flashcards
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Sample Questions
Q1) The bid price of a treasury bill is _________.
A) the price at which the dealer in treasury bills is willing to sell the bill
B) the price at which the dealer in treasury bills is willing to buy the bill
C) greater than the ask price of the treasury bill expressed in dollar terms
D) the price at which the investor can buy the treasury bill
Answer: B
Q2) A bond that has no collateral is called _________.
A) a callable bond
B) a debenture
C) a junk bond
D) a mortgage
Answer: B
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Chapter 3: Securities Markets
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90 Flashcards
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Sample Questions
Q1) The New York Stock Exchange is a good example of _________.
A) an auction market
B) a brokered market
C) a dealer market
D) a direct search market
Answer: A
Q2) Specialists try to maintain a narrow bid-ask spread because _______.
I.If the spread is too large they will not participate in as many trades,losing commission income
II.The exchange requires specialists to maintain price continuity
III.Specialists are non-profit entities designed to facilitate market transactions rather than make a profit
A) I only
B) I and II only
C) II and III only
D) I, II and III
Answer: B
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Page 5
Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) In the 1970 study,Malkiel found that mutual funds that do well in one period,have an approximately ________ chance of doing well in the subsequent ear period.
A) 33%
B) 52%
C) 65%
D) 85%
Q2) Which of the following typically employ significant amounts of leverage?
I.Hedge funds
II.REITs
III.Money market funds
IV.Equity mutual funds
A) I and II only
B) II and III only
C) III and IV only
D) I, II and III only
Q3) Specialized sector funds concentrate their investments in _________________.
A) bonds of a particular maturity
B) geographical segments of the real estate market
C) government securities
D) securities issued by firms in a particular industry
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Chapter 5: Risk and Return: Past and Prologue
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Sample Questions
Q1) The rate of return on _____ is known at the beginning of the holding period while the rate of return on ____ is not known until the end of the holding period.
A) risky assets, Treasury bills
B) Treasury bills, risky assets
C) excess returns, risky assets
D) index assets, bonds
Q2) During the 1926 to 2008 period the Sharpe ratio was greatest for which of the following asset classes?
A) Small U.S. stocks
B) Large U.S. stocks
C) Long-Term U.S. Treasury Bonds
D) Bond World portfolio return in U.S. dollars
Q3) Annual percentage rates can be converted to effective annual rates by means of the following formula:
A) (1 + (APR/n))n - 1
B) (APR)(n)
C) (APR/n)
D) (periodic rate)(n)
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Chapter 6: Efficient Diversification
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Sample Questions
Q1) A stock has a correlation with the market of 0.45.The standard deviation of the market is 21% and the standard deviation of the stock is 35%.What is the stock's beta?
A) 1.00
B) 0.75
C) 0.60
D) 0.55
Q2) The optimal risky portfolio can be identified by finding ____________.
I.the minimum variance point on the efficient frontier
II.the maximum return point on the efficient frontier the minimum variance point on the efficient frontier
III.the tangency point of the capital market line and the efficient frontier
IV.the line with the steepest slope that connects the risk free rate to the efficient frontier
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only
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8
Chapter 7: Capital Asset Pricing and Arbitrage Pricing
Theory
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Sample Questions
Q1) The most significant conceptual difference between the arbitrage pricing theory (APT)and the capital asset pricing model (CAPM)is that the CAPM _____________.
A) places less emphasis on market risk
B) recognizes multiple unsystematic risk factors
C) recognizes only one systematic risk factor
D) recognizes multiple systematic risk factors
Q2) You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.
A) 1.14
B) 1.20
C) 1.26
D) 1.50
Q3) A stock's alpha measures the stock's ____________________.
A) expected return
B) abnormal return
C) excess return
D) residual return
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Page 9
Chapter 8: The Efficient Market Hypothesis
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Sample Questions
Q1) According to results by Seyhun __________.
A) investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public
B) investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public
C) investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public
D) investors cannot earn abnormal returns by trading before insiders
Q2) __________ is the return on a stock beyond what would be predicted from market movements alone.
A) A normal return
B) A subliminal return
C) An abnormal return
D) An excess return
Q3) Proponents of the EMH typically advocate __________.
A) a conservative investment strategy
B) a liberal investment strategy
C) a passive investment strategy
D) an aggressive investment strategy
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Page 10
Chapter 9: Behavioral Finance and Technical Analysis
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Sample Questions
Q1) An investor holds a very conservative portfolio invested for retirement but she takes some extra cash she earned from her year-end bonus and buys gold futures.She appears to be engaging in ___________.
A) overconfidence
B) representativeness
C) forecast errors
D) mental accounting
Q2) The Dow Theory gives a buy signal when you can identify a primary bull trend by identifying _________.
A) a pattern of upward moving tops and bottoms
B) a pattern of declining oscillators
C) declining volume on up moves and increasing volume on down moves
D) tertiary trends that support the primary trend
Q3) Trend analysts that follow bonds are most likely to monitor the ____________.
A) confidence index
B) odd-lot trading
C) short interest
D) trin statistic
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11
Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) If the coupon rate on a bond is 4.50% and the bond is selling at a premium,which of the following is the most likely yield to maturity on the bond?
A) 4.30%
B) 4.50%
C) 5.20%
D) 5.50%
Q2) A debenture is _________.
A) secured by other securities held by the firm
B) secured by equipment owned by the firm
C) secured by property owned by the firm
D) unsecured
Q3) The primary difference between Treasury notes and bonds is ________.
A) maturity at issue
B) default risk
C) coupon rate
D) tax status
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Chapter 11: Managing Bond Portfolios
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Sample Questions
Q1) You have a 15 year maturity 4% coupon,6% yield bond with duration of 10.5 years and a convexity of 128.75.The bond is currently priced at $805.76.If interest rate were to increase 200 basis points your predicted new price for the bond (including convexity)is
A) $638.85
B) $642.54
C) $666.88
D) $705.03
Q2) A bank has $50 million in assets,$47 million in liabilities and $3 million in shareholders' equity.If the duration of its liabilities are 1.3 and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero,it should select assets with an average duration of _________.
A) 1.22
B) 1.50
C) 1.60
D) 2.00
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Chapter 12: Macroeconomic and Industry Analysis
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89 Verified Questions
89 Flashcards
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Sample Questions
Q1) An increase in the value of the yen against the U.S.dollar can cause the Japanese automaker,Toyota,to either _____________ on its U.S.sales.
A) lose market share or reduce its profit margin
B) gain market share or reduce its profit margin
C) lose market share or increase its profit margin
D) gain market share or increase its profit margin
Q2) Everything else equal,if you expect a larger interest rate increase than other market participants,you should _________.
A) buy long-term bonds
B) buy short-term bonds
C) buy common stocks
D) buy preferred stocks
Q3) Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?
A) The nominal exchange rate
B) The nominal interest rate
C) The real exchange rate
D) The real interest rate
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14
Chapter 13: Equity Valuation
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Sample Questions
Q1) Grott and Perrin,Inc.has expected earnings of $3 per share for next year.The firm's ROE is 20% and its earnings retention ratio is 70%.If the firm's market capitalization rate is 15%,what is the present value of its growth opportunities?
A) $20
B) $70
C) $90
D) $115
Q2) A stock has an intrinsic value of $15 and an actual stock price of $13.50.You know that this stock ________.
A) has a Tobin's Q value < 1
B) will generate a positive alpha
C) has an expected return less than its required return
D) has a beta > 1
Q3) A firm increases its dividend plowback ratio.All else equal you know that
A) earnings growth will increase and the stock's P/E will increase
B) earnings growth will decrease and the stock's P/E will increase
C) earnings growth will increase and the stock's P/E will decrease
D) earnings growth will increase and the stock's P/E may or may not increase
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Page 15
Chapter 14: Financial Statement Analysis
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Sample Questions
Q1) What must cash flow from financing have been in 2008 for Interceptors,Inc.?
A) $5
B) $28
C) $30
D) $33
Q2) A firm increases its financial leverage when its ROA is greater than the cost of debt.Everything else equal this change will probably increase the firm's _______.
I.beta
II.earnings variability over the business cycle
III.ROE
IV.stock price
A) I and II only
B) III and IV only
C) I, III and IV only
D) I, II and III only
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Chapter 15: Options Markets
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Sample Questions
Q1) You purchase one IBM March 120 put contract for a put premium of $10.The maximum profit that you could gain from this strategy is _________.
A) $120
B) $1,000
C) $11,000
D) $12,000
Q2) You purchase a call option on a stock.The profit at contract maturity of the option position is ___________ where X equals the option's strike price,S<sub>T</sub> is the stock price at contract expiration and C<sub>0</sub> is the original purchase price of the option.
A) Max(-C<sub>0</sub>, S<sub>T</sub> - X - C<sub>0</sub>)
B) Min(-C<sub>0</sub>, S<sub>T</sub> - X - C<sub>0</sub>)
C) Max(C<sub>0</sub>, S<sub>T</sub> - X + C<sub>0</sub>)
D) Max(0, S<sub>T</sub> - X - C<sub>0</sub>)
Q3) The writer of a put option _______________.
A) agrees to sell shares at a set price if the option holder desires
B) agrees to buy shares at a set price if the option holder desires
C) has the right to buy shares at a set price
D) has the right to sell shares at a set price
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Page 17
Chapter 16: Option Valuation
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Sample Questions
Q1) What would have been the cost of a protective put portfolio?
A) $48.81
B) $51.19
C) $52.38
D) $53.38
Q2) The stock price of Ajax Inc.is currently $105.The stock price a year from now will be either $130 or $90 with equal probabilities.The interest rate at which investors can borrow is 10%.Using the binomial OPM,the value of a call option with an exercise price of $110 and an expiration date one year from now should be worth __________ today.
A) $11.59
B) $15.00
C) $20.00
D) $40.00
Q3) Using the Black-Scholes OPM,the put option should be worth __________ today.
A) $0.01
B) $0.08
C) $9.26
D) $9.62
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Chapter 17: Futures Markets and Risk Management
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Sample Questions
Q1) At contract maturity the basis should equal ___________.
A) 1
B) 0
C) risk-free interest rate
D) -1
Q2) You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098.The contract has a $100,000 underlying par value bond.If the futures price falls to $108,000 you will experience a ______ percent loss on your money invested.
A) 31
B) 41
C) 52
D) 64
Q3) The spot price for is $650.The dividend yield on the S&P 500 is 2.5%.The risk-free interest rate is 5%.The futures price for gold for a one year contract should be
A) $658.58
B) $675.43
C) $682.50
D) $666.25
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Chapter 18: Portfolio Performance Evaluation
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Sample Questions
Q1) A mutual fund with a beta of 1.1 has outperformed the S&P500 over the last 20 years.We know that this mutual fund manager _______________________.
A) must have had superior stock selection ability
B) must have had superior asset allocation ability
C) must have had superior timing ability
D) may or may not have outperformed the S&P500 on a risk adjusted basis
Q2) Which of the following investment strategies would have produced the highest returns in the time period since 1926?
A) T bills portfolio
B) S&P 500 index fund
C) Perfect market timing
D) Random stock selection
Q3) Recent analysis indicates that the style of investing is a critical component of fund performance.In fact on average about _____ of fund performance is attributable to the asset allocation decision.
A) 68%
B) 74%
C) 88%
D) 97%
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Page 20
Chapter 19: Globalization and International Investing
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Sample Questions
Q1) WEBS differ from mutual funds in that __________.
I.Shares of WEBS can be shorted
II.WEBS shares trade continuously on the AMEX
III.WEBS are passively managed
A) II only
B) II and III only
C) I and III only
D) I, II and III
Q2) The present exchange rate is C $1 = US $0.77.The 1-year future rate is C $1 = US $0.73.The yield on a 1-year U.S.bill is 4%.A yield of __________ on a 1-year Canadian bill will make investors indifferent between investing in the U.S.bill and the Canadian bill.
A) 9.7%
B) 2.9%
C) 2.8%
D) 2.0%
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21
Chapter 20: Hedge Funds
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Sample Questions
Q1) Some argue that abnormally high returns of hedge funds are tainted by __________,which arises when unsuccessful funds cease operations leaving only successful ones.
A) reporting bias
B) survivorship bias
C) backfill bias
D) incentive bias
Q2) A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year.Throughout the year assets grow at 12%.The fund charges 3% management fee on assets.The fee is imposed on year end asset values.What is the end of year NAV for the fund?
A) $15.00
B) $15.60
C) $16.30
D) $17.55
Q3) Management fees for hedge funds,typically range between _____ and _____.
A) 0.5%; 1.5%
B) 1%; 3%
C) 2%; 5%
D) 5%; 8%
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Chapter 21: Taxes,inflation,and Investment Strategy
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Sample Questions
Q1) In 2009,the income cap on social security taxes was set at _____ with an exemption of _____.
A) $200,000; $10,000
B) $153,600; $7,600
C) $106,800; $0
D) $96,000; $10,000
Q2) You earn 6% on your corporate bond portfolio this year and you are in a 25% federal tax bracket and an 8% state tax bracket.Your after tax return is _____.(Assume that federal taxes are not deductible against state taxes and vice versa).
A) 4.50%
B) 4.14%
C) 4.02%
D) 3.12%
Q3) Which one of the following is an example of "global" consumption smoothing?
A) Borrowing to buy a car
B) Borrowing to buy a home
C) Saving to send children to college
D) Saving during your working years for retirement
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Chapter 22: Investors and the Investment Process
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Sample Questions
Q1) Of the following,the most flexible type of life insurance policy from the policyholder's perspective is probably a(n)___________ policy.
A) term life
B) whole life
C) variable life
D) universal life
Q2) When a company sets up a defined contribution pension plan,the __________ bears all the risk and the __________ receives all the return from the plan's assets.
A) employee; employee
B) employee; employer
C) employer; employee
D) employer; employer
Q3) My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service.I must have ___________.
A) a defined benefit plan
B) a defined contribution plan
C) an endowment fund
D) a variable annuity
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