Investment Analysis
Chapter Exam Questions
Course Introduction
Investment Analysis is a comprehensive course that explores the fundamental principles and techniques used to evaluate various investment opportunities. The course covers key topics such as risk and return, portfolio theory, asset pricing models, fixed income and equity securities, and the analysis of mutual funds and alternative investments. Students learn both qualitative and quantitative methods to assess financial statements, value assets, and make informed investment decisions. Practical case studies and real-world data are used to develop students' analytical and decision-making skills, preparing them for careers in finance, banking, asset management, and related fields.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Chapter 1: Getting Started-Principles of Finance
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Q1) The goal of profit maximization ignores the timing of profit.
A)True
B)False Answer: True
Q2) A sole proprietorship is the most desirable business form in all circumstances.
A)True
B)False Answer: False
Q3) Which forms of organization are free of initial legal requirements?
A)Sole proprietorship
B)General partnership
C)Corporation
D)Both A and B Answer: D
Q4) There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited partnership.
A)True
B)False Answer: False
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Chapter 2: Firms and the Financial Market
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Q1) All of the following are classified as non-bank financial intermediaries except A)stock brokerages.
B)investment banks.
C)insurance companies.
D)hedge funds.
Answer: A
Q2) The principal participants in the financial markets are
A)businesses,banks,government.
B)borrowers,savers,financial institutions.
C)mutual funds,hedge funds,investment bankers.
D)dealers,brokers,regulators.
Answer: B
Q3) Preferred stock prices are solely dependent on investors' expectations of future cash flows to the corporation.
A)True
B)False
Answer: False
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Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) Which of the following would NOT be included as a liability in a corporate balance sheet?
A)Notes payable
B)Accounts payable
C)Bonds
D)Accumulated Depreciation
Answer: D
Q2) Based on the information contained in Table 3,what was the total amount of Snark Enterprise's common stock dividend for 2012?
A)$0
B)$400
C)$600
D)Cannot be determined with available information
Answer: B
Q3) An advantage of balance sheet numbers is that assets reflect current market values.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) Champion Company has sales of $20 million,total debt of $1.5 million,and a debt ratio of 40%.What is Champion's total asset turnover?
A)13.33
B)9.11
C)6.55
D)5.33
Q2) Assume that a particular firm has a total asset turnover ratio lower than the industry norm.In addition,this firm's current ratio and acid test ratio also meet industry standards.Based on this information,we can conclude that this firm must have excessive
A)accounts receivable.
B)fixed assets.
C)debt.
D)inventory.
Q3) Common size financial statements represent all figures on the financial statements
A)in inflation adjusted dollars from a base year.
B)as if all companies being compared had the same total revenue.
C)as if all companies being compared had the same total assets.
D)as a percentage of either sales or total assets.
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) Assuming two investments have equal lives,a high discount rate tends to favor
A)the investment with large cash flow early.
B)the investment with large cash flow late.
C)the investment with even cash flow.
D)neither investment since they have equal lives.
Q2) Stephen's grandmother deposited $100 in an investment account for him when he was born,25 years ago.The account is now worth $1,500.What was the average rate of return on the account? Which of the following is a correct way to solve this problem using EXCEL?
A)=PV(25,i,-100,1500)
B)=rate(25,0,100,1500)
C)=rate(25,0,-100,1500)
D)=rate(0,-100,1500,25)
Q3) The annual percentage rate (APR)is calculated as which of the following?
A)Interest rate per period x compounding periods per year
B)(1+quoted annual rate/compounding periods per year)<sup>compounding periods per year</sup>-1
C)Interest rate per period / compounding periods per year
D)1+quoted annual rate/compounding periods per year)<sup>1/compounding periods per year</sup>-1
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Q1) If you have $20,000 in an account earning 8% annually,what constant amount could you withdraw each year and have nothing remaining at the end of five years?
A)$3,525.62
B)$5,008.76
C)$3,408.88
D)$2,465.78
Q2) You have just purchased a car from Friendly Sam.The selling price of the car is $6,500.If you pay $500 down,then your monthly payments are $317.22.The annual interest rate is 24%.How many payments must you make?
Q3) What is the present value of an annuity of $27 received at the beginning of each year for the next six years? The first payment will be received today,and the discount rate is 10% (round to nearest $10).
A)$120
B)$130
C)$100
D)$110
Q4) If you have an opportunity cost of 10%,how much must you invest each year to have $4,000 accumulated in 10 years?
Page 8
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) The higher the standard deviation,the less risk the investment has.
A)True
B)False
Q2) If a market is weak form efficient,an investor can make higher than expected profits by studying the past price patterns of a stock.
A)True
B)False
Q3) Investments that have earned the highest rates of return over time also have
A)the lowest risk.
B)the highest standard deviation of returns.
C)the largest market capitalization.
D)the least sensitivity to inflation.
Q4) What is the standard deviation of an investment that has the following expected scenario? 18% probability of a recession,2.0% return;65% probability of a moderate economy,9.5% return;17% probability of a strong economy,14.2% return.
A)3.68% B)1.23%
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Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) Firm B's risk premium is
A)2.66%.
B)4.8%.
C)6.3%.
D)8.1%.
Q2) Unsystematic risk can be eliminated through diversification.
A)True
B)False
Q3) You are considering a portfolio of three stocks with 30% of your money invested in company X,45% of your money invested in company Y,and 25% of your money invested in company Z.If the betas for each stock are 1.22 for company X,1.46 for company Y,and 1.03 for company Z,what is the portfolio beta?
A)1.24
B)1.00
C)1.28
D)1.33
Q4) The market rewards assuming additional unsystematic risk with additional returns.
A)True
B)False
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Zero coupon bonds are disadvantageous to the issuing firm if interest rates fall.
A)True
B)False
Q2) Bonds cannot be worth less than their book value.
A)True
B)False
Q3) Debentures are unsecured long-term debt.
A)True
B)False
Q4) Caldwell,Inc.sold an issue of 30-year,$1,000 par value bonds to the public.The bonds carry a 10.85% coupon rate and pay interest semiannually.It is now 12 years later.The current market rate of interest on the Caldwell bonds is 8.45%.What is the current market price (intrinsic value)of the bonds? Round off to the nearest $1.
A)$751
B)$1,177
C)$1,220
D)$976
Q5) Compare and contrast current yield and yield to maturity.
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Chapter 10: Stock Valuation
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Sample Questions
Q1) Which of the following provisions is unique to preferred stockholders and usually NOT available to common stockholders?
A)Cumulative dividends feature
B)Voting rights
C)Fixed dividend
D)Both A and C
Q2) A small,newly listed technology company is most likely to be listed on A)AMEX.
B)NYSE.
C)Nasdaq National Markets.
D)Nasdaq Capital Markets.
Q3) Edison Power and Light has an outstanding issue of cumulative preferred stock with an annual fixed dividend of $2.00 per share.It has not paid the preferred dividend for the last 3 years,but intends to pay a dividend on the common stock in the coming year.Before Edison can pay a dividend on the common stock
A)preferred shareholders may cast all their votes for a single director.
B)preferred shareholders must receive dividends totaling $8.00 per share.
C)preferred shareholders must receive $2.00 per share.
D)will not necessarily receive any dividend.
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Chapter 11: Investment Decision Criteria
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Q1) WSU Inc.has various options for replacing a piece of manufacturing equipment.The present value of costs for option Ell is $84,000.Option Ell has a useful life of 5 years;annual operating costs were discounted at 9%.What is the equivalent annual cost?
A)$16,800
B)$21,595.77
C)$14,035.77
D)$18,312
Q2) Tinker Tools,Inc.is considering a project with the following cash flows.Calculate the MIRR of the project assuming a reinvestment rate of 8%.
Year Cash Flows
0 ($70,000)
1 ($55,000)
2 $40,000
3 $60,000
4 $100,000
Q3) Why is it so difficult for firms to find good investment ideas?
Q4) Briefly describe the actual capital budgeting methods of large U.S.corporations.
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Chapter 12: Analyzing Project Cash Flows
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Q1) Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital investment proposal?
A)Training expense
B)Working capital investments
C)Installation costs of an asset
D)Before-tax selling price of old machine
Q2) By examining cash flows,we are correctly able to analyze the timing of the benefits.
A)True
B)False
Q3) Marguerite's Florist is considering the purchase of a new delivery van.It will cost $25,000 plus another $3,000 to have it painted in the company's characteristic floral motif.The van will be depreciated over 5 years using MACRS percentages and a half year convention.Compute depreciation for the second year in the life of the van.
Q4) The pertinent issue for determining whether overhead costs should be part of a project's relevant after-tax cash flow is whether the project benefits from the overhead items.
A)True B)False
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Chapter 13: Risk Analysis and Project Evaluation
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Q1) Economists at PHE Llc estimate a 20% probability of a recession next year,a 50% probability of an average economy,and a 30% probability of a rapid expansion.If there is a recession,the NPV of project O will be $20 million;if the economy is average,it will be $45 million and in case of a rapid expansion,it will be $75 million.What is the expected NPV of the project?
A)$57.5 million
B)$49 million
C)$46.67 million
D)$45 million
Q2) Sensitivity analysis shows how the distribution of possible net present values is affected by a change in one input variable.
A)True
B)False
Q3) Most of the variables used in forecasting cash flows are known with certainty.
A)True
B)False
Q4) Dudster company's DOL is 2.If sales increase by 10%,NOI will increase by 5%.
A)True
B)False
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Chapter 14: The Cost of Capital
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Q1) Verigreen Lawn Care products just paid a dividend of $1.85.This dividend is expected to grow at a constant rate of 3% per year,so the next expected dividend is $1.90.The stock price is currently $12.50.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 40%.Compute the cost of common equity.
A)18.0%
B)17.8%
C)18.2%
D)15.2%
Q2) The average cost of capital is the appropriate rate to use when evaluating new investments,even though the new investments might be in a higher risk class.
A)True
B)False
Q3) No adjustment is made in the cost of preferred stock for taxes since preferred stock dividends are not tax-deductible.
A)True
B)False
Q4) Discuss the primary advantages of the CAPM approach in determining the cost of common equity.
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Chapter 15: Capital Structure Policy
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Q1) Chelsea Corporation's cost of equity is 16% and it is 100% equity financed.If it can borrow enough money at 10% to buy back half of its stock,what would would happen to the cost of equity be under the original assumptions of the Modigliani and Miller Capital Structure Theorem.
A)It would remain at 16%.
B)It would rise to 22%.
C)It would fall to 11%.
D)It would fall to 13%.
Q2) Briefly explain what the empirical evidence suggests about financial managers' actions as they relate to the capital structure theory.
Q3) When benchmarking a firm's capital structure,management should compare it to A)firms in S&P 500.
B)firms in the same geographic region.
C)firms recognized for the quality of their management.
D)firms in similar lines of business.
Q4) List and briefly explain at least two important reasons why capital structures tend to differ between industries and even companies within the same industry.
Q5) Why is the Debt to Assets Ratio always higher than the Debt to Value ratio?
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Chapter 16: Dividend Policy
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Q1) In practice,firms tend to increase their dividend
A)when the stock seems to be underpriced in the market.
B)reducing cash to force executives to focus on efficient investment decisions.
C)only when they believe they can sustain the increased payout indefinitely.
D)when company is holding more cash than it would like.
Q2) Share repurchases convey information to investors that the shares are underpriced.
A)True
B)False
Q3) Dividends tend to be higher for firms with stable earnings.
A)True
B)False
Q4) When a firm makes the decision to pay dividends,it also makes the decision not to reinvest the cash in the firm.
A)True
B)False
Q5) Dividends per share divided by earnings per share (EPS)equals the dividend retention date.
A)True
B)False
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Chapter 17: Financial Forecasting and Planning
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Q1) Why is financial planning important in a highly uncertain financial environment.
Q2) Your firm is trying to determine its cash disbursements for the next two months (June and July).In any month,the firm makes purchases of 60% of that month's sales,which are paid the following month.In addition,the firm incurs the following costs every month and pays for them in the month the expenses are incurred: wages/salaries of $10,000,rent of $4,000,and miscellaneous cash expenses of $1,000.Depreciation amortized on a monthly basis is $2,000.June's sales are expected to be $100,000,and July's sales are expected to be $150,000.Cash disbursements for the month of July are expected to be
A)$105,000.
B)$107,000.
C)$77,000.
D)$75,000.
Q3) The function of a budget includes to
A)indicate the amount and time of future financing needs.
B)provide a basis for corrective action.
C)provide information for performance evaluations.
D)all of the above.
Q4) What is meant by discretionary financing?
Q5) What is meant by spontaneous financing?
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Chapter 18: Working Capital Management
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Q1) Which of the following is NOT a typical characteristic of money-market securities?
A)Little or no default risk
B)Liquid,easily bought and sold
C)Interest is not taxable at federal level
D)Maturities less than 1 year
Q2) A company with a current ratio less than one or negative net working capital would not be able to pay its bills on time.
A)True
B)False
Q3) What is the annual percentage cost of the loan,to the nearest .01%?
A)5.00%
B)4.50%
C)5.56%
D)2.5%
Q4) Trade credit is a source of spontaneous financing.
A)True
B)False
Q5) Describe the differences between secured and unsecured short-term credit.
Q6) Discuss the advantages of using commercial paper.
Page 20
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Chapter 19: International Business Finance
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Q1) The forward price of currencies can be either higher,lower or even the same as the spot price.
A)True B)False
Q2) The bid rate (also called the offer rate)is the number of units of home currency paid to a customer in exchange for their foreign currency.
A)True B)False
Q3) The 1 year interest rate in the U.S.is 1%.The spot exchange rate for Canadian dollars 1.007 to the U.S.dollar.The 6 months forward rate is 1.0068 to the U.S.dollar.These prices indicate that interest rates in Canada,on an annualized basis,are about
A).08% lower.
B).08% higher.
C).04% higher.
D).8% lower.
Q4) Forward rates,like spot rates,are quoted in both direct and indirect form.
A)True
B)False
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Chapter 20: Corporate Risk Management
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Q1) There is only one day per month on which a listed option on any stock can expire.
A)True
B)False
Q2) As the length of time left until expiration increases,the value of call and put options on the stock also increases.
A)True
B)False
Q3) The most you can ever lose when you purchase a put or call option is the premium.
A)True
B)False
Q4) What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?
Q5) Which of the following types of insurance cannot be sold in the United States?
A)Insurance that protects against loss of revenue due to bad weather
B)Insurance that protects a companies executives and directors from lawsuits
C)Life insurance which pays the corporation when an employee dies
D)All these types of insurance can be sold in the U.S.
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