Investment Analysis
Exam Materials
Course Introduction
Investment Analysis introduces students to the principles and techniques used in the evaluation of financial assets and investment opportunities. The course covers topics such as risk and return measurement, portfolio theory, asset pricing models, valuation of stocks and bonds, and the analysis of mutual funds and alternative investments. Students learn to assess market trends, perform fundamental and technical analysis, and apply decision-making tools to optimize portfolio performance. Emphasis is placed on understanding the impact of economic, financial, and behavioral factors on investment outcomes, preparing students for informed participation in personal or professional investment environments.
Recommended Textbook Fundamentals of Corporate Finance 3rd Eition by Jonathan Berk
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Page 2
Chapter 1: Corporate Finance and the Financial Manager
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Sample Questions
Q1) Based on the information shown above, how much would you receive from selling 2,000 shares of the above stock?
A) 40,840
B) 40,740
C) 41,000
D) 42,560
Answer: B
Q2) What are the main differences between a limited partnership and a limited liability corporation?
Answer: A limited partnership is required to have at least one general partner. A limited liability corporation is similar to a limited partnership but without the general partner.
Q3) Using the above information, how much would you receive if you sold a share of Washington Post stock?
A)$683.00
B)$677.62
C)$678.50
D)$677.64
Answer: B
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) A firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.
A)True
B)False
Answer: True
Q2) What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?
Answer: The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow.
Q3) Cash is a ________.
A)long-term asset
B)current asset
C)current liability
D)long-term liability
Answer: B
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Chapter 3: Time Value of Money: an Introduction
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Q1) How does arbitrage help the Law of One Price?
Answer: Any arbitrage opportunity will exploit any mispricing to restore the Law of One Price.
Q2) Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?
Answer: Yes, buy 1,000 shares × 20.50 ($20,500)and sell 1,000 shares × 20.75 ($20,750)= $250.00.
Q3) A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?
A)$24.0 per hour
B)$29.0 per hour
C)$4.0 per hour
D)$48.0 per hour
Answer: A
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Chapter 4: Time Value of Money: Valuing Cash Flow
Streams
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Q1) If a few intermediate cash flows in valuing a stream of cash flows are zero can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?
Q2) You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?
A)$7291.00
B)$14,582.00
C)$17,012.34
D)$12,151.67
Q3) A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).
A)True
B)False
Q4) How do you calculate (mathematically)the present value (PV)of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity
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Chapter 5: Interest Rates
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Q1) Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?
A)The number of borrowers seeking funds is low.
B)The expected inflation rate is expected to be low.
C)The borrower is judged to have a low degree of risk.
D)The loan will be for a long period of time.
Q2) Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by?
A)The monthly payment will increase by $104.79.
B)The monthly payment will decrease by $104.79
C)The monthly payment will increase by $343.12.
D)The monthly payment will decrease by $343.12.
Q3) Everything else remaining same, under what situation will APR and EAR be equal?
Q4) What is the implied assumption about interest rates when the equation to calculate the present value (PV)of perpetuity is used?
Q5) How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?
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Chapter 6: Bonds
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Q1) Bond traders generally quote bond yields rather than bond prices, since yield to maturity depends on the face value of the bond.
A)True
B)False
Q2) An investor holds a Ford bond with a face value of $5000, a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029?
A)$2606.25
B)$5000.00
C)$5212.50
D)$5425.00
Q3) A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a premium?
A)7%
B)6%
C)8%
D)10%
Q4) Under what situation can a zero-coupon bond be selling at par to its face value?
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Chapter 7: Stock Valuation
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Q1) Avril Synchronistics will pay a dividend of $1.20 per share this year. It is expected that this dividend will grow by 3% each year in the future. What will be the current value of a single share of Avril's stock if the firm's equity cost of capital is 16%?
A)$6.46
B)$6.92
C)$9.23
D)$10.15
Q2) A floor broker is a person at the NASDAQ with a trading license who represents orders on the floor.
A)True
B)False
Q3) The above screen shot from Google Finance shows the basic stock information for Logitech International SA (USA). What is Logitech International SA (USA)'s ticker symbol?
A)LIS
B)LOGITECH
C)LOG
D)LOGI
Q4) What is a major assumption about growth rate in the dividend-discount model?
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Chapter 8: Investment Decision Rules
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Sample Questions
Q1) A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires for $20,000 down today, then $45 per tire, payable in one year. What is the difference in PV between the first and the second offer, assuming interest rates are 8.1%?
A)-$860
B)-$229
C)-$574
D)$860
Q2) An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?
A)$498,597
B)$747,896
C)$797,756
D)$847,615
Q3) What are some potential problems in using internal rate of return (IRR)for mutually exclusive projects?
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Chapter 9: Fundamentals of Capital Budgeting
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Q1) Which of the following best defines incremental earnings?
A)cash flows arising from a particular investment decision
B)the amount by which a firm's earnings are expected to change as a result of an investment decision
C)the earnings arising from all projects that a company plans to undertake in a fixed time span
D)the net present value (NPV)of earnings that a firm is expected to receive as the result of an investment decision
Q2) What are project externalities?
Q3) A capital budget lists the potential projects a company may undertake in future years.
A)True
B)False
Q4) How are the taxes paid under MACRS different from that paid under straight-line depreciation?
Q5) What is the correct tax rate that should be used for capital budgeting decisions?
Q6) What is the major difference between scenario analysis and sensitivity analysis?
Q7) If available, should MACRS be preferred to straight-line depreciation?
Page 11
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Chapter 10: Stock Valuation: a Second Look
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Q1) Which of the following should be done by a manager wishing to raise his stock's price?
I. Focus on maximizing the present value (PV)of the free cash flow.
II. Focus on accounting earnings.
III. Focus on financial policy.
A)I only
B)II only
C)I and II
D)II and II
Q2) Gonzales Corporation generated free cash flow of $81 million this year. For the next two years, the company's free cash flow is expected to grow at a rate of 9%. After that time, the company's free cash flow is expected to level off to the industry long-term growth rate of 4% per year. If the weighted average cost of capital is 11% and Gonzales Corporation has cash of $100 million, debt of $300 million, and 100 million shares outstanding, what is Gonzales Corporation's expected free cash flow in year 2?
A)$1429.79 million
B)$86.61 million
C)$1572.77 million
D)$96.24 million
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Page 12
Chapter 11: Risk and Return in Capital Markets
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Q1) The S&P 500 index delivered a return of 25%, 15%, -35%, and -5% over four successive years. What is the arithmetic average annual return for four years?
A)-5%
B)0%
C)5%
D)3%
Q2) Which of the following statements is FALSE?
A)Expected return should rise proportionately with volatility.
B)Investors would not choose to hold a portfolio that is more volatile unless they expected to earn a higher return.
C)Smaller stocks have lower volatility than larger stocks.
D)The largest stocks are typically more volatile than a portfolio of large stocks.
Q3) Is volatility a reasonable measure of risk when evaluating the investment in a single stock?
Q4) Which type of investment has historically had the lowest volatility?
Q5) Comment on the accuracy of the statement that as we put more stocks in a portfolio, its risk gets eliminated to zero.
Q6) Is volatility a reasonable measure of risk when evaluating large portfolios?
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Chapter 12: Systematic Risk and the Equity Risk Premium
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Q1) Historically, the average excess return of the S&P 500 over the return of U.S. Treasury bonds has been ________ and is proxy for the market risk premium.
A)between 10% and 12%
B)between 14% and 16%
C)between 5% and 7%
D)between 11% and 13%
Q2) The market portfolio is the portfolio of all risky investments held ________.
A)in descending weights
B)in ascending weights
C)in proportion to their value
D)based on previous year performance
Q3) What is the lowest risk possible by selecting two stocks that are perfectly negatively correlated?
Q4) Correlation is the degree to which the returns of two stocks share common risks. A)True B)False
Q5) What role does the correlation of two assets play in computation of the expected return of the two asset portfolio?
Q6) Is it possible for a stock to have high total risk but low systematic risk?
Page 14
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Chapter 13: The Cost of Capital
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Q1) Internal financing is more costly than external financing because of issuance costs.
A)True
B)False
Q2) Holding everything else constant, an increase in cash ________ a firm's net debt.
A)will decrease
B)will have no impact on
C)will increase
D)may increase or decrease
Q3) The fact that the after-tax cost of debt is lower than the pretax cost of debt implicitly assumes that interest expense can be ________.
A)expensed
B)margined
C)refinanced
D)capitalized
Q4) Why do we use market values rather than book values in calculation of WACC?
Q5) What is the difference between the effective cost of debt and the cost of debt?
Q6) Which of the three costs-debt, preferred stock and common equity-is most difficult to estimate?
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Chapter 14: Raising Equity Capital
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Q1) The founder of a company issues 200,000 shares of stock of series A stock for his own $250,000 investment. He then goes through three further rounds of investment, as shown below: Round Price Number of Shares
Series B $2.50 200,000
Series C $2.75 300,000
Series D $2.90 100,000
Which of the following is closest to the percentage of the company owned by the founder of the company?
A)25.0%
B)50.0%
C)62.5%
D)68.8%
Q2) Dusty Corporation is issuing an IPO with an issue price of $15 per share that is expected to raise about $100 million. Which of the following is likely to be true?
A)The price of the stock will be less than $15 at the close of the first trading day.
B)The cost of the IPO to Dusty will be about $7 million.
C)The stock will perform very well in the three to five years after the issue.
D)None of the above is likely to happen.
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Page 16
Chapter 15: Debt Financing
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Q1) Which of the following is an advantage of a public bond issue over private placement?
A)It can be tailored to a particular situation.
B)It is less costly to issue.
C)It does not need to be registered with the SEC.
D)It is freely tradable on the bond market.
Q2) Which of the following statements regarding sinking fund provisions is FALSE?
A)With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par, the decision as to which bonds to repurchase is made by lottery.
B)With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond.
C)Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund.
D)Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision.
Q3) What are bond covenants?
Q4) What are secured debt?
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Chapter 16: Capital Structure
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Q1) Which of the following statements is FALSE?
A)As long as a firm's choice of securities does not change the cash flows generated by its assets, the capital structure decision will not change the total value of the firm or the amount of capital it can raise.
B)If securities are fairly priced, then buying or selling securities has a net present value (NPV)of zero and, therefore, should not change the value of a firm.
C)The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front.
D)An investor who would like more leverage than the firm has chosen can lend and add leverage to his or her own portfolio.
Q2) Managerial entrenchment means that managers ________ and run the firm for their own best interests.
A)may face little threat of being fired
B)are overseen by equity holders
C)are overseen by debt holders
D)are well compensated
Q3) What is the capital structure of a firm?
Q4) What are the issues in determining the optimal leverage for a firm?
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Page 18
Chapter 17: Payout Policy
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Q1) A(n)________ may occur if a major shareholder desires to sell a large number of shares but the market for the shares is not sufficiently liquid to sustain such a large sale without severely affecting the price.
A)open market share repurchase
B)Dutch auction share repurchase
C)tender offer
D)targeted repurchase
Q2) Empirical evidence about the behavior of financial managers suggests that firms ________ repurchase activity and they ________ dividend payments.
A)smooth, smooth
B)smooth, do not smooth
C)do not smooth, do not smooth
D)do not smooth, smooth
Q3) Homemade dividend refers to the process by which an investor ________.
A)can take on more debt
B)chooses between equity and debt
C)can sell shares to create a dividend policy to suit his preferences
D)reinvests dividend payments
Q4) What are the ways in which a firm can pay out its free cash flow?
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Chapter 18: Financial Modeling and Pro Forma Analysis
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Q1) Assuming that Ideko has an EBITDA multiple of 9.4, then the continuation EV/Sales ratio of Ideko in 2015 is closest to ________.
A)1.9
B)1.7
C)1.6
D)1.8
Q2) Which of the following accounts may reasonably be expected to grow with sales?
I. Accounts Receivable
II. Accounts Payable
III. Property, Plant and Equipment
IV. Inventory
V. Long-Term Debt
A)I, II, and III
B)I, II, and V
C)I, II and IV
D)III and V
Q3) What is net new financing?
Q4) Is total net working capital or incremental net working capital more relevant for calculation of free cash flow?
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Chapter 19: Working Capital Management
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Q1) Luther's cash conversion cycle is closest to ________.
A)51 days
B)66 days
C)71 days
D)129 days
Q2) Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?
A)Delaying payment can increase the effective cost of credit in some circumstances.
B)The supplier may demand COD or CBD in the future.
C)The supplier may choose to discontinue business with delinquent customers.
D)The firm's credit rating may be damaged.
Q3) SwenCorp had sales of $154 million this year and an average accounts receivable of $18 million per day. Its credit terms specify "2/14 net 40." On average, how long does it take to collect on its sales?
A)8.5 days
B)13 days
C)28 days
D)43 days
Q4) What are the five C's of Credit?
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Chapter 20: Short-Term Financial Planning
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Q1) Crimini Foods is offered a $400,000 line of credit for six months at an APR of 10%. This loan has a loan origination fee of 2%. What is the actual six-month interest rate paid, expressed as an EAR?
A)7.14%
B)10.60%
C)11.03%
D)14.80%
Q2) What is single, end-of-period payment loan?
Q3) A petroleum exploration company takes a short-term bank loan in order to finance the purchase of several truck-mounted, vibroseis shakers, which have unexpectedly come onto the market at a good price. Once the purchase is made, the company will obtain long-term financing. Which of the following best describes the short-term loan the company has taken?
A)a single, end-of-period payment loan
B)a promissory note
C)a bridge loan
D)an uncommitted line of credit
Q4) What do we understand by seasonality?
Q5) What are commitment fees and what effect does it have on the loan?
Q6) What are loan origination fees and what effect does it have on the loan?
Page 22
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Chapter 21: Option Applications and Corporate Finance
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Q1) A share of stock can be thought of as a call option on the assets of the firm with a strike price equal to the face value of debt.
A)True
B)False
Q2) The Black-Scholes formula is notable because it does not require us to know
A)the expected return on a stock
B)the risk-free rate
C)the volatility of the stock
D)the dividend rate on the stock
Q3) A share of stock is a ________ option on the assets of the firm with a strike price equal to ________.
A)put option, face value of debt
B)call option, market value of equity
C)call option, face value of debt
D)put option, market value of equity
Q4) What are European options?
Q5) When is an option out-the-money?
Q6) What is the long position of an options contract?
Q7) What is the short position of an options contract?
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Chapter 22: Mergers and Acquisitions
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Q1) The period of the ________ is known for known for "strategic" or "global" deals that were more likely to be friendly and to involve companies in related businesses; these mergers often were designed to create strong firms on a scale that would allow them to compete globally.
A)1960s
B)1970s
C)1980s
D)1990s
Q2) The period of the ________ is known for hostile, "bust-up" takeovers, in which the acquirer purchased a poorly performing conglomerate and sold off its individual business units for more than the purchase price.
A)1960s
B)1970s
C)1980s
D)1990s
Q3) What is a white knight?
Q4) If Martin pays no premium to acquire Luther, what will the earnings per share be after the merger?
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24
Chapter 23: International Corporate Finance
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Q1) 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.
Q2) The ________ market is where currencies are traded twenty-four hours a day and with a large turnover.
A)foreign exchange
B)bond
C)stock
D)none of the above
Q3) How are exchange rates quoted in the Wall Street Journal?
Q4) What is a currency timeline?
Q5) What is covered interest parity?
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Chapter 24: Leasing
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Q1) Which of the following statements is FALSE?
A)In a leveraged lease the lessor borrows from a bank or other lender to obtain the initial capital for the purchase, using the lease payments to pay interest and principal on the loan.
B)In some circumstances, the lessor is not an independent company but rather a separate business partnership, called a special-purpose entity (SPE), which is created by the lessor for the sole purpose of obtaining the lease.
C)In a direct lease, the lessor is not the manufacturer, but is often an independent company that specializes in purchasing assets and leasing them to customers.
D)SPEs are commonly used in synthetic leases, which are designed to obtain specific accounting and tax treatment.
Q2) A lease that gives the lessee the option to purchase the asset at its fair market value at the termination of the lease is called a ________.
A)fair market value cap lease
B)fair market value lease
C)$1.00-out lease
D)fixed price lease
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Chapter 25: Insurance and Risk Management
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Q1) The risk that arises because the value of a futures contract will not be perfectly correlated with the firm's exposure is called ________.
A)commodity price risk
B)basis risk
C)liquidity risk
D)speculation risk
Q2) Which of the following is an agreement to trade an asset on some future date, at a price that is fixed today?
A)margin
B)futures contract
C)notional contract
D)interest rate swap
Q3) Assuming that your firm will purchase insurance, what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?
Q4) What are some of the disadvantages of long-term supply contracts?
Q5) What is the actuarially fair cost of full insurance?
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Chapter 26: Corporate Governance
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Q1) Which of the following statements is FALSE?
A)An active takeover market is part of the system through which the threat of dismissal is maintained.
B)When internal governance systems such as ownership, compensation, board oversight, and shareholder activism fail, the one remaining way to remove poorly performing managers is by mounting a hostile takeover.
C)Likely because hostile takeovers and internal governance systems are substitute mechanisms, researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity.
D)The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover.
Q2) What is corporate governance?
Q3) How does a pyramid structure work?
Q4) Describe the "stakeholder" model of corporate governance.
Q5) What is the role of takeovers in corporate governance?
Q6) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q7) What is the difference between inside, gray, and outside directors?
Page 28
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