Investment Analysis
Test Bank
Course Introduction
Investment Analysis explores the fundamental principles and techniques used to evaluate financial assets and investment projects. The course covers topics such as risk and return, portfolio theory, asset pricing models, fundamental and technical analysis, and valuation of stocks, bonds, and alternative investments. Students gain the analytical skills necessary to assess market conditions, construct portfolios, and make informed investment decisions. Emphasis is placed on both theoretical frameworks and practical applications using real-world examples and case studies.
Recommended Textbook
Corporate Finance Asia 1st Global Edition by Stephen Ross
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1174 Verified Questions
1174 Flashcards
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Chapter 1: Introduction to Corporate Finance
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Sample Questions
Q1) A proxy fight occurs when:
A)the board solicits renewal of current members.
B)a group solicits proxies to replace the board of directors.
C)a competitor offers to sell their ownership in the firm.
D)the firm files for bankruptcy.
E)the firm is declared insolvent.
Answer: B
Q2) Which of the following are advantages of the corporate form of business ownership?
I.limited liability for firm debt
II.double taxation
III.ability to raise capital
IV.unlimited firm life
A)I and II only
B)III and IV only
C)I,II,and III only
D)II,III,and IV only
E)I,III,and IV only
Answer: E
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Chapter 2: Financial Statements and Cash Flow
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Sample Questions
Q1) What is the operating cash flow for 2011?
A)$520
B)$800
C)$1,015
D)$1,110
E)$1,390
Answer: D
Q2) Which of the following is not included in the computation of operating cash flow?
A)Earnings before interest and taxes
B)Interest paid
C)Depreciation
D)Current taxes
E)All of the above are included
Answer: B
Q3) Explain why the income statement is not a good representation of cash flow.
Answer: Most income statements contain some noncash items,so these must be accounted for when calculating cash flows.More importantly,however,since GAAP is used to create income statements,revenues and expenses are booked when they accrue,not when their corresponding cash flows occur.
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Page 4
Chapter 3: Financial Statements Analysis and Long-Term Planning
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Sample Questions
Q1) The External Funds Needed (EFN)equation does not measure the:
A)additional asset requirements given a change in sales.
B)additional total liabilities raised given the change in sales.
C)rate of return to shareholders given the change in sales.
D)net income expected to be earned given the change in sales.
E)None of the above.
Answer: C
Q2) A supplier,who requires payment within ten days,is most concerned with which one of the following ratios when granting credit?
A)current
B)cash
C)debt-equity
D)quick
E)total debt
Answer: B
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Page 5
Chapter 5: Net Present Value and Other Investment Rules
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Sample Questions
Q1) A situation in which accepting one investment prevents the acceptance of another investment is called the:
A)net present value profile.
B)operational ambiguity decision.
C)mutually exclusive investment decision.
D)issues of scale problem.
E)multiple choices of operations decision.
Q2) Graham and Harvey (2001)found that ___ and ___ were the two most popular capital budgeting methods.
A)Internal Rate of Return;Payback Period
B)Internal Rate of Return;Net Present Value
C)Net Present Value;Payback Period
D)Modified Internal Rate of Return;Internal Rate of Return
E)Modified Internal Rate of Return;Net Present Value
Q3) An investment is acceptable if its IRR:
A)is exactly equal to its net present value (NPV).
B)is exactly equal to zero.
C)is less than the required return.
D)exceeds the required return.
E)is exactly equal to 100%.
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Chapter 8: Interest Rates and Bond Valuation
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Sample Questions
Q1) Explain why some bond investors are subject to liquidity risk,default risk,and/or taxability risk.How does each of these risks affect the yield of a bond?
Q2) The Fisher formula is expressed as _____ where R is the nominal rate,r is the real rate,and h is the inflation rate.
A)1 + r = (1 + R) \(\div\) (1 + h)
B)1 + r = (1 + R) \(\times\) (1 + h)
C)1 + h = (1 + r) \(\div\) (1 + R)
D)1 + R = (1 + r) \(\div\) (1 + h)
E)1 + R = (1 + r) \(\times\) (1 + h)
Q3) If its yield to maturity is less than its coupon rate,a bond will sell at a _____,and increases in market interest rates will _____.
A)discount;decrease this discount.
B)discount;increase this discount.
C)premium;decrease this premium.
D)premium;increase this premium.
E)None of the above.
Q4) Sometimes it is not clear if a particular security is debt or equity.Explain the basic difference between debt and equity.
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Chapter 10: Risk and Return: Lessons From Market History
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Sample Questions
Q1) Little John Industries sold for $1.90 on January 1 and ended the year at a price of $2.50.In addition,the stock paid dividends of $0.20 per share.Calculate Little John's dividend yield,capital gains yield,and total rate of return for the year.
Q2) Which country has the lowest stock market risk premium?
A)Denmark
B)Belgium
C)Switzerland
D)Spain
E)Norway
Q3) Capital market history shows us that the average return relationship from lowest to highest between securities is:
A)inflation,corporate bonds,Treasuries,small company stocks,large company stocks.
B)Treasury bills,inflation,small company stocks,large company stocks.
C)Treasury bills,corporate bonds,government bonds,large common stocks,small company stocks.
D)Treasury bills,government bonds,corporate bonds,large common stocks,small company stocks.
E)There is no ordering.
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8
Chapter 11: Return and Risk: the Capital Asset Pricing Model
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Sample Questions
Q1) In the first chapter,it was stated that financial managers should act to maximize shareholder wealth.Why are the efficient markets hypothesis (EMH),the CAPM,and the SML so important in the accomplishment of this objective?
Q2) The stock of Big Joe's has a beta of 1.14 and an expected return of 11.6%.The risk-free rate of return is 4%.What is the expected return on the market?
A)7.60%
B)8.04%
C)9.33%
D)10.67%
E)12.16%
Q3) Total risk can be divided into:
A)standard deviation and variance.
B)standard deviation and covariance.
C)portfolio risk and beta.
D)systematic risk and unsystematic risk.
E)portfolio risk and covariance.
Q4) Why are some risks diversifiable and some nondiversifiable? Give an example of each.
Q5) Explain in words what beta is and why it is important.
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Sample Questions
Q1) A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices. A)negative;anticipated B)positive;anticipated C)negative;unanticipated D)positive;unanticipated E)None of the above.
Q2) The systematic response coefficient for productivity,\(\beta\)<sub>p</sub>,would produce an unexpected change in any security return of __ \(\beta\)<sub>P</sub><sub> </sub>if the expected rate of productivity was 1.5% and the actual rate was 2.25%.
A)0.75%
B)-0.75%
C)2.25%
D)-2.25%
E)1.5%
Q3) Explain the conceptual differences in the theoretical development of the CAPM and APT.
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Sample Questions
Q1) An efficient capital market is one in which:
A)brokerage commissions are zero.
B)taxes are irrelevant.
C)securities always offer a positive rate of return to investors.
D)security prices are guaranteed by the U.S.Securities and Exchange Commission to be fair.
E)security prices reflect available information.
Q2) The notion that actual capital markets,such as the NYSE,are fairly priced is called the:
A)Efficient Markets Hypothesis (EMH).
B)Law of One Price.
C)Open Markets Theorem.
D)Laissez-Faire Axiom.
E)Monopoly Pricing Theorem.
Q3) Insider trading does not offer any advantages if the financial markets are:
A)weak form efficient.
B)semiweak form efficient.
C)semistrong form efficient.
D)strong form efficient.
E)inefficient.
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Chapter 15: Long-Term Financing: an Introduction
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Sample Questions
Q1) There was an upward trend in the ratio of the book value of debt to the book value of debt and equity throughout the 1990s.Some of this was due to the repurchasing of stock.The market value ratio of debt to debt and equity exhibited no upward trend.This can be explained by:
A)the change in the accounting rules of the period.
B)the difference between tax accounting and accounting for financial accounting purposes.
C)a large increase in the market value of equity that was greater than the increase in debt.
D)All of the above.
E)None of the above.
Q2) The Lory Bookstore used internal financing as a source of long-term financing for 85% of its total needs in 2013.The company borrowed an additional 25% of its total needs in the long-term debt markets in 2013.What were Lory's net new stock issues in that year?
A)-20%
B)-10%
C)10%
D)20%
E)30%
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Page 12
Chapter 20: Raising Capital
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Sample Questions
Q1) Which of the following is not one of the four main functions that underwriters provide?
A)Risk bearing
B)Marketing
C)Auditing the financial statements
D)Certification
E)Monitoring
Q2) Lamar Inc.is attempting to raise $5,000,000 in new equity with a rights offering.The subscription price will be $40 per share.The stock currently sells for $50 per share and there are 250,000 shares outstanding.How many rights are needed to buy a new share?
Q3) Dilution refers to:
A)the increase in stock value due to wider ownership of stock.
B)the loss in existing shareholder's equity.
C)the loss in new shareholder's equity.
D)the loss in all shareholder's equity,both existing shareholders and new shareholders.
E)None of the above.
Q4) Discuss the stages of venture capital financing,defining each in detail.
Q5) Discuss what a Dutch auction is and how it works.
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Chapter 22: Options and Corporate Finance
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Sample Questions
Q1) In the Black-Scholes option pricing formula,N(d<sub>1</sub>)is the probability that a standardized,normally distributed random variable is:
A)less than or equal to N(d<sub>2</sub>).
B)less than one.
C)equal to one.
D)equal to d<sub>1</sub>.
E)less than or equal to d<sub>1</sub>.
Q2) The fixed price in an option contract at which the owner can buy or sell the underlying asset is called the option's:
A)opening price.
B)intrinsic value.
C)strike price.
D)market price.
E)time value.
Q3) Suppose you look in the newspaper and see ABC trading at $50 per share.Calls on ABC with one month to expiration and an exercise price of $45 are trading at $6.50 each.Puts on ABC with one month to expiration and an exercise price of $55 are trading at $3.50 each.Are these prices reasonable? Explain.(Ignore transactions costs.
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Sample Questions
Q1) Which of the following is not part of the Black Scholes option pricing model?
A)Standard deviation
B)Time to maturity
C)Exercise price
D)Par value of the company's stock
E)Interest rate
Q2) What is e<sup>-rt</sup>?
A).6087
B).7087
C).7952
D).8476
E).8869
Q3) Calculate N(d<sub>1</sub>).
A).5054
B).6508
C).6882
D).7047
E).8096
Q4) Why is straight NPV analysis flawed as compared to models that include option pricing in the NPV analysis?
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Chapter 24: Warrants and Convertibles
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Sample Questions
Q1) Which of the following would not be a sensible explanation of why convertibles and warrants are issued if markets are efficient?
A)Cash flow from these securities best match cash flow of the firm.
B)If the firm does well,convertible bonds will turn out to have been the better alternative versus issuing common stock.
C)The securities are useful when it is costly to assess the risk of the issuing firm.
D)The securities may resolve agency problems associated with raising money.
E)All of the above are sensible explanations.
Q2) What would your gain per share be from exercising the warrants,assuming all are exercised?
A)$0.00 per share
B)$1.96 per share
C)$2.00 per share
D)$25.00 per share
E)$27.00 per share
Q3) Why are warrants and convertibles issued?
Q4) Illustrate and explain how a convertible bond value is based on both debt and equity value.What is the option value?
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Chapter 25: Derivatives and Hedging Risk
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Sample Questions
Q1) You have taken a short position in a futures contract on corn at $2.60 per bushel.Over the next 5 days the contract settled at 2.52,2.57,2.62,2.68,and 2.70.You then decide to reverse your position in the futures market on the fifth day at close.What is the net amount you receive at the end of 5 days?
A)$0.00
B)$2.60
C)$2.70
D)$2.80
E)Must know the number of contracts
Q2) A pure discount bond pays:
A)no coupons,therefore its duration is equal to its maturity.
B)discounted coupons,therefore its duration is greater than its maturity.
C)level coupons,therefore its duration is equal to its maturity.
D)declining coupons,therefore its duration is less than its maturity.
E)None of the above.
Q3) What new asset duration will immunize the balance sheet?
Q4) The futures markets are labeled as pure speculation and even gambling.Why is this an inaccurate portrayal of the market's function?
Q5) Calculate the duration of Tiger State Bank's assets and liabilities.
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Chapter 31: International Corporate Finance
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Sample Questions
Q1) Suppose the spot exchange rate is 2 U.S.dollars per British pound.The forward exchange rate is 1.9 dollars per pound.Which of the following is true?
A)The U.S.inflation rate is lower.
B)The pound is selling at a premium.
C)The pound is selling at a discount.
D)U.S.interest rates are lower.
E)More than one of the above is true.
Q2) The cross rate is the:
A)exchange rate between the U.S.dollar and another currency.
B)exchange rate between two currencies,neither of which is generally the U.S.dollar.
C)rate converting the direct rate into the indirect rate.
D)estimated based on the weighted average cost of capital by the agent at the exchange kiosk.
E)None of the above.
Q3) Are exchange rate changes between the U.S.dollar and the Japanese yen necessarily good or bad for Japanese automakers? Explain your reasoning.
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