Financial Analysis
Textbook Exam Questions
Course Introduction
Financial Analysis is a comprehensive course designed to introduce students to the fundamental tools and techniques used to evaluate a company's financial health and performance. By exploring topics such as ratio analysis, cash flow analysis, trend identification, and financial statement interpretation, students learn to assess profitability, liquidity, efficiency, and solvency. This course emphasizes both the theoretical and practical aspects of financial analysis, equipping students with the ability to make informed business decisions, forecast future performance, and support strategic corporate planning in a global economic environment.
Recommended Textbook
Corporate Finance 2nd Canadian by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) How much would you receive if you sold 200 shares of XYZ stock on November 11th?
A) $5050
B) $5040
C) $5186
D) $5200
Answer: B
Q2) Which of the following is/are subject to double taxation in Canada?
A) Corporation
B) Partnership
C) Sole proprietorship
D) A and B
Answer: A
Q3) A sole proprietorship is owned by
A) one person.
B) two or more people.
C) shareholders.
D) bankers.
Answer: A
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities?
A) Add increases in accounts payable.
B) Add back depreciation.
C) Add increases in accounts receivable.
D) Deduct increases in inventory.
Answer: C
Q2) Which of the following statements regarding the income statement is incorrect?
A) The income statement shows the earnings and expenses at a given point in time.
B) The income statement shows the flow of earnings and expenses generated by the firm between two dates.
C) The last or "bottom" line of the income statement shows the firm's net income.
D) The first line of an income statement lists the revenues from the sales of products or services.
Answer: A
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Chapter 3: Arbitrage and Financial Decision Making
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Q1) You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of 208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is 0.78 to $1.00.What is the NPV of this project? Would you take the project?
A) NPV = 0; No
B) NPV = 2,358; No
C) NPV = 2,358; Yes
D) NPV = 13,650; Yes
Answer: A
Q2) If equivalent investment opportunities trade simultaneously in different competitive markets,then they must trade for the ________ price in ________.
A) higher, one market than another
B) lower, one market than another
C) same, both markets
D) different, both markets
Answer: C
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 79.50 + 3 × 40.00 + 3 × 48.50 = $424.50
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Draw a timeline that details the amount that would be available for the daughter's college expenses on her 18th birthday.
Q2) The British government has a consol bond outstanding that pays 100 in interest each year.Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment one year from now,then the value of the consol bond is closest to:
A) 1000
B) 1100
C) 2100
D) 2000
Q3) Draw a timeline detailing Joe's cash flows from the sale of the family business.
Q4) Draw a timeline detailing the cash flows from investment "A."
Q5) The future value at retirement (age 65)of your savings is:
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Chapter 5: Interest Rates
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Q1) If your income tax rate is 30%,then the after-tax EAR for your home equity loan is closest to:
A) 6.0%
B) 5.9%
C) 8.6%
D) 5.8%
Q2) You are considering purchasing a new automobile that will cost you $28,000.The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month).Assuming you finance the entire $28,000 and finance through the dealer,your monthly payments will be closest to:
A) $1,454
B) $527
C) $467
D) $478
Q3) What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one,three,and five years ?
Q4) Assuming that you have made all of the first 24 payments on time,how much interest have you paid over the first two years of your loan?
Q5) What is the effective after-tax rate of each instrument,expressed as an EAR?
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Chapter 6: Investment Decision Rules
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Q1) Assuming that your capital is constrained,which investment tool should you use to determine the correct investment decisions?
A) Profitability Index
B) Incremental IRR
C) NPV
D) IRR
Q2) The internal rate of return (IRR)for project B is closest to:
A) 21.6%
B) 23.3%
C) 42.9%
D) 7.7%
Q3) Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:
A) 11.0%
B) 0.0%
C) 2.5%
D) 1.0%
Q4) If the discount rate for project B is 15%,then what is the NPV for project B?
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Chapter 7: Fundamentals of Capital Budgeting
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Q1) The depreciation tax shield for Shepard Industries project in year one is closest to:
A) $84 million
B) $168 million
C) $96 million
D) $72 million
Q2) Epiphany would like to know how sensitive the project's NPV is to changes in the discount rate.How much can the discount rate vary before the NPV reaches zero?
Q3) The incremental unlevered net income for Shepard Industries in year two is closest to:
A) $355 million
B) $415 million
C) $600 million
D) $510 million
Q4) The change in net working capital from year one to year two is closest to:
A) A decrease of $360
B) An increase of $360
C) An increase of $396
D) A decrease of $396
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Chapter 8: Valuing Bonds
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Q1) Government of Canada Bonds are highly liquid investments which may be sold back by investors into the
A) primary market prior to maturity.
B) money market prior to maturity.
C) capital market prior to maturity.
D) secondary market prior to maturity.
Q2) Assume that the YTM increases by 1% for each of the four bonds listed.Rank the bonds based upon the sensitivity of their prices from least to most sensitive.
Q3) The credit spread of the B corporate bond is closest to:
A) 1.6%
B) 0.8%
C) 1.0%
D) 1.4%
Q4) The percentage change in the price of the bond "A" if its yield to maturity increases from 5% to 6% is closest to:
A) -4%
B) -6%
C) -1%
D) 4%
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is false?
A) To estimate a firm's enterprise value, we compute the present value of the free cash flows (FCF) that the firm has available to pay equity holders.
B) The NPV of any individual project represents its contribution to the firm's enterprise value.
C) When using the total payout model, we discount total dividends and share repurchases, and use the growth rate in earnings when forecasting the growth of the firm's payout.
D) In the total payout model, we first value the firm's equity, rather than just a single share.
Q2) Suppose that Defenestration decides to pay a dividend of only $2 per share this year and use the remaining $2 per share to repurchase stock.If Defenestration's payout rate remains constant,then Defenestration's stock price is closest to:
A) $50.00
B) $22.25
C) $32.30
D) $30.75
Q3) Calculate the enterprise value for DM Corporation.
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11
Chapter 10: Capital Markets and the Pricing of Risk
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Q1) Suppose that KAN's beta is 1.5.If the market risk premium is 8% and the risk-free interest rate is 4%,then then expected return for KAN stock is:
A) 8.0%
B) 16.0%
C) 13.5%
D) 10.0%
Q2) Which of the following statements is false?
A) Investments with higher volatility have rewarded investors with higher average returns.
B) Investments with higher volatility should have a higher risk premium and therefore higher returns.
C) Volatility seems to be a reasonable measure of risk when evaluating returns on large portfolios and the returns of individual securities.
D) Riskier investments must offer investors higher average returns to compensate them for the extra risk they are taking on.
Q3) What is the market portfolio?
Q4) Do expected returns for individual stocks increase proportionately with volatility?
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12
Chapter 11: Optimal Portfolio Choice and the Capital Asset
Pricing Model
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Q1) The amount of risk that will remain depends on the degree to which the stocks are exposed to
A) independent risks.
B) diversifiable risks.
C) common risks.
D) idiosyncratic risks.
Q2) By combining stocks into a portfolio,we reduce risk through A) higher expected return.
B) higher rate of return.
C) higher average return.
D) diversification.
Q3) The volatility of a portfolio that consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:
A) 9%
B) 14%
C) 11%
D) 12%
Q4) What is the variance on a portfolio that has $2000 invested in Duke Energy,$3000 invested in Microsoft,and $5000 invested in Wal-Mart stock?
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Chapter 12: Estimating the Cost of Capital
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Q1) Which of the following statements is false?
A) There is a need to calculate the cost of capital for the project's cash flows if a project's risk and leverage differ from those for the firm overall.
B) There is no need to calculate the cost of capital for the project's cash flows if a project's risk and leverage are the same as those for the firm overall.
C) There is no need to calculate the cost of capital for the project's cash flows if a project's risk and leverage differ from those for the firm overall.
D) None of the above.
Q2) The total market capitalization for all four stocks is closest to:
A) $479 billion
B) $415 billion
C) $2,100 billion
D) $200 billion
Q3) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
Q4) Why does the yield to maturity of a firm's debt generally overestimate its debt cost of capital?
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Chapter 13: Investor Behaviour and Capital Market
Efficiency
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Q1) Which of the following statements is false?
A) As a practical matter, it is extremely difficult to identify portfolios that are efficient because we cannot measure the expected return and the standard deviation of a portfolio with great accuracy.
B) The portfolios in a multifactor model can be thought of as either risk factors themselves or portfolios of stocks correlated with unobservable risk factors.
C) Each factor beta is the expected percent change in the excess return of a security for a 1% change in the excess return of the factor portfolio.
D) Even if the market portfolio is not efficient, it still must capture all components of systematic risk.
Q2) Investors can ________ without reducing their expected return.
A) take more risk
B) take less risk
C) take the same risk
D) reduce risk
Q3) Why is the high trading volume observed in markets inconsistent with the CAPM equilibrium?
Q4) Explain why the market portfolio proxy may not be efficient.
Page 15
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Chapter 14: Capital Structure in a Perfect Market
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Q1) Show mathematically that the stock price of RC won't change following the debt issuance and share repurchase.
Q2) Following the borrowing of $12 million and the subsequent share repurchase,the number of shares that RC will have outstanding is closest to:
A) 4.0 million
B) 6.0 million
C) 4.9 million
D) 4.5 .million
Q3) Show mathematically that the stock price of Rockwood does not depend on whether they issue new stock or borrow to fund their expansion.
Q4) Suppose you own 10% of the equity of With.What is another portfolio you could hold that would provide you with the same exact cash flows?
Q5) Equity in a firm with debt is called
A) levered equity.
B) riskless equity.
C) unlevered equity.
D) risky equity.
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Page 16
Chapter 15: Debt and Taxes
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Q1) If Flagstaff maintains a debt to equity ratio of 1,then Flagstaff's pre-tax WACC is closest to:
A) 11.0%
B) 10.5%
C) 10.0%
D) 9.0%
Q2) The value of Shepard Industries with leverage is closest to:
A) $64 million
B) $100 million
C) $135 million
D) $114 million
Q3) If Rosewood had no interest expense,its net income would be closest to:
A) $405 million
B) $160 million
C) $450 million
D) $290 million
Q4) With its current leverage,WELS Corporation will have net income this year of $2.6 million.If WELS corporate tax rate is 35% and it pays 8% interest on its debt,how much additional debt can WELS issue this year and still receive the benefit of the interest tax shield next year?
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Chapter 16: Financial Distress, managerial Incentives, and Information
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Q1) The value of Luther with leverage is closest to:
A) $315 million
B) $340 million
C) $205 million
D) $300 million
Q2) The agency costs are the costs that arise when there are conflicts of interest
A) between management and shareholders.
B) between customers and suppliers.
C) between stakeholders.
D) between the board of directors and shareholders.
Q3) Assume that in the event of default,20% of the value of MI's assets will be lost in bankruptcy costs and suppose that MI has zero-coupon debt with a $125 million face value due next year.The total value of MI with leverage is closest to:
A) $140 million
B) $100 million
C) $125 million
D) $134 million
Q4) List five general categories of indirect costs associated with bankruptcy.
Page 18
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Chapter 17: Payout Policy
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Q1) The effective dividend tax rate for a pension fund in 1999 is closest to:
A) 40%
B) 20%
C) 0%
D) 25%
Q2) The effective tax disadvantage for retaining cash in 2000 is closest to:
A) 15.00%
B) 13.35%
C) 14.75%
D) 35.00%
Q3) Assuming Luther issues a 5:2 stock split,then Luther's new share price is closest to:
A) $32.00
B) $16.00
C) $24.00
D) $30.00
Q4) A member of Iota's board of directors suggests that Iota's stock price would be higher if they used the $200 million to repurchase shares instead of funding the expansion.If you were advising the board,what course of action would you recommend: expansion or repurchase? Which provides the higher stock price?
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Calculate the NPV for Iota's new project.
Q2) The weighted average cost of capital for "Eenie" is closest to:
A) 6.0%
B) 6.5%
C) 7.5%
D) 5.5%
Q3) The debt capacity for Omicron's new project in year 1 is closest to:
A) $38.75
B) $48.25
C) $50.25
D) $58.00
Q4) The unlevered value of Omicron's new project is closest to:
A) $96
B) $124
C) $126
D) $25
Q5) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
Q6) Suppose that to fund this new project,Aardvark borrows $150 million with the principal to be paid in three equal installments at the end each year.Calculate the levered value of Aardvark's new project.
Page 20
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) Assuming that Ideko has a EBITDA multiple of 9.4,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A) 17.2
B) 16.4
C) 14.5
D) 19.4
Q2) According to the Canadian Institute of Chartered Accountants (CICA)handbook,a firm's goodwill is not necessarily amortized but it is subject to ________ at least once a year.
A) an impairment test
B) an impairment charge
C) an asset valuation
D) a capital asset valuation
Q3) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A) 17.6
B) 16.4
C) 14.5
D) 19.0
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Chapter 20: Financial Options
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Q1) You pay $3.25 for a call option on Luther Industries that expires in three months with a strike price of $40.00.Three months later,at expiration,Luther Industries is trading at $41.00 per share.Your profit per share on this transaction is closest to?
A) -$1.00
B) $1.00
C) -$2.25
D) $2.25
Q2) An option strategy in which you hold a long position in both a put and a call option with the same strike price is called
A) a strangle.
B) portfolio insurance.
C) a butterfly spread.
D) a straddle.
Q3) Describe the conditions when it would be optimal to exercise an American Call and an American Put option prior to their expiration.
Q4) Graph the payoff at expiration of a short position in a put option with a strike price of $20.
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Chapter 21: Option Valuation
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Q1) Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A) $2.00
B) $1.45
C) $2.40
D) $2..15
Q2) Risk-neutral probabilities are known by other names as well: ________.
A) martingale prices
B) state prices
C) state-contingent prices
D) all the above
Q3) Using risk-neutral probabilities,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A) $2.00
B) $2.15
C) $1.45
D) $2.40
Q4) Using risk-neutral probabilities,calculate the price of a two-year call option on Kinston stock with a strike price of $9.
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Chapter 22: Real Options
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Q1) Mortgage interest rates ________ Government of Canada bond rates because mortgages have ________ that the bonds do not have.
A) are lower than; an abandonment option
B) are higher than; a growth option
C) are lower than; a growth option
D) are higher than; an abandonment option
Q2) Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high or low demand would still be 50%.What is the value of the the option to do pilot production and test marketing?
Q3) When the investment cannot be delayed,the optimal rule is to invest whenever ________ is greater than zero.
A) the profitability index
B) the payback period
C) the internal rate of return
D) the discounted payback period
Q4) Describe the two factors that affect the value of an investment timing option?
Q5) Using the equivalent annual benefit method,which project would you select and why?
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Chapter 23: The Mechanics of Raising Equity Capital
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Q1) Which of the following is NOT a common name for a corporation that invests in private companies?
A) Strategic investor
B) Corporate partner
C) Venture partner
D) Strategic partner
Q2) Describe the four characteristics of IPOs that puzzle financial economists.
Q3) Once a company goes public,it must satisfy all of the requirements and new standards that focused on more thorough ________,________ and more stringent requirements for the board of directors.These standards,in general,were designed to provide better protection for ________.
A) financial disclosure; greater accountability; companies
B) financial disclosure; less accountability; investors
C) financial disclosure; greater accountability; investors
D) financial disclosure; less accountability; companies
Q4) Sovereign wealth funds (SWFs)are pools of money controlled ________.
A) by publicly traded corporations
B) by private firms
C) by a government
D) by non-profit organizations
25
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Chapter 24: Debt Financing
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Q1) In addition to the tradable securities,the Canadian government also borrows directly from ________ through ________ and Canada Premium Bonds.
A) corporate investors; Canada Savings Bonds
B) venture capital investors; Government of Canada Bonds
C) institutional investors; Government of Canada Bonds
D) individuals; Canada Savings Bonds
Q2) Which of the following statements is false?
A) When bond yields have increased, by exercising the call on the callable bond and then immediately refinancing, the issuer can lower its borrowing costs.
B) To understand how call provisions affect the price of a bond, we first need to consider when an issuer will exercise its right to call the bond.
C) If the call provision offers a cheaper way to retire the bonds the issuer will forgo the option of purchasing the bonds in the open market and will call the bonds instead.
D) An issuer can always retire one of its bonds early by repurchasing the bond in the open market.
Q3) What is the Yield to Maturity (YTM)on this bond?
Q4) What is the Yield to Call (YTC)on this bond?
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Chapter 25: Leasing
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Q1) In a perfect market,where lessors compete with one another in initiating,the cost of leasing and then purchasing the asset ________ the cost of borrowing to purchase the asset.
A) is greater than B) is equivalent to C) is less than D) is double
Q2) Which of the following statements is false?
A) By offering assets together with complementary services, lessors can achieve efficiency gains and offer attractive lease rates.
B) Assets of the lessor leased under a true lease are afforded bankruptcy protection and cannot be seized in the event of default.
C) Because of the higher recovery value in the event of default, a lessor may be able to offer more attractive financing through the lease than an ordinary lender could.
D) Lessors often have efficiency advantages over lessees in maintaining or operating certain types of assets.
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Chapter 26: Working Capital Management
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Q1) Stretching the accounts payable means to ________.
A) reduce the trade credit period
B) raise the amount of accounts payable
C) decrease the discount percentage offered
D) increase the trade credit period
Q2) KT Enterprises would like to construct and operate a new ice skating rink.In addition to the capital expenditures on the rink,management estimates that the project will require an investment today of $220,000 in net working capital.The firm will recover the investment in net working capital fifteen years from today,when management anticipates closing the rink.The discount rate for this type of cash flow is 8% per year.Calculate the present value of the cost of working capital for the ice skating rink.
Q3) Luther Industries bills its accounts on terms of 2/10,net 30.The firm's accounts receivable include $250,000 that has been outstanding for 10 or fewer days,$375,000 outstanding for 11 to 30 days,$70,000 outstanding for 31 to 40 days,$35,000 outstanding for 41 to 50 days,$20,000 outstanding for 51 to 60 days,and $8,000 outstanding for more than 60 days.Prepare an aging schedule for Luther Industries.
Q4) What is a compensating balance?
Q5) Calculate the number of days in Luther's Operating Cycle.
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Chapter 27: Short-Term Financial Planning
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Q1) Which of the following statements is false?
A) In a pledging of accounts receivable agreement, the lender reviews the invoices that represent the credit sales of the borrowing firm and decides which credit accounts it will accept as collateral for the loan, based on its own credit standards.
B) With a trust receipts loan or floor planning, all inventory items are held in a trust as security for the loan.
C) If the factoring agreement is without recourse, the borrowing firm must receive credit approval for a customer from the factor prior to shipping the goods. If the factor gives its approval, the firm ships the goods and the customer is directed to make payment directly to the lender.
D) In a warehouse arrangement, the inventory that serves as collateral for the loan is stored in a warehouse.
Q2) A short-term bank loan that is often used until a firm can arrange for long-term financing is called
A) a committed line of credit.
B) a short-term mortgage loan.
C) a bridge loan.
D) a single, end-of-period-payment loan.
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Page 29
Chapter 28: Mergers and Acquisitions
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Q1) Assume that Martin pays no premium to acquire Luther.Calculate Martin's price-earnings (P/E)ratio both pre- and post-merger.
Q2) Which of the following statements regarding mergers and taxes is false?
A) Because it may be easier to measure performance accurately in a conglomerate, agency costs may be reduced and resources may be more efficiently allocated.
B) Because employees holding a large fraction of their wealth in shares of the corporation for which they work are obligated to hold idiosyncratic risk, they benefit when the firm reduces that risk by conglomerating.
C) Like a large portfolio, large firms bear less idiosyncratic risk, so often mergers are justified on the basis that the combined firm is less risky.
D) Because most stockholders will already be holding a well-diversified portfolio, they get no further benefit from the firm diversifying through acquisition.
Q3) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
Q4) What is a white knight?
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Chapter 29: Corporate Governance
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Q1) A variety of pyramid structures are quite common in Canada and ________.
A) other countries including the United States
B) other countries except the United States
C) the United States and not the European countries
D) other Asian countries except Japan
Q2) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
Q3) What is corporate governance?
Q4) Which of the following statements is false?
A) Increasing the pay-for-performance sensitivity comes with the added benefit of reducing managers' risk.
B) Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible.
C) By tying compensation to performance, the shareholders effectively give the manager an ownership stake in the firm.
D) During the 1990s, most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives.
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Chapter 30: Risk Management
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Q1) Which of the following statements is false?
A) Corporations use interest rate swaps routinely to alter their exposure to interest rate fluctuations. Firms can use interest rate swaps with duration-hedging strategies.
B) The value of a swap, while initially zero, will fluctuate over time as interest rates change.
C) An interest rate that adjusts to current market conditions is called a floating rate.
D) When interest rates rise, the swap's value will rise for the party receiving the fixed rate; conversely, it will fall for the party paying the fixed rate.
Q2) The Century 22 Fund has invested in a portfolio of mortgaged back securities that has a current market value of $245 million.The duration of this portfolio of mortgaged back securities is 14.7 years.The fund has borrowed to purchase these securities,and the current value of its liabilities (i.e.,the current value of the bonds Century 22 has issued)is $160 million.The duration of these liabilities is 5.4 years.What is the initial duration of the equity for the Century 22 fund?
Q3) What is the actuarially fair cost of full insurance?
Q4) What are some of the disadvantages of long-term supply contracts?
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Chapter 31: International Corporate Finance
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Q1) What is the pound present value of the project?
Q2) The present value of the £5 million cash inflow computed by first converting into dollars and then discounting is closest to:
A) $8,950,495
B) $8,954,615
C) $8,943,695
D) $8,961,420
Q3) Which of the following statements is false?
A) In some countries, especially in the developing world, all investors do not have equal access to financial securities.
B) Firms may face differential access to markets if there is any kind of asymmetry with respect to information about them.
C) In some cases, a country's risk-free securities are internationally integrated but markets for a specific firm's securities are not.
D) When countries' capital markets are not integrated we call them disintegrated capital markets.
Q4) What is the dollar present value of the project?
Q5) Calculate the pound denominated cost of capital for Luther's project.
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