Investment Analysis
Chapter Exam Questions
Course Introduction
Investment Analysis is a comprehensive course that explores the fundamental principles and practical approaches to evaluating various investment vehicles such as stocks, bonds, and alternative assets. Students learn to assess risk and return, analyze financial statements, and apply quantitative techniques for portfolio construction and management. The course covers key topics including market efficiency, asset pricing models, valuation methods, and the impact of macroeconomic factors on investment decisions. Through case studies and project work, students gain hands-on experience in formulating investment strategies and making informed financial decisions in dynamic markets.
Recommended Textbook
Financial Management Principles and Applications 12th Edition by Sheridan Titman
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Page 2
Chapter 1: Getting Started-Principles of Finance
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Q1) A sole proprietorship is the most desirable business form in all circumstances.
A)True
B)False
Answer: False
Q2) The term stockholder is equivalent to A)general partner.
B)creditor.
C)shareholder.
D)stakeholder.
Answer: C
Q3) A corporation is owned by
A)shareholders and partners.
B)the shareholders who hold the company's stock.
C)the Board of Directors.
D)its Chief Executive Officer.
Answer: B
Q4) The goal of the firm should be the maximization of profit.
A)True
B)False
Answer: False
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Chapter 2: Firms and the Financial Market
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Sample Questions
Q1) Investors in common stock increase their wealth when the
A)the market value of the stock goes up.
B)when the stock pays a dividend.
C)when the stock pays interest on the original investment.
D)both A and B.
Answer: D
Q2) Which of the following financial instruments is not traded in the capital markets?
A)Debt with a maturity of less than one year
B)Bonds
C)Common stock
D)Preferred stock
Answer: A
Q3) Each of the following is true of Mutual Funds EXCEPT
A)Funds can be classified as load or no-load funds.
B)Mutual Fund shares must be bought from or sold to the Fund by investors.
C)An index fund is the fund with the highest expenses payable by investors.
D)The NAV is the total value of stock held by the fund divided by the number of outstanding shares in the mutual fund.
Answer: C
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Page 4
Chapter 3: Understanding Financial Statements,taxes,and Cash Flows
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Sample Questions
Q1) A & K Co.expects to have earnings before taxes of $250,000 to $300,000.The company's marginal tax rate is 39% and its average tax rate about 33%.For every additional dollar of interest expense,A & K's taxes will
A)increase by 39 cents.
B)fall by 39 cents.
C)be unaffected.
D)fall by about 33 cents.
Answer: B
Q2) Your firm has the following income statement items: sales of $50,250,000;income tax of $1,744,000;operating expenses of $10,115,000;cost of goods sold of $35,025,000;and interest expense of $750,000.What is the amount of the firm's gross profit?
A)$18,000,000
B)$15,225,000
C)$5,000,110
D)$6,632,000
Answer: B
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Page 5
Chapter 4: Financial Analysis-Sizing up Firm Performance
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Sample Questions
Q1) The debt ratio is a measure of a firm's
A)leverage.
B)profitability.
C)liquidity.
D)efficiency.
Q2) A retailer that accepts credit cards will have a higher accounts receivable turnover ratio than a retailer with its own credit department.
A)True
B)False
Q3) Which of the following ratios would be the most useful in evaluating the ability of a firm to meet its short-term obligations?
A)The quick ratio (acid test)
B)Return on equity
C)Total asset turnover
D)Operating profit margin
Q4) A small start-up company should choose an industry leader in the same industry as a benchmark.
A)True B)False
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Chapter 5: Time Value of Money-The Basics
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Sample Questions
Q1) The last amount shown on a timeline represents the future value of all amounts invested up to that point.
A)True
B)False
Q2) How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?
A)17
B)19
C)21
D)25
Q3) If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly,what will the investment be worth in 21 months (round to the nearest dollar)?
A)$827
B)$833
C)$828
D)$1,176
Q4) If you invest $450 today and it increases to $6,185 at the end of 20 years,what rate of return have you earned?
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Chapter 6: The Time Value of Money-Annuities and Other Topics
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Sample Questions
Q1) Your company has received a $50,000 loan from an industrial finance company.The annual payments are $6,202.70.If the company is paying 9% interest per year,how many loan payments must the company make?
A)15
B)13
C)12
D)19
Q2) What is the present value of $250 received at the beginning of each year for 21 years? Assume that the first payment is received today.Use a discount rate of 12%,and round your answer to the nearest $10.
A)$1,870
B)$2,090
C)$2,117
D)$3,243
Q3) All else constant,an individual would be indifferent between receiving $2,000 today or receiving a $200 perpetuity when the discount rate is 10% annually.
A)True
B)False
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Chapter 7: An Introduction to Risk and Return-History of
Financial Market Returns
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Sample Questions
Q1) Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT
A)There is publicly available information that Boeing Aircraft has procured a contract to build 25 planes for the U.S.Government and the price of Boeing quickly goes up.
B)ACG,Inc.performed well for the past six months,but they just lost a major distribution contract,but the price of ACG stock continues to go up.
C)Louisville Slugger,Inc. ,gets a contract to supply bats for Little League play,a contract it never had before,and stock price remains stable.
D)Muguet Company consistently underperforms the market in October,but outperforms the market in May.
Q2) The expected rate of return is the weighted average of the possible returns for an investment.
A)True
B)False
Q3) Risky investments have the potential for higher returns,but also larger losses.
A)True
B)False
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Page 9
Chapter 8: Risk and Return-Capital Market Theory
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Sample Questions
Q1) It is impossible to eliminate all risk through diversification.
A)True
B)False
Q2) A portfolio containing a mix of stocks,bonds,and real estate is likely to be more diversified than a portfolio made up of only one asset class.
A)True
B)False
Q3) The appropriate measure for risk according to the capital asset pricing model is A)the standard deviation of a firm's cash flows.
B)alpha.
C)beta.
D)probability of correlation.
Q4) Briefly discuss why there is no reason to believe that the market will reward investors with additional returns for assuming unsystematic risk.
Q5) An investor will get maximum risk reduction by combining assets that are A)negatively correlated.
B)positively correlated.
C)uncorrelated.
D)perfectly,positively correlated.
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Chapter 9: Debt Valuation and Interest Rates
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Sample Questions
Q1) Which of the following statements is true?
A)A bond that has a rating of AA is considered to be a junk bond.
B)A bond will sell at a premium if the prevailing required rate of return is less than the bond's coupon rate.
C)A zero coupon is a bond that is secured by a lien on real property.
D)The legal document that describes all of the terms and conditions of a bond issue is called a debenture agreement.
Q2) Bond ratings directly affect a bond's
A)spread over the Treasury yield.
B)coupon rate.
C)maturity date.
D)call provisions.
Q3) What elements determine what the yield to maturity will be for a bond?
Q4) As interest rates,and consequently investors' required rates of return,change over time,the ________ of outstanding bonds will also change.
A)maturity date
B)coupon interest payment
C)par value
D)price
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Chapter 10: Stock Valuation
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Q1) Which of the following statements is true?
A)Preferred stockholders are entitled to dividends before common stockholders can receive dividends.
B)Preferred stock,like common stock,usually has no maturity;i.e. ,the corporation does not pay back the investment.
C)The market value of preferred stock,like bonds,will usually fluctuate in value primarily as the result of market rates of interest.
D)All of the above.
Q2) Marshall Manufacturing has common stock which paid a dividend of $1.00 a share last year.You expect the stock to grow at 5% per year.If the appropriate rate of return on this stock is 12%,how much are you willing to pay for the stock today?
A)$13.00
B)$15.00
C)$17.00
D)$19.00
Q3) Discuss two reasons why preferred stock would be viewed as less risky than common stock to investors.
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Chapter 11: Investment Decision Criteria
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Q1) According to the modified internal rate of return (MIRR)technique,when a project's MIRR is greater than its cost of capital,the project should be accepted.
A)True
B)False
Q2) Project Sigma requires an investment of $1 million and has a NPV of $10.Project Delta requires an investment of $500,000 and has a NPV of $150,000.The projects involve unrelated new product lines.
A)Both projects should be accepted because they have positive NPV's.
B)Neither project should be accepted because they might compete with one another.
C)Only project Delta should be accepted.Alpha's NPV is too low for the investment. D)The company should look at other investment criteria,not just NPV.
Q3) Which of the following techniques will always produce a single rate of return estimate?
A)IRR
B)MIRR
C)PI
D)Discounted payback
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Chapter 12: Analyzing Project Cash Flows
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Q1) Which of the following is the best example of an incremental cash inflow/outflow?
A)Cash flows that are achieved by diverting sales from other projects of the firm
B)Cash flows that are associated with the financing of a project
C)Cash flows that occur a little at a time
D)What the total cash flows will be to the company if the project is undertaken as opposed to what they would have been if the project had not been undertaken
Q2) 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
Q3) Accounting profits represents free cash flows that are available for reinvestment.
A)True
B)False
Q4) What is the advantage,if any,to using MACRS rather than straight line depreciation?
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14
Chapter 13: Risk Analysis and Project Evaluation
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Sample Questions
Q1) A project's internal rate of return and the company's required rate of return were both exactly 12%,therefore the project's NPV was greater than $0.00.
A)True
B)False
Q2) Variable cost for Light.com's fluorescent tubes is $12.50,the tubes are sold over the internet to businesses and organizations for $20.00 each.Fixed costs are $7,500,000.What is the break-even quantity for the fluorescent tubes?
A)600,000
B)1,000,000
C)375,000
D)7,500,000
Q3) Why is it important to consider real options in the capital budgeting process? Give two specific examples.
Q4) If a project reaches the accounting break-even point in every year of its life,it must also have a positive NPV.
A)True
B)False
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15
Chapter 14: The Cost of Capital
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Sample Questions
Q1) Walker & Son is issuing a 10-year,$1,000 par value bond that pays 9% interest annually.The bond is expected to sell for $885.What is Walker & Son's after-tax cost of debt if the firm is in the 34% tax bracket?
A)7.23%
B)8.01%
C)9.15%
D)10.35%
Q2) Briefly identify and describe some important uses of a firm's weighted average cost of capital.
Q3) A firm can estimate its cost of debt by finding the yield on bonds issued by other firms with similar ratings and maturities.
A)True
B)False
Q4) Most firms use Treasury securities with maturities of ________ to determine the appropriate risk-free rate to use in the CAPM.
A)90 days
B)180 days
C)10 years
D)30 years
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Chapter 15: Capital Structure Policy
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Sample Questions
Q1) Which of the following is consistent with the original formulation of the Modigliani and Miller Capital Structure Theorem?
A)A firm's composite cost of capital decreases as financial leverage is used.
B)A firm's common stock price falls as financial leverage is used.
C)A firm's composite cost of capital and common stock price are unaffected by the amount of financial leverage used by the firm.
D)A firm's composite cost of capital increases as operating leverage is used.
Q2) Financial structure includes long-term and short-term sources of funds.
A)True
B)False
Q3) The EBIT-EPS indifference point,sometimes called the break-even point,identifies the optimal range of financial leverage regardless of the financing plan chosen by the financial manager.
A)True
B)False
Q4) Bipolar Beverages total assets equal $360 million.The book value of Bipolar's equity is $180 million.The market value of Bipolar's equity is $ 250 million.The book value of the company's interest bearing debt is $120 million.Compute Bipolar's Debt Ratio and Debt to Value Ratio.
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Chapter 16: Dividend Policy
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Sample Questions
Q1) Managers are prohibited from using dividend changes and repurchase offers to communicate information concerning their future expectations concerning the firm's cash flows.
A)True
B)False
Q2) If a firm's EPS are $8.33,and the firm is paying a dividend of $1.25 per share,what is the firm's dividend payout ratio?
A)33%
B)6%
C)15%
D)25%
E)66%
Q3) If dividends and capital gains are taxed at the same rate,should investors prefer cash dividends or stock repurchases?
A)They would prefer to have neither a dividend nor a stock repurchase.
B)It would not matter.Either cash dividends or stock repurchases would result in the same after-tax cash flow.
C)They should prefer cash dividends to stock repurchases.
D)They should prefer stock repurchases to cash dividends.
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Page 18
Chapter 17: Financial Forecasting and Planning
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Q1) Cash budgets usually include details such as the timing of materials purchases,interest payments,and the like.
A)True
B)False
Q2) Why is financial planning important in a highly uncertain financial environment.
Q3) Holding all other variables constant,as the dividend payout ratio decreases,the sustainable growth rate increases.
A)True
B)False
Q4) A discretionary form of financing would be A)notes payable.
B)accounts payable.
C)accrued expenses.
D)none of the above.
Q5) Depreciation expense is always included in the cash budget as it reflects the impact of fixed asset purchases.
A)True B)False
Q6) Discuss the basic functions that budgets perform for a firm.
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Chapter 18: Working Capital Management
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Sample Questions
Q1) Fibercom Inc.needs $500,000 for one year.If the loan takes the form of a discounted note at a stated rate of 4%,how much will Fibercom actually need to borrow?
A)$480,000
B)$500,000
C)$520,833
D)$520,000
Q2) According to the self-liquidating debt principle permanent assets should be financed with ________ liabilities.
A)permanent
B)spontaneous
C)current
D)fixed
Q3) The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.
A)True
B)False
Q4) Lines of credit involve fixed rates of interest.
A)True
B)False
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Chapter 19: International Business Finance
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Q1) An attempt to profit by converting dollars to yen,yen to euros,and euros back to dollars would be an example of A)arbitrage.
B)speculation.
C)hedging.
D)intervention.
Q2) What is the role of arbitrage in the foreign exchange markets?
Q3) Forward contracts benefit only the customer due to a reduction in uncertainty. A)True
B)False
Q4) Assume that the interest rate in India is 10% while in Europe it is 3% and that the exchange rate is 65.50 rupees to the euro.What would we expect the 6 month exchange rate to be?
Q5) An investor purchased 1,000,000 Canadian dollars at an exchange rate of 1.0309 Canadian dollars to the U.S.dollar.The Canadian dollars cost her
A)$103,090.
B)$970,026.
C)$1,030,927.
D)$97,000.
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Chapter 20: Corporate Risk Management
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Sample Questions
Q1) You purchased one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.By the end of the day,the price had fallen to $.57 per lb.How much did the value of your contract change during the day?
A)It rose by $800.
B)It fell by $356.
C)It fell by $800.
D)There is no change in value until the contract expires.
Q2) Self-insurance would not provide adequate protection in which of the following circumstances?
A)Unemployment insurance for a firm that rarely lays off employees.
B)Damage to the company's own vehicles.
C)Major ecological disasters resulting from oil spills.
D)Revenue lost because of bad weather during the peak shopping season.
Q3) If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.
A)True
B)False
Q4) What are the rights and obligations of the buyer and the seller of a call option on common stock?
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