Corporate Finance
Pre-Test Questions
Course Introduction
Corporate Finance explores the principles and techniques used by firms to make financial decisions and maximize shareholder value. The course covers key topics such as capital budgeting, risk and return, cost of capital, capital structure, dividend policy, financial planning, and working capital management. Students will analyze how organizations raise and allocate funds, assess investment opportunities, and manage financial risks, drawing on real-world examples and case studies to develop practical skills in corporate financial decision-making.
Recommended Textbook
Fundamentals of Investments 8th Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Q1) The arithmetic average return is the:
A) summation of the returns for a number of years, t, divided by (t - 1).
B) compound total return for a period of years, t, divided by t.
C) average compound return earned per year over a multi-year period.
D) average squared return earned in a single year.
E) return earned in an average year over a multi-year period.
Answer: E
Q2) Jeremy owns a stock that has historically returned 7.5 percent annually with a standard deviation of 10.2 percent.There is only a 0.5 percent chance that the stock will produce a return greater than ________ percent in any one year.
A) 20.9
B) 22.9
C) 32.2
D) 38.1
E) 54.8
Answer: D
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3
Chapter 2: The Investment Process
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Sample Questions
Q1) A company that owns income-producing real estate such as an apartment complex or a retail shopping center is called a(n):
A) REIT.
B) SIPC.
C) REEF.
D) EAR.
E) SPIC.
Answer: A
Q2) The SIPC:
A) guarantees investors against any loss related to an investment account held at a brokerage firm.
B) guarantees cash balances held in brokerage accounts up to $500,000.
C) is an agency of the federal government.
D) protects private brokerage firms from bankruptcy.
E) protects investors from missing assets when a brokerage firm closes.
Answer: E
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Page 4
Chapter 3: Overview of Security Types
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Sample Questions
Q1) You bought six call option contracts with a strike price of $25.00 and a premium of $0.45.At expiration,the stock was selling for $23.75 a share.What is the total profit or loss on your option position if you did not exercise it prior to the expiration date?
A) -$9.24
B) -$10.20
C) $0
D) -$270
E) -$450
Answer: D
Q2) You own one futures contract on gold that you purchased at a quoted price of 1,448.5.The current price quote is 1405.5.The contract size is 100 ounces and the quotes are expressed in dollars and cents per ounce.What is your current profit or loss on this investment?
A) -$43.00
B) -$912.00
C) -$4,300.00
D) $912.00
E) $4,300.00
Answer: C
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Chapter 4: Mutual Funds and Other Investment Companies
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Sample Questions
Q1) Six years ago,you purchased 210.20 shares of a mutual fund.Since then,you have reinvested your fund dividends and acquired an additional 36.32 shares.The fund currently has an NAV of $38.95.The fund charges a contingent deferred sales charge of 5 percent for the first 2 years after which time the charge declines by 1 percent a year.How much money will you receive if you redeem all of your shares today?
A) $9,320.38
B) $9,414.52
C) $9,505.16
D) $9,603.75
E) $9,699.79
Q2) You want to purchase shares in a fund and also ensure that your money does not support firms that harm the environment.Which type of fund should you purchase?
A) international fund
B) income fund
C) tax-managed fund
D) index fund
E) social conscience fund
Q3) Which type of investor is most apt to purchase municipal bond funds and why?
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Chapter 5: The Stock Market
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Q1) In 2007,NYSE Holdings merged with which one of the following?
A) NASDAQ
B) AMEX
C) Chicago Stock Exchange
D) London Stock Exchange
E) Euronext, N.V.
Q2) Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price?
A) balanced
B) market-weighted
C) dollar-weighted
D) price-weighted
E) value-weighted
Q3) The stocks listed on the Pink Sheets:
A) are those stocks trading on the NASDAQ CAPITAL MARKET.
B) do not have to file financial statements with the SEC.
C) have all been delisted by the NYSE.
D) are the highest priced stocks listed on NASDAQ.
E) must file financial statements with the SEC but do not have to meet any listing requirements.
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Chapter 6: Common Stock Valuation
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Q1) Knit 'n Needle started paying dividends 4 years ago.The annual dividends thus far have been $0.35,$0.38,$0.42,and $0.48,respectively.What is the arithmetic average dividend growth rate?
A) 6.33 percent
B) 8.58 percent
C) 9.70 percent
D) 10.80 percent
E) 11.13 percent
Q2) How is a sustainable dividend growth rate defined?
A) a constant rate at which dividends increase
B) a rate of growth that does not exceed two percent of the annual increase in revenue
C) a rate of growth that is set equal to one-half of the average growth rate of a firm's earnings
D) a rate that can be supported over time by a company's earnings
E) a rate of dividend growth that is equal to the discount rate used to value the firm's stock
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Chapter 7: Stock Price Behavior and Market Efficiency
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Q1) Research on semistrong-form efficient markets indicates which one of the following is correct?
A) Identifying a stock with repetitive price movements is generally the best method of active investing.
B) Future returns on large company stocks tend to closely follow past pricing patterns.
C) Buying and holding a broad market index is one of the best investment strategies.
D) Predicting future stock prices is relatively easy for academic researchers.
E) Trading costs have little, if any, impact on investment returns.
Q2) Which one of the following would best reveal how stock prices react when competitive firms merge?
A) financial analysis
B) field testing
C) risk analysis
D) event study
E) market survey
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Chapter 8: Behavioral Finance and the Psychology of Investing
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Sample Questions
Q1) Which one of the following defines frame dependence?
A) Investors react differently to prospective gains and losses.
B) Investors tend to make more cognitive errors when they view investing as gambling.
C) Investors tend to be more irrational in bear markets than in bull markets.
D) Investors react differently depending on how an opportunity is presented.
E) Investors suffer from money illusion in bull markets but not in bear markets.
Q2) Last year,Kate purchased 4 shares of stock A at $40 a share.At the same time,she purchased 6 shares of stock B at $40 a share.Today,stock A is valued at $56 a share and stock B is worth $42 a share.What is the relative strength of stock A as compared to stock B?
A) 0.84
B) 0.89
C) 0.93
D) 1.04
E) 1.14
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Chapter 9: Interest Rates
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Sample Questions
Q1) Which one of the following facilitates international trade?
A) secured bond
B) Treasury security
C) banker's acceptance
D) commercial paper
E) Eurodollar loan
Q2) A one-year STRIPS sells at an interest rate of 3.15 percent and a two-year STRIPS sells at an interest rate of 3.88 percent.What is the implied one year forward rate? Assume the rates are effective annual rates.
A) 4.44 percent
B) 4.50 percent
C) 4.54 percent
D) 4.57 percent
E) 4.62 percent
Q3) Which one of the following best describes the Fisher hypothesis?
A) Long-term interest rates are based on current inflation rates.
B) Nominal interest rates are inversely related to real rates.
C) Interest rates tend to be higher than inflation rates.
D) Nominal interest rates tend to be relatively constant over time.
E) Future interest rates must be higher than current interest rates.
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Chapter 10: Bond Prices and Yields
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Sample Questions
Q1) An issuer has a bond outstanding that matures in 18 years.Which one of the following prevents the issuer from buying back that bond today?
A) make-whole provision
B) call protection period
C) newly issued provision
D) put provision
E) call premium
Q2) Periodically rebalancing a portfolio so that the duration continues to match the target date is called:
A) risk assessment.
B) duration testing.
C) dedication matching.
D) portfolio matching.
E) dynamic immunization.
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Page 12
Chapter 11: Diversification and Risky Asset Allocation
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Sample Questions
Q1) You are graphing the portfolio expected return against the portfolio standard deviation for a portfolio consisting of two securities.Which one of the following statements is correct regarding this graph?
A) Risk-taking investors should select the minimum variance portfolio.
B) Risk-averse investors should select the portfolio with the lowest rate of return.
C) Some portfolios will be efficient while others will not.
D) The minimum variance portfolio will have the lowest portfolio expected return of any of the possible portfolios.
E) All possible portfolios will graph as efficient portfolios.
Q2) Which one of the following correlation coefficients must apply to two assets if the equally weighted portfolio of those assets creates a minimum variance portfolio that has a standard deviation of zero?
A) -1.0
B) -0.5
C) 0.0
D) 0.5
E) 1.0
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Chapter 12: Return,Risk,and the Security Market Line
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Q1) Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month.This announcement will cause the firm's stock price to:
A) increase.
B) either increase or remain constant.
C) remain constant.
D) decrease.
E) either increase, decrease, or remain constant.
Q2) What is the beta of a risk-free security?
A) 0.00
B) 0.50
C) 1.00
D) 1.50
E) 2.00
Q3) Which one of the following measures systematic risk?
A) beta
B) alpha
C) variance
D) standard deviation
E) correlation coefficient
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Page 14
Chapter 13: Performance Evaluation and Risk Management
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Q1) Which one of the following Value-at-Risk measures would be most appropriate for a portfolio designed for a very risk-adverse investor?
A) Prob (R<sub>p</sub> 0.20) = 100%
B) Prob (R<sub>p</sub> 0.15) = 50%
C) Prob (R<sub>p</sub> 0.10) = 25%
D) Prob (R<sub>p</sub> 0.10) = 10%
E) Prob (R<sub>p</sub> 0.05) = 1%
Q2) The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?
A) raw return
B) Value-at-Risk
C) Jensen's alpha
D) Sharpe ratio
E) Treynor ratio
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15
Chapter 14: Futures Contracts
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Q1) Which one of the following is a contract managed by an organized exchange that allows a buyer and seller to agree on a price today for an exchange of goods that will occur sometime in the future?
A) futures contract
B) spot market
C) cash market
D) forward contract
E) discounted contract
Q2) An investor who shifts risk is referred to as which one of the following?
A) hedger
B) short seller
C) speculator
D) broker
E) dealer
Q3) How is a futures contract on the S&P 500 settled?
A) cash
B) shares of stock selected by the contract buyer
C) shares of stock selected by the contract seller
D) shares of stock equivalent to those in the index
E) delivery of a Treasury bill equal in value to the settlement amount
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Chapter 15: Stock Options
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Q1) You purchased one SPX put option with a strike of 1,400.You wrote one SPX put option with the same maturity date and a strike of 1,300.At maturity,what is your total payoff if the S&P 500 index is 1,320?
A) -$8,000
B) -$2,000
C) $2,000
D) $4,000
E) $8,000
Q2) Gerold purchased 3 put option contracts at an option premium of $0.95 and a strike price of $40.At expiration,the stock price was $42.25 per share.What is his percentage return?
A) -100 percent
B) 0 percent
C) 15.79 percent
D) 21.62 percent
E) 31.58 percent
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Chapter 16: Option Valuation
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Q1) A stock with a current price of $32 will either move up to $40.00 or down to $30 over the next period.The risk-free rate of interest is 3 percent.What is the value of a call option with a strike price of $35?
A) $1.30
B) $1.44
C) $1.87
D) $2.09
E) $2.41
Q2) Stock prices and call option prices are:
A) unrelated.
B) negatively correlated.
C) directly related.
D) perfectly related.
E) inversely related.
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.
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Chapter 17: Projecting Cash Flow and Earnings
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Q1) Which of the following reports are always included in a 10K filing with the SEC?
I.statement of cash flows
II.balance sheet
III.pro-forma statement
IV.income statement
A) I only
B) IV only
C) II, III, and IV only
D) I, II, and IV only
E) I, II, III, and IV
Q2) A firm has $4,200 of cash,equipment worth $46,300,inventory of $38,400,a building worth $130,500,and $21,500 of accounts receivable.What is the value of the total fixed assets?
A) $176,800
B) $203,500
C) $196,400
D) $223,100
E) $226,900
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Page 19
Chapter 18: Corporate and Government Bonds
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Q1) Which of the following features apply to T-bills?
I.original maturities of 4,13,or 26 weeks
II.minimum face value of $10,000
III.sold at a discount
IV.semiannual interest payments
A) IV only
B) I and III only
C) I and IV only
D) II and III only
E) II and IV only
Q2) A Treasury bond has a quoted bid price of 101:15 and a quoted ask price of 101:22.What is the amount you will receive if you sell your bond that has a par value of $15,000?
A) $15,016.12
B) $15,050.45
C) $15,062.60
D) $15,100.08
E) $15,220.31
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Page 20
Chapter 19: Global Economic Activity and Industry Analysis
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Q1) It has been estimated that "substitution effects" underestimate the Consumer Price Index by approximately how much?
A) 3%
B) 2.5%
C) 1.75%
D) 1.0%
E) 0.5%
Q2) The CPI for this year was reported as 164.9,If inflation was 1.25 percent,what must the CPI have been last year?
A) 161.21
B) 161.63
C) 162.47
D) 162.65
E) 162.86
Q3) Which of the following is NOT considered a leading economic indicator?
A) stock prices
B) M2 money supply
C) industrial production
D) interest rate spread
E) consumer expectations index
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Chapter 20: Mortgage-Backed Securities
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Q1) You have decided to pay $1,800 a month on your 30-year,$225,000 mortgage.The interest rate is 7.75 percent.What is your total prepayment amount for year two?
A) $2,208
B) $2,257
C) $3,387
D) $3,979
E) $4,002
Q2) Which one of the following financing terms will provide the lowest monthly payment for a fixed-rate $175,000 mortgage? (No calculations are required.)
A) 10-year, 5.5 percent
B) 10-year, 6.0 percent
C) 15-year, 5.5 percent
D) 15-year, 6.0 percent
E) 30-year, 5.5 percent
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