Investment Analysis
Final Exam Questions
Course Introduction
Investment Analysis explores the fundamental principles and techniques used to evaluate various investment opportunities in financial markets. The course covers topics such as risk and return, portfolio theory, asset pricing models, security analysis, and the valuation of equities, bonds, and alternative investments. Students learn to assess the performance of investment portfolios, interpret market information, and apply quantitative and qualitative methods to make informed investment decisions. Practical cases and market data analyses equip students with the skills necessary to critically analyze investment prospects and manage investment portfolios in real-world scenarios.
Recommended Textbook
Foundations of Finance 8th Edition by Arthur J. Keown
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) A homeowner that owes more on his/her mortgage than the home is worth is said to be "under water".
A)True
B)False
Answer: True
Q2) Underemployment is a term used to describe hiring employees who work for a designated foreman or team leader.In this sense they are employed under a specific individual.
A)True
B)False
Answer: False
Q3) Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.
A)True
B)False
Answer: False
Q4) The goal of profit maximization ignores the risk of financial decisions
A)True
B)False Answer: True
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Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) Which of the following statements is false?
A)Brokers purchase securities for their own account.
B)Most corporate bond trading takes place over the counter.
C)Broker-dealers stand ready to buy and sell specific securities at selected prices.
D)none of the above
Answer: A
Q2) Part of the U.S.Government's huge deficit is financed by foreign countries,such as China,which is a savings surplus unit.
A)True
B)False
Answer: True
Q3) The one-year interest rate is 4%.The interest rate for a two-year security is 6%.According to the unbiased expectations theory,the one-year interest rate one year from now must be equal to A)5.00%.
B)8.00%.
C)8.04%.
D)10.00%.
Answer: C
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) A balance sheet reflects the current market value of a firm's assets and liabilities. A)True
B)False Answer: False
Q2) Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock.The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased.Therefore
A)Corporation A's operating income will decrease due to higher interest expense.
B)Corporation A's net income will increase due to the tax deductibility of interest expense.
C)Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment.
D)Corporation A's gross profit will decrease. Answer: B
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) Based on the information in Table 4-1,the fixed asset turnover ratio is A)1.69.
B)2.17.
C)4.39.
D)4.80.
Q2) Based on the information in Table 4-1,the acid-test ratio is A)1.71.
B)1.67.
C)1.02.
D)0.98.
Q3) Which of the following is true if a firm wishes to collect its accounts faster by imposing stricter credit terms on its customers?
A)The firm's average collection period is likely to fall.
B)The firm's accounts receivable turnover might rise.
C)The firm's sales might decrease.
D)all of the above
Q4) Calculate the following 2010 financial ratios of Aggie Corporation using the information given in Table 4-7: i.current ratio ii.acid test ratio iii.debt ratio iv.return on total assets v.return on common equity
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) It is never appropriate to compare nominal rates unless they include the same number of compounding periods per year.
A)True B)False
Q2) The future value of an annuity due is greater than the future value of an otherwise identical ordinary annuity.
A)True
B)False
Q3) You plan to go to Asia to visit friends in three years.The trip is expected to cost a total of $10,000 at that time.Your parents have deposited $5,000 for you in a Certificate of Deposit paying 6% interest annually,maturing three years from now.Uncle Lee has agreed to pay for all remaining expenses.If you are going to put Uncle Lee's gift in an investment earning 10% over the next three years,how much must he deposit today,so you can visit your friends three years from today?
A)$3,757
B)$3,039
C)$5,801
D)$3,345
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Chapter 6: The Meaning and Measurement of Risk and Return
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Q1) For a well-diversified investor,an investment with an expected return of 10% with a standard deviation of 3% dominates an investment with an expected return of 10% with a standard deviation of 5%.
A)True
B)False
Q2) Negative historical returns are not possible during periods of high volatility (high standard deviations of returns)due to the risk-return tradeoff.
A)True
B)False
Q3) Historically,investments with the highest returns have the lowest standard deviations because investors do not like risk.
A)True
B)False
Q4) The T-bill return is used in the CAPM model as the risk free rate. A)True
B)False
Q5) Another name for an asset's expected rate of return is holding-period return.
A)True B)False
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) If a bond sells for its par value,the coupon interest rate and yield to maturity are equal.
A)True B)False
Q2) Federal regulations make it impossible for rating agencies to drop a company's credit rating more than two notches at a time in order to prevent panic in bond markets.
A)True B)False
Q3) The yield to maturity on a bond is the rate of return that equates the present value of the bond's future cash flows with the bond's A)face value.
B)market value.
C)liquidation value. D)book value.
Q4) gat,Inc.has issued a $1,000 par 4% annual coupon bond that is to mature in 18 years.If your required rate of return is 6.5%,what price would you be willing to pay for the bond?
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9
Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) You are considering the purchase of Zee Company stock.You anticipate that the company will pay dividends of $3.50 per share next year and $4.00 per share the following year.You believe that you can sell the stock for $20.00 per share two years from now.If your required rate of return is 10 percent,what is the maximum price that you would pay for a share of Zee Company stock?
Q2) A small biotechnology research corporation has been experiencing losses for the first three years of its existence,and thus has a negative balance in retained earnings.The corporation's stock price,however,is $1 per share.Which of the following statements is MOST correct?
A)Investors are irrational to pay $1 per share when earnings per share have been negative for three years.
B)Investors believe the stock is worth $1 per share because future earnings (and cash flows)are expected to be positive.
C)The corporation's accountants must have made a mistake because retained earnings may not be negative.
D)The required return on the stock will be small because the company has very few assets.
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Page 10
Chapter 9: The Cost of Capital
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Sample Questions
Q1) Phillips Enterprises Inc.is expected to pay a dividend of $2.60 next year.Dividends are expected to grow at a constant rate of 8% per year,and the stock price is currently $20.00.New stock can be sold at this price subject to flotation costs of 15%.The company's marginal tax rate is 35%.Compute the cost of internal equity (retained earnings)and the cost of external equity (new common stock),respectively.
A)0,21.00%
B)8.00%,23.29%
C)21.00%,23.29%
D)23.00%,25.48%
Q2) Glenna Gayle common stock sells for $55,and dividends paid last year were $1.35.Flotation costs on issuing stock will be 8% of the market price.The dividends are predicted to have a 10% growth rate.What is the cost of internal equity,and new equity,respectively for Glenna Gayle?
Q3) A corporation may lower its cost of capital by shifting a portion of its total financing from a higher cost source of capital,such as common equity,to a lower cost source of capital,such as debt.
A)True
B)False
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11
Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) The discounted payback period takes the time value of money into account in that it uses discounted free cash flows rather than actual undiscounted free cash flows in calculating the payback period.
A)True
B)False
Q2) If a project's profitability index is less than one then the project should be rejected.
A)True
B)False
Q3) The profitability index is the ratio of the present value of the future free cash flows to the initial investment.
A)True
B)False
Q4) If two projects are mutually exclusive then the IRR is more important than the NPV in deciding the project that should be chosen.
A)True
B)False
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Chapter 11: Cash Flows and Other Topics in Capital Budgeting
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Sample Questions
Q1) Capital budgeting decisions are based on free cash flow because free cash flow better reflects when money is received and available for reinvestment than account profits.
A)True
B)False
Q2) The initial outlay for a new project is an example of an opportunity cost.
A)True
B)False
Q3) The initial outlay includes the cost of purchasing the asset and getting is operational,but this excludes any training costs for employees which should be included as part of differential cash flows over the life of the project.
A)True
B)False
Q4) In general,a project's free cash flows will fall into one of three categories: (1)incremental costs,(2)sunk costs,and (3)opportunity costs.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) Business risk refers to the relative dispersion (variability)of a company's net income.
A)True
B)False
Q2) Fixed costs are called indirect costs while variable costs are called direct costs.
A)True
B)False
Q3) Financial structure includes long- and short-term sources of funds.
A)True
B)False
Q4) Fixed operating costs include charges incurred from the firm's use of debt financing.
A)True
B)False
Q5) If a firm's production process requires high operating leverage (use of fixed costs),then the firm should finance its assets with debt,so that the cost of capital will be reduced and financing costs will remain fixed.
A)True
B)False
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Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) Trevor Co.'s future earnings for the next four years are predicted below.Assuming there are 500,000 shares outstanding,what will the yearly dividend per share be if the dividend policy is Trevor & Co. 1 $ 900,000 2 1,200,000 3 850,000 4 1,350,000
a.a constant payout ratio of 40%
b.stable dollar dividend targeted at 40% of the average earnings over the four-year period
c.small,regular dividend of $0.75 plus a year-end extra of 40% of profits exceeding $1,000,000
Q2) The correct order of dividend process dates is
A)date of record,declaration date,ex-dividend date,payment date.
B)declaration date,date of record,ex-dividend date,payment date.
C)ex-dividend date,date of record,declaration date,payment date.
D)declaration date,ex-dividend date,date of record,payment date.
Q3) The existence of taxes can directly affect a common shareholder's preference for capital gains or dividend income.
A)True
B)False
Q4) What is the information effect associated with dividends? Why does it occur?
Q5) Describe the three divergent views of dividend policy's effect on share price.
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010.The retained earnings balance at the end of 2012 is $7 million.Ribbon Industries has a dividend payout ratio of 30%.If sales are expected to increase by 25% next year,what will be the projected balance in retained earnings using the percent of sales method?
A)$7,280,000
B)$6,720,000
C)$7,350,000
D)$8,750,000
Q2) Discretionary financing needed (DFN)is equal to projected total assets minus projected total liabilities minus projected owners' equity.
A)True
B)False
Q3) Cash budgets are completed only on an annual basis because shorter periods of time are too variable and uncertain for meaningful results.
A)True
B)False
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16
Chapter 15: Working-Capital Management
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Sample Questions
Q1) A company decreases the risk of insolvency by financing long-term assets with short-term debt.
A)True
B)False
Q2) An inventory loan agreement in which the inventories pledged as collateral are physically separated from the firm's other inventory and placed under the control of a third-party is called
A)a floating lien agreement.
B)a chattel mortgage agreement.
C)a field warehouse agreement.
D)a securitized inventory loan arrangement.
Q3) A firm increases the risks of insolvency by keeping relatively large amounts of money tied up in marketable securities.
A)True
B)False
Q4) The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.
A)True
B)False
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Chapter 16: International Business Finance
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Sample Questions
Q1) Except for the effects of small transaction costs,the forward premium or discount should be equal and opposite in size to the difference in the national interest rates for securities of the same maturity.What is the name of this theory?
A)the purchasing power parity theory
B)the Bobby Fisher effect
C)interest rate parity theory
D)the law of one price
Q2) A quote of .7645 euros per dollar in New York is an example of a direct quote.
A)True
B)False
Q3) A direct quote of $1.6 per British Pound in the United States is equivalent to a direct quote of .625 British Pounds per U.S.dollar in Great Britain.
A)True
B)False
Q4) What is arbitrage? Assume that the dollar is quoted $1 = £0.625 in New York and the pound sterling is quoted as £1 = $1.63 in London.Is there an arbitrage opportunity? If so,what would an astute trader do? What will happen to the quotes as trades are made at current prices?
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Page 18
Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) Which of the following is the least liquid?
A)U.S.Treasury bills
B)commercial paper
C)money market mutual funds
D)federal agency securities
Q2) As inflation pushes interest rates up,the cost of carrying inventory rises.
A)True
B)False
Q3) Manfred Manufacturing is involved in the production of machine parts.The company uses 600,000 pounds of steel annually.The current purchasing cost for steel is $3.20 per pound.The carrying cost for inventory is 10 percent of the purchase price.The cost of ordering steel is $800 per order.The company has decided to maintain a safety stock of 15,000 pounds.The delivery time per order is 6 days.The company works 365 days a year. a.Determine the optimal EOQ. b.How many orders will be placed annually? c.What is the average inventory? d.What is the inventory order point? (That is,at what level of inventory should a new order be placed?) e.What is the company's total inventory costs for the year?
Q4) The minimum denomination of U.S.Treasury bills is $100,000.
A)True
B)False
Page 19
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