Investment Analysis
Question Bank
Course Introduction
Investment Analysis explores the fundamental principles and techniques used to evaluate different investment opportunities and make informed financial decisions. The course covers topics such as risk and return analysis, portfolio theory, asset valuation, security analysis, and market efficiency. Students learn to assess stocks, bonds, and alternative investments, using quantitative tools and financial models to analyze performance and predict future trends. Emphasis is placed on the practical application of concepts to real-world scenarios, enabling students to develop strategies for constructing and managing investment portfolios that align with various financial objectives and risk tolerances.
Recommended Textbook
Foundations of Finance 8th Edition by Arthur J. Keown
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17 Chapters
2473 Verified Questions
2473 Flashcards
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Page 2
Chapter 1: An Introduction to the Foundations of Financial Management
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Sample Questions
Q1) Which of the following categories of owners enjoy limited liability?
A)all partners in a limited partnership
B)common shareholders of a corporation
C)in a partnership,only the general partners
D)only B and C above
Answer: B
Q2) The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.
A)True
B)False
Answer: False
Q3) An investment project is acceptable if the total cash received over the life of the project exceeds the total cash spent over the life of the project.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Financial Markets and Interest Rates
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Sample Questions
Q1) Which of the following securities will likely have the highest default risk premium?
A)U.S.Treasury Bond maturing in 2027
B)BBB-rated corporate bond maturing in 2020 actively traded on a major exchange
C)AAA-rated corporate bond maturing in 2015 not actively traded
D)U.S.Treasury Bill
Answer: B
Q2) For a firm to have its securities listed on an exchange,it must meet certain requirements.These usually include measures of profitability,size,market value,and public ownership.
A)True
B)False
Answer: True
Q3) Which of the following is an advantage of using private placements for debt?
A)reduced costs from the elimination of the registration statement for the SEC,investment-banking underwriting fees and distribution costs
B)lower interest costs
C)fewer and less burdensome restrictive covenants
D)the possibility of future SEC registration
Answer: A
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Page 4
Chapter 3: Understanding Financial Statements and Cash Flows
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Sample Questions
Q1) Two companies have identical assets and operating activities.Which of the follow statements is true?
A)Both companies have the same net income.
B)The company with more debt will have lower operating income due to interest expense.
C)The company with more debt will have higher operating income due to leverage.
D)The company with more debt will have lower net income due to interest expense.
Answer: D
Q2) All of the following statements about balance sheets are true EXCEPT
A)Assets - Liabilities = Shareholders' Equity.
B)assets are reported at historical cost.
C)balance sheets show average asset balances over a one-year period.
D)a balance sheet reports a company's financial position at a specific point in time.
Answer: C
Q3) Net profit margin is equal to the gross profit margin times the operating profit margin.
A)True
B)False
Answer: False
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Chapter 4: Evaluating a Firms Financial Performance
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Sample Questions
Q1) The goal of most financial managers is to reduce the amount of long-term debt to zero,thus maximizing shareholder wealth.
A)True
B)False
Q2) Based on the information in Table 4-2,the current ratio is
A)2.97.
B)2.46.
C)2.35.
D)2.23.
Q3) Based on the information contained in Tables 4-5,what was Yen's quick ratio at the end of 2010?
A)2.10
B)1.43
C)2.93
D)1.79
Q4) Based on the information in Table 4-2,the acid-test ratio is A)1.17.
B)1.33.
C)1.39.
D)2.15.
Page 6
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Chapter 5: The Time Value of Money
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Sample Questions
Q1) What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1.
A)$5,790
B)$6,508
C)$7,210
D)$9,010
Q2) Congratulations! You are the proud winner of the multi-state Sour Ball Lottery.You are to receive $2,000,000 at the end of each year for the next 20 years.While the Lottery Commission refers to this as a $40,000,000 jackpot,if you choose the "cash option" they will give you much less than that; you can receive a lump sum payment today equal to the present value of the ordinary annuity instead of the 20 annual payments.If the discount rate that the Lottery Commission uses to determine the lump sum payoff is 7%,what is your payoff if you select the cash option?
A)$26,945,332
B)$39,707,503
C)$42,977,401
D)$21,188,028
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Chapter 6: The Meaning and Measurement of Risk and Return
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Sample Questions
Q1) The category of securities with the highest historical risk premium is
A)large company stocks.
B)small company stocks.
C)government bonds.
D)small company corporate bonds.
Q2) Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return.What is the expected amount of return this investment will produce?
A)$4,040
B)$7,640
C)$12140
D)$1,540
Q3) Surf and Spray Inc.has a beta equal to 1.8 and a required return of 15% based on the CAPM.If the market risk premium is 7.5%,the risk-free rate of return is
A)4.1%.
B)3.4%.
C)2.0%.
D)1.5%.
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Chapter 7: The Valuation and Characteristics of Bonds
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Sample Questions
Q1) If the demand for a new bond issue increases,it is likely that the coupon rate will be adjusted upward by the issuing company.
A)True
B)False
Q2) Bonds issued in a country different from the one in which the currency of the bond is denominated are called Eurobonds.
A)True B)False
Q3) Restrictive provisions in bond indenture agreements are designed to protect bondholders and lessen the agency problems between bondholders and stockholders. A)True B)False
Q4) The current yield for a bond is constant over time because the coupon rate is fixed. A)True B)False
Q5) Define interest rate risk.How does a bond's level of interest rate risk depend on its maturity?
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Page 9
Chapter 8: The Valuation and Characteristics of Stock
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Sample Questions
Q1) South Stage,Inc.preferred stock pays an annual dividend of $2.75 per share.If the stock is currently selling for $27.50 per share,what is the expected rate of return on this stock?
A)2.75%
B)10.0%
C)17.5%
D)27.5%
Q2) Which of the following changes will make the value of a stock go up,other things being held constant?
A)The required return decreases.
B)The required return increases.
C)In general,investors become more risk averse.
D)The growth rate of dividends decreases.
Q3) Convertibility is a common feature of common stock; it allows the common stockholders to convert their common shares into preferred shares or into bonds.
A)True
B)False
Q4) U.S Technologies preferred stock sells for $80 and pays $9 each year in dividends.What is the expected rate of return?
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Chapter 9: The Cost of Capital
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Sample Questions
Q1) The risk free rate of return is 3% and the expected return on the market portfolio is 14%.Oklahoma Oilco has a beta of 2.0 and a standard deviation of returns of 26%.Oilco's marginal tax rate is 35%.Analysts expect Oilco's net income to grow by 12% per year for the next 5 years.Using the capital asset pricing model,what is Oklahoma Oilco's cost of retained earnings?
A)18.6%
B)21.2%
C)22.8%
D)25.0%
Q2) A firm's cost of capital is the required rate of return on the firm's average project. A)True B)False
Q3) An increase in a corporation's marginal tax rate will decrease the corporation's cost of debt,but have no impact on its cost of preferred stock or cost of common equity.
A)True
B)False
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Chapter 10: Capital-Budgeting Techniques and Practice
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Sample Questions
Q1) NPV is the most theoretically correct capital budgeting decision tool examined in the text.
A)True B)False
Q2) The profitability index is the ratio of the company's net income (or profits)to the initial outlay or cost of a capital budgeting project.
A)True B)False
Q3) Your firm is considering an investment that will cost $920000 today.The investment will produce cash flows of $450,000 in year 1,$270,000 in years 2 through 4,and $200,000 in year 5.The discount rate that your firm uses for projects of this type is 11.25%.What is the investment's net present value?
A)$540,000
B)$378,458
C)$192,369
D)$112,583
Q4) One drawback of the payback method is that some cash flows may be ignored. 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) An opportunity cost is a relevant incremental cost for capital budgeting decisions.
A)True
B)False
Q2) Proceeds from the issuance of new debt and principal payments upon maturity of debt used to finance a project should be included in the calculation of the project's after-tax cash flows.
A)True
B)False
Q3) According to the CAPM,systematic risk is the only relevant risk for capital budgeting purposes.
A)True
B)False
Q4) Any increase in interest payments caused by a project should be counted in the incremental cash flows.
A)True
B)False
Q5) Financial theory assumes that individuals are risk averse.
A)True
B)False
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Chapter 12: Determining the Financing Mix
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Sample Questions
Q1) The break-even model assumes that selling price per unit and variable cost per unit of output are constant over the relevant range of output.
A)True
B)False
Q2) The break-even point in sales dollars is convenient if
A)the firm sells a large amount of one product.
B)the firm deals with more than one product.
C)the price per unit is very low.
D)depreciation expense is high.
Q3) Operating leverage is measured as the responsiveness of the firm's earnings before interest and taxes relative to fluctuations in sales.
A)True
B)False
Q4) Higher bankruptcy costs will result in optimal capital structures using more long-term debt financing.
A)True
B)False
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14
Chapter 13: Dividend Policy and Internal Financing
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Sample Questions
Q1) Concentric Corporation has 10 million shares of stock outstanding.Concentric's after-tax profits are $140 million and the corporation's stock is selling at a price-earnings multiple of 18,for a stock price of $252 per share.Concentric's management issues a 40% stock dividend.What is the effect on an investor who owns 100 shares of Concentric before the dividend if Concentric's price-earnings multiple remains the same after the dividend is paid?
A)The investor will own 140 shares worth $25,200.
B)The investor will own 140 shares worth $35,280.
C)The investor will own 100 shares worth $25,200.
D)The investor will own 100 shares worth $35,280.
Q2) All of the following are methods available to a corporation that desires to repurchase stock EXCEPT
A)offering to employees who own an interest in the firm.
B)open market.
C)tender offer to all existing stockholders.
D)offer to one or more major stockholders on a negotiated basis.
Q3) There is no difference on an economic basis between a stock dividend and a stock split.
A)True
B)False
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Chapter 14: Short-Term Financial Planning
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Sample Questions
Q1) The cash budget can be used to provide an estimate of the firm's future financing needs.
A)True B)False
Q2) Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory.Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%.The firm's investment in inventory in the current year is $5,890,200.What is the projection for next year's inventory?
A)$7,657,260
B)$6,981,250
C)$5,845,500
D)$4,526,600
Q3) Pro forma statements are important since they formally report the performance of the firm during the previous reporting period.
A)True B)False
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16
Chapter 15: Working-Capital Management
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Sample Questions
Q1) With regard to the hedging principle,which of the following assets should be financed with current liabilities?
A)minimum level of cash required for year round operations
B)expansion of accounts receivable to meet seasonal demand
C)machinery
D)buildings
Q2) The hedging principle is also called the principle of self-liquidating inventory.
A)True
B)False
Q3) The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.
A)True
B)False
Q4) The prime rate of interest is
A)the rate the bank charges its most credit-worthy borrowers.
B)the rate the bank charges for money it borrows from the Federal Reserve Board.
C)the rate the bank charges its average borrower.
D)the rate the bank charges on home mortgages.
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Chapter 16: International Business Finance
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Sample Questions
Q1) A quote of .7645 euros per dollar in New York is an example of a direct quote.
A)True
B)False
Q2) In an international trade contract involving one buyer and one seller,both parties may be exposed to exchange rate risk if the contract is denominated in a third currency.
A)True
B)False
Q3) An indirect quote indicates the number of units of foreign currency that can be bought for one unit of the home currency.
A)True
B)False
Q4) The asked rate is also known as the selling rate or the offer rate.
A)True
B)False
Q5) A currency swap is the exchange of principal and interest in one currency for the same in another currency for an agreed period of time.
A)True
B)False
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Chapter 17: Cash,receivables,and Inventory Management
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Sample Questions
Q1) A security is considered liquid if it can be sold,regardless of the time it takes to make the sale.
A)True
B)False
Q2) You have a choice between investing in a corporate bond or a municipal bond.The corporate bond has an annual yield of 10 percent,while the municipal bond has an annual yield of 7 percent.At what tax rate would you be indifferent between buying the corporate bond or the municipal bond?
Q3) Cash management system objectives include
A)maintaining sufficient cash to meet disbursal needs.
B)maintaining idle cash balances at "doomsday event" levels.
C)maintaining accounts payable balances at zero by early bill payment.
D)all of the above are objectives of the system.
Q4) Which of the following would be an example of the "precautionary motive" for a firm holding cash balances?
A)purchase of inventory
B)anticipating a strike
C)purchase fixed assets
D)make dividend payments
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