Investment Analysis
Final Exam
Course Introduction
Investment Analysis explores the fundamental principles, tools, and techniques used to evaluate different investment opportunities. The course covers topics such as risk and return, portfolio theory, asset pricing models, securities analysis, and valuation methods for stocks, bonds, and alternative investments. Students will learn to analyze markets, interpret financial data, and make informed investment decisions based on quantitative and qualitative information. Emphasis is placed on applying analytical frameworks to real-world scenarios to guide portfolio management and optimal asset allocation.
Recommended Textbook
Foundations of Financial Management 10th Canadian Edition by Stanley B. Block
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Page 2
Chapter 1: The Goals and Activities of Financial Management
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Sample Questions
Q1) The 1990 Nobel Prize in economics was given to three finance professors.They are:
A) Harry Markowitz,Merton Miller,William Sharpe
B) Harry Markowitz,Franco Modigilani,Paul Samuelson
C) Merton Miller,Franco Modigliani,Robert Merton
D) William Sharpe,Richard Roll,Steve Ross
Answer: A
Q2) Which of the following securities is not included as part of the capital market?
A) Common stock
B) Commercial paper
C) Government bonds
D) Preferred stock
Answer: B
Q3) The first Nobel Prizes given to finance professors was for their contributions to capital structure theory and portfolio theories of risk and return.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) List the 3 primary sections on the cash flow statement.
Answer: These sections are:
1.Operating activities
2.Investing activities
3.Financing activities
Q2) Amortization is an accounting entry and does not involve a cash expense.
A)True
B)False
Answer: True
Q3) Amortization expense is charged in the income statement.
A)True
B)False
Answer: True
Q4) The statement of cash flows helps measure how the changes in a balance sheet are financed between two time periods.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Analysis
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Sample Questions
Q1) LIFO inventory pricing does a better job than FIFO in equating current costs with current revenue.
A)True
B)False
Answer: True
Q2) Return on equity (ROE)indicates a return to the owners of the firm and is closely followed by investment analysts.What 4 deficiencies does this ratio have?
Answer: Focuses on past results not future expected results Does not focus on share price,the goal of the firm
Relies on book value and not the actual market value of the investment Doesn't capture the firm's assumed risk to generate earnings
Q3) In addition to comparison with industry ratios,it is also helpful to analyze ratios using: A) ethical behaviour.
B) comparison of industry benchmarks.
C) focus groups.
D) trend analysis.
Answer: D
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Page 5
Chapter 4: Financial Forecasting
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Sample Questions
Q1) A cash budget is unnecessary under level production since we know how much will be produced every month.
A)True
B)False
Q2) A firm has forecasted sales of $8,000 in January,$12,000 in February,and $11,000 in March.All sales are on credit.40% is collected the month of sale and the remainder the following month.How much is collected from accounts receivable in February?
A) $10,800
B) $9,600
C) $12,000
D) $6,000
Q3) If inventory turnover is equal to 3,that means that the company keeps a three-month supply of inventory on hand.
A)True
B)False
Q4) Level production schedules usually have the advantage of reducing overall production costs.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) The interwoven boundaries of banks and different trading companies in Japan make it easier to acquire credit in Japan than in Canada.
A)True
B)False
Q2) The closer a firm is to its break-even point,the lower the degree of operating leverage will be.
A)True
B)False
Q3) Firms with a high degree of operating leverage are:
A) easily capable of surviving large changes in sales volume.
B) usually trading off lower levels of risk for higher profits.
C) significantly affected by changes in interest rates.
D) trading off higher fixed costs for lower per-unit variable costs.
Q4) Explain the implications of your answers if the machine shop business is highly cyclical.
Q5) Calculate the Degree of Financial Leverage and the Degree of Combined Leverage under each of the possible financing plans.
Q6) Calculate the Degree of Operating Leverage at the expected first-year sales volume.
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Only the segmentation theory has any significant impact on interest rates.
A)True
B)False
Q2) Humped yield curves have higher intermediate term rates (4-7 year maturities)than either short-term or long-term rates.
A)True
B)False
Q3) The "term structure of interest rates" is a schedule that tells when a company's bonds mature and shows how many dollars a firm must pay in interest payments.
A)True
B)False
Q4) Working capital management is relatively unimportant to the small businessperson. A)True
B)False
Q5) Explain why long-term financing is more expensive but less risky than short-term financing.
Q6) Define working capital management.Why is it important to a firm?
Q7) What influences the amount of liquidity in the firm?
Page 8
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Chapter 7: Current Asset Management
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Sample Questions
Q1) The three primary policy variables to consider when extending credit include all of the following except:
A) credit standards.
B) the level of interest rates.
C) the terms of trade.
D) collection policy.
Q2) Inventories are usually the most liquid,but lowest-yielding,current asset of a firm.
A)True
B)False
Q3) Cash management becomes more important as the level of short-term interest rates rise.
A)True
B)False
Q4) "Extended disbursement float" has to do with the length of time a corporation takes to collect bills.
A)True
B)False
Q5) List and explain the "4C's of credit" as discussed by the author.
Q6) SWIFT stands for the Society for Worldwide International Funds Transfer.
Page 9
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) Accounts payable is a spontaneous source of funds that grows as the business expands.
A)True
B)False
Q2) Bank loans to business firms:
A) are usually long-term in nature.
B) are preferred by the business not to be self-liquidating.
C) may require commercial paper to be issued.
D) may require compensating balances.
Q3) The London Interbank Offered Rate (LIBOR):
A) does not compete with the prime rate domestically for international firms.
B) often is lower than the domestic prime rate.
C) is the loan rate offered by London banks to its best customers.
D) is a stable international rate.
Q4) Compensating balances are a way for banks to recover the cost of corporate services provided,but not directly charged.
A)True
B)False
Q5) What are the risks in the commercial paper market?
Q6) Why is commercial paper an attractive alternative to short-term bank financing?
Page 10
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Chapter 9: The Time Value of Money
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Sample Questions
Q1) The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering periods of over one year.
A)True
B)False
Q2) You are to receive $12,000 at the end of 5 years.The available yield on investments is 6%.Which table would you use to determine the value of that sum today?
A) Present value of an annuity of $1
B) Future value of an annuity
C) Present value of $1
D) Compound sum of $1
Q3) Higher interest rates (discount rates)reduce the present value of amounts to be received in the future.
A)True
B)False
Q4) An amount of money to be received in the future is worth less today than the stated amount.
A)True
B)False
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11
Chapter 10: Valuation and Rates of Return
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Sample Questions
Q1) The required rate of return is payment given to the investor for forgoing present consumption.
A)True
B)False
Q2) A 15-year bond pays 11% on a face value of $1,000.If similar bonds are currently yielding 8%,what is the market value of the bond?
A) Over $1,000
B) Under $1,000
C) Over $1,200
D) Under $800
Q3) In estimating the market value of a bond,the coupon rate should be used as the discount rate.
A)True
B)False
Q4) The risk premium is likely to be highest for:
A) government bonds.
B) corporate bonds.
C) gold mining expedition.
D) blue chip stock.
Q5) How is a supernormal growth firm's common stock valued?
Page 12
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Chapter 11: Cost of Capital
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Sample Questions
Q1) A firm's stock is selling for $78.The next annual dividend is expected to be $2.34.The growth rate is 9%.The flotation cost is $5.00.What is the cost of retained earnings?
A) 12.82%
B) 12.21%
C) 12.00%
D) 9.41%
Q2) The Halifax Corporation has 70% of its capital structure in the form of equity capital.$150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings.How much must be raised through common stock to maintain Halifax Corporation's capital structure?
A) $105,000
B) $75,000
C) $120,000
D) $21,000
Q3) Modigliani and Miller originally suggested that firm value and the use of debt were independent.
A)True
B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) Most real estate property is amortized over a 10 year period.
A)True
B)False
Q2) Under the payback period and assuming these machines are mutually exclusive,which machine(s)would Horne Robinson Inc.choose?
A) Machine A
B) Machine B
C) Machine C
D) Machine A and B
Q3) If a firm is experiencing no capital rationing,it should accept all investment proposals:
A) as long as it has available funds.
B) that return an amount equal to or greater than the cost of capital.
C) that return an amount greater than the cost of equity.
D) that are available,regardless of return.
Q4) The net present value profile allows a firm to examine the project's net present value over time.
A)True
B)False
Q5) List the 5 methods for evaluating cash flows as described in the text.
Page 14
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Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) A "what if" simulation using a computer helps to:
A) reduce the risk associated with a particular investment.
B) determine the effects of changes in certain variables.
C) increase the accuracy of the inputs.
D) none of these answer options are true.
Q2) The coefficient of correlation represents the standard deviation divided by the expected value.
A)True
B)False
Q3) An example of negative correlation may exist between the:
A) forest products and housing industries.
B) jewellery and discount furniture industries.
C) steel and aluminum industries.
D) oil and auto industries.
Q4) The highest possible value for positive correlation is +1.
A)True
B)False
Q5) A stock with a beta of 1 has systematic risk that is equal to the market.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) The accumulated debt of the federal government at its peak in 2014 was approximately:
A) $600 billion.
B) $200 billion.
C) $40 billion.
D) $30 billion.
Q2) Households and the government are mainly considered to be suppliers of funds while corporations are generally considered users of funds.
A)True
B)False
Q3) Secondary market trading activity is further divided between organized exchanges and over-the-counter markets.
A)True
B)False
Q4) When an investor buys shares in the stock market,he is purchasing shares from a company.
A)True
B)False
Q5) List and briefly describe the 4 key components of a good organized exchange?
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) Publicly traded companies generally have:
A) more pressure for short-term performance.
B) less pressure for short-term performance.
C) very strong stock market performance.
D) low distribution costs in selling securities.
Q2) The amount of securities funding by private placement in the last decade has been:
A) about the same as public offerings.
B) about the same as rights offerings.
C) somewhere between public offerings and rights offerings.
D) less than public and rights offerings.
Q3) The underwriting spread is the guaranteed minimum profit to an investment dealer for each share distributed.
A)True
B)False
Q4) An investment dealer acts as a middleperson between a corporation needing funds and investors with funds.
A)True
B)False
Q5) List and describe the trends in the securities industry in Canada.
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) An internal reorganization means that:
A) a possible redesign of management and the capital structure may be necessary.
B) a merger partner may be found.
C) is frequently carried out in the banking industry.
D) a liquidation is likely to follow.
Q2) Prices of existing bonds move _________ as market interest rates move _________.
A) down; down
B) up; up
C) up; down
D) Bond prices don't move as market interest rates move.
Q3) From the corporate issuer viewpoint,a zero-coupon bond allows the firm to:
A) receive deferred income for tax purposes.
B) reduce the multiplier of the initial investment.
C) defer payment obligations.
D) take advantage of low volatility.
Q4) Bonds with a call premium generally trade at higher yields than bonds without call premiums.
A)True
B)False
Q5) Describe the characteristics of a Strip Bond.
Page 18
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) The ex-rights date usually takes place after the end of the subscription period.
A)True
B)False
Q2) After a rights offering,the common stock will sell at the subscription price.
A)True
B)False
Q3) The difference between the rights-on and ex-rights price is equal to the subscription price divided by N.
A)True
B)False
Q4) Preferred stock may be good for a company because it:
A) expands the capital base of the firm without diluting the common stock ownership.
B) does not require interest payment in times of financial trouble,but are tax-deductible when dividends are paid.
C) is not as costly as common stock or bonds.
D) gives up no control even when dividend payments are missed.
Q5) Preferred stock generally carries a higher interest rate than debt.
A)True
B)False
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Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The primary purpose of a stock split is to:
A) indicate the firm's desire to retain funds.
B) increase the investor's overall wealth.
C) reduce the threat of a takeover by creating more shares.
D) bring the share price to a lower trading range.
Q2) A rapid growth firm can often expect a shift in the type of its typical shareholder as the firm moves into maturity.
A)True
B)False
Q3) One of the major influences on dividends is the corporate growth rate in sales and the subsequent return on assets.
A)True
B)False
Q4) The marginal principle of retained earnings states that the corporation must be able to earn a higher return on retained earnings than shareholders could receive for themselves after paying taxes on the distributed dividends.
A)True
B)False
Q5) Why might a company repurchase its own shares?
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Chapter 19: Convertibles, Warrants and Derivatives
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Sample Questions
Q1) The principle device used by the corporation to force conversion:
A) is setting the conversion price above the current market price.
B) is reducing the amount of interest payments.
C) is buying bonds back at below par value.
D) is a call provision.
Q2) The term forced conversion is derived from the fact that in such a situation,the bond issuer has no choice but to convert.
A)True
B)False
Q3) If the time to expire of an option increases:
A) the value of a call option will increase,but a put option will decrease.
B) the value of a call option will decrease,but a put option will increase.
C) the value of a call option will decrease,and a put option will decrease.
D) the value of a call option will increase,and a put option will increase.
Q4) Warrants and call options are similar because:
A) each requires the firm to issue new shares when exercised.
B) each will affect the share value when exercised.
C) both are issued by the corporation.
D) give the holder leverage on the company's share price.
Q5) Describe the similarities and differences between options and futures.
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) Company A has a growth rate in EPS of 14%.Company B's growth rate in EPS is 10%.What is the post-merger growth rate assuming the facts as previously stated? (Assume no Synergy.)
A) 13.20%
B) 10.88%
C) 12.00%
D) 12.67%
Q2) All of the following are potential benefits to a corporation in offering share purchases rather than non-equity compensation except:
A) a share purchase more readily qualifies a merger for a tax-free exchange.
B) a corporation may diminish the perceived dilutive effect of a merger.
C) the shareholders of the acquired firm may defer any capital gains taxes.
D) when the stock is sold,the tax is recognized.
Q3) One potential advantage of a merger to the acquiring firm is the portfolio effect which attempts to achieve risk reduction while perhaps maintaining the rate of return for the firm.
A)True
B)False
Q4) List and describe nonfinancial motives for mergers.
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Chapter 21: International Financial Management
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Sample Questions
Q1) Since most foreign currency values fluctuate from time to time,the monetary value of an international transaction or investment,measured in either the seller's or the buyer's currency,is likely to change over time.
A)True
B)False
Q2) The purchasing power parity theory of exchange rates suggests that exchange rates will adjust until the cost of equivalent goods is approximately equal in each country.
A)True
B)False
Q3) A forward exchange rate is used to help determine the value of a currency at a future point in time.
A)True
B)False
Q4) A firm that might suffer a loss as a result of a decline in the value of the Japanese yen could offset part of that risk by selling Japanese yen futures.
A)True
B)False
Q5) List and discuss the 3 risks of international financial management.
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