Investment Analysis
Exam Answer Key
Course Introduction
Investment Analysis is a comprehensive course designed to equip students with the foundational concepts and practical tools used in evaluating various investment opportunities. The course covers key topics such as risk and return, portfolio theory, asset pricing models, securities valuation, fixed income analysis, and alternative investments. Through a combination of theoretical frameworks and case studies, students learn how to assess financial statements, interpret market trends, and construct effective portfolios to maximize returns while managing risk. Ultimately, this course prepares students to make informed investment decisions in complex and dynamic financial markets.
Recommended Textbook Finance Applications and Theory 4th Edition by Marcia Cornett
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20 Chapters
2227 Verified Questions
2227 Flashcards
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Page 2
Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) From the perspective of access to capital, the best form of business organization is the
A)sole proprietorship.
B)corporation.
C)partnership.
D)S corporation.
Answer: B
Q2) Which of the following can use financial concepts to improve their decisions?
A)financial professionals only
B)financial and nonfinance professionals
C)day-to-day operations managers only
D)long-term operations managers only
Answer: B
Q3) Which statement is incorrect regarding hybrid organizations?
A)They offer single taxation.
B)They offer limited risk to the owners.
C)They offer the same type of control as a sole proprietorship.
D)All of these choices are correct.
Answer: C
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Page 3
Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Hunt Taxidermy, Inc. is concerned about the taxes paid by the company in 2018. In addition to $36.5 million of taxable income, the firm received $1,250,000 of interest on state-issued bonds and $400,000 of dividends on common stock it owns in Hunt Taxidermy, Inc. Calculate Hunt Taxidermy's taxable income.
A)$40,250,000
B)$38,150,000
C)$36,900,000
D)$36,620,000
Answer: D
Q2) Which of the following statements is correct?
A)The bottom line on the statement of cash flows equals the change in the retained earnings on the balance sheet.
B)The reason the statement of cash flows is important is because cash is what pays the firm's obligations, not accounting profit.
C)If a firm has accounting profit, its cash account will always increase.
D)All of these choices are correct.
Answer: B
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Chapter 3: Analyzing Financial Statements
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Sample Questions
Q1) You are considering a stock investment in one of two firms (A and B), both of which operate in the same industry. A finances its $20 million in assets with $18 million in debt and $2 million in equity. B finances its $20 million in assets with $2 million in debt and $18 million in equity. Calculate the debt-to-equity ratio for the two firms.
A)Firm A: 9 times; Firm B: 1.11 times
B)Firm A: 19 times; Firm B: 0.11 times
C)Firm A: 9 times; Firm B: 0.11 times
D)Firm A: 19 times; Firm B: 1.11 times
Answer: C
Q2) A firm ended the year with an average collection period of 20 days. The firm's credit sales were $50 million. What is the firm's year-end balance in accounts receivable?
A)$1.46 million
B)$2.50 million
C)$2.74 million
D)$4.00 million
Answer: C
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) Which of the following statements is incorrect with respect to time lines?
A) A helpful tool for organizing our analysis is the time line.
B) Cash flows we receive are called inflows and denoted with a positive number.
C) Cash flows we pay out are called outflows and designated with a negative number.
D) Interest rates are not included on our time lines.
Q2) How many years (and months) will it take $1 million to grow to $3 million with an annual interest rate of 7.5 percent?
A) 15 years and 2.29 months
B) 17 years and 5.6 months
C) 18 years and 3.8 months
D)19 years and 2.4 months
Q3) If an average home in your town currently costs $350,000, and house prices are expected to grow at an average rate of 3 percent per year, what will an average house cost in "5" years?
A) $402,500.00
B) $405,168.75
C) $405,745.93
D) $507,500.00
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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Sample Questions
Q1) Bank A charges a 7.50 percent annual percentage rate and interest is due at the end of the year. Bank B charges a 6.95 percent annual percentage rate and interest must be paid monthly. What is the effective annual rate charged by each bank?
A)Bank A: 7.5 percent, Bank B: 6.95 percent
B)Bank A: 7.76 percent, Bank B: 6.95 percent
C)Bank A: 7.5 percent, Bank B: 7.18 percent
D)Bank A: 7.76 percent, Bank B: 7.18 percent
Q2) Hank purchased a $20,000 car two years ago using an 8 percent, 5-year loan. He has decided that he would sell the car now, if he could get a price that would pay off the balance of his loan. What is the minimum price Hank would need to receive for his car?
A)$8,000.00
B)$12,079.65
C)$12,941.12
D)$15,133.64
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Page 7
Chapter 6: Understanding Financial Markets and Institutions
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Sample
Questions
Q1) One-year Treasury bills currently earn 2.55 percent. You expect that one year from now, one-year Treasury bill rates will increase to 2.85 percent and that two years from now, one-year Treasury bill rates will increase to 3.15 percent. If the unbiased expectations theory is correct, what should the current rate be on 3-year Treasury securities?
A)2.55 percent
B)2.85 percent
C)2.93 percent
D)3.15 percent
Q2) Which of the following occurs as the utility derived from an asset purchased with borrowed funds increases?
A)The willingness of market participants to borrow decreases.
B)The absolute dollar value borrowed increases.
C)At every interest rate the demand for loanable funds decrease.
Q3) All of the following special provisions benefit security holders EXCEPT
A)tax-free status.
B)convertibility.
C)callability.
D)All of these choices are correct.
Page 8
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Chapter 7: Valuing Bonds
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Sample Questions
Q1) Which of the following was the catalyst for the recent financial crisis?
A)corruption in the investment banking industry
B)widespread layoffs due to illegal alien hiring
C)defaults on subprime mortgages
D)All of these choices are correct.
Q2) Calculate the price of a zero-coupon bond that matures in 20 years if the market interest rate is 8.5 percent. (Assume annual compounding and a par value of $1,000.)
A)$90.29
B)$195.62
C)$1,195.62
D)$995.62
Q3) A 7.25 percent coupon bond with 25 years left to maturity is priced to offer a 7 percent yield to maturity. You believe that in one year, the yield to maturity will be 7.15 percent. If this occurs, what would be the total return of the bond in percent? (Assume semiannual interest payments and $1,000 par value.)
A)3.5 percent
B)5.3 percent
C)7.0 percent
D)7.15 percent
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Page 9
Chapter 8: Valuing Stocks
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Sample Questions
Q1) All of the following are stock market indices EXCEPT
A)Standard & Poor's 500 Index.
B)Dow Jones Industrial Average.
C)Nasdaq Composite Index.
D)Mercantile 1000.
Q2) Suppose Walmart (WMT) recently earned a profit of $5.10 per share and has a P/E ratio of 16.25. The dividend has been growing at a 6 percent rate over the past few years. If this growth continues, what would be the stock price in five years if the P/E ratio remained unchanged? What would the price be if the P/E ratio declined to 12 in five years?
A)$41.44, $30.60 respectively
B)$82.88, $61.20 respectively
C)$110.91, $81.90 respectively
D)$414.38, $306.00 respectively
Q3) Which of the following will only be executed if the order's price conditions are met?
A)a trade
B)a limit order
C)an unlimited order
D)a spread
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Page 10
Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) FedEx Corp. stock ended the previous year at $113.39 per share. It paid a $0.40 per share dividend last year. It ended last year at $126.69. If you owned 300 shares of FedEx, what was your dollar return and percent return?
A)$3,990, 11.73 percent
B)$4,110, 12.08 percent
C)$4,250, 12.29 percent
D)$2,009, 9.13 percent
Q2) Year-to-date, Oracle had earned a 12.57 percent return. During the same time period, Valero Energy earned -9.32 percent and McDonald's earned 3.45 percent. If you have a portfolio made up of 60 percent Oracle, 20 percent Valero Energy, and 20 percent McDonald's, what is your portfolio return?
A)10.10 percent
B)8.45 percent
C)6.70 percent
D)6.37 percent
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11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) Whenever a set of stock prices go unnaturally high and subsequently crash down, the market experiences what we call a(n)
A)financial meltdown.
B)irrational behavior.
C)stock market bubble.
D)none of these choices are complete.
Q2) Which of the following is data that includes past stock prices and volume, financial statements, corporate news, analyst opinions, etc.?
A)audited financial statements
B)generally accepted accounting principles
C)privately held information
D)public information
Q3) You own $2,000 of City Steel stock that has a beta of 2.5. You also own $8,000 of Rent-N-Co (beta = 1.9) and $4,000 of Lincoln Corporation (beta = 0.25). What is the beta of your portfolio?
A)1.51
B)1.55
C)4.65 D)14.00
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Page 12
Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) Sports Corp. has 10 million shares of common stock outstanding, 5 million shares of preferred stock outstanding, and 1 million bonds. If the common shares are selling for $25 per share, the preferred shares are selling for $12.50 per share, and the bonds are selling for 97 percent of par, what would be the weight used for equity in the computation of Sports' WACC?
A)18.59 percent
B)19.49 percent
C)62.50 percent
D)79.75 percent
Q2) Which statement makes this a false statement? When a firm pays commissions to underwriting firms that float the issuance of new stock
A)the component cost will need to be integrated to figure project WACCs.
B)the component cost will need to be integrated only for the firm's WACC.
C)the firm can increase the project's WACC to incorporate the flotation costs' impact.
D)the firm can leave the WACC alone and adjust the project's initial investment upwards.
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13
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) You are evaluating a project for your company. You estimate the sales price to be $100 per unit and sales volume to be 5,000 units in year 1; 10,000 units in year 2; and 2,500 units in year 3. The project has a three-year life. Variable costs amount to $50 per unit and fixed costs are $75,000 per year. The project requires an initial investment of $250,000 in assets that will be depreciated straight-line to zero over the three-year project life. The actual market value of these assets at the end of year 3 is expected to be $25,000. NWC requirements at the beginning of each year will be approximately 20 percent of the projected sales during the coming year. The tax rate is 35 percent and the required return on the project is 14 percent. What change in NWC occurs at the end of year 1?
A)$65,000
B)$70,000
C)$100,000
D)$250,000
Q2) With regard to depreciation, the time value of money concept tells us that:
A)delaying the depreciation expense is always better.
B)taking the depreciation expense sooner is always better.
C)delaying the depreciation expense is sometimes better.
D)taking the depreciation expense sooner is sometimes better.
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) Compute the MIRR statistic for Project J and advise whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
\[\begin{array} { l c c c c c c }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \\
\text { Cash Flow } & - \$ 1,000 & \$ 300 & \$ 1,480 & - \$ 500 & \$ 300 & - \$ 100 \\
\hline
\end{array}\]
A) The project's MIRR is 14.77 percent and the project should be accepted.
B) The project's MIRR is 9.29 percent and the project should be rejected.
C) The project's MIRR is 13.76 percent and the project should be accepted.
D) The project's MIRR is 15.31 percent and the project should be accepted.
Q2) Which rate-based decision statistic measures the excess return (the amount above and beyond the cost of capital for a project), rather than the gross return?
A)Internal rate of return (IRR)
B)Modified internal rate of return (MIRR)
C)Profitability index (PI)
D)Net present value (NPV)
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Page 15
Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) Which of these is the period of time after a check has been written, but not yet cleared and deposited?
A)Liquid current assets
B)Safety stock
C)Overnight securities
D)Float
Q2) Dandee Lions, Inc. has a cash balance of $105,000; accounts payable of $290,000; inventory of $213,000; accounts receivable of $310,000; notes payable of $95,000; and accrued wages and taxes of $65,000. How much net working capital does the firm need to fund?
A)$8,000
B)$83,000
C)$178,000
D)$18,000
Q3) If a firm has a cash cycle of 55 days and an operating cycle of 150 days, what is its payables turnover?
A)9.50
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Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) First order effects are defined as which of the following?
A)The subsequent, less observable effects of the change
B)The subsequent, more observable effects of the change
C)Higher order effects of the change
D)The immediately observable effects of changing one item on another
Q2) Goldilochs Inc. reported sales of $8 million and net income of $2 million. The firm has a total asset turnover of 3.2. The firm's chief financial officer is projecting a $5 million increase in sales and that spontaneous liabilities will increase by $350,000 automatically. The firm currently pays out 80 percent of its net income to shareholders. Assuming that all assets and current liabilities are expected to grow with sales, how much in additional funds will Goldilochs need from external sources to fund the expected growth?
A)$501,900
B)$562,500
C)$601,800
D)$446,600
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Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
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Sample Questions
Q1) Which of the following is a true statement regarding Proposition I?
A)Vu in a world with taxes is going to be more than Vu in a world without taxes.
B)Vu in a world with taxes is going to be less than Vu in a world without taxes.
C)Vu in a world with taxes is going to be equal to Vu in a world without taxes.
D)Vu in a world with taxes cannot be compared to Vu in a world without taxes.
Q2) An all-equity financed firm has $500 in assets and the stock price is $20. If the firm restructures with 15 percent debt which creates interest expense of $30 per year and the firm's tax rate is 40 percent, what is the break-even EBIT?
A)$20
B)$150
C)$200
D)$500
Q3) The mix of debt and equity that a firm uses to finance its operations is known as:
A)capital structure.
B)capital management.
C)separation structure.
D)break even.
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Page 18
Chapter 17: Sharing Firm Wealth: Dividends, Share
Repurchases, and Other Payouts
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Sample Questions
Q1) Which of the following refers to the fact that, in real life, investors do not have identical desires about taxability and timing of firm payouts?
A)Clientele effect
B)Dividend irrelevance effect
C)Capital gain theory
D)Bird-in-the-hand theory
Q2) Suppose a firm has a dividend payout ratio of 65 percent and net income of $5 million. What would be the annual addition to retained earnings?
A)$3,250,000
B)$5,250,000
C)$1,750,000
D)$750,000
Q3) Which of the following is an exchange of existing shares for a different (usually larger) number of "new shares," with proportionately different par and market values?
A)Stock dividend
B)Stock split
C)Payment date
D)Ex-dividend
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Chapter 18: Issuing Capital and the Investment Banking Process
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Sample Questions
Q1) Which of the following refers to when the bond issuing firm invites bids from a number of underwriters?
A)Competitive sale
B)Negotiated sale
C)Commercial sale
D)Auction
Q2) Sipe's Paint and Wallpaper, Inc., needs to raise $1.05 million to finance plant expansion. In discussions with its investment bank, Sipe's Paint and Wallpaper learns that the bankers recommend a gross price of $22 per share and that 50,000 shares of stock be sold. If the net proceeds on the stock sale leave Sipe's Paint and Wallpaper with $1.05 million, what percent of the stock price does the underwriter's spread represent?
A)4.29 percent
B)4.55 percent
C)5.62 percent
D)6.15 percent
Q3) The rate on commercial paper is generally higher than the prime rate. True or false?
A)True
B)False
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Chapter 19: International Corporate Finance
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Sample Questions
Q1) Convert the following indirect quote to a dollar direct quote: $1 = 15,990 Vietnam dong
A)$0.00006254
B)$159.90
C)$6.2539
D)$1.00625
Q2) All of the following are ways to conduct international business EXCEPT:
A)direct ownership investment.
B)import/export operations.
C)partnership arrangements.
D)all of the options.
Q3) Purchasing power parity (PPP) may not hold exactly because of which of the following?
A)Shipping costs
B)Insurance costs
C)Trading costs
D)All of the options are transaction costs that may not allow PPP to hold exactly.
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) The managers of BSW Inc. have been approached by EAG Corp. for a possible merger. EAG Corp. is asking a price of $20.5 million to be purchased by BSW Inc. The two firms currently have cumulative total cash flows of $1 million that are growing at 3 percent annually. Managers of EAG estimate that because of synergies the merged firm's cash flows will increase by an additional 4 percent for the first three years following the merger. After the first three years, managers of EAG have estimated that cash flows will grow at a rate of 2 percent. The WACC for the merged firms is 8 percent. Managers of BSW Inc. agree that cash flows should grow at an additional 4 percent for the first three years, but are unsure of the long-term growth rate in cash flows estimated by EAG.
Calculate the minimum growth rate needed after the first three years such that BSW Inc. would see this merger as a positive NPV project.
A)3.00 percent
B)2.82 percent
C)4.05 percent
D)8.00 percent
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