Investment Analysis
Exam Questions
Course Introduction
Investment Analysis introduces students to the fundamental concepts, techniques, and tools used to evaluate and select investment opportunities in financial markets. The course covers a broad range of topics including risk and return measurement, asset pricing models, portfolio theory, fixed income and equity securities, alternative investments, and behavioral finance. Students learn to analyze financial statements, assess the value of stocks and bonds, and apply both qualitative and quantitative methods to make informed investment decisions. Through case studies and practical assignments, the course equips participants with the analytical skills necessary for careers in investment management, financial planning, and related fields.
Recommended Textbook
Corporate Finance Core Principles and Applications 3rd Edition by Stephen A. Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts.If so,what impact would this have on the functioning of primary and secondary markets for common stock?
Answer: With unlimited liability,you would be very careful which stocks you invest in.In particular,you would not invest in companies you expected to be unable to satisfy their financial obligations.Both the primary and secondary markets for common stock would be severely hampered if this rule existed.It would be very difficult for a young,untested business to acquire enough capital to grow.
Q2) Insider trading is:
A)legal.
B)impossible to have in our efficient market.
C)illegal.
D)discouraged, but legal.
E)list only the securities of the largest firms.
Answer: C
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Chapter 2: Financial Statements Cash Flow
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Q1) Why is interest expense excluded from the operating cash flow calculation?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operating activities.Interest expense arises from a financing decision and thus should be considered as a cash flow to creditors.
Q2) Cash flow is generated by the firm and paid to creditors and shareholders.How are financial cash flows classified and why is estimating cash flow so important in financial analysis?
Answer: Cash flow can be classified as cash flow from operations,cash flow from changes in fixed asset,and cash flow from changes in working capital.The estimation of cash flow is important because it is the basis for subsequent valuation techniques which allow the analyst to determine whether of not to accept a project or investment.While discussed in this chapter,students will see in more detail in later chapters how a small change in cash flows,especially early cash flows can dramatically impact the financial analysis.
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Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) Neal's Nails has an 11% return on assets and a 30% dividend payout ratio.What is the internal growth rate?
A)7.11%
B)7.70%
C)8.01%
D)8.34%
E)11.99%
Answer: D
Q2) A firm has sales of $1,700,net income of $200,net fixed assets of $600,and current assets of $400.The firm has $150 in inventory.What is the common-size statement value of inventory?
A)8.3%
B)12.5%
C)15.0%
D)33.3%
E)50.0%
Answer: C
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) You are considering a job offer.The job offers an annual salary of $52,000,$55,000,and $60,000 a year for the next three years,respectively.The offer also includes a starting bonus of $2,000 payable immediately.What is this offer worth to you today at a discount rate of 6 percent?
A)$148,283.56
B)$148,383.56
C)$150,283.56
D)$150,383.56
E)$152,983.56
Q2) Which of the following amounts is closest to the end value of investing $7,500 for 2.5 years at an effective annual interest rate of 12.36%.Interest is compounded semiannually.
A)$7,531
B)$8,427
C)$9,469
D)$9,818
E)$10,037
Q3) If you invest $100,000 today at 12% per year over the next 15 years,what is the most you can spend in equal amounts out of the fund each year over that time?
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Chapter 5: Interest Rate and Bond Valuation
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Q1) A Treasury bond is quoted at a price of 101: 00 with a current yield of 5.94%.What is the coupon rate?
A)5.88%
B)5.94%
C)6.00%
D)6.06%
E)6.88%
Q2) The semiannual,ten-year bonds of Adep,Inc.are selling at par and have an effective annual yield of 4.295%.What is the amount of each interest payment on a $1,000 Adep bond?
A)$21.25
B)$21.48
C)$21.50
D)$42.50
E)$42.95
Q3) Calculate the YTM on a bond priced at $1,036 which has 2 years to maturity,a 10% annual coupon rate,and a return of $1,000 at maturity.
Q4) Sometimes it is not clear if a particular security is debt or equity.Explain the basic difference between debt and equity?
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Chapter 6: Stock Valuation
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Sample Questions
Q1) The market in which new securities are originally sold to investors is called the _____ market.
A)dealer
B)auction
C)over-the-counter
D)secondary
E)primary
Q2) Which one of the following statements concerning preferred stock is correct?
A)Unpaid preferred dividends are a liability of the firm.
B)Preferred dividends must be paid quarterly provided the firm has net income that exceeds the amount of the quarterly dividend.
C)Preferred dividends must be paid timely each quarter or the unpaid dividends start accruing interest.
D)All unpaid dividends on preferred stock, regardless of the type of preferred, must be paid before any income can be distributed to common shareholders.
E)Preferred shareholders may be granted voting rights and seats on the board if preferred dividend payments remain unpaid.
Q3) Briefly explain the differences between preferred and common stock.
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Chapter 7: Net Present Value and Other Investment Rules
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Q1) Based on the payback period of ____ for this project,you should _____ the project.
A)2.0 years; reject
B)2.5 years; accept
C)2.5 years; reject
D)3.0 years; reject
E)3.0 years; accept
Q2) Graham and Harvey (2001)found that ___ and ___ were the two most popular capital budgeting methods.
A)Internal Rate of Return; Payback Period
B)Internal Rate of Return; Net Present Value
C)Net Present Value; Payback Period
D)Modified Internal Rate of Return; Internal Rate of Return
E)Modified Internal Rate of Return; Net Present Value
Q3) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.
Q4) The IRR rule is said to be a special case of the NPV rule.Explain why this is so and why it has some limitations NPV does not?
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Chapter 8: Making Capital Investment Decisions
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Q1) Which of the following should be included in the analysis of a project?
I.sunk costs
II.opportunity costs
III.erosion costs
IV.incremental costs
A)I and II only
B)III and IV only
C)II and IV only
D)II, III, and IV only
E)I, II, and IV only
Q2) The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:
A)after-tax depreciation savings.
B)depreciable basis.
C)depreciation tax shield.
D)operating cash flow.
E)after-tax salvage value.
Q3) This chapter introduced three new methods for calculating project operating cash flow (OCF).Under what circumstances is each method appropriate?
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Chapter 9: Risk Analysis, Real Options, and Capital Budgeting
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Sample Questions
Q1) The company conducts a sensitivity analysis using a variable cost of $11.The total variable cost estimate will be:
A)$31,375
B)$32,500
C)$33,625
D)$38,500
E)$44,750
Q2) The type of analysis that is most dependent upon the use of a computer is _____ analysis.
A)Monte Carlo simulation
B)degree of operating leverage
C)sensitivity
D)break-even
E)scenario
Q3) What is the contribution margin under the expected case scenario?
A)$2.67
B)$3.00
C)$8.00
D)$8.65
E)$8.72
11
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Chapter 10: Risk and Return Lessons From Market History
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Q1) The average squared difference between the actual return and the average return is called the:
A)excess return.
B)risk premium.
C)standard deviation.
D)variance.
E)volatility return
Q2) Six months ago,you purchased 1,200 shares of ABC stock for $21.20 a share.You have received dividend payments equal to $.60 a share.Today,you sold all of your shares for $22.20 a share.What is your total dollar return on this investment?
A)$720
B)$1,200
C)$1,440
D)$1,920
E)$3,840
Q3) What is the difference between arithmetic average and geometric mean? Is one better than the other to use in financial analysis?
Q4) What are the lessons learned from capital market history? What evidence is there to suggest these lessons are correct?
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Chapter 11: Return and Risk: The Capital Asset Pricing Model
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Q1) Your portfolio is comprised of 25% of stock X,55% of stock Y,and 20% of stock Z.Stock X has a beta of .64,stock Y has a beta of 1.48,and stock Z has a beta of 1.04.What is the beta of your portfolio?
A)1.01
B)1.05
C)1.09
D)1.14
E)1.18
Q2) The expected return on HiLo stock is 13.99% while the expected return on the market is 11.5%.The beta of HiLo is 1.3.What is the risk-free rate of return?
A)2.8%
B)3.2%
C)3.7%
D)4.2%
E)4.5%
Q3) Explain in words what beta is and why it is important.
Q4) What is the separation principle?
Q5) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
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Chapter 12: Risk, Cost of Capital, and Capital Budgeting
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Q1) Jake's Sound Systems has 210,000 shares of common stock outstanding at a market price of $36 a share.Last month,Jake's paid an annual dividend in the amount of $1.593 per share.The dividend growth rate is 4%.Jake's also has 6,000 bonds outstanding with a face value of $1,000 per bond.The bonds carry a 7% coupon,pay interest annually,and mature in 4.89 years.The bonds are selling at 99% of face value.The company's tax rate is 34%.What is Jake's weighted average cost of capital?
A)5.3%
B)5.8%
C)6.3%
D)6.9%
E)7.2%
Q2) Given the sample of returns of the Top Black Asphalt Company and the S&P 500 index,calculate Top Black's correlation.What can be said about the relationship of Top Black and the market return behavior?
Q3) Explain the factors that determine beta and how an asset beta can differ from equity betas.
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Chapter 13: Efficient Capital Markets and Behavioral Challenges
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Q1) When the stock price follows a random walk,the price today is said to be equal to the prior period price plus the expected return for the period with any remaining: difference to the actual return due to
A)a predictable amount based on the past prices.
B)a component based on new information unrelated to past prices.
C)the security's risk.
D)the risk free rate.
E)None of the above.
Q2) Under the concept of an efficient market,a random walk in stock prices means that: A)there is no driving force behind price changes.
B)technical analysts can predict future price movements to earn excess returns.
C)the unexplained portion of price change in one period is unrelated to the unexplained portion of price change in any other period.
D)the unexplained portion of price change in one period that can not be explained by expected return can only be explained by the unexplained portion of price change in a prior period.
E)None of the above.
Q3) Define the three forms of market efficiency.
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Chapter 14: Capital Structure: Basic Concepts
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Q1) The cost of capital for a firm,r<sub>WACC</sub>,in a zero tax environment is:
A)equal to the expected earnings divided by market value of the unlevered firm.
B)equal to the rate of return for that business risk class.
C)equal to the overall rate of return required on the levered firm.
D)is constant regardless of the amount of leverage.
E)All of the above.
Q2) After seeing Steve's analysis,Mike tells Steve that while his analysis looks good on paper,Steve will never be able to borrow at 8%,but would have to pay a more realistic rate of 12%.If Mike is right,what will Steve's payout be?
Q3) A key assumption of MM's Proposition I without taxes is:
A)that individuals must be able to borrow on their own account at rates equal to the firm.
B)managers are acting to maximize the value of the firm.
C)that financial leverage increases risk.
D)that individuals can borrow on their own account at rates less than the firm.
E)All of the above.
Q4) Based on MM with taxes and without taxes,how much time should a financial manager spend analyzing the capital structure of his firm?
Q5) Verbally explain MM Proposition I without taxes.
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Chapter 15: Capital Structure: Limits to the Use of Debt
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Q1) Assume that all earnings are paid out as dividends.Now consider the fact that Louis must pay personal tax on the firm's cash flow.Louis pays taxes on interest at a rate of 33%,but pays taxes on dividends at a rate of 28%.Calculate the total cash flow to Louis after he pays personal taxes.(Challenge problem; covered in text problems 9 and 10)
Q2) The costs of avoiding a bankruptcy filing by a financially distressed firm are classified as _____ costs.
A)capital structure
B)direct bankruptcy
C)financial solvency
D)indirect bankruptcy
E)flotation
Q3) The value of a firm in financial distress is diminished only if the firm:
A)is declared bankrupt and proceeds to be liquidated.
B)is declared insolvent and undergoes financial reorganization.
C)hires lawyers and accountants to receive and make all payments.
D)Both A and C.
E)Both A and B.
Q4) Explain the difference between direct and indirect bankruptcy costs.Give an example of each.
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Chapter 16: Dividend and Other Payouts
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Q1) Payments made by a firm to its owners from sources other than current or accumulated earnings are called:
A)dividends.
B)distributions.
C)share repurchases.
D)payments-in-kind.
E)stock splits.
Q2) Robinson's has 16,000 shares of stock outstanding with a par value of $1.00 per share and a market price of $36 a share.The balance sheet shows $16,000 in the common stock account,$315,000 in the capital in excess of par account,and $189,000 in the retained earnings account.The firm just announced a 3-for-2 stock split.How many shares of stock will be outstanding after the split?
A)10,000 shares
B)12,500 shares
C)20,000 shares
D)22,500 shares
E)24,000 shares
Q3) What is the life cycle theory of cash distributions and what does it mean?
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Chapter 17: Options and Corporate Finance
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Q1) You own both a May 20 call and a May 20 put.If the call finishes in the money,then the put will:
A)also finish in the money.
B)finish out of the money.
C)finish at the money.
D)either finish at the money or out of the money.
E)either finish at the money or in the money.
Q2) Which of the following statements are correct concerning option values?
I.The value of a call increases as the price of the underlying stock increases.
II.The value of a call decreases as the exercise price increases.
III.The value of a put increases as the price of the underlying stock increases.
IV.The value of a put decreases as the exercise price increases.
A)I and III only
B)II and IV only
C)I and II only
D)II and III only
E)I, II, and IV only
Q3) Distinguish the difference between American and European options.All else equal,which has more value?
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Chapter 18: Short-Term Finance and Planning
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Q1) Wilson,Inc.has an inventory turnover rate of 14,an accounts payable period of 54 days and an accounts receivable period of 37 days.What is the length of the cash cycle?
A)-7.33 days
B)-2.00 days
C)2.00 days
D)7.33 days
E)9.07 days
Q2) The length of time between the payment for inventory and the collection of cash from receivables is called the:
A)operating cycle.
B)inventory period.
C)accounts receivable period.
D)accounts payable period.
E)cash cycle.
Q3) Accounts receivable and inventory are some of the most liquid assets a firm owns and its market value is typically fairly close to book value.Even so,in the eyes of many lenders,these assets make for inadequate collateral on loans,particularly if the business looking to borrow the money is in a liquidity crisis.Why do you think this is the case?
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Chapter 19: Raising Capital
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Q1) Which one of the following terms could be defined as a new issue of common stock offered to the general public by a firm that is currently publicly held?
A)Initial public offering
B)Private placement
C)Rights offer
D)Venture capital
E)Seasoned equity offering
Q2) Which one of the following is an underwriting of securities where the offer price is determined by investor bids?
A)Private placement
B)Best efforts underwriting
C)Initial public offering
D)Green Shoe option
E)Dutch auction
Q3) What are some of the key factors an individual should consider before selecting a first-stage venture capitalist?
Q4) Provide two arguments in favor of IPO underpricing and two arguments against IPO underpricing.
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Chapter 20: International Corporate Finance
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Q1) The condition stating that the current forward rate is an unbiased predictor of the future spot exchange rate is called:
A)the unbiased forward rates condition.
B)uncovered interest rate parity.
C)the international Fisher effect.
D)purchasing power parity.
E)interest rate parity.
Q2) A risk-free asset in the U.S.is currently yielding 3% while a Canadian risk-free asset is yielding 2%.The current spot rate is C$.75 is equal to $1.What is the approximate two-year forward rate if interest rate parity holds?
A)C$.7257
B)C$.7328
C)C$.7351
D)C$.7389
E)C$.7472
Q3) What is triangle arbitrage?
Using the U.S.dollar,the Canadian dollar,and the euro,construct an example in which triangle arbitrage exists,and then show how to exploit it.
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