Investment Analysis
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Course Introduction
Investment Analysis introduces students to the principles and techniques used to evaluate potential investment opportunities and make informed financial decisions. The course covers fundamental topics such as risk and return, portfolio theory, asset pricing models, and the analysis of equity, fixed income, and alternative investments. Students will learn to assess financial statements, apply valuation methods, and use quantitative tools to analyze securities and manage investment portfolios. Emphasis is placed on practical application, critical thinking, and understanding the impact of market trends and economic factors on investment choices.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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21 Chapters
1827 Verified Questions
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) In order to maximize its shareholders' value,a firm's management must attempt to maximize the expected EPS.
A)True
B)False
Answer: False
Q2) Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
A) Pay managers large cash salaries and give them no stock options.
B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
C) Beef up the restrictive covenants in the firm's debt agreements.
D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.
E) For a firm that compensates managers with stock options,reduce the time before options are vested,i.e. ,the time before options can be exercised and the shares that are received can be sold.
Answer: B
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Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) While the distinctions are becoming blurred,investment banks generally specialize in lending money,whereas commercial banks generally help companies raise capital from other parties.
B) The NYSE operates as an auction market,whereas NASDAQ is an example of a dealer market.
C) Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks.
D) Money markets are markets for long-term debt and common stocks.
E) A liquid security is a security whose value is derived from the price of some other "underlying" asset.
Answer: B
Q2) Money markets are markets for A) Foreign currencies.
B) Consumer automobile loans.
C) Common stocks.
D) Long-term bonds.
E) Short-term debt securities such as Treasury bills and commercial paper.
Answer: E
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4
Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) During 2018,Bascom Bakery paid out $33,525 of common dividends.It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $159,600.How much net income did the firm earn during the year?
A) $55,897
B) $49,140
C) $47,297
D) $61,425
E) $63,882
Answer: D
Q2) Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company.The before-tax dividend yield on the preferred stock is 8.75%.What is the company's after-tax return on the preferred,assuming a 70% dividend exclusion?
(Round your final answer to two decimal places. )
A) 9.63%
B) 7.83%
C) 5.95%
D) 7.20%
E) 9.55%
Answer: B
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Page 5
Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) A firm wants to strengthen its financial position.Which of the following actions would increase its current ratio?
A) Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase a new plant and equipment.
B) Use cash to repurchase some of the company's own stock.
C) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.
D) Issue new stock,then use some of the proceeds to purchase additional inventory and hold the remainder as cash.
E) Use cash to increase inventory holdings.
Q2) A firm's new president wants to strengthen the company's financial position.Which of the following actions would make the company financially stronger?
A) Increase accounts receivable while holding sales constant.
B) Increase EBIT while holding sales and assets constant.
C) Increase accounts payable while holding sales constant.
D) Increase notes payable while holding sales constant.
E) Increase inventories while holding sales constant.
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Chapter 5: Time Value of Money
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Sample Questions
Q1) You plan to borrow $47,400 at a 7.5% annual interest rate.The terms require you to amortize the loan with 7 equal end-of-year payments.How much interest would you be paying in Year 2?
A) $2,520.35
B) $2,835.40
C) $2,992.92
D) $3,150.44
E) $3,623.01
Q2) The present value of a future sum decreases as either the discount rate or the number of periods per year increases,other things held constant.
A)True
B)False
Q3) You plan to invest some money in a bank account.Which of the following banks provides you with the highest effective rate of interest?
A) Bank 1;6.1% with annual compounding.
B) Bank 2;6.0% with monthly compounding.
C) Bank 3;6.0% with annual compounding.
D) Bank 4;6.0% with quarterly compounding.
E) Bank 5;6.0% with daily (365-day)compounding.
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Page 7
Chapter 6: Interest Rates
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Sample Questions
Q1) The risk that interest rates will increase,and that increase will lead to a decline in the prices of outstanding bonds,is called "interest rate risk," or "price risk."
A)True
B)False
Q2) Assume the following: The real risk-free rate,r*,is expected to remain constant at 3%.Inflation is expected to be 3% next year and then to be constant at 2% a year thereafter.The maturity risk premium is zero.Given this information,which of the following statements is CORRECT?
A) The yield curve for U.S.Treasury securities will be upward sloping.
B) A 5-year corporate bond must have a lower yield than a 5-year Treasury security.
C) A 5-year corporate bond must have a lower yield than a 7-year Treasury security.
D) The real risk-free rate cannot be constant if inflation is not expected to remain constant.
E) This problem assumed a zero maturity risk premium,but that is probably not valid in the real world.
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8
Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) Bond X has an 8% annual coupon,Bond Y has a 10% annual coupon,and Bond Z has a 12% annual coupon.Each of the bonds is noncallable,has a maturity of 10 years,and has a yield to maturity of 10%.Which of the following statements is CORRECT?
A) If the bonds' market interest rate remains at 10%,Bond Z's price will be lower one year from now than it is today.
B) Bond X has the greatest reinvestment risk.
C) If market interest rates decline,the prices of all three bonds will increase,but Z's price will have the largest percentage increase.
D) If market interest rates remain at 10%,Bond Z's price will be 10% higher one year from today.
E) If market interest rates increase,Bond X's price will increase,Bond Z's price will decline,and Bond Y's price will remain the same.
Q2) If a firm raises capital by selling new bonds,it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) A stock with a beta equal to -1.0 has zero systematic (or market)risk.
A)True
B)False
Q2) 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
Q3) Which of the following statements is CORRECT?
A) Beta is measured by the slope of the security market line.
B) If the risk-free rate rises,then the market risk premium must also rise.
C) If a company's beta is halved,then its required return will also be halved.
D) If a company's beta doubles,then its required return will also double.
E) The slope of the security market line is equal to the market risk premium, (r<sub>M</sub> - r<sub>RF</sub>).
Q4) Diversification will normally reduce the riskiness of a portfolio of stocks.
A)True
B)False
Page 10
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Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Ryan Enterprises forecasts the free cash flows (in millions)shown below.Assume the firm has zero non-operating assets.The weighted average cost of capital is 13.0%,and the FCFs are expected to continue growing at a 5.0% rate after Year 3.What is the firm's total corporate value (in millions)? Do not round intermediate calculations. \[\begin{array} { l r r r }
\text { Year } & 1 & 2 & 3 \\ \hline \text { FCF } & - \$ 15.0 & \$ 10.0 & \$ 25.0 \end{array}\]
?
A) $268.01
B) $196.22
C) $217.75
D) $272.79
E) $239.29
Q2) Preferred stock is a hybrid-a cross between a common stock and a bond-in the sense that it pays dividends that normally increase annually (like a stock),but its payments are contractually guaranteed (like interest on a bond).
A)True
B)False
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Page 11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) The cost of debt,r<sub>d</sub>,is normally less than r<sub>s</sub>,so r<sub>d</sub>(1 - T)will normally be much less than r<sub>s</sub>.Therefore,as long as the firm is not completely debt financed,the weighted average cost of capital (WACC)will normally be greater than r<sub>d</sub>(1 - T).
A)True
B)False
Q2) If a typical U.S.company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years,then the firm will most likely
A) become riskier over time,but its intrinsic value will be maximized.
B) become less risky over time,and this will maximize its intrinsic value.
C) accept too many low-risk projects and too few high-risk projects.
D) become more risky and also have an increasing WACC.Its intrinsic value will not be maximized.
E) continue as before,because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.
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Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life.
B) One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money.
C) One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital.
D) One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until sometime in the future.
E) One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects.
Q2) Conflicts between two mutually exclusive projects occasionally occur,where the NPV method ranks one project higher but the IRR method puts the other one first.In theory,such conflicts should be resolved in favor of the project with the higher NPV.
A)True
B)False
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Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Since depreciation is a cash expense,the faster an asset is depreciated,the lower the projected NPV from investing in the asset.
B) Under current laws and regulations,corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
C) Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
D) Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV.
E) Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project's forecasted NPV.
Q2) Extending the lives of projects with different lives out to a common life for comparison purposes,while theoretically appealing,is valid only if there is a reasonably high probability that the projects will actually be repeated beyond their initial lives.
A)True
B)False
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Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Games Unlimited Inc.is considering a new game that would require an investment of $21.0 million.If the new game is well received,then the project would produce cash flows of $9.5 million a year for 3 years.However,if the market does not like the new game,then the cash flows would be only $6.8 million per year.There is a 50% probability of both good and bad market conditions.The firm could delay the project for a year while it conducts a test to determine if demand would be strong or weak.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.If the WACC is 9.6%,what is the value (in thousands)of the investment timing option? Do not round intermediate calculations.
?
A) $1,274
B) $1,083
C) $1,592
D) $1,019
E) $1,147
Q2) The option to abandon a project is a real option,but a call option on a stock is not a real option.
A)True
B)False
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Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) Your uncle is considering investing in a new company that will produce high quality stereo speakers.The sales price would be set at 1.70 times the variable cost per unit;the variable cost per unit is estimated to be $75.00;and fixed costs are estimated at $1,170,000.What sales volume would be required to break even,i.e. ,to have EBIT = zero?
A) 23,400
B) 25,851
C) 18,051
D) 17,160
E) 22,286
Q2) According to the signaling theory of capital structure,firms first use common equity for their capital,then use debt if and only if they can raise no more equity on "reasonable" terms.This occurs because the use of debt financing signals to investors that the firm's managers think that the future does not look good.
A)True
B)False
Q3) If a firm borrows money,it is using financial leverage.
A)True
B)False
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Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock,other things held constant.
A)True
B)False
Q2) Suppose a firm that has been earning $2 and paying a dividend of $1.00,or a 50% dividend payout,announces that it is increasing the dividend to $1.50.The stock price then jumps from $20 to $30.Some people would argue that this is proof that investors prefer dividends to retained earnings.Miller and Modigliani would agree with this argument.
A)True
B)False
Q3) Mid-State BankCorp recently declared a 7-for-2 stock split.Prior to the split,the stock sold for $100 per share.If the firm's total market value is unchanged by the split,what will the stock price be following the split?
A) $35.71
B) $28.57
C) $28.86
D) $26.29
E) $25.43
Page 17
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 55.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )
A) 24.49%
B) 20.24%
C) 19.03%
D) 18.62%
E) 17.00%
Q2) Singal Inc.is preparing its cash budget.It expects to have sales of $30,000 in January,$35,000 in February,and $20,000 in March.If 20% of sales are for cash,40% are credit sales paid in the month after the sale,and another 40% are credit sales paid 2 months after the sale,what are the expected cash receipts for March?
A) $27,600
B) $34,200
C) $30,000
D) $24,600
E) $28,200
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Page 18
Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) To determine the amount of additional funds needed (AFN),you may subtract the expected increase in liabilities,which represents a source of funds,from the sum of the expected increases in retained earnings and assets,both of which are uses of funds.
A)True
B)False
Q2) Spontaneously generated funds are generally defined as follows:
A) Assets required per dollar of sales.
B) A forecasting approach in which the forecasted percentage of sales for each item is held constant.
C) Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.
D) Funds that arise out of normal business operations from its suppliers,employees,and the government,and they include spontaneous increases in accounts payable and accruals.
E) The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm's growth.
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Suppose a hypothetical CBOT 13-year U.S. ,semiannual payment,6% coupon Treasury note futures contract has a quoted price of 89-090.If the note has a $1,000 par value,what is the implied annual interest rate inherent in this futures contract? Do not round your intermediate calculations.
?
A) 7.35%
B) 8.30%
C) 7.28%
D) 8.15%
E) 5.97%
Q2) An option that gives the holder the right to buy a stock at a specified price at some time in the future is called a(n)
A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
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Chapter 19: Multinational Financial Management
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Q1) If the spot rate of the Israeli shekel is 5.51 shekels per dollar and the 180-day forward rate is 5.76 shekels per dollar,then the forward rate for the Israeli shekel is selling at a(n)______________ to the spot rate.
A) 3.68% premium
B) 3.72% premium
C) 4.99% discount
D) 4.54% discount
E) 5.58% discount
Q2) Calculating a currency cross rate involves determining the exchange rate for two currencies by using a third currency as a base.
A)True
B)False
Q3) Exchange rate quotations consist solely of direct quotations. A)True
B)False
Q4) A Eurodollar is a U.S.dollar deposited in a bank outside the United States.
A)True
B)False
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21
Chapter 20: Hybrid Financing: Preferred
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) Warrants have an option feature,but convertibles do not.
B) One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted,but exercising warrants does not bring in any additional funds.
C) The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt,even though investing in convertibles is more risky than investing in straight debt.
D) The value of a warrant to buy a safe,stable stock should exceed the value of a warrant to buy a risky,volatile stock,other things held constant.
E) Warrants can sometimes be detached and traded separately from the security with which they were issued,but this is unusual.
Q2) Preferred stock normally has no voting rights.However,most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.
A)True
B)False
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Page 22
Chapter 21: Mergers and Acquisitions
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Q1) At the beginning of the year Ham Inc.'s management is considering making an offer to buy Egg Corporation.Egg's projected operating income (EBIT)for the current year is $25.0 million,but Ham believes that if the two firms were merged,it could consolidate some operations,reduce Egg's expenses,and raise its EBIT to $39.0 million.Neither company uses any debt,and they both pay income taxes at a 40% rate.Ham has a better reputation among investors,who regard it as better managed and also less risky,so Ham's stock has a P/E ratio of 18 versus a P/E of 12 for Egg.Since Ham's management will be running the entire enterprise after a merger,investors will value the resulting corporation based on Ham's P/E.Based on expected market values,how much synergy should the merger create? Do not round your intermediate calculations.
A) $301.50 million
B) $277.38 million
C) $241.2 million
D) $205.02 million
E) $229.14 million
Q2) In a merger with true synergies,the post-merger value exceeds the sum of the separate companies' pre-merger values.
A)True
B)False
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Page 23