Investment Analysis
Test Preparation
Course Introduction
Investment Analysis explores the key principles, tools, and techniques used to evaluate potential investment opportunities in financial markets. The course covers topics such as risk and return measurement, portfolio theory, asset pricing models, securities analysis, and the valuation of stocks, bonds, and alternative investments. Emphasizing both quantitative and qualitative approaches, students learn to assess market trends, perform fundamental and technical analysis, and make informed investment decisions. Through case studies and real-world data, the course fosters practical skills in constructing and managing investment portfolios, balancing risk, and maximizing returns in accord with different investor objectives.
Recommended Textbook
Foundations of Financial Management 14th Edition by Stanley B. Block
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21 Chapters
2273 Verified Questions
2273 Flashcards
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Chapter 1: The Goals and Functions of Financial Management
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Sample Questions
Q1) There are some serious problems with the financial goal of maximizing the earnings of the firm.
A)True
B)False
Answer: True
Q2) Increased productivity due to technology has
A) increased corporations' reliance on debt for capital expansion needs.
B) created larger asset values on the firm's historical balance sheet.
C) made it cheaper (in terms of interest costs) for firms to borrow money.
D) helped to keep corporate costs in check.
Answer: D
Q3) Proper risk-return management means that
A) the firm should take as few risks as possible.
B) the firm must determine an appropriate trade-off between risk and return.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.
Answer: B
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Page 3
Chapter 2: Review of Accounting
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Sample Questions
Q1) Which of the following is not subtracted out in arriving at operating income?
A) Interest expense
B) Cost of goods sold
C) Depreciation
D) Selling and administrative expense
Answer: A
Q2) When a firm's earnings are falling more rapidly than its stock price, its P/E ratio will:
A) remain the same
B) go up
C) go down
D) go either up or down
Answer: B
Q3) Preferred stock dividends __________ earnings available to common stockholders.
A) increase
B) decrease
C) do not effect
D) not enough information to tell
Answer: B
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Page 4
Chapter 3: Financial Analysis
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126 Verified Questions
126 Flashcards
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Sample Questions
Q1) A company can improve their ROE by changing their capital structure.
A)True
B)False
Answer: True
Q2) Refer to the figure above. The firm's return on equity is
A) 75%
B) 26.8%
C) 13.4%
D) 15%
Answer: C
Q3) Asset utilization ratios relate balance sheet assets to income statement sales.
A)True
B)False
Answer: True
Q4) Refer to the figure above. The firm's average collection period is
A) 18 days.
B) 277 days.
C) 139 days.
D) 20 days.
Answer: A
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Chapter 4: Financial Forecasting
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Sample Questions
Q1) The value of ending inventory should be equal to beginning inventory plus total production costs minus cost of goods sold.
A)True
B)False
Q2) In the percent-of-sales method, if (A/S) and (L/S) both increase:
A) RNF stays the same.
B) RNF goes down.
C) RNF goes up.
D) more information is needed.
Q3) If Excel Inc. has projected sales of $30,000 in January, $20,000 in February, and $20,000 in March; 80% of sales are on credit; 20% are collected in the month of sale and 80% are collected the month after, what are cash receipts in March?
A) $20,000
B) $16,200
C) $21,400
D) $10,300
Q4) A higher growth rate in sales will often require more external funds.
A)True
B)False
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Chapter 5: Operating and Financial Leverage
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Sample Questions
Q1) Heavy use of long-term debt may be beneficial in an inflationary economy because
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.
Q2) Financial leverage primarily affects the left-hand side of the balance sheet.
A)True
B)False
Q3) If a firm has a price of $6.00, variable cost per unit of $4.00 and a breakeven point of 40,000 units, fixed costs are equal to:
A) $27,000
B) $90,000
C) $80,000
D) $50,000
Q4) If fixed costs rise while other variables stay constant
A) the breakeven point rises.
B) degree of operating leverage increases.
C) total profit declines.
D) all of these
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Chapter 6: Working Capital and the Financing Decision
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Sample Questions
Q1) Short-term interest rates are more dependent upon inflation than on current demand for money.
A)True
B)False
Q2) Frisch Fish Corp expects net income next year to be $750,000. Inventory and accounts receivable will have to be increased by $650,000 to accommodate this sales level. Frisch will pay dividends of $300,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
A) No external financing is required.
B) $100,000
C) $200,000
D) $300,000
Q3) Ideally, which of the following type of assets should be financed with long-term financing?
A) Fixed assets only
B) Fixed assets and temporary current assets
C) Fixed assets and permanent current assets
D) Temporary and permanent current assets
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8
Chapter 7: Current Asset Management
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Sample Questions
Q1) A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested.
A)True
B)False
Q2) Waldron Inc. is considering selling to a group of new customers that will bring in credit sales of $24,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 6 to 1 between sales and accounts receivable. What is the return on investment?
A) 3%
B) 25%
C) 5%
D) none of these
Q3) Inventory is usually divided into three basic categories except A) projected sales.
B) work in progress.
C) finished goods.
D) raw materials.
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Chapter 8: Sources of Short-Term Financing
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Sample Questions
Q1) The cost of not taking the discount on trade credit of 3/20, net 90 is equal to
A) 15.9%
B) 16.3%
C) 18.0%
D) 17.4%
Q2) Although the LIBOR has remained competitive and comparable to the US Prime rate, it has remained slightly higher than the prime rate in the past 15 years.
A)True
B)False
Q3) The sale of asset-backed securities can sometimes enable the issuing firm to acquire lower-cost funds than it normally would receive from a bank loan or bond offering.
A)True
B)False
Q4) Hedging refers to
A) avoiding high-risk investment opportunities.
B) a transaction that reduces risk exposure.
C) the same thing as asset diversification.
D) avoiding the financial futures market.
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Chapter 9: The Time Value of Money
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Sample
Questions
Q1) Mr. Fish wants to build a house in 8 years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?
A) Between 17% and 18%
B) Between 15% and 16%
C) 12%
D) None of these
Q2) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?
A) $143,555
B) $134,560
C) $141,200
D) None of these
Q3) The present value of a positive future inflow can become negative as discount rates become higher and higher.
A)True
B)False
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Chapter 10: Valuation and Rates of Return
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112 Flashcards
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Sample Questions
Q1) An increase in the riskiness of a particular security would NOT affect
A) the risk premium for that security.
B) the premium for expected inflation.
C) the total required return for the security.
D) investors' willingness to buy the security.
Q2) A 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently yielding 5%, what is the market value of the bond? Use annual analysis.
A) Over $1,100
B) Under $1,000
C) Under $900
D) Not enough information given to tell
Q3) An increase in inflation will cause a bond's required return to rise.
A)True
B)False
Q4) The dividend on preferred stock is most similar to:
A) common stock with no growth in dividends.
B) common stock with constant growth in dividends.
C) common stock with variable growth in dividends.
D) certificate of Deposit.
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Chapter 11: Cost of Capital
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Sample Questions
Q1) Given the information about Jury Co. in the previous problem, calculate the company's weighted average cost of capital assuming that its new financing will consist of 40% debt, 10% preferred stock, and 50% retained earnings.
Q2) Per the capital asset pricing model, the slope of the security market line (SML) must be 1.0.
A)True
B)False
Q3) The after-tax cost of preferred stock to the issuing corporation
A) is the same as the before-tax cost.
B) is usually lower than the cost of debt.
C) is dependent on the firm's tax bracket.
D) none of these.
Q4) Although the after-tax cost of debt is below the cost of equity, firms cannot increase their use of debt without limit.
A)True B)False
Q5) The use of the optimum capital structure minimizes the cost of capital. A)True B)False
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Chapter 12: The Capital Budgeting Decision
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Sample Questions
Q1) The modified internal rate of return assumes that inflows are reinvested at 80 percent of the internal rate of return.
A)True
B)False
Q2) Investors discount the later years of a long-term project at a lower rate because they are generally less precise.
A)True
B)False
Q3) The selection of a mutually exclusive project means that all other projects with a positive net present value may also be selected.
A)True
B)False
Q4) It is not unusual for a corporate president, who deals with security analysts, to be as sensitive to after-tax income as to cash flow.
A)True
B)False
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Page 14
Chapter 13: Risk and Capital Budgeting
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Sample Questions
Q1) Which of the following combinations of investments would provide the firm with the highest negative correlation?
A) Textiles firm and retail firm
B) Telecommunications firm and internet firm
C) Soft drink manufacturer and healthcare firm
D) Airline co. and gasoline manufacturer
Q2) The concept of being risk averse-means
A) for a given situation investors would prefer relative certainty to uncertainty.
B) investors would usually prefer investments with high standard deviations and greater opportunity for gain.
C) that the greater the risk the higher the expected return must be.
D) a and c are both true.
Q3) Cyclical businesses are likely to have higher costs of capital than firms with less variability in earnings. Therefore, more cyclical firms should typically use a higher discount rate in project evaluation.
A)True
B)False
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Chapter 14: Capital Markets
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Sample Questions
Q1) Federal National Mortgage Association buys mortgage loans from local lenders, bundles them together, and resells them as securities.
A)True
B)False
Q2) In the new issues market for corporate capital, common stocks account for the largest percentage of new funds raised.
A)True B)False
Q3) The capital structure of the firm consists of long-term debt and equity.
A)True
B)False
Q4) The European Central Bank that was created with the European Monetary Union has no control over monetary policy but is responsible for clearing transactions between the eleven countries.
A)True B)False
Q5) NASDAQ market is the primary market for international securities. A)True B)False
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Chapter 15: Investment Banking: Public and Private Placement
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Sample Questions
Q1) Which of the following is not an advantage of private placement?
A) No expensive registration process
B) Lower interest rates
C) More flexibility in negotiation
D) No extensive public relations requirements
Q2) Privately placed bonds are the most popular method of raising long-term corporate debt.
A)True
B)False
Q3) One of the reasons why the debt market is much larger than the equity market is because debt issuances mature periodically unlike equity issuances.
A)True
B)False
Q4) In today's market environment, most investment banking houses specialize in underwriting and do not engage in the dealer-broker function.
A)True
B)False
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Chapter 16: Long-Term Debt and Lease Financing
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Sample Questions
Q1) A bond indenture is a bond with no specific collateral securing it.
A)True
B)False
Q2) A debenture represents:
A) unsecured debt.
B) secured debt.
C) a long document covering every detail of a bond issue.
D) debt that is subordinate to preferred stock.
Q3) The term debenture refers to
A) long-term, secured debt.
B) long-term, unsecured debt.
C) the after-acquired property clause.
D) a 100-page document covering the specific terms of the offering.
Q4) Which of the following does not represent a tax implication in the bond refunding decision?
A) Call premium
B) Cost savings in lower interest rates
C) Underwriting costs of new issue
D) All of these have tax implications.
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Chapter 17: Common and Preferred Stock Financing
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Sample Questions
Q1) Stock classes are similar to bond ratings in that they are used to rank the performance of different corporation's stock.
A)True
B)False
Q2) Under cumulative voting, holding 30% of the shares outstanding will guarantee an investor the ability to elect 3 of 9 directors to the board.
A)True
B)False
Q3) Which of the following statements about floating rate preferred stock is true?
A) The dividend rate changes quarterly.
B) The price of the stock will fluctuate with the market.
C) The dividend rate is tied to the inflation rate.
D) More than one of the above are true.
Q4) ADRs are subject to foreign exchange risk unlike direct methods of investing on the foreign exchange.
A)True
B)False
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Page 19
Chapter 18: Dividend Policy and Retained Earnings
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Sample Questions
Q1) The dividend yield is the dividend divided by the stock price.
A)True
B)False
Q2) Some researchers feel that stockholders prefer dividends to retained earnings because dividends have information content.
A)True
B)False
Q3) If the cash dividend per share remains constant following a stock dividend, the stockholder will receive greater total cash dividends.
A)True
B)False
Q4) A stock dividend will
A) increase the value of a share of stock.
B) decrease the capital in excess of par account.
C) decrease the retained earnings account.
D) none of these.
Q5) Maxwell Electronics had net income of $21 million last year, and had 3 million common shares outstanding. They declared a 12% stock dividend. Calculate EPS before and after the stock dividend.
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Chapter 19: Convertibles, Warrants, and Derivatives
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Sample Questions
Q1) The Rocky Scholes Swimwear's warrant is trading for $10.00. The warrant carries the option to purchase a half share of common stock for $50. What is the speculative premium if the stock price is $65?
A) $1.00
B) $2.50
C) $5.00
D) None of these.
Q2) The following benefits occur to the corporation after forced conversion of a convertible bond except
A) Lower times interest earned
B) Lower debt to asset ratio
C) Higher earnings after taxes
D) All of these are benefits
Q3) In general the average size of convertible issues is small compared to normal bond issues.
A)True B)False
Q4) Diluted earnings per share must include all convertible securities.
A)True B)False
Page 21
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Chapter 20: External Growth Through Mergers
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Sample Questions
Q1) The price that a company has to pay to purchase another firm is usually
A) the book value.
B) the market value.
C) some premium over current market value.
D) some discount of current market value.
Q2) It is possible to merge with a company which results in the same earnings per share but still lowers the new firm's cost of capital.
A)True
B)False
Q3) All of the following are potential challenges or downsides to mergers except:
A) anti-trust laws
B) dilution
C) firm valuation
D) synergies
Q4) The typical merger premium is
A) 0-20%
B) 40%
C) 40-60%
D) 60-80%
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Chapter 21: International Financial Management
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Sample Questions
Q1) A fronting loan disguises the identity of a parent multinational corporation that infuses money into a foreign subsidiary. This technique is intended to reduce the political risk of operating a subsidiary in a foreign country.
A)True
B)False
Q2) As inflation in France increases and stays the same in the U.S., the exchange rate of the euro to the dollar will increase.
A)True
B)False
Q3) In a fronting loan arrangement, the intermediary bank extends a risk-free loan to the foreign affiliate.
A)True
B)False
Q4) A portfolio of international stocks in comparison to purely U.S. stocks generally shows:
A) lower percentage risk for a given number of stocks.
B) higher percentage risk for a given number of stocks.
C) the same percentage risk for a given number of stocks.
D) lower percentage return for a given number of stocks.
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