Investment Analysis
Pre-Test Questions
Course Introduction
Investment Analysis is a comprehensive course that explores the principles and techniques essential for evaluating various investment opportunities and making informed financial decisions. Students learn about asset valuation, risk and return, portfolio theory, and the functioning of capital markets. The course covers topics such as securities analysis, bond and stock valuation, efficient market hypothesis, and portfolio management strategies, equipping learners with the analytical tools necessary to assess investment performance and formulate sound investment strategies in a dynamic economic environment.
Recommended Textbook
Financial Management Theory and Practice 15th Edition by Eugene F. Brigham
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Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) The form of organization for a business is not an important issue,as this decision has very little effect on the income and wealth of the firm's owners.
A)True
B)False
Answer: False
Q2) Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
A) Corporations generally find it relatively difficult to raise large amounts of capital.
B) Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
C) Corporate shareholders escape liability for the firm's debts,but this factor may be offset by the tax disadvantages of the corporate form of organization.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally face relatively few regulations.
Answer: C
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Chapter 2: Financial Statements, Cash Flow, and Taxes
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Q1) Edwards Electronics recently reported $11,250 of sales,$5,500 of operating costs other than depreciation,and $1,250 of depreciation.The company had no amortization charges,it had $3,500 of bonds that carry a 6.25% interest rate,and its federal-plus-state income tax rate was 35%.How much was its net cash flow?
A) $3,284.75
B) $3,457.63
C) $3,639.61
D) $3,831.17
E) $4,032.81
Answer: E
Q2) The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends,and the riskiness of those cash flows.
A)True
B)False
Answer: True
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Chapter 3: Analysis of Financial Statements
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Q1) Profitability ratios show the combined effects of liquidity,asset management,and debt management on operating results.
A)True
B)False
Answer: True
Q2) Last year Urbana Corp.had $197,500 of assets,$307,500 of sales,$19,575 of net income,and a debt-to-total-assets ratio of 37.5%.The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000.Assets,sales,and the debt ratio would not be affected.By how much would the cost reduction improve the ROE?
A) 9.32%
B) 9.82%
C) 10.33%
D) 10.88%
E) 11.42%
Answer: D
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Chapter 4: Time Value of Money
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Q1) You want to buy new kitchen appliances 2 years from now,and you plan to save $8,200 per year,beginning one year from today.You will deposit your savings in an account that pays 6.2% interest.How much will you have just after you make the 2nd deposit,2 years from now?
A) $15,260
B) $16,063
C) $16,908
D) $17,754
E) $18,642
Q2) What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?
A) $16,806
B) $17,690
C) $18,621
D) $19,601
E) $20,633
Q3) Starting to invest early for retirement reduces the benefits of compound interest.
A)True
B)False
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Chapter 5: Bonds, Bond Valuation, and Interest Rates
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Q1) 5-year Treasury bonds yield 5.5%.The inflation premium (IP)is 1.9%,and the maturity risk premium (MRP)on 5-year bonds is 0.4%.What is the real risk-free rate,r*?
A) 2.59%
B) 2.88%
C) 3.20%
D) 3.52%
E) 3.87%
Q2) If its yield to maturity declined by 1%,which of the following bonds would have the largest percentage increase in value?
A) A 1-year bond with an 8% coupon.
B) A 10-year bond with an 8% coupon.
C) A 10-year bond with a 12% coupon.
D) A 10-year zero coupon bond.
E) A 1-year zero coupon bond.
Q3) A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially)at par.These bonds provide compensation to investors in the form of capital appreciation.
A)True
B)False
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Chapter 6: Risk and Return
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Q1) If you plotted the returns on a given stock against those of the market,and if you found that the slope of the regression line was negative,the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue into the future.
A)True B)False
Q2) In portfolio analysis,we often use ex post (historical)returns and standard deviations,despite the fact that we are really interested in ex ante (future)data.
A)True B)False
Q3) The CAPM is a multi-period model that takes account of differences in securities' maturities,and it can be used to determine the required rate of return for any given level of systematic risk.
A)True B)False
Q4) A stock with a beta equal to 1.0 has zero systematic (or market)risk.
A)True B)False
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Chapter 7: Corporate Valuation and Stock Valuation
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Q1) The projected cash flow for the next year for Minesuah Inc.is $100,000,and FCF is expected to grow at a constant rate of 6%.If the company's weighted average cost of capital is 11%,what is the value of its operations?
A) $1,714,750
B) $1,805,000
C) $1,900,000
D) $2,000,000
E) $2,100,000
Q2) Which of the following statements is CORRECT?
A) The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.
B) Corporations cannot buy the preferred stocks of other corporations.
C) Preferred dividends are not generally cumulative.
D) A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.
E) Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income,but not to the proceeds in a liquidation.
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Chapter 8: Financial Options and Applications in Corporate Finance
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Q1) An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
A) Put
B) Naked
C) Covered
D) Out-of-the-money
E) In-the-money
Q2) Cazden Motors' stock is trading at $30 a share.Call options on the company's stock are also available,some with a strike price of $25 and some with a strike price of $35.Both options expire in three months.Which of the following best describes the value of these options?
A) The options with the $25 strike price will sell for less than the options with the $35 strike price.
B) The options with the $25 strike price have an exercise value greater than $5.
C) The options with the $35 strike price have an exercise value greater than $0.
D) If Cazden's stock price rose by $5,the exercise value of the options with the $25 strike price would also increase by $5.
E) The options with the $25 strike price will sell for $5.
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Chapter 9: The Cost of Capital
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Q1) Refer to the data for the Collins Group.Based on the CAPM,what is the firm's cost of common stock?
A) 11.15%
B) 11.73%
C) 12.35%
D) 13.00%
E) 13.65%
Q2) The cost of equity raised by retaining earnings can be less than,equal to,or greater than the cost of external equity raised by selling new issues of common stock,depending on tax rates,flotation costs,the attitude of investors,and other factors.
A)True
B)False
Q3) The lower the firm's tax rate,the lower will be its after-tax cost of debt and also its WACC,other things held constant.
A)True
B)False
Q4) "Capital" is sometimes defined as funds supplied to a firm by investors.
A)True
B)False
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Chapter 10: The Basics of Capital Budgeting: Evaluating Cash Flows
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Q1) Which of the following statements is CORRECT?
A) To find the MIRR,we first compound cash flows at the regular IRR to find the TV,and then we discount the TV at the cost of capital to find the PV.
B) The NPV and IRR methods both assume that cash flows can be reinvested at the cost of capital.However,the MIRR method assumes reinvestment at the MIRR itself.
C) If two projects have the same cost,and if their NPV profiles cross in the upper right quadrant,then the project with the higher IRR probably has more of its cash flows coming in the later years.
D) If two projects have the same cost,and if their NPV profiles cross in the upper right quadrant,then the project with the lower IRR probably has more of its cash flows coming in the later years.
E) For a project with normal cash flows,any change in the cost of capital will change both the NPV and the IRR.
Q2) A basic rule in capital budgeting is that if a project's NPV exceeds its IRR,then the project should be accepted.
A)True
B)False
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Chapter 11: Cash Flow Estimation and Risk Analysis
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Q1) Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate,projects' initial outlays and subsequent costs can be forecasted with great accuracy.This is especially true for large product development projects.
A)True
B)False
Q2) Kasper Film Co.is selling off some old equipment it no longer needs because its associated project has come to an end.The equipment originally cost $22,500,of which 75% has been depreciated.The firm can sell the used equipment today for $6,000,and its tax rate is 40%.What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value,the firm will receive a tax credit as a result of the sale.
A) $5,558
B) $5,850
C) $6,143
D) $6,450
E) $6,772
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Chapter 12: Financial Planning and Applications to Corporate Valuation
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Q1) Which of the following statements is CORRECT?
A) If a firm's assets are growing at a positive rate,but its retained earnings are not increasing,then it would be impossible for the firm's AFN to be negative.
B) If a firm increases its dividend payout ratio in anticipation of higher earnings,but sales and earnings actually decrease,then the firm's actual AFN must,mathematically,exceed the previously calculated AFN.
C) Higher sales usually require higher asset levels,and this leads to what we call AFN.However,the AFN will be zero if the firm chooses to retain all of its profits,i.e. ,to have a zero dividend payout ratio.
D) Dividend policy does not affect the requirement for external funds based on the AFN equation.
E) The sustainable growth rate is the maximum achievable growth rate without the firm having to raise external funds.In other words,it is the growth rate at which the firm's AFN equals zero.
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Chapter 13: Corporate Governance
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Q1) 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
Q2) Which of the following is NOT normally regarded as being a barrier to hostile takeovers?
A) Targeted share repurchases.
B) Shareholder rights provisions.
C) Restricted voting rights.
D) Poison pills.
E) Abnormally high executive compensation.
Q3) 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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Q1) Norton Electrical has quite a few positive NPV projects from which to choose.The problem is that it has more of these projects than it can finance without issuing new stock and the board of directors refuses to issue any new shares in the foreseeable future.Norton's projected net income is $150.0 million,its target capital structure is 25% debt and 75% equity,and its target payout ratio is 65%.The CFO now wants to determine how the maximum capital budget would be affected by changes in capital structure policy and/or the target dividend payout policy.Versus the current policy,how much larger could the capital budget be if (1)the target debt ratio were raised to 75%,other things held constant, (2)the target payout ratio were lowered to 20%,other things held constant,and (3)the debt ratio and payout were both changed by the indicated amounts.
Increase in Capital Budget
Increase Lower
Debt to 75% Payout to 20% Do both
A) $114.0 $73.3 $333.9
B) $120.0 $77.2 $351.5
C) $126.4 $81.2 $370.0
D) $133.0 $85.5 $389.5
E) $140.0 $90.0 $410.0
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Chapter 15: Capital Structure Decisions
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Q1) Whenever a firm borrows money,it is using financial leverage.
A)True
B)False
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) The major contribution of the Miller model is that it demonstrates that
A) personal taxes decrease the value of using corporate debt.
B) financial distress and agency costs reduce the value of using corporate debt.
C) equity costs increase with financial leverage.
D) debt costs increase with financial leverage.
E) personal taxes increase the value of using corporate debt.
Q4) The Miller model begins with the MM model with corporate taxes and then adds personal taxes.
A)True
B)False
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Chapter 16: Supply Chains and Working Capital Management
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Q1) Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.
A)True
B)False
Q2) The facts (1)that no explicit interest is paid on accruals and (2)that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.
A)True
B)False
Q3) Net working capital is defined as current assets divided by current liabilities.
A)True
B)False
Q4) Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.
A)True B)False
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Chapter 17: Multinational Financial Management
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Q1) Because political risk is seldom negotiable,it cannot be explicitly addressed in multinational corporate financial analysis.
A)True
B)False
Q2) Credit policy for multinational firms is generally more risky due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.
A)True
B)False
Q3) If 1.64 Canadian dollars can purchase one U.S.dollar,how many U.S.dollars can you purchase for one Canadian dollar?
A) 0.37
B) 0.61
C) 1.00
D) 1.64
E) 3.28
Q4) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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Q1) If its managers make a tender offer and buy all shares that were not held by the management team,this is called a private placement.
A)True
B)False
Q2) Which of the following statements is most CORRECT?
A) Private placements occur most frequently with stocks,but bonds can also be sold in a private placement.
B) Private placements are convenient for issuers,but the convenience is offset by higher flotation costs.
C) The SEC requires that all private placements be handled by a registered investment banker.
D) Private placements can generally bring in funds faster than is the case with public offerings.
E) In a private placement,securities are sold to private (individual)investors rather than to institutions.
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Chapter 19: Lease Financing
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Q1) If a leased asset has a negative residual value,for example,as a result of a statutory requirement to dispose of an asset in an environmentally sound manner,the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
A)True
B)False
Q2) A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.
A)True
B)False
Q3) In a synthetic lease a special purpose entity (SPE)is set up by a corporation that wants to acquire the use of an asset.The SPE borrows up to 97% of its capital,uses its funds to buy the asset,and then leases it to the sponsoring corporation on a short-term basis.This keeps both the asset and the debt off the sponsoring company's books.
A)True
B)False
Q4) A sale and leaseback arrangement is a type of financial,or capital,lease.
A)True
B)False
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Chapter 20: Hybrid Financing: Preferred Stock, Warrants, and Convertibles
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Q1) Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00,and has an expected constant growth rate of 5.00%.The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value.The bonds would have an 8.00% annual coupon,and each bond could be converted into 20 shares of common stock.The required rate of return on an otherwise similar nonconvertible bond is 10.00%.What is the estimated floor price of the convertible at the end of Year 3?
A) $794.01
B) $835.81
C) $879.80
D) $926.10
E) $972.41
Q2) Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,which is desirable for liquidity portfolios,and they also benefit from the 70% tax exemption on preferred dividends received.
A)True
B)False
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Chapter 21: Dynamic Capital Structures and Corporate Valuation
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Q1) Refer to data for Kitto Electronics.According to the compressed adjusted present value model,what is Kitto's unlevered value?
A) $1,296,000
B) $1,440,000
C) $1,600,000
D) $1,760,000
E) $1,936,000
Q2) Refer to data for Kitto Electronics.Using the compressed adjusted present value model,what is the value of Kitto's tax shield?
A) $156,385
B) $164,616
C) $173,280
D) $182,400
E) $192,000
Q3) According to MM,in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.
A)True
B)False
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Chapter 22: Mergers and Corporate Control
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Q1) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
Q2) A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.
A)True
B)False
Q3) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True
B)False
Q4) If the capital structure is stable,and free cash flows are expected to be growing at a constant rate at the horizon date,then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.
A)True
B)False
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Chapter 23: Enterprise Risk Management
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Q1) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q2) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07.If annual interest rates go up by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,and round to the nearest whole dollar. )
A) $78.00
B) $82.00
C) $86.00
D) $90.00
E) $95.00
Q3) In theory,reducing the volatility of its cash flows will always increase a company's value.
A)True
B)False
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Chapter 24: Bankruptcy, Reorganization, and Liquidation
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Q1) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
Q2) A central question that must be addressed in bankruptcy proceedings is whether the firm's inability to meet scheduled interest payments results from a temporary cash flow problem or from a potentially permanent problem caused by falling asset values.
A)True
B)False
Q3) In the event of bankruptcy under the federal bankruptcy laws,debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders.Moreover,in a bankruptcy all debtholders are treated equally as a single class of claimants.
A)True
B)False
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Chapter 25: Portfolio Theory and Asset Pricing Models
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Q1) If investors are risk averse and hold only one stock,we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However,if stocks are held in portfolios,it is possible that the required return could be higher on the low standard deviation stock.
A)True
B)False
Q2) It is possible for a firm to have a positive beta,even if the correlation between its returns and those of another firm are negative.
A)True
B)False
Q3) Arbitrage pricing theory is based on the premise that more than one factor affects stock returns,and the factors are specified to be (1)market returns, (2)dividend yields,and (3)changes in inflation.
A)True
B)False
Q4) The slope of the SML is determined by the value of beta.
A)True
B)False
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Chapter 26: Real Options
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Q1) Real options exist when managers have the opportunity,after a project has been implemented,to make operating changes in response to changed conditions that modify the project's cash flows.
A)True
B)False
Q2) Real options are options to buy real assets,like stocks,rather than interest-bearing assets,like bonds.
A)True
B)False
Q3) Refer to the data for Drilling Experts.Calculate the project's coefficient of variation.(Hint: Use the expected NPV. )
A) 5.87
B) 6.52
C) 7.25
D) 7.97
E) 8.77
Q4) Real options are most valuable when the underlying source of risk is very low. A)True
B)False
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Chapter 27: Providing and Obtaining Credit
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Q1) Campbell Computing Inc.currently has sales of $1,000,000,and its days sales outstanding is 30 days.The financial manager estimates that offering longer credit terms would (1)increase the days sales outstanding to 50 days and (2)increase sales to $1,200,000.However,bad debt losses,which were 2 percent on the old sales,would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent).Variable costs are 80 percent of sales,and Campbell has a 15 percent receivables financing cost.What would the annual incremental pre-tax profit be if Bass extended its credit period?
A) $20,000
B) $10,000
C) $0
D) $10,000
E) $20,000
Q2) Refer to Exhibit 27.2.What are the incremental pre-tax profits from this proposal?
A) $181,250
B) $271,750
C) $256,250
D) $206,500
E) $231,250
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Chapter 28: Advanced Issues in Cash Management and Inventory Control
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Q1) Halliday Inc.receives a $2 million payment once a year.Of this amount,$700,000 is needed for cash payments made during the next year.Each time Halliday deposits money in its account,a charge of $2.00 is assessed to cover clerical costs.If Halliday can hold marketable securities that yield 5 percent,and then convert these securities to cash at a cost of only the $2 deposit charge,what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?
A) $7,483
B) $187
C) $3,741
D) $374
E) $748
Q2) Refer to Exhibit 28.2.How many orders should Cartwright place during the year?
A) 12
B) 25
C) 30
D) 40
E) 60
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Chapter 29: Pension Plan Management
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10 Verified Questions
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Source URL: https://quizplus.com/quiz/65479
Sample Questions
Q1) Which of the following statements about pension plan portfolio performance is incorrect?
A) Alpha analysis,which relies on the Capital Asset Pricing Model,considers the risk of the portfolio when measuring performance.
B) Peer comparison examines the relative performance of portfolio managers with similar investment objectives.
C) A portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.
D) In managing the retiree portfolio,fund managers often use immunization techniques such as alpha analysis to eliminate,or at least significantly reduce,the risk associated with changing interest rates.
E) Pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.
Q2) Under a defined contribution plan,employees agree to contribute some percentage of their salaries,up to 20 percent,to the firm's pension fund.
A)True
B)False
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Source URL: https://quizplus.com/quiz/65480
Sample Questions
Q1) The primary goal of investor-owned firms is shareholder wealth maximization,while the primary goal of not-for-profit firms is typically stated in terms of some mission;for example,to provide health care services to the communities served.
A)True
B)False
Q2) Which of the following statements about a not-for-profit firm's fund capital is most correct?
A) The sole source of fund capital is the excess of revenues over expenses. B) Fund capital has a zero opportunity cost. C) Fund capital can only come from donations. D) Fund capital does not change over time. E) Fund capital is equivalent to equity capital in investor-owned firms.
Q3) Not-for-profit firms have fund capital in place of equity capital.Since fund capital does not have to provide a return to stockholders,the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True B)False
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