Investment Analysis
Test Questions
Course Introduction
Investment Analysis is a comprehensive course that examines the fundamental concepts, tools, and techniques used to evaluate investment opportunities in financial markets. Students will explore asset valuation methods, risk and return analysis, portfolio theory, and various approaches for analyzing stocks, bonds, and alternative investments. The course emphasizes quantitative and qualitative frameworks for assessing asset performance, as well as strategies for constructing diversified portfolios to achieve specific financial objectives. Through case studies and practical exercises, students develop the analytical skills necessary to make informed investment decisions in both individual and institutional contexts.
Recommended Textbook
Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.
A)True
B)False
Answer: False
Q2) A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers.If the old managers were managing the firm inefficiently,then hostile takeovers can improve the economy.However,hostile takeovers are controversial,and legislative actions have been taken to make them more difficult to undertake.
A)True
B)False
Answer: True
Q3) In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price in the long run,or the stock's "intrinsic value."
A)True
B)False
Answer: True
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3
Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) The NYSE is defined as a "spot" market purely and simply because it has a physical location.The NASDAQ,on the other hand,is not a spot market because it has no one central location.
A)True
B)False
Answer: False
Q2) Private markets are those like the NYSE,where transactions are handled by members of the organization,while public markets are those like the NASDAQ,where anyone can make transactions.
A)True
B)False
Answer: False
Q3) A publicly owned corporation is a company whose shares are held by the investing public,which may include other corporations as well as institutional investors.
A)True
B)False
Answer: True
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Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) Carter Corporation has some money to invest,and its treasurer is choosing between City of Chicago municipal bonds and U.S.Treasury bonds.Both have the same maturity,and they are equally risky and liquid.If Treasury bonds yield 6.00%,and Carter's marginal income tax rate is 15.00%,what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two?
A) 4.79%
B) 4.74%
C) 5.10%
D) 5.61%
E) 6.38%
Answer: C
Q2) The annual report contains four basic financial statements: the income statement,the balance sheet,the cash flow statement,and the statement of stockholders' equity.
A)True
B)False Answer: True
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Page 5
Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) Refer to Exhibit 4.1.What is the firm's profit margin? Do not round your intermediate calculations.
A) 1.84%
B) 2.48%
C) 1.82%
D) 2.36%
E) 2.52%
Q2) Refer to Exhibit 4.1.What is the firm's return on invested capital?
A) 7.64%
B) 6.41%
C) 8.32%
D) 6.03%
E) 8.63%
Q3) The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year,depending on the time of year when the financial statements are constructed.
A)True
B)False
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Chapter 5: Time Value of Money
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Sample Questions
Q1) Your child's orthodontist offers you two alternative payment plans.The first plan requires a $4,000 immediate up-front payment.The second plan requires you to make monthly payments of $137.41,payable at the end of each month for 3 years.What nominal annual interest rate is built into the monthly payment plan?
A) 17.81%
B) 14.50%
C) 14.36%
D) 13.50%
E) 11.34%
Q2) What is the PV of an ordinary annuity with 10 payments of $7,700 if the appropriate interest rate is 5.5%?
A) $52,816.14
B) $61,522.10
C) $51,655.35
D) $67,326.07
E) $58,039.72
Q3) A time line is meaningful even if all cash flows do not occur annually.
A)True B)False
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Page 7
Chapter 6: Interest Rates
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Sample Questions
Q1) Which of the following statements is CORRECT?
A) The yield on a 3-year Treasury bond cannot exceed the yield on a 10-year Treasury bond.
B) The real risk-free rate is higher for corporate than for Treasury bonds.
C) Most evidence suggests that the maturity risk premium is zero.
D) Liquidity premiums are higher for Treasury than for corporate bonds.
E) The pure expectations theory states that the maturity risk premium for long-term Treasury bonds is zero and that differences in interest rates across different Treasury maturities are driven by expectations about future interest rates.
Q2) The real risk-free rate is 3.05%,inflation is expected to be 3.60% this year,and the maturity risk premium is zero.Ignoring any cross-product terms,i.e. ,if averaging is required,use the arithmetic average,what is the equilibrium rate of return on a 1-year Treasury bond?
A) 8.18%
B) 6.65%
C) 5.72%
D) 5.32%
E) 5.52%
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Chapter 7: Bonds and Their Valuation
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Sample Questions
Q1) McCue Inc.'s bonds currently sell for $1,175.They pay a $90 annual coupon,have a 25-year maturity,and a $1,000 par value,but they can be called in 5 years at $1,050.Assume that no costs other than the call premium would be incurred to call and refund the bonds,and also assume that the yield curve is horizontal,with rates expected to remain at current levels on into the future.What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM;it is possible to get a negative answer. )
A) 1.26%
B) 1.47%
C) 1.74%
D) 1.68%
E) 1.88%
Q2) Sinking funds are provisions included in bond indentures that require companies to retire bonds on a scheduled basis prior to their final maturity.Many indentures allow the company to acquire bonds for sinking fund purposes by either (1)purchasing bonds on the open market at the going market price or (2)selecting the bonds to be called by a lottery administered by the trustee,in which case the price paid is the bond's face value.
A)True
B)False
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Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) The risk-free rate is 6% and the market risk premium is 5%.Your $1 million portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8.Which of the following statements is CORRECT?
A) If the stock market is efficient,your portfolio's expected return should equal the expected return on the market,which is 11%.
B) The required return on the market is 10%.
C) The portfolio's required return is less than 11%.
D) If the risk-free rate remains unchanged but the market risk premium increases by 2%,your portfolio's required return will increase by more than 2%.
E) If the market risk premium remains unchanged but expected inflation increases by 2%,your portfolio's required return will increase by more than 2%.
Q2) If the returns of two firms are negatively correlated,then one of them must have a negative beta.
A)True
B)False
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10
Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) A share of common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 14.2%,then what is the stock price?
A) $12.70
B) $11.98
C) $14.61
D) $10.66
E) $12.10
Q2) For a stock to be in equilibrium,two conditions are necessary: (1)The stock's market price must equal its intrinsic value as seen by the marginal investor,and (2)the expected return as seen by the marginal investor must equal his or her required return.
A)True
B)False
Q3) If a firm's stockholders are given the preemptive right,then they can call for a meeting to vote to replace the management.Without the preemptive right,dissident stockholders have to seek a change in management through a proxy fight.
A)True
B)False
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11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method,the DCF method,and the bond-yield-plus-risk-premium method.Since we cannot be sure that the estimate obtained with any of these methods is correct,it is often appropriate to use all three methods,then consider all three estimates,and end up using a judgmental estimate when calculating the WACC.
A)True
B)False
Q2) Refer to Exhibit 10.1.Which of the following is the best estimate for the weight of debt for use in calculating the WACC? Do not round your intermediate calculations.
A) 16.56%
B) 17.23%
C) 17.57%
D) 17.92%
E) 18.64%
Q3) The component costs of capital are market-determined variables in the sense that they are based on investors' required returns.
A)True
B)False
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Page 12
Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) A firm should never accept a project if its acceptance would lead to an increase in the firm's cost of capital (its WACC).
A)True
B)False
Q2) Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows,with one outflow followed by a series of inflows.
A) A project's regular IRR is found by compounding the initial cost at the WACC to find the terminal value (TV),then discounting the TV at the WACC.
B) A project's regular IRR is found by compounding the cash inflows at the WACC to find the present value (PV),then discounting the TV to find the IRR.
C) If a project's IRR is smaller than the WACC,then its NPV will be positive.
D) A project's IRR is the discount rate that causes the PV of the inflows to equal the project's cost.
E) If a project's IRR is positive,then its NPV must also be positive.
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Chapter 12: Cash Flow Estimation and Risk Analysis
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Sample Questions
Q1) Any cash flows that can be classified as incremental to a particular project - i.e. ,results directly from the decision to undertake the project - should be reflected in the capital budgeting analysis.
A)True
B)False
Q2) Typically,a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation.This is because the total cash flows over the project's life will be higher if accelerated depreciation is used,other things held constant.
A)True
B)False
Q3) Although the replacement chain approach is appealing for dealing with mutually exclusive projects that have different lives,it is not used in practice because not projects meet the assumptions the method requires.
A)True
B)False
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14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Winters Corp.is considering a new product that would require an investment of $22 million now,at t = 0.If the new product is well received,then the project would produce after-tax cash flows of $11.0 million at the end of each of the next 3 years (t = 1,2,3),but if the market did not like the product,then the cash flows would be only $4 million per year.There is a 50% probability that the market will be good.The firm could delay the project for a year while it conducts a test to determine if demand is likely to be strong or weak,but it would have to incur costs to obtain this timing option.The project's cost and expected annual cash flows would be the same whether the project is delayed or not.The project's WACC is 10.0%.What is the value (in thousands)of the option to delay the project? Do not round intermediate calculations. ?
A) $2,678
B) $1,826
C) $2,556
D) $2,191
E) $2,434
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Page 15
Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) 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
Q2) According to Modigliani and Miller (MM),in a world without corporate income taxes the use of debt has no effect on the firm's value.
A)True
B)False
Q3) It is possible for Firms A and B to have identical financial and operating leverage,yet for Firm A to have more risk as measured by the variability of EPS.This would occur if Firm A has more business risk than Firm B.
A)True
B)False
Q4) If a firm borrows money,it is using financial leverage.
A)True
B)False
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) NY Fashions has the following data.If it follows the residual dividend model,how much total dividends,if any,will it pay out? \[\begin{array} { l r }
\text { Capital budget } & \$ 1,000,000 \\
\% \text { Debt } & 65 \% \\
\text { Net income (NI) } & \$ 625,000 \end{array}\]
?
A) $231,000
B) $258,500
C) $291,500
D) $335,500
E) $275,000
Q2) Some investors prefer dividends to retained earnings (and the capital gains retained earnings bring),while others prefer retained earnings to dividends.Other things held constant,it makes sense for a company to establish its dividend policy and stick to it,and then it will attract a clientele of investors who like that policy.
A)True
B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Data on Shin Inc for last year are shown below,along with the inventory conversion period (ICP)of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done,by how much would inventories decline? Use a 365-day year.Do not round your intermediate calculations. \(\begin{array}{lr}
\text { Cost of goods sold }= & \$ 71,000 \\
\text { Inventory = } & \$ 20,000 \\
\text { Inventory Conversion Period (ICP) = } & 102.82 \\
\text { Benchmark Inventory Conversion Period (ICP) }= & 38.00 \end{array}\)
?
A) $12,608
B) $14,752
C) $11,221
D) $11,347
E) $12,482
Q2) Net working capital is defined as current assets divided by current liabilities.
A)True
B)False
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Page 18
Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) A company expects sales to increase during the coming year,and it is using the AFN equation to forecast the additional capital that it must raise.Which of the following conditions would cause the AFN to increase?
A) The company previously thought its fixed assets were being operated at full capacity,but now it learns that it actually has excess capacity.
B) The company increases its dividend payout ratio.
C) The company begins to pay employees monthly rather than weekly.
D) The company's profit margin increases.
E) The company decides to stop taking discounts on purchased materials.
Q2) Last year Godinho Corp.had $420 million of sales,and it had $75 million of fixed assets that were being operated at 80% of capacity.In millions,how large could sales have been if the company had operated at full capacity?
A) $551.3
B) $462.0
C) $509.3
D) $656.3
E) $525.0
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Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?
A) An increase in GCC's stock price.
B) An increase in the exercise price of the option.
C) An increase in the amount of time until the option expires.
D) An increase in the risk-free rate.
E) GCC's stock price becomes more risky (higher variance).
Q2) A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)
A) Straddle option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
Q3) The value of a stock option depends on all of the following EXCEPT:
A) Exercise price.
B) Variability of the stock price.
C) Length of time until option expiration.
D) Risk-free rate of interest.
E) Bond price.
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Chapter 19: Multinational Financial Management
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Q1) Multinational financial management requires that financial analysts consider the effects of changing currency values.
A)True B)False
Q2) The cost of capital may be different for a foreign project than for an equivalent domestic project because foreign projects may be more or less risky.
A)True
B)False
Q3) Which of the following statements is NOT CORRECT?
A) Any bond sold outside the country of the borrower is called an international bond.
B) Foreign bonds and Eurobonds are two important types of international bonds.
C) Foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
D) The term Eurobond applies only to foreign bonds denominated in U.S.currency.
E) A Eurodollar is a U.S.dollar deposited in a bank outside the U.S.
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Chapter 20: Hybrid Financing: Preferred
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Q1) Upstate Water Company just sold a bond with 57 warrants attached.The bonds have a 20-year maturity and an annual coupon of 11.4%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 17%.What is the implied value of each warrant? Do not round your intermediate calculations.
A) $5.53
B) $6.08
C) $5.25
D) $6.91
E) $4.42
Q2) Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?
A) $703.32
B) $535.87
C) $502.37
D) $669.83
E) $803.80
Q3) The owner of a convertible bond owns,in effect,both a bond and a call option.
A)True
B)False
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Chapter 21: Mergers and Acquisitions
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Q1) In a financial merger,the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies,measured as if they were operated independently.
A)True
B)False
Q2) Which of the following statements is most CORRECT?
A) The acquiring firm's required rate of return in most horizontal mergers will not be affected,because the two firms will have similar betas.
B) The goal of merger valuation is to value the target firm's total capital at the target firm's weighted average cost of capital because a firm is acquired from all of its investors--both shareholders and creditors.
C) The basic rationale for any financial merger is synergy and,thus,the estimation of pro forma cash flows is the single most important part of the analysis.
D) In most mergers,the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.
E) The primary rationale for most operating mergers is synergy.
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Page 23