Investment Analysis
Exam Practice Tests
Course Introduction
Investment Analysis provides students with a comprehensive understanding of the principles and techniques used to evaluate investment opportunities in the financial markets. The course covers key topics such as security valuation, risk and return analysis, portfolio theory, efficient market hypothesis, and the application of quantitative tools for investment decision-making. Students will explore different asset classes, including stocks, bonds, and alternative investments, and learn how to construct and manage portfolios to meet specific investment objectives. Practical case studies and real-world examples help to reinforce concepts and prepare students for careers in finance, banking, and investment management.
Recommended Textbook
Corporate Finance A Focused Approach 5th Edition by Michael C. Ehrhardt
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17 Chapters
1391 Verified Questions
1391 Flashcards
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Chapter 1: An overview of financial management and the financial environment
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding.
B) Capital market transactions only include preferred stock and common stock transactions.
C) The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments.That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.
D) Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks.
E) An electronic communications network (ECN)is a physical location exchange.
Answer: D
Q2) If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.
A)True
B)False
Answer: False
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3
Chapter 2: Financial statements, cash flow, and taxes
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
B) The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
C) The balance sheet gives us a picture of the firm's financial position at a point in time.
D) The income statement gives us a picture of the firm's financial position at a point in time.
E) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
Answer: C
Q2) The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.
A)True
B)False
Answer: False
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Chapter 3: Analysis of financial statements
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104 Flashcards
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Sample Questions
Q1) A firm wants to strengthen its financial position.Which of the following actions would increase its current ratio?
A) Use cash to increase inventory holdings.
B) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.
C) Use cash to repurchase some of the company's own stock.
D) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
E) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
Answer: E
Q2) It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Time value of money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) You want to open a sushi bar 3 years from now, and you plan to save $7, 000 per year, beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions, how much will you have 3 years from today?
A) $20, 993
B) $22, 098
C) $23, 261
D) $24, 424
E) $25, 645
Q2) Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding.What is the effective annual rate?
A) 15.27%
B) 16.08%
C) 16.88%
D) 17.72%
E) 18.61%
Q3) A "growing annuity" is any cash flow stream that grows over time.
A)True
B)False
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Page 6
Chapter 5: Bonds, bond valuation, and interest rates
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) You are considering 2 bonds that will be issued tomorrow.Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1, 000 par values.However, Bond SF has a sinking fund while Bond NSF does not.Under the sinking fund, the company must call and pay off 5% of the bonds at par each year.The yield curve at the time is upward sloping.The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.
A)True
B)False
Q2) Income bonds pay interest only if the issuing company actually earns the indicated interest.Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.
A)True
B)False
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Chapter 6: Risk and return
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146 Flashcards
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Sample Questions
Q1) If the returns of two firms are negatively correlated, then one of them must have a negative beta.
A)True
B)False
Q2) Stock A has a beta of 0.8 and Stock B has a beta of 1.2.50% of Portfolio P is invested in Stock A and 50% is invested in Stock B.If the market risk premium (rM - rRF)were to increase but the risk-free rate (rRF)remained constant, which of the following would occur?
A) The required return would decrease by the same amount for both Stock A and Stock B.
B) The required return would increase for Stock A but decrease for Stock B.
C) The required return on Portfolio P would remain unchanged.
D) The required return would increase for Stock B but decrease for Stock A.
E) The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.
Q3) Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.
A)True
B)False
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Page 8
Chapter 7: Valuation of stocks and corporations
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80 Flashcards
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Sample Questions
Q1) The preemptive right is important to shareholders because it A) will result in higher dividends per share.
B) is included in every corporate charter.
C) protects the current shareholders against a dilution of their ownership interests. D) protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.
E) allows managers to buy additional shares below the current market price.
Q2) A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?
A) $16.28
B) $16.70
C) $17.13
D) $17.57
E) $18.01
Q3) The corporate valuation model cannot be used unless a company doesn't pay dividends.
A)True
B)False
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Page 9
Chapter 8: Financial options and applications in corporate finance
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Sample Questions
Q1) The exercise value is the positive difference between the current price of the stock and the strike price.The exercise value is zero if the stock's price is below the strike price.
A)True
B)False
Q2) Which of the following statements is most correct, holding other things constant, for XYZ Corporation's traded call options?
A) The higher the strike price on XYZ's options, the higher the option's price will be.
B) Assuming the same strike price, an XYZ call option that expires in one month will sell at a higher price than one that expires in three months.
C) If XYZ's stock price stabilizes (becomes less volatile), then the price of its options will increase.
D) If XYZ pays a dividend, then its option holders will not receive a cash payment, but the strike price of the option will be reduced by the amount of the dividend.
E) The price of these call options is likely to rise if XYZ's stock price rises.
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Chapter 9: The cost of capital
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Sample Questions
Q1) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
Q2) You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate the cost of capital.You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30.Based on the CAPM approach, what is the cost of common from reinvested earnings?
A) 9.67%
B) 9.97%
C) 10.28%
D) 10.60%
E) 10.93%
Q3) For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly common equity.
A)True
B)False
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Chapter 10: The basics of capital budgeting: evaluating cash flows
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108 Verified Questions
108 Flashcards
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Sample Questions
Q1) An increase in the firm's WACC will decrease projects' NPVs, which could change the accept/reject decision for any potential project.However, such a change would have no impact on projects' IRRs.Therefore, the accept/reject decision under the IRR method is independent of the cost of capital.
A)True
B)False
Q2) Martin Manufacturing is considering two normal, equally risky, mutually exclusive, but not repeatable projects.Martin's WACC is 10%.The two projects have the same investment costs, but Project A has an IRR of 15%, while Project B has an IRR of 20%.Assuming the projects' NPV profiles cross in the upper right quadrant, which of the following statements is CORRECT?
A) Since the projects are mutually exclusive, the firm should always select Project B.
B) If the crossover rate is 8%, Project B will have the higher NPV.
C) Only one project has a positive NPV.
D) If the crossover rate is 8%, Project A will have the higher NPV.
E) Each project must have a negative NPV.
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Chapter 11: Cash flow estimation and risk analysis
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Sample Questions
Q1) Any cash flows that can be classified as incremental to a particular project¾i.e., results directly from the decision to undertake the project¾should be reflected in the capital budgeting analysis.
A)True
B)False
Q2) Suppose a firm's CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision¾estimates of its effect would really just be guesses.In this case, the externality should be ignored¾i.e., not considered at all¾because if it were considered it would make the analysis appear more precise than it really is.
A)True
B)False
Q3) Because of differences in the expected returns on different investments, the standard deviation is not always an adequate measure of risk.However, the coefficient of variation adjusts for differences in expected returns and thus allows investors to make better comparisons of investments' stand-alone risk.
A)True
B)False
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13
Chapter 12: Corporate valuation and financial planning
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Sample Questions
Q1) One of the first steps in arriving at a firm's forecasted financial statements is a review of industry-average operating ratios relative to these same ratios for the firm to determine whether changes to the ratios need to be made.
A)True
B)False
Q2) A firm's profit margin is 5%, its debt/assets ratio is 56%, and its dividend payout ratio is 40%.If the firm is operating at less than full capacity, then sales could increase to some extent without the need for external funds, but if it is operating at full capacity with respect to all assets, including fixed assets, then any positive growth in sales will require some external financing.
A)True
B)False
Q3) A firm's AFN must come from external sources.Typical sources include short-term bank loans, long-term bonds, preferred stock, and common stock.
A)True
B)False
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14
Chapter 13: Agency conflicts and corporate governance
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Sample Questions
Q1) ESOPs were originally designed to help improve worker productivity, but today they are also used to help prevent hostile takeovers.
A)True
B)False
Q2) A poison pill is also known as a corporate restructuring.
A)True
B)False
Q3) The CEO of D'Amico Motors has been granted some stock options that have provisions similar to most other executive stock options.If D'Amico's stock underperforms the market, these options will necessarily be worthless.
A)True
B)False
Q4) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) To enable the firm to borrow at a below-market interest rate.
B) To make it easier to grant stock options to employees.
C) To help prevent a hostile takeover.
D) To help retain valued employees.
E) To increase worker productivity.
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Chapter 14: Distributions to shareholders: dividends and repurchases
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Sample Questions
Q1) Victor Rumsfeld Inc.'s dividend policy is under review by its board.Its projected capital budget is $2, 000, 000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $600, 000.If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
A) $240, 000
B) $228, 000
C) $216, 600
D) $205, 770
E) $0
Q2) If a firm adopts a residual distribution policy, distributions are determined as a residual after funding the capital budget.Therefore, the better the firm's investment opportunities, the lower its payout ratio should be.
A)True
B)False
Q3) A reverse split reduces the number of shares outstanding.
A)True
B)False
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Page 16
Chapter 15: Capital structure decisions
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Sample Questions
Q1) Merriwether Building has operating income of $20 million, a tax rate of 40%, and no debt.It pays out all of its net income as dividends and has a zero growth rate.The current stock price is $40 per share, and it has 2.5 million shares of stock outstanding.If it moves to a capital structure that has 40% debt and 60% equity (based on market values), its investment bankers believe its weighted average cost of capital would be 10%.What would its stock price be if it changes to the new capital structure?
A) $40
B) $48
C) $52
D) $54
E) $60
Q2) A firm's business risk is largely determined by the financial characteristics of its industry, especially by the amount of debt the average firm in the industry uses.
A)True
B)False
Q3) Whenever a firm borrows money, it is using financial leverage. A)True
B)False
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Chapter 16: Supply chains and working capital management
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Sample Questions
Q1) If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).
A)True
B)False
Q2) Hinkle Corporation buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $550, 000 per year.On average, what is the dollar amount of total trade credit (costly + free)the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
A) $90, 411
B) $94, 932
C) $99, 678
D) $104, 662
E) $109, 895
Q3) If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.
A)True
B)False
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Chapter 17: Multinational financial management
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Sample Questions
Q1) In 1985, a given Japanese imported automobile sold for 1, 476, 000 yen, or $8, 200.If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S.dollars?
A) $5.964
B) $8, 200
C) $10, 250
D) $12, 628
E) $13, 525
Q2) When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
Q3) LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to smaller U.S.corporations.
A)True
B)False
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