Investment Analysis
Exam Practice Tests
Course Introduction
Investment Analysis provides students with an in-depth understanding of the principles, techniques, and tools used to evaluate various investment opportunities. The course covers key topics such as risk and return trade-offs, portfolio theory, security valuation, fixed income and equity analysis, efficient market hypothesis, and behavioral finance. Students learn how to assess investment performance, construct optimal portfolios, and apply quantitative methods in decision-making. Through case studies and practical exercises, the course prepares students to analyze financial markets and make informed investment decisions for both individuals and institutions.
Recommended Textbook
Corporate Finance 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Sample Questions
Q1) Explain the main differences between the NYSE and NASDAQ stock markets.
Answer: Key points:
NYSE has physical location - NASDAQ is an electronic market.
NYSE has one specialist in each stock and his role is to match buyers and sellers.
NASDAQ has multiple market makers (dealers)in each stock who stand ready to trade on their own accounts.
Q2) Which of the following statements regarding limited partnerships is TRUE?
A)There is no limit on a limited partner's liability.
B)A limited partner's liability is limited by the amount of their investment.
C)A limited partner is not liable until all the assets of the general partners have been exhausted.
D)A general partner's liability is limited by the amount of their investment.
Answer: B
Q3) A sole proprietorship is owned by:
A)one person.
B)two of more persons.
C)shareholders.
D)bankers.
Answer: A
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Page 3
Chapter 2: Introduction to Financial Statement Analysis
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Sample Questions
Q1) On the balance sheet,current maturities of long-term debt appears:
A)in the Stockholders' Equity section.
B)in the Operating Expenses section.
C)in the Current Assets section.
D)in the Current Liabilities section.
Answer: D
Q2) Accounts payable is a:
A)long-term liability.
B)current asset.
C)long-term asset.
D)current liability.
Answer: D
Q3) Which of the following adjustments to net income is NOT correct if you are trying to calculate cash flow from operating activities?
A)Add increases in accounts payable
B)Add back depreciation
C)Add increases in accounts receivable
D)Deduct increases in inventory
Answer: C
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Page 4
Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) Suppose you have $1000 today and the risk-free rate of interest (r<sub>f</sub>)is 3.5%.The equivalent value in one year is closest to:
A)$965.00 today.
B)$966.18 today.
C)$1000.00 today.
D)$1035.00 today.
Answer: D
Q2) If we use future value rather than present value to decide whether to make an investment:
A)we will make a bad decision,since the future value will always be higher if the discount rate is positive.
B)we will make a bad decision,since the future value will always be lower if the discount rate is positive.
C)we will make the same decision using either future value or present value.
D)There is not enough information given to answer the question.
Answer: C
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2 × 121.57 + 3 × 36.59 + 3 × 3.15 = $362.36
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Chapter 4: The Time Value of Money
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Sample Questions
Q1) Assuming that costs continue to increase an average of 4% per year,tuition and other costs for one year for this student in 18 years when she enters college will be closest to:
A)$12,500
B)$21,500
C)$320,568
D)$25,323
Q2) Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Draw a timeline that details the amount that would be available for the daughter's college expenses on her 18th birthday.
Q3) The Internal Rate of return of this project is closest to:
A)10.2%
B)12.2%
C)14.2%
D)16.2%
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Page 6
Chapter 5: Interest Rates
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Q1) The total amount of principal that Dagny will pay during the first month of her mortgage is closest to:
A)$246
B)$446
C)$1800
D)$2245
Q2) Dagny's monthly payments are closest to:
A)$1110
B)$1800
C)$2215
D)$2245
Q3) The total amount of interest that Dagny will pay during the first month of her mortgage is closest to:
A)$1110
B)$1785
C)$1800
D)$2245
Q4) What is the NPV of an investment that costs $2500 and pays $1000 certain at the end of one,three,and five years?
Q5) What is the effective after-tax rate of each instrument,expressed as an EAR?
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Chapter 6: Valuing Bonds
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Q1) Which of the four bonds is the most sensitive to a one percent increase in the YTM?
A)Bond A
B)Bond B
C)Bond C
D)Bond D
Q2) Based upon the information provided in the table above,you can conclude
A)that the yield curve is flat.
B)nothing about the shape of the yield curve.
C)that the yield curve is downward sloping.
D)that the yield curve is upward sloping.
Q3) Assuming that this bond trades for $1112,then the YTM for this bond is closest to:
A)8.0%
B)3.4%
C)6.8%
D)9.2%
Q4) Assume that the YTM increases by 1% for each of the four bonds listed.Rank the bonds based upon the sensitivity of their prices from least to most sensitive.
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8
Chapter 7: Investment Decision Rules
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Sample Questions
Q1) The payback period for project Beta is closest to:
A)2.9 years
B)3.1 years
C)2.6 years
D)3.2 years
Q2) Assume that projects Alpha and Beta are mutually exclusive.The correct investment decision and the best rational for that decision is to:
A)invest in project Beta since NPV<sub>Beta</sub> > 0.
B)invest in project Alpha since NPV<sub>Beta</sub> < NPV<sub>Alpha.</sub>
C)invest in project Beta since IRR<sub>B</sub> > IRR<sub>A.</sub>
D)invest in project Beta since NPV<sub>Beta</sub> > NPV<sub>Alpha </sub>> 0.
Q3) Which of the following statements is FALSE?
A)The IRR investment rule will identify the correct decision in many,but not all,situations.
B)By setting the NPV equal to zero and solving for r,we find the IRR.
C)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
D)The simplest investment rule is the NPV investment rule.
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Page 9
Chapter 8: Fundamentals of Capital Budgeting
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Q1) The amount of incremental income taxes that the Sisyphean Company will pay in the first year on this new project is closest to:
A)$6300
B)$5200
C)$3500
D)$2800
Q2) The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:
A)an opportunity cost.
B)irrelevant to the investment decision.
C)an overhead expense.
D)a sunk cost.
Q3) The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to:
A)$8000
B)$3500
C)$2800
D)$5200
Q4) What is sensitivity analysis?
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Chapter 9: Valuing Stocks
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Q1) Assuming that Novartis AG (NVS)has an EPS of $3.35,based upon the price-to-book ratios for its competitors,the lowest expected stock price for Novartis is closest to:
A)$7.47
B)$13.00
C)$22.95
D)$31.86
Q2) When discounting dividends you should use:
A)the weighted average cost of capital.
B)the after tax weighted average cost of capital.
C)the equity cost of capital.
D)the before tax cost of debt.
Q3) You expect KT Industries (KTI)will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend.KTI's return on new investments is 15% and their equity cost of capital is 12%.The value of a share of KTI's stock is closest to:
A)$39.25
B)$20.00
C)$33.35
D)$12.50
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Page 11
Chapter 10: Capital Markets and the Pricing of Risk
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Sample Questions
Q1) If the expected return on the market is 11% and the risk-free rate is 4%,then the expected return of investing in IBM is closest to:
A)9.1%
B)10.3%
C)11.0%
D)12.0%
Q2) Suppose that you want to use the 10 year historical average return on the Market to forecast the expected future return on the Market.Calculate the 95% confidence interval for your estimate of the expect return.
Q3) The beta for security "Z" is closest to:
A)-1.00
B)-0.25
C)0.00
D)0.25
Q4) What is the excess return for the S&P 500?
A)5.7%
B)7.0%
C)0%
D)8.4%
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Chapter 11: Optimal Portfolio Choice and the Capital Asset
Pricing Model
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Sample Questions
Q1) The Sharpe ratio for the market (which is a 50-50 combination of the value and growth portfolios)portfolio is closest to:
A).53
B).58
C).61
D).79
Q2) Explain how having different interest rates for borrowing and lending affects the CAPM and the SML.
Q3) Will adding the precious metals fund improve your portfolio?
Q4) Which of the following statements is FALSE?
A)Graphically,the efficient portfolios are those on the northeast edge of the set of possible portfolios,an area which we call the efficient frontier.
B)To arrive at the best possible set of risk and return opportunities,we should keep adding stocks until all investment opportunities are represented.
C)We say a portfolio is short those stocks that have negative portfolio weights.
D)Adding new investment opportunities allows for greater diversification and improves the efficient frontier.
Q5) Calculate the correlation between Stock Y's and Stock Z's returns .
Page 13
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Chapter 12: Estimating the Cost of Capital
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Sample Questions
Q1) Assume that the Wilshire 5000 currently has a dividend yield of 2% and that on average,the dividends of Wilshire 5000 firms have increased by about 7% per year.If the risk-free interest rate is 4%,then your estimate for the future market risk premium is:
A)4%
B)7%
C)8%
D)5%
Q2) The e<sub>i</sub> in the regression:
A)measures the market risk in returns.
B)measures the deviation from the best fitting line and is zero on average.
C)measures the sensitivity of the security to market risk.
D)measures the historical performance of the security relative to the expected return predicted by the SML.
Q3) Which firm has the most total risk?
A)Eenie
B)Meenie
C)Miney
D)Moe
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14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Sample Questions
Q1) What does the existence of a positive alpha investment strategy imply?
Q2) The amount of money that Galt's fund will have under management is closest to:
A)$500 million
B)$600 million
C)$1000 million
D)$1250 million
Q3) Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of March,which stocks are you most inclined to hold?
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors
A)1 only
B)1 and 3 only
C)2 only
D)2 and 4 only
Q4) Explain why the market portfolio proxy may not be efficient.
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Page 15
Chapter 14: Capital Structure in a Perfect Market
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Q1) Which of the following statements is FALSE?
A)As long as the 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 an 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) If Rockwood finances their expansion by issuing $100 million in debt at 5%,what will Rockwood's cost of equity capital be?
A)11.25%
B)10.70%
C)12.50%
D)12.00%
Q3) What is the conservation of value principle?
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Chapter 15: Debt and Taxes
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Q1) Which of the following statements is FALSE?
A)Given a 35% corporate tax rate,for every $1 in new permanent debt that the firm issues,the value of the firm increases by $0.65.
B)The firm's marginal tax rate may fluctuate due to changes in the tax code and changes in the firm's income bracket.
C)Many large firms have a policy of maintaining a certain amount of debt on their balance sheets.
D)Typically,the level of future interest payments varies due to changes the firm makes in the amount of debt outstanding,changes in the interest rate on that debt,and the risk that the firm may default and fail to make an interest payment.
Q2) Raceway Products has a market debt-to-equity ratio of .60,a corporate tax rate of 40%,and pays 8% interest on its debt.The interest tax shield on Raceway's debt lowers its WACC by what amount?
Q3) FBNA's EBIT is closest to:
A)$43 million
B)$40 Million
C)$45 million
D)$60 million
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Chapter 16: Financial Distress,managerial Incentives,and Information
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Q1) The term moral hazard refers to:
A)the chance the firm will default and impose losses on its debtholders.
B)the under-investment problem.
C)the over-investment problem.
D)the idea that individuals will change their behavior if they are not fully exposed to its consequences.
Q2) The value of Luther with leverage is closest to:
A)$315 million
B)$340 million
C)$205 million
D)$300 million
Q3) What is the expected payoff to debt holders with the speculative oil lease deal?
A)$10 million
B)$275 million
C)$85 million
D)$160 million
Q4) List five general categories of indirect costs associated with bankruptcy.
Q5) Suppose that MI has zero-coupon debt with a $140 million face value due next year.Calculate the value of levered equity,the value of debt,and the total value of MI with leverage.
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Chapter 17: Payout Policy
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Q1) The effective dividend tax rate for a one-year individual investor in 1999 is closest to:
A)0%
B)20%
C)25%
D)40%
Q2) If Wyatt Oil distributes the $70 million as a share repurchase,then the number of shares outstanding after the repurchase will be closest to:
A)16.0 million
B)16.5 million
C)17.5 million
D)18.0 million
Q3) In which years were dividends tax disadvantaged?
A)1987 - 2002
B)1987,1993 - 2002
C)1987,1991 - 2002
D)1988 - 1990,2003 - 2009
Q4) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Given that Rose issues new debt of $50 million initially to fund the acquisition,the total value of this acquisition using the APV method is closest to:
A)$100 million
B)$120 million
C)$124 million
D)$115 million
Q2) The NPV for Omicron's new project is closest to:
A)$23.75
B)$27.50
C)$28.75
D)$25.75
Q3) Suppose that to fund this new project,Aardvark borrows $120 with the principal to be paid in three equal installments at the end each year.The levered value of Aardvark's new project is closest to:
A)$210.15
B)$207.35
C)$207.00
D)$210.50
Q4) Calculate the debt capacity of Omicron's new project for years 0,1,and 2.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) The after tax interest expense in 2010 is closest to:
A)0
B)2856
C)5304
D)8160
Q2) The unlevered beta for Nike is closest to:
A)0.70
B)1.00
C)1.50
D)0.60
Q3) The amount of net working capital for Ideko in 2008 is closest to:
A)$35,195
B)$26,420
C)$22,170
D)$30,510
Q4) What is the purpose of the sensitivity analysis?
Q5) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
21
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Chapter 20: Financial Options
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Q1) The writer of a call option has:
A)the obligation to sell a security for a given price.
B)the obligation to buy a security for a given price.
C)the right to sell a security for a given price.
D)the right to buy a security for a given price.
Q2) Which of the following statements is FALSE?
A)The intrinsic value of an option is the value it would have if it expired immediately.
B)A European option cannot be worth less than its American counterpart.
C)Put options increase in value as the stock price falls.
D)A put option cannot be worth more than its strike price.
Q3) Which of the following statements is FALSE?
A)Because an American option cannot be worth less than its intrinsic value,it cannot have a negative time value.
B)An American option with a later exercise date cannot be worth less than an otherwise identical American option with an earlier exercise date.
C)The value of an option generally decreases with the volatility of the stock.
D)The intrinsic value is the amount by which the option is currently in-the money or 0 if the option is out-of-the-money.
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Chapter 21: Option Valuation
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Q1) The Black-Scholes of a one-year,at-the-money put option on Taggart stock is closest to:
A)-0.2850
B)0.2850
C)-0.3859
D)-0.6141
Q2) Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A)$2.00
B)$1.45
C)$2.40
D)$2.15
Q3) Assuming the beta on Taggart stock is 0.75,then the beta for a one-year,at-the-money call option on Taggart stock is closest to:
A)0.60
B)0.75
C)2.84
D)3.89
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23
Chapter 22: Real Options
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Q1) Assuming that this project will provide Rearden with perpetual annual cash flows of $55,000,the NPV of investing in the project next year is closest to:
A)-281,000
B)-83,000
C)+46,000
D)+83,000
E)+143,000
Q2) Which of the following statements is FALSE?
A)One way to see why you sometimes choose not to invest in a positive-NPV project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1)invest today or (2)wait.
B)You invest today only when the NPV of investing today exceeds the value of the option of waiting,which from option pricing theory we know to be always positive.
C)When you do not have the option to wait,it is optimal to invest in any positive-NPV project.
D)When you have the option of deciding when to invest,it is usually optimal to invest only when the NPV is positive but close to zero.
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Page 24
Chapter 23: Raising Equity Capital
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Q1) Assuming that this is the venture capitalist's first investment in your firm,what percentage of the firm will the venture capitalist own?
A)50%
B)40%
C)25%
D)33%
Q2) Which of the following statements is FALSE?
A)A venture capital firm is a limited partnership that specializes in raising money to invest in the private equity of young firms.
B)Venture capitalists typically control about three-quarters of the seats on a start-up's board of directors,and often represent the single largest voting block on the board.
C)The initial capital that is required to start a business is usually provided by the entrepreneur herself and her immediate family.
D)Individual investors who buy equity in small private firms are called angel investors.
Q3) When referring to IPOs,what is book building?
Q4) What will the proceeds from the IPO be if Luther is selling 1.1 million shares?
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Chapter 24: Debt Financing
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Q1) Mortgages that do not meet certain credit criteria and have a high probability of default are know as ________ mortgages.
A)prepayment
B)pooled
C)under-water
D)subprime
Q2) Galt Industries has just issued a callable,$1000 par value,five-year,6% coupon bond with semiannual coupon payments.The bond can be called at par in three years or anytime thereafter on a coupon payment date.If the bond is currently trading for $978.94,then its yield to call is closest to:
A)3.4%
B)6.0%
C)6.5%
D)6.8%
Q3) What kind of corporate debt can be secured by any specified assets?
A)Mortgage bonds
B)Notes
C)Asset-backed bonds
D)Debentures
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Page 26
Chapter 25: Leasing
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Q1) Which of the following statements is FALSE?
A)If a firm only needs to use the asset for a short time,it is probably less costly to lease it than to buy and resell the asset.
B)While owners of assets are likely to resell them only if the assets are "lemons," a short-term lease can commit the user of an asset to return it regardless of its quality.In this way,leases can help mitigate the adverse selection problem in the used goods market.
C)Car dealerships are in a better position to sell a used car at the end of a lease than a consumer is.
D)If the asset's tax depreciation deductions are faster than its lease payments,there are tax gains from a true tax lease if the lessor is in a lower tax bracket than the lessee.
Q2) Assuming that Rearden's annual lease payments are $1.2 million,and using the direct method,the NPV of leasing is closest to:
A)($165,000)
B)($95,000)
C)$0
D)$95,000
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Chapter 26: Working Capital Management
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Q1) The average number of inventory days outstanding for Rearden is closest to:
A)6 days
B)8 days
C)37 days
D)64 days
Q2) The difference between a firm's operating cycle and its cash cycle is:
A)there is no difference between the cash and operating cycles.
B)its account receivable days.
C)its accounts payable days.
D)its inventory days.
Q3) Which of the following money market investments is a draft typically used in international trade,which is written by the borrower and guaranteed by the bank on which the draft is drawn?
A)Treasury Bill
B)Repurchase Agreement
C)Certificates of Deposit (CD)
D)Banker's Acceptance
E)Commercial Paper
Q4) What is a compensating balance?
Q5) Describe "just-in-time" inventory management.
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Chapter 27: Short-Term Financial Planning
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Q1) The effective annual rate for Taggart if they choose alternative #3 is closest to:
A)13.9%
B)18.8%
C)27.0%
D)27.9%
Q2) Occasionally,a company will encounter circumstances in which cash flows are temporarily negative for an unexpected reason.We refer to such a situation as:
A)a liquidity shock.
B)a negative cash flow shock.
C)a negative liquidity shock.
D)a cash crunch.
Q3) A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called:
A)a short-term mortgage loan.
B)a single,end-of-period-payment loan.
C)a bridge loan.
D)a line of credit.
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Chapter 28: Mergers and Acquisitions
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Q1) The justification for the benefits of diversification from mergers include all of the following EXCEPT:
A)tax loss benefits.
B)lower cost of debt or increased debt capacity.
C)direct risk reduction.
D)liquidity enhancement.
Q2) Which of the following statements regarding mergers and taxes is FALSE?
A)Because it may be easier to measure performance accurately in a conglomerate,agency costs may be reduced and resources may be more efficiently allocated.
B)Because these employees are obligated to hold idiosyncratic risk,they benefit when the firm reduces that risk by conglomerating.
C)Like a large portfolio,large firms bear less idiosyncratic risk,so often mergers are justified on the basis that the combined firm is less risky.
D)Because most stockholders will already be holding a well-diversified portfolio,they get no further benefit from the firm diversifying through acquisition.
Q3) If Martin pays no premium to acquire Luther,what will the earnings per share be after the merger?
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Chapter 29: Corporate Governance
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Q1) What is corporate governance?
Q2) Which of the following statements is FALSE?
A)The incentives come from owning stock in the company and from compensation that is sensitive to performance.
B)The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm.
C)Punishment comes when a board fires a manager for poor performance or fraud,or when,upon failure of the board to act,shareholders or raiders launch control contests to replace the board and management.
D)The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action.
Q3) What is the difference between inside,gray,and outside directors?
Q4) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q5) Describe the "stakeholder" model of corporate governance.
Q6) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
Q7) What is the role of takeovers in corporate governance?
Page 31
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Chapter 30: Risk Management
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Q1) Suppose the current exchange rate is $1.42/ ,the interest rate in the United States is 4.0%,the interest rate in the EU is 6%,and the volatility of the $/ exchange rate is 20%.Using the Black-Scholes formula,the price of a three-month European call option on the Euro with a strike price of $1.45/ will be closest to:
A)$0.040/
B)$0.059/
C)$0.078/
D)$0.097/
Q2) In December 2005,the spot exchange rate for the British Pound was $1.7188/£ and the one-year forward rate was $1.8675/£.Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £375,000 to be delivered in one year.Simultaneously Luther entered into a one-year forward contract to purchase £375,000.What is the amount of the payment in U.S.dollars that Luther Industries will have to make in one year to pay for their goods?
Q3) The actuarially fair premium for this insurance policy is closest to:
A)$417,000
B)$446,000
C)$500,000
D)$568,000
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Page 32
Chapter 31: International Corporate Finance
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Q1) Assuming that the Irish and Mexican subsidiaries did not exist,the U.S.tax liability on the Japanese subsidiary would be closest to:
A)$0
B)$81 million
C)$103 million
D)$106 million
Q2) After the Irish taxes are paid,the amount of the earnings before interest and after taxes in dollars from the Ireland operations is closest to:
A)$5.1 million
B)$20.5 million
C)$35.6 million
D)$29.5 million
Q3) Incorporated Tools total U.S.tax liability on its foreign earnings is closest to:
A)$0
B)$81 million
C)$106 million
D)$112 million
Q4) Calculate the pound denominated cost of capital for Luther's project.
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