Investment Analysis
Textbook Exam Questions
Course Introduction
Investment Analysis is a comprehensive course that explores the fundamental principles and methodologies used to evaluate various investment opportunities and manage portfolios. Students learn about the risk-return tradeoff, security valuation techniques, market efficiency, and asset allocation strategies. The curriculum covers both traditional financial instruments such as stocks and bonds, as well as alternative investments. Through case studies, financial modeling, and real-world applications, participants gain practical skills in analyzing investment performance, understanding behavioral finance, and applying quantitative tools to make informed investment decisions. The course prepares students for careers in finance, investment banking, and asset management.
Recommended Textbook
Finance Applications and Theory 2nd Edition by Marcia Millon Cornett
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20 Chapters
2330 Verified Questions
2330 Flashcards
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Chapter 1: Introduction to Financial Management
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Sample Questions
Q1) This subarea of finance helps facilitate the capital flows between investors and companies.
A) investments
B) financial management
C) treasury management
D) financial institutions and markets
Answer: D
Q2) This should be the primary objective of a firm as it may actually be the most beneficial for society in the long run.
A) Minimizing layoffs
B) Maximizing market share
C) Minimizing costs
D) Maximizing shareholder value
Answer: D
Q3) In 2006, a significant indicator of the U.S. economic decline was:
A) a significant drop in interest rates
B) a sharp increase in unregulated Ponzi-type security sales
C) rising defaults by subprime mortgage borrowers
D) a large increase in loan default due to unemployment
Answer: C
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Chapter 2: Reviewing Financial Statements
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Sample Questions
Q1) Debt versus Equity Financing You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What are the asset funders' (the debt holders and stockholders') resulting return on assets for the two firms?
A) 27.5%, and 30%, respectively
B) 31.67%, and 30%, respectively
C) 33%, and 30%, respectively
D) 50%, and 50%, respectively
Answer: B
Q2) All of the following are cash flows from financing except a(n) _________.
A) Increase in accounts payable
B) Issuing stock
C) Stock repurchases
D) Paying dividends
Answer: A
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Page 4
Chapter 3: Analyzing Financial Statements
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131 Flashcards
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Sample Questions
Q1) This ratio measures the overall return on the firm's assets inclusive of financial leverage and taxes.
A) ROA
B) ROE
C) Basic earning power
D) Profit margin
Answer: A
Q2) Calculate the times interest earned ratio using the following information. Sales = $1.5 million, cost of goods sold = $800,000, depreciation expense = $100,000, addition to retained earnings = $85,000, dividends per share = $1.2, tax rate = 30%, and number of shares of common stock outstanding = 100,000. Assume the firm has no preferred stock.
A) 2.25 times
B) 1.25 times
C) 1.95 times
D) 2.75 times
Answer: C
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Chapter 4: Time Value of Money 1: Analyzing Single Cash Flows
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Sample Questions
Q1) A $400 investment has doubled to $800 in six years because of a 12.25% return. How much longer will it take for the investment to reach $1100 if it continues to earn 12.25%?
A) 2.56 years
B) 2.76 years
C) 3.46 years
D) 5 years
Q2) Solving for Rates What annual rate of return is implied on a $1,000 loan taken next year when $1,500 must be repaid in year 5?
A) 8.45%
B) 10.00%
C) 10.67%
D) 12.50%
Q3) A $1,000 investment has doubled to $2,000 in seven years. How much longer will it take for the investment to reach $5,000 if it continues to earn the same rate?
A) 6.16 years
B) 6.86 years
C) 7.15 years
D) 9.25 years
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Chapter 5: Time Value of Money 2: Analyzing Annuity Cash
Flows
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148 Flashcards
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Sample Questions
Q1) Chase purchased a $23,000 car three years ago using a 14%, 6-year car loan. He has decided that he would sell the car now if he could get a price that would pay off the balance of his loan. What is the minimum price Chase would need to receive for his car? (Assume monthly payments.)
A) $12,592.41
B) $13,866.82
C) $14,136.72
D) $14,809.48
Q2) Future Value of an Annuity Due If the future value of an ordinary, 4-year annuity is $1,000 and interest rates are 6 percent, what's the future value of the same annuity due?
A) $943.40
B) $1,000.00
C) $1,040.00
D) $1,060.00
Q3) In order to discount multiple cash flows to the present, one would use
A) the appropriate compound rate.
B) the appropriate discount rate.
C) the appropriate simple rate.
D) the appropriate tax rate.
Page 7
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Chapter 6: Understanding Financial Markets and Institutions
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Sample Questions
Q1) This is the ease with which an asset can be converted into cash.
A) direct transfer
B) liquidity
C) primary market
D) secondary market
Q2) The Wall Street Journal states that the yield curve for Treasuries is downward sloping and there is no liquidity premium or maturity risk premium. Given this information, which of the following statements is correct?
A) A 30-year corporate bond must have a higher yield than a 5-year corporate bond.
B) A 5-year corporate bond must have a higher yield than a 30-year Treasury bond.
C) A 5-year Treasury bond must have a higher yield than a 5-year corporate bond.
D) All of these statements are correct.
Q3) Which of the following is not correct with respect to derivative securities?
A) They are among the riskiest of securities in the financial securities markets.
B) They can be used for hedging purposes.
C) Examples of derivatives include futures, options and swaps.
D) All of these are correct statements about derivatives.
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Page 8
Chapter 7: Valuing Bonds
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Sample Questions
Q1) Consider a 4.5% TIPS with an issue CPI reference of 187.2. At the beginning of this year, the CPI was 199.5 and was 213.7 at the end of the year. What was the capital gain of the TIPS in dollars?
A) $32.73
B) $46.92
C) $62.49
D) $75.85
Q2) Possible shapes for the yield include all of the following except ____________.
A) Humped
B) Downward sloping
C) Flat
D) All of these are possible shapes.
Q3) A 30-year bond with an 8% coupon has a yield to maturity of 6%. The bond could be called in 7 years and if called would generate a yield to call of 5.75%. What is this bond's call premium? Assume the coupon payments are made annually and par value is $1,000.
A) $219.73
B) $152.64
C) $106.29
D) $301.76
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Chapter 8: Valuing Stocks
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Sample Questions
Q1) This will only be executed if the order's price conditions are met.
A) a trade
B) a limit order
C) an unlimited order
D) a spread
Q2) The Standard & Poor's 500 Index includes
A) all of the stock listed on the New York Stock Exchange.
B) 30 of the largest (market capitalization) and most active companies in the U.S. economy.
C) 500 firms that are the largest in their respective economic sectors.
D) 500 firms that are the largest as ranked by Fortune Magazine.
Q3) Stock valuation model dynamics make clear that higher growth rates lead to
A) lower valuations.
B) higher valuations.
C) lower growth rates continuing.
D) higher growth rates continuing.
Q4) Under what conditions would the constant-growth-rate model not be appropriate?
Q5) Explain how stock is valued if the constant growth model cannot be used.
Q6) Explain the characteristics of preferred stock.
Q7) What are the differences between common stock and preferred stock?
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Chapter 9: Characterizing Risk and Return
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Sample Questions
Q1) Jenna receives an investment newsletter that recommends that she invest in a stock that has doubled the return of the S&P 500 in the last two months. It also claims that this stock is a "safe bet" for the future. Which of the following statements is correct regarding this information?
A) This investment newsletter is most likely correct because they most likely have some special knowledge about the stock.
B) The investment newsletter contains contrary information since the stock must be a high risk and therefore cannot also be a "safe bet."
C) It is common for individual stocks to double the return of the S&P500 and still be a "safe bet."
D) None of these statements are correct.
Q2) This is the portion of total risk that is attributable to overall economic factors.
A) firm specific risk
B) market risk
C) modern portfolio risk
D) total risk
Q3) What is the source of firm-specific risk? What is the source of market risk?
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11
Chapter 10: Estimating Risk and Return
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Sample Questions
Q1) Similar to the Capital Market Line except risk is characterized by beta instead of standard deviation.
A) Market Risk Line
B) Probability Market Line
C) Security Market Line
D) Stock Market Line
Q2) Required Return Using the information in the table, compute the required return for each company using both CAPM and the constant growth model. Compare and discuss the results. Assume that the market portfolio will earn 11 percent and the risk-free rate is 2.5 percent.
Q3) This is the average of the possible returns weighted by the likelihood of those returns occurring.
A) efficient return
B) expected return
C) market return
D) required return
Q4) Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier.
Q5) List and describe the three basic levels of market efficiency,
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Chapter 11: Calculating the Cost of Capital
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Sample Questions
Q1) FarCry Industries, a maker of telecommunications equipment, has 26 million shares of common stock outstanding, 1 million shares of preferred stock outstanding, and 10 thousand bonds. If the common shares sell for $12 per share, the preferred shares sell for $114.50 per share, and the bonds sell for 98% of par ($1000), what weight should you use for preferred stock in the computation of FarCry's WACC?
A) 28.52%
B) 27.51%
C) 26.24%
D) 25.01%
Q2) JLP Industries has 6.5 million shares of common stock outstanding with a market price of $20.00 per share. The company also has outstanding preferred stock with a market value of $10 million, and 25,000 bonds outstanding, each with face value $1,000 and selling at 90% of par value. The cost of equity is 14%, the cost of preferred is 10%, and the cost of debt is 6.25%. If JLP's tax rate is 34%, what is the WACC?
A) 12.39%
B) 12.98%
C) 13.13%
D) 13.72%
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13
Chapter 12: Estimating Cash Flows on Capital Budgeting Projects
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Sample Questions
Q1) You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $20,000 initially, and then $4,000 per year in maintenance costs. Machine B costs $25,000 initially, has a life of three years, and requires $3500 in annual maintenance costs. Either machine must be replaced at the end of its life with an equivalent machine. Which is the better machine for the firm? The discount rate is 14% and the tax rate is zero.
A) Machine A
B) Machine B
C) Both Machines A and B
D) Neither Machine A nor B
Q2) A new project would require an immediate increase in raw materials in the amount of $12,000. The firm expects that accounts payable will automatically increase $8,500. How much must the firm expect its investment in net working capital to change if they accept this project?
A) +$20,000
B) +$3,500
C) -$20,500
D) -$3,500
Q3) Will operating cash flow typically be larger or smaller than net income? Why?
Page 14
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Chapter 13: Weighing Net Present Value and Other Capital
Budgeting Criteria
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Sample Questions
Q1) We accept projects with a positive NPV because it means that ____________.
A) We have recovered all our costs
B) We are creating wealth for shareholders
C) The project's expected return exceeds the cost of capital
D) All of these
Q2) All of the following capital budgeting tools are suitable for non-normal cash flows except ____.
A) MIRR
B) Profitability Index
C) Discounted Payback
D) NPV
Q3) Use the MIRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?
A) accept both A and B
B) accept neither A nor B
C) accept A, reject B
D) reject A, accept B
Q4) Is the set of cash flows depicted below normal or non-normal? Explain.
Page 15
Q5) Explain the Rule of Signs as it pertains to IRR.
Q6) Explain what a PI of 35.23% would signify.
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Page 16
Chapter 14: Working Capital Management and Policies
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Sample Questions
Q1) If a firm's inventory ratio increases, what will happen to the firm's operating cycle?
A) It will increase.
B) It will decrease.
C) It will increase and then slowly decrease back to the initial level.
D) It will decrease and the slowly increase back to the initial level.
Q2) List and explain the "five C's" of credit analysis.
Q3) For most businesses, particularly smaller ones, the most common way to cover a short-term financing need is to apply at a bank for which of the following?
A) commercial loan
B) line of credit
C) asset-based loan
D) inventory loan
Q4) If a firm has a cash cycle of 75 days and an operating cycle of 120 days, what is its payables turnover?
A) 8.11x
B) 7.19x
C) 5.97x
D) 6.73x
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Chapter 15: Financial Planning and Forecasting
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Sample Questions
Q1) The additional funds needed by the firm can be calculated by assuming which of the following?
A) The firm's additional sales will grow proportionately as assets are purchased.
B) The firm's additional capital needed will grow proportionately with projected changes in sales.
C) The firm's balance sheet will grow proportionately with projected changes in sales.
D) The firm's additional sales will grow proportionately as capital is brought on to the balance sheet.
Q2) Suppose that the 2009 actual and 2010 projected financial statements for CMT Corp are initially as shown below. In these tables, sales are projected to rise 35 percent in the coming year, and the components of the income statement and balance sheet that are expected to increase at the same 35 percent rate as sales need to be calculated and are indicated with a blank space (___). Assuming that CMT Corp wants to cover the AFN with 30 percent equity, 35 percent long-term debt, and the remainder from notes payable, what amount of additional funds will they need to raise if debt carries a 9 percent interest rate?
Q3) Which liabilities would tend to spontaneously increase with sales? Why?
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Page 18
Chapter 16: Assessing Long-Term Debt, Equity, and Capital Structure
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Sample Questions
Q1) Why is debt often referred to as leverage in finance?
A) Debt magnifies the firm's total asset turnover.
B) Debt magnifies both the potential returns and the risk to bondholders.
C) Debt magnifies both the potential returns and the risk to equityholders.
D) None of these.
Q2) This is the level of EBIT at which EPS will be equal for two different capital structures.
A) Break-even EBIT
B) Break-even EPS
C) Break-even capital structures
D) Break-even financial structures
Q3) In M&M's perfect world, their theorem's two main propositions are referred to as which of the following?
A) active capital structure management
B) passive capital structure management
C) capital structure irrelevance assertion
D) capital structure relevance assertion
Q4) What two main factors come into play when a firm is deciding to change its funding mix with regard to their capital structure?
Page 19
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Chapter 17: Sharing Firm Wealth: Dividends, Share
Repurchases, and Other Payouts
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Sample Questions
Q1) If a firm has retained earnings of $10 million, a common shares account of $15 million, and additional paid-in-capital of $5 million, how much would be transferred in (or out) of these accounts in response to a 50 percent stock dividend, respectively?
A) -100%, 0%, +100%
B) -100%, +100%, 0%
C) -100%, +50%, +50%
D) -50%, +50%, +50%
Q2) If a firm has retained earnings of $20 million, a common shares account of $40 million, and additional paid-in-capital of $10 million, how much would be transferred in (or out) of these accounts in response to a 30 percent stock dividend, respectively?
A) -30%, 0%, +30%
B) -30%, +30%, 0%
C) -75%, +30%, +30%
D) -75%, +37.5%, +37.5%
Q3) What would prompt a firm like GE to start paying out a much higher percentage of its earnings as dividends?
Q4) Explain the residual dividend model.
Q5) Why might a firm announce a reverse stock split?
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Chapter 18: Issuing Capital and the Investment Banking Process
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Sample Questions
Q1) Calculating Fees on a Loan Commitment You have approached your local bank for a start-up loan commitment for $1,000,000 needed to open an auto repair store. You have requested that the term of the loan be one-year. Your bank has offered you the following terms: size of loan commitment = $1,000,000, term = 1 year, up-front fee = 20 basis points, back-end fee = 50 basis points. If you take down 90 percent of the total loan commitment, calculate the total fees you have paid on this loan commitment.
A) $2,000
B) $2,500
C) $5,000
D) d.$ 6,500
Q2) Which of the following describes the type of venture capital firms who are wealthy individuals who make equity investments?
A) blue chip venture capital firms
B) institutional venture capital firms
C) angel venture capitalists
D) expertise venture capitalists
Q3) The rate on commercial paper is generally higher than the prime rate.
A) True
B) False
Page 21
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Chapter 19: International Corporate Finance
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Sample Questions
Q1) Cross Rate Given these two exchange rates, $1 = 1.3254 Australian dollars and $1 = £0.5233, compute the cross rate between the Australian dollars and the pound. State this exchange rate in Australian dollars and in pounds.
A) A$2.5329, 0.3948 pounds
B) A$0.3948, 2.5329 pounds
C) A$0.3948, 0.6936 pounds
D) A$0.6936, 0.3948 pounds
Q2) Exchange Rate Quote Convert the following indirect quote to a dollar direct quote: $1 = 2,150.4 Venezuelan Bolivar
A) $0.00046503
B) $4.65
C) $1.465
D) $2.1504
Q3) Convert the following direct quote to dollar indirect quote: 1 Indian Rupee = $0.2110.
A) 5.0226 Rupee
B) 4.7393 Rupee
C) 4.8814 Rupee
D) 4.9097 Rupee
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Chapter 20: Mergers and Acquisitions and Financial
Distress
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Sample Questions
Q1) Cindy's Computer Corp. is considering a merger with Bobby's Hard Drive, Inc. Cindy's total operating costs of producing services are $2.1 million for a sales volume (S<sub>C</sub>) of $13 million. Bobby's total operating costs of producing services are $2.5 million for a sales volume (S<sub>B</sub>) of $7 million. If the two firms merge, calculate the total average cost (TAC) for the merged firm assuming no synergies.
A) 23%
B) 17%
C) 19%
D) 21%
Q2) The merged firm's ability to generate synergistic cost savings through the joint use of inputs in producing multiple products is referred to as ______________.
A) Economies of scale
B) Economies of scope
C) X-efficiencies
D) None of these
Q3) How can managers' personal incentives result in value-destroying mergers and acquisitions?
Q4) What is the difference between a Chapter 11 and a Chapter 7 bankruptcy?
Page 23
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