Corporate Finance
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Course Introduction
Corporate Finance explores the fundamental principles and strategies involved in managing a companys financial resources. The course covers key topics such as capital budgeting, financial analysis, risk management, cost of capital, capital structure, dividend policy, and valuation of investments. Students will learn how companies make strategic investment and financing decisions to maximize shareholder value, as well as how to analyze financial statements and assess corporate performance. Emphasis is placed on real-world applications, case studies, and the effective use of financial tools and concepts in decision-making processes within corporations.
Recommended Textbook Investments Analysis and Management 13th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Sample Questions
Q1) Gold coins would be classified as:
A)real assets.
B)indirect assets.
C)personal assets.
D)financial assets.
Answer: A
Q2) Security analysts are typically employed only at brokerage houses.
A)True
B)False
Answer: False
Q3) Most financial advisors are registered with the Securities and Exchange Commission as:
A)registered representatives.
B)registered investment advisors.
C)registered financial planners.
D)registered securities consultants.
Answer: B
Q4) Define risk in the context of investments.
Answer: Risk is the chance that the actual return on an investment will differ from its expected return.
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Chapter 2: Investment Alternatives
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Q1) The par value of Blaze,Inc.common stock is $0.50,the earnings per share is $4,the stock price is $60,and the dividend per share is $1.Calculate the payout ratio.
Answer: Payout rate = $1/$4 = 0.25 = 25%
Q2) Zero-coupon bonds are similar to Treasury bills in that both:
A)are issued exclusively by the U.S.Treasury.
B)are money-market securities.
C)are capital-market securities.
D)are sold at less than par.
Answer: D
Q3) Callable bonds attract investors because they can be redeemed early.
A)True
B)False
Answer: False
Q4) Savings accounts are:
A)negotiable but are not liquid.
B)marketable but are not liquid.
C)liquid but are not personal.
D)liquid but are not marketable.
Answer: D
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Chapter 3: Indirect Investing
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Q1) The ___________________________________ requires most investment companies to register with the Securities and Exchange Commission (SEC),the primary federal agency regulating investment companies.
Answer: Investment Company Act of 1940
Q2) Which of the following is a major objective of unit investment trusts?
A)Capital preservation
B)Capital gains
C)Current income
D)Tax deferment
Answer: A
Q3) An unmanaged fixed-income security portfolio handled by an independent trustee is known as a:
A)junk bond fund.
B)closed-end investment company.
C)unit investment trust.
D)hedge fund.
Answer: C
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Chapter 4: Securities Markets and Market Indexes
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Q1) What is the difference between a seasoned issue and an IPO?
Q2) Most trading of bonds in the secondary market takes place on:
A)the NYSE.
B)the American Stock Exchange.
C)the OTC.
D)the CME.
Q3) Stocks traded on NASDAQ are bought and sold from specialists,who are often affiliated with brokerage firms.
A)True
B)False
Q4) Investment bankers operate in the:
A)primary market.
B)secondary market.
C)tertiary market.
D)fourth market.
Q5) What is the Nasdaq National Market System?
Q6) All OTC stocks are included in the NASDAQ.
A)True
B)False
Q7) Why do the DJIA and the S&P 500 have a high correlation?
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Chapter 5: How Securities Are Traded
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Q1) If maintenance margin is not maintained,the broker will:
A)sell sufficient securities to ensure the portfolio is compliant with maintenance margin requirements.
B)sell sufficient securities to ensure the portfolio is compliant with initial margin requirements.
C)contact the investor with a margin put.
D)contact the investor with a margin call.
Q2) The use of stock certificates,compared to book-entry systems,is on the rise due,in part,to increased computer fraud.
A)True
B)False
Q3) What are two methods of investing in stocks without a broker?
Q4) Most securities are sold on a regular way basis,which means the settlement date is one week after the trade date.
A)True B)False
Q5) A sell stop loss order is placed above the current market price. A)True
B)False
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Chapter 6: The Risks and Returns From Investing
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Sample Questions
Q1) Bond prices and interest rates are inversely related.
A)True
B)False
Q2) What common variable is used in the calculation of both the cumulative wealth index and the geometric mean return?How is the common variable calculated?How is it used in each?
Q3) Investors should be willing to invest in riskier investments only:
A)if the expected holding period is short term.
B)if there are no safe alternatives except for holding cash.
C)if the expected return is adequate for the risk level.
D)if they are speculators.
Q4) What was the effect on foreign investors owning U.S.stocks when the dollar fell in 2008?
Q5) Both present value and future value are based upon the concept of the time value of money.
A)True
B)False
Q6) It is generally easier to predict interest rate risk than market risk.
A)True
B)False
Page 8
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Chapter 7: Portfolio Theory
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Q1) In the case of a four-security portfolio,there will be 8 covariances.
A)True
B)False
Q2) When constructing a portfolio,standard deviations,expected returns,and correlation coefficients are typically calculated from historical data.Why may that be a problem?
Q3) Security A and Security B have a correlation coefficient of 0.If Security A's return is expected to increase by 10 percent,Security B's:
A)return should also increase by 10 percent.
B)return should decrease by 10 percent.
C)return should be zero.
D)expected return is impossible to determine from the above information.
Q4) Which of the following is true regarding the expected return of a portfolio?
A)It is a weighted average only for stock portfolios.
B)It can only be positive.
C)It can never be above the highest individual asset return.
D)It is always below the highest individual asset return.
Q5) Portfolio risk is a weighted average of the individual security risks.
A)True
B)False
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Chapter 8: Portfolio Selection
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Sample Questions
Q1) Which of the following would not be considered a source of systematic risk?
A)A hostile takeover
B)An increase in inflation
C)A decrease in GDP
D)A panic on Wall Street
Q2) It would be impossible to combine an asset allocation plan with Markowitz analysis.
A)True
B)False
Q3) Real estate has never been shown to be positively correlated with the performance of stocks.
A)True
B)False
Q4) Which of the following statements is true regarding TIPS?
A)As inflation changes,the interest rate on the bond is adjusted.
B)The correlation between TIPS and the S&P 500 Index has often been negative.
C)TIPS are more volatile than regular Treasury bonds of similar maturity.
D)The return on TIPS is often lower than the inflation rate.
Q5) Explain what is efficient about the efficient frontier.
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) The CML indicates the required return for each portfolio risk level.
A)True
B)False
Q2) The CML states that all investors should invest in the same portfolio of risky assets.
A)True
B)False
Q3) Select the correct statement regarding the market portfolio.
A)It is readily and precisely observable.
B)It has no unsystematic risk.
C)It has no systematic risk.
D)It should be composed of stocks or bonds.
Q4) Which of the following statements about the difference between the SML and the CML is true?
A)The intercept of the CML is the origin,whereas the intercept of the SML is RF.
B)The CML applies to efficient portfolios,whereas the SML applies to all Portfolios or securities.
C)The CML can be downward sloping,whereas that is impossible for the SML.
D)The CML and the SML are essentially the same except for the price of risk.
Q5) Compare the capital market line and the security market line.
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Chapter 10: Common Stock Valuation
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Q1) When using the free cash flow to the firm (FCFF)model,which of the following should be used as the discount rate?
A)The required return on equity
B)The before-tax cost of debt
C)The after-tax cost of equity
D)The weighted average cost of capital
Q2) The only reliable way to value a common stock is to discount the future flow of dividends at a discount rate appropriate to the riskiness of the company.
A)True
B)False
Q3) The P/E ratio is one of the most widely used measures to assess the financial attractiveness of potential stock investments.
A)True
B)False
Q4) Which of the following is not used in relative valuation comparisons?
A)The relative value measure from past periods.
B)The relative value measure for the industry under consideration.
C)The relative value measure for a comparable firm.
D)The relative value measure derived from the DCF model.
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Chapter 11: Common Stocks: Analysis and Strategy
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Sample Questions
Q1) A significant advantage of index funds is their:
A)lower market price than other types of funds.
B)superior sector rotation approach.
C)tax efficiency.
D)minimization of risk.
Q2) How is the required rate of return utilized in stock analysis?
Q3) An investor using the buy-and-hold strategy will receive dividends to reinvest.What dividend option do many companies offer that would make this strategy even more passive?
Q4) The nominal risk-free rate is calculated by subtracting an expected inflation premium from the real risk-free rate.
A)True
B)False
Q5) If security markets are fully efficient,the best common stock strategy is:
A)a rotation strategy.
B)a buy low,sell high strategy.
C)an active strategy.
D)a passive strategy.
Q6) Compare and contrast the passive strategies of buy-and-hold and buying index funds.
Page 13
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Chapter 12: Market Efficiency
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Q1) Which of the following is not an investor trading bias?
A)Loss aversion
B)Framing
C)Overconfidence
D)Mean reversion
Q2) Data mining refers to the search for security return patterns by:
A)regressing firm stock returns against firm price multiples.
B)calculating CARs relative to firm earnings announcements.
C)applying various investment techniques to a set of return data.
D)applying filter tests to very large samples of return data.
Q3) In an efficient market,the expected abnormal return on a security is:
A)equal to zero.
B)equal to the risk-free rate of return.
C)equal to the security's required return.
D)greater than the security's required return.
Q4) Efficient markets imply investors can not earn abnormal returns.
A)True
B)False
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Chapter 13: Economy Market Analysis
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Q1) If the economy is prospering,investors expect corporate earnings to rise.
A)True
B)False
Q2) Which of the following is not a type of index of general economic activity?
A)Lagging indicators
B)Emerging indicators
C)Leading indicators
D)Coincident indicators
Q3) In the U.S. ,since the end of World War II,the typical business cycle contraction has had a duration of:
A)10 months.
B)21 months.
C)32 months.
D)46 months.
Q4) Why do stock investors pay attention to the bond market?
Q5) Approaches to assessing the stock market's likely direction include application of the ________________ model,also called the Fed model.
Q6) Is it useful to do a trend analysis of P/E ratios of the S&P 500 Composite Index over time and extrapolate it to project future expected P/Es?
Page 15
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Chapter 14: Industry Analysis
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Q1) The North American Industry Classification System (NAICS)was developed using a production-oriented approach,resulting in companies being classified into industries based on the activity in which they are primarily engaged.
A)True
B)False
Q2) How can historical performance help the analyst assess the future prospects for an industry?
Q3) Which of the following industry categories is said to be "bought to be sold?"
A)Cyclical
B)Defensive
C)Growth
D)Countercyclical
Q4) What industries do you think will be the growth industries of the next decade?
Q5) Since performance is not always consistent,an industry's track record should not be of much concern to investors.
A)True
B)False
Q6) Differentiate between defensive industries and countercyclical industries.
Q7) What are four basic aspects of qualitative assessment of industries?
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Chapter 15: Company Analysis
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Q1) The auditor's report:
A)guarantees accuracy of the financial statements.
B)guarantees the quality of the earnings.
C)attests that the statements are a fair presentation of financial position.
D)includes a recommendation on the stock.
Q2) On a company's balance sheet,shareholder's equity is measured in:
A)book value.
B)market value.
C)current value.
D)non-depreciated value.
Q3) Regardless of how closely a company adheres to good accounting practices and auditors do their job,investors need to examine "Notes to the Financial Statements" on 10-K and 10-Q Reports to understand the company's financial situation.
A)True
B)False
Q4) The cash flow statement consists of the following parts:
A)cash holdings from revenue,operations,investing,and financing activities.
B)cash flows from revenue,operations,investing,and financing activities.
C)cash holdings from operations,investing,and financing activities.
D)cash flows from operations,investing,and financing activities.
Page 17
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Chapter 16: Technical Analysis
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Q1) A support level is a price range:
A)at which a significant increase in demand for a stock is expected.
B)at which a significant increase in supply of a stock is expected.
C)below which a stock price cannot go.
D)above which a stock price cannot go.
Q2) Which of the following would be considered a strong bearish signal?
A)High mutual fund liquidity
B)Bullish advisory opinion
C)Low short interest ratio
D)Bearish advisory opinion
Q3) Historical tests of filter rules indicate that:
A)several filters were profitable before commissions,but not after.
B)several filters were profitable before and after commissions.
C)no filters were profitable even before commissions.
D)all filters were profitable before commissions,but not after.
Q4) A filter rule specifies a breakpoint for a stock or average and trades are made when the price move is greater than the filter.
A)True
B)False
Q5) How is relative strength calculated and used?
Page 18
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Chapter 17: Bond Yields
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Q1) As interest rates increase,long bonds will decrease in price more slowly than shorter bonds.
A)True
B)False
Q2) What is meant by "yield to maturity"?It is measured as the:
A)coupon payment divided by the face value of the bond.
B)coupon payment divided by the current price of the bond.
C)rate that equates the bond's current price with the PV of its expected future cash flows.
D)rate that equates the bond's face value with the PV of its expected future cash flows.
Q3) Relative to a decrease in interest rates,an increase in interest rates of the same size will produce:
A)a larger percentage change in a bond's price.
B)a smaller percentage change in a bond's price.
C)the same sized change in a bond's price.
D)no change in the bond's price since its coupon rate is fixed.
Q4) Yield spreads vary inversely with the: ______________________________.
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Duration is a measure that relates a:
A)bond's price to its time to maturity.
B)bond's price to its coupon rate.
C)bond's yield to maturity to its time to maturity.
D)bond's price to its yield to maturity.
Q2) A bond investor has $100,000 and has determined 5 years is his maximum term.He puts $20,000 in one-year bonds,$20,000 in two-year bonds,etc.up to $20,000 in five-year bonds.This is an example of:
A)a barbell strategy.
B)a laddering strategy.
C)an immunization strategy.
D)a term management strategy.
Q3) A noncallable bond would be expected to have a higher yield to maturity than a comparable callable bond.
A)True
B)False
Q4) What are the advantages and disadvantages of index funds for an individual bond investor?
Q5) What are two passive management strategies?Two active strategies?
Q6) Why is immunization considered to be a hybrid strategy?
Page 20
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Chapter 19: Options
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Q1) The exercise price on an option is also known as the:
A)premium.
B)strike price.
C)theoretical value.
D)spot price.
Q2) A writer of a call can terminate the contract before expiration by:
A)writing a second call.
B)buying a put.
C)buying a comparable call.
D)writing a put.
Q3) Writing a naked call is potentially riskier than writing a naked put.
A)True
B)False
Q4) Options can be purchased on margin.
A)True
B)False
Q5) There is a positive relationship between the price of a put option and the volatility of the underlying common stock.
A)True
B)False
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Chapter 20: Futures
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Q1) The difference between the cash price and the futures price on the same asset or commodity is known as the: A)basis. B)spread.
C)yield spread. D)premium.
Q2) Index arbitrage attempts to exploit the differences between the prices on two different stock indices.
A)True
B)False
Q3) Futures exchanges standardize nonstandard forward contracts,establishing such features as contract size,delivery dates,and grades that can be delivered.Only the price and number of contracts are left for futures traders to negotiate.
A)True
B)False
Q4) The National Futures Association is the federal agency which regulates the futures markets.
A)True B)False
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Chapter 21: Portfolio Management
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Q1) Which of the following is not one of the phases of the life-cycle theory of asset allocation?
A)Accumulation
B)Consolidation
C)Gifting
D)Retirement
Q2) Retirement programs offer tax sheltering for individual U.S.investors.
A)True
B)False
Q3) Retirees would likely have a greater percentage of their wealth in common stock than would a recent college graduate.
A)True
B)False
Q4) The consolidation phase of the life cycle begins when the investor reaches retirement.
A)True
B)False
Q5) Explain the life-cycle theory of portfolio policies.
Q6) What are the differences between individual investors and institutional investors?
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Chapter 22: Evaluation of Investment Performance
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Q1) Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared.
A)True
B)False
Q2) Which measure calculates performance relative to a benchmark portfolio?
A)Sortino ratio
B)M2
C)Information ratio
D)Sharpe ratio
Q3) Based on Jensen's performance measure,which fund significantly outperformed?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
Q4) The time-weighted rate of return is affected by any cash flows to the portfolio.
A)True
B)False
Q5) Total risk of a portfolio is measured by the beta coefficient.
A)True
B)False
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