Investments
Exam Questions
Course Introduction
This course offers a comprehensive introduction to the principles and practices of investment. Students will explore the fundamental concepts of risk and return, asset allocation, and portfolio diversification. The curriculum covers various types of financial instruments, including stocks, bonds, mutual funds, and alternative investments, as well as the functioning of securities markets. Through case studies and hands-on exercises, participants learn how to analyze investment opportunities, understand market trends, and develop strategies for creating and managing investment portfolios. The course also addresses ethical considerations and regulatory frameworks relevant to the investment landscape.
Recommended Textbook Fundamentals of Corporate Finance 11thEdition by Stephen Ross
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Page 2
Chapter 1: Introduction to Corporate Finance
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Q1) Which one of the following is defined as a firm's short-term assets and its short-term liabilities?
A)working capital
B)debt
C)investment capital
D)net capital
E)capital structure
Answer: A
Q2) A general partner:
A)is personally responsible for all the partnership debts.
B)has no say over a firm's daily operations.
C)faces double taxation whereas a limited partner does not.
D)has a maximum loss equal to his or her equity investment.
E)receives a salary in lieu of a portion of the profits.
Answer: A
Q3) Describe the key advantages associated with the corporate form of organization.
Answer: The advantages of the corporate form of organization are the ease of transferring ownership,the owners' limited liability for business debts,the ability to raise large amounts of capital,and the potential for an unlimited life for the organization.
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Chapter 2: Financial Statements, Taxes, and Cash Flow
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Q1) Which one of the following statements related to liquidity is correct?
A)Liquid assets tend to earn a high rate of return.
B)Liquid assets are valuable to a firm.
C)Liquid assets are defined as assets that can be sold quickly regardless of the price obtained.
D)Inventory is more liquid than accounts receivable because inventory is tangible.
E)Any asset that can be sold within the next year is considered liquid.
Answer: B
Q2) Four years ago,Velvet Purses purchased a mailing machine at a cost of $176,000.This equipment is currently valued at $64,500 on today's balance sheet but could actually be sold for $58,900.This is the only fixed asset the firm owns.Net working capital is $57,200 and long-term debt is $111,300.What is the book value of shareholders' equity?
A)$4,800
B)$7,700
C)$10,400
D)$222,600
E)$233,000
Answer: C
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Page 4
Chapter 3: Working With Financial Statements
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Sample Questions
Q1) A firm has sales of $68,400,costs of $42,900,interest paid of $2,100,and depreciation of $6,500.The tax rate is 34 percent.What is the value of the cash coverage ratio?
A)12.14
B)15.24
C)17.27
D)23.41
E)24.56
Answer: A
Q2) A firm has total debt of $4,850 and a debt-equity ratio of 0.57.What is the value of the total assets?
A)$6,128.05
B)$7,253.40
C)$9,571.95
D)$11,034.00
E)$13,358.77
Answer: E
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Chapter 4: Long-Term Financial Planning and Growth
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Q1) The Parodies Corp.has a 22 percent return on equity and a 23 percent payout ratio.What is its sustainable growth rate?
A)18.68 percent
B)19.25 percent
C)19.49 percent
D)20.39 percent
E)22.00 percent
Q2) Smith & Daughters is getting ready to compile pro forma statements for the next few years.How can the managers establish a reasonable range of growth rates that they should consider during this planning process?
Q3) Frasier Cabinets wants to maintain a growth rate of 5 percent without incurring any additional equity financing.The firm maintains a constant debt-equity ratio of .0.55,a total asset turnover ratio of 1.30,and a profit margin of 9.0 percent.What must the dividend payout ratio be?
A)26.26 percent
B)38.87 percent
C)49.29 percent
D)61.13 percent
E)73.74 percent
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Page 6
Chapter 5: Introduction to Valuation: The Time Value of Money
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Q1) Alex invested $10,500 in an account that pays 6 percent simple interest.How much money will he have at the end of four years?
A)$12,650
B)$12,967
C)$13,020
D)$13,256
E)$13,500
Q2) You want to have $25,000 saved 6 years from now to buy a house.How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.
A)$524.24
B)$691.18
C)$724.60
D)$745.11
E)$819.02
Q3) What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
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Chapter 6: Discounted Cash Flow Valuation
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Q1) Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years.His holdings are now worth $598,100.What is his annual rate of return on this stock?
A)6.13 percent
B)6.24 percent
C)6.29 percent
D)6.32 percent
E)6.36 percent
Q2) You want to buy a new sports car for $55,000.The contract is in the form of a 60-month annuity due at a 6 percent APR,compounded monthly.What will your monthly payment be?
A)$1,047.90
B)$1,053.87
C)$1,058.01
D)$1,063.30
E)$1,072.11
Q3) Explain the difference between the effective annual rate (EAR)and the annual percentage rate (APR).Of the two,which one has the greater importance and why?
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Chapter 7: Interest Rates and Bond Valuation
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Q1) Kaiser Industries has bonds on the market making annual payments,with 14 years to maturity,and selling for $1,382.01.At this price,the bonds yield 7.5 percent.What is the coupon rate?
A)8.00 percent
B)8.50 percent
C)9.00 percent
D)10.50 percent
E)12.00 percent
Q2) A zero coupon bond with a face value of $1,000 is issued with an initial price of $212.56.The bond matures in 22 years.What is the implicit interest,in dollars,for the first year of the bond's life?
A)$14.72
B)$15.50
C)$15.90
D)$16.63
E)$16.89
Q3) Explain the conditions that would need to exist for the Treasury yield curve to be downward sloping.
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Chapter 8: Stock Valuation
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Q1) Big Falls Tours just paid a dividend of $1.55 per share.The dividends are expected to grow at 30 percent for the next 8 years and then level off to a 6 percent growth rate indefinitely.What is the price of this stock today given a required return of 15 percent?
A)$67.54
B)$69.90
C)$70.47
D)$71.07
E)$78.19
Q2) The preferred stock of Rail Lines,Inc.,pays an annual dividend of $12.25 and sells for $59.70 a share.What is the rate of return on this security?
A)19.38 percent
B)19.63 percent
C)20.52 percent
D)20.72 percent
E)20.84 percent
Q3) Explain why small shareholders should prefer cumulative voting over straight voting.
Q4) What are the primary differences and similarities between NASDAQ and the NYSE?
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Chapter 9: Net Present Value and Other Investment Criteria
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Q1) Which one of the following is an advantage of the average accounting return method of analysis?
A)easy availability of information needed for the computation
B)inclusion of time value of money considerations
C)the use of a cutoff rate as a benchmark
D)the use of pre-tax income in the computation
E)use of real, versus nominal, average income
Q2) Which one of the following will decrease the net present value of a project?
A)increasing the value of each of the project's discounted cash inflows
B)moving each of the cash inflows forward to a sooner time period
C)decreasing the required discount rate
D)increasing the project's initial cost at time zero
E)increasing the amount of the final cash inflow
Q3) A project's average net income divided by its average book value is referred to as the project's average:
A)net present value.
B)internal rate of return.
C)accounting return.
D)profitability index.
E)payback period.
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Chapter 10: Making Capital Investment Decisions
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Q1) Mason Farms purchased a building for $689,000 eight years ago.Six years ago,repairs were made to the building which cost $136,000.The annual taxes on the property are $11,000.The building has a current market value of $840,000 and a current book value of $494,000.The building is totally paid for and solely owned by the firm.If the company decides to use this building for a new project,what value,if any,should be included in the initial cash flow of the project for this building?
A)$494,000
B)$582,000
C)$840,000
D)$865,000
E)$953,000
Q2) Assume a firm sets its bid price for a project at the minimum level as computed using the discounted cash flow method.Given this,what do you know about the net present value and the internal rate of return on the project as bid?
Q3) In a single sentence,explain how you can determine which cash flows should be included in the analysis of a project.
Q4) How can two firms arrive at two different bid prices when bidding for the same job and given the same bid specifications?
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Chapter 11: Project Analysis and Evaluation
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Q1) When the operating cash flow of a project is equal to zero,the project is operating at the:
A)maximum possible level of production.
B)minimum possible level of production.
C)financial break-even point.
D)accounting break-even point.
E)cash break-even point.
Q2) The contribution margin per unit is equal to the:
A)sales price per unit minus the total costs per unit.
B)variable cost per unit minus the fixed cost per unit.
C)sales price per unit minus the variable cost per unit.
D)pre-tax profit per unit.
E)aftertax profit per unit.
Q3) At the accounting break-even point,the:
A)payback period must equal the required payback period.
B)NPV is zero.
C)IRR is zero.
D)contribution margin per unit equals the fixed costs per unit.
E)contribution margin per unit is zero.
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Page 13
Chapter 12: Some Lessons From Capital Market History
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Q1) A stock has an expected rate of return of 13 percent and a standard deviation of 21 percent.Which one of the following best describes the probability that this stock will lose at least half of its value in any one given year?
A)0.1 percent
B)0.5 percent
C)1.0 percent
D)2.5 percent
E)5.0 percent
Q2) Standard deviation is a measure of which one of the following?
A)average rate of return
B)volatility
C)probability
D)risk premium
E)real returns
Q3) Which one of the following is defined by its mean and its standard deviation?
A)arithmetic nominal return
B)geometric real return
C)normal distribution
D)variance
E)risk premium
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Chapter 13: Return, Risk, and the Security Market Line
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Q1) Which one of the following should earn the most risk premium based on CAPM?
A)diversified portfolio with returns similar to the overall market
B)stock with a beta of 1.38
C)stock with a beta of 0.74
D)U.S. Treasury bill
E)portfolio with a beta of 1.01
Q2) The expected rate of return on a stock portfolio is a weighted average where the weights are based on the:
A)number of shares owned of each stock.
B)market price per share of each stock.
C)market value of the investment in each stock.
D)original amount invested in each stock.
E)cost per share of each stock held.
Q3) The _____ tells us that the expected return on a risky asset depends only on that asset's nondiversifiable risk.
A)efficient markets hypothesis
B)systematic risk principle
C)open markets theorem
D)law of one price
E)principle of diversification
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Chapter 14: Cost of Capital
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Q1) Justice,Inc.has a capital structure which is based on 30 percent debt,5 percent preferred stock,and 65 percent common stock.The flotation costs are 11 percent for common stock,10 percent for preferred stock,and 7 percent for debt.The corporate tax rate is 37 percent.What is the weighted average flotation cost?
A)8.97 percent
B)9.48 percent
C)9.62 percent
D)9.75 percent
E)10.00 percent
Q2) Highway Express has paid annual dividends of $1.05,$1.20,$1.25,$1.15,and $0.95 over the past five years,respectively.What is the average dividend growth rate?
A)-1.74 percent
B)-3.60 percent
C)2.28 percent
D)2.47 percent
E)4.39 percent
Q3) What role does the weighted average cost of capital play when determining a project's cost of capital?
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Chapter 15: Raising Capital
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Q1) Jones & Co.is funded by a group of individual investors for the sole purpose of providing funding for individuals who are trying to convert their new ideas into viable products.What is this type of funding called?
A)green shoe funding
B)tombstone underwriting
C)venture capital
D)red herring funding
E)life cycle capital
Q2) High Mountain Mining wants to expand its current operations and requires $3.5 million in additional funding to do so.After discussing this with key shareholders,the firm has decided to raise the necessary funds through a rights offering at a subscription price of $18 a share.The current market price of the firm's stock is $22 a share.How many shares of stock will the firm need to sell through the rights offering to fund the expansion plans?
A)140,015 shares
B)159,091 shares
C)166,667 shares
D)194,444 shares
E)205,688 shares
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Page 17
Chapter 16: Financial Leverage and Capital Structure Policy
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Q1) Young's Home Supply has a debt-equity ratio of 0.80.The cost of equity is 14.5 percent and the aftertax cost of debt is 4.9 percent.What will the firm's cost of equity be if the debt-equity ratio is revised to 0.70?
A)10.89 percent
B)11.47 percent
C)11.70 percent
D)13.89 percent
E)13.97 percent
Q2) Bankruptcy:
A)creates value for a firm.
B)transfers value from shareholders to bondholders.
C)technically occurs when total equity equals total debt.
D)costs are limited to legal and administrative fees.
E)is an inexpensive means of reorganizing a firm.
Q3) Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.
Q4) Based on the M & M propositions with and without taxes,how much time should a financial manager spend analyzing the capital structure of a firm? What if the analysis is based on the static theory?
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Chapter 17: Dividends and Payout Policy
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Q1) South Shore Limited has 21,000 shares of stock outstanding with a par value of $1 per share and a market price of $7.50 a share.The firm just announced a 5-for-2 stock split.What will the par value of the stock be after the split?
A)$0.40
B)$0.80
C)$1.00
D)$1.40
E)$1.60
Q2) Jean's Warehouse has 16,000 shares of stock outstanding.The current market value of the firm is $768,000.The company has retained earnings of $130,000,paid in surplus of $321,000,and a common stock account value of 16,000.The company is planning a 5-for-3 stock split.What will the retained earnings account value be after the split?
A)$73,800
B)$130,000
C)$153,600
D)$205,000
E)$245,500
Q3) Explain the meaning of the dividend clientele effect and why it is important.
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Page 19
Chapter 18: Short-Term Finance and Planning
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Q1) A manufacturing firm has a 90-day collection period.The firm produces seasonal merchandise and thus has the least sales during the first quarter of a year and the highest level of sales during the fourth quarter of a year.The firm maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters.The firm is most apt to face a cash-out situation in:
A)the first quarter.
B)the second quarter.
C)the third quarter.
D)the fourth quarter.
E)any quarter with equal probabilities of occurrence.
Q2) Metal Products Co.has an inventory period of 53 days,an accounts payable period of 68 days,and an accounts receivable turnover rate of 18.What is the length of the cash cycle?
A)3.00 days
B)5.28 days
C)26.28 days
D)71.00 days
E)73.28 days
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Chapter 19: Cash and Liquidity Management
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Q1) Roger's Distributors receives an average of 310 checks a day.The average amount per check is $629.The firm is considering a lockbox system which it anticipates will reduce the average collection time by 1.5 days.The daily interest rate on Treasury bills is 0.011 percent.What is the amount of the expected daily savings of the lockbox system?
A)$2.04
B)$6.92
C)$14.95
D)$22.42
E)$32.17
Q2) You are considering implementing a lockbox system for your firm.The system is expected to reduce the average collection time by 2.8 days.On an average day,your firm receives 2,419 checks with an average value of $1,287 each.The daily interest rate on Treasury bills is 0.016 percent.The bank charge per check is $0.30.What is the net present value of this lockbox arrangement?
A)-$4,535,625
B)-$2,611,575
C)$187,419
D)$4,181,483
E)$13,252,733
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Page 21
Chapter 20: Credit and Inventory Management
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Q1) Preston Milled Products currently sells a product with a variable cost per unit of $21 and a unit selling price of $40.At the present time,the firm only sells on a cash basis with monthly sales of 2,800 units.The monthly interest rate is 0.5 percent.What is the switch break-even point if the firm switched to a net 30 credit policy? Assume the selling price per unit and the variable costs per unit remain constant.
A)2,830 units
B)2,910 units
C)3,333 units
D)3,414 units
E)3,526 units
Q2) The period of time that extends from the day a credit sale is made until the day the bank credits a firm's account with the payment for that sale is known as the _____ period.
A)float
B)cash collection
C)sales
D)accounts receivable
E)discount
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22
Chapter 21: International Corporate Finance
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Q1) The price of one Euro expressed in U.S.dollars is referred to as a(n):
A)ADR rate.
B)cross inflation rate.
C)depository rate.
D)exchange rate.
E)foreign interest rate.
Q2) You want to invest in a project in Canada.The project has an initial cost of C$2.2 million and is expected to produce cash inflows of C$900,000 a year for 3 years.The project will be worthless after the first 3 years.The expected inflation rate in Canada is 4 percent while it is only 3 percent in the U.S.The applicable interest rate for the project in Canada is 13 percent.The current spot rate is C$1 = $0.8158.What is the net present value of this project in Canadian dollars?
A)-C$91,889
B)-C$87,924
C)-C$74,963
D)C$165,139
E)C$167,528
Q3) Using currencies A,B,and C construct an example in which triangle arbitrage exists and then show how to exploit it.
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Page 23
Chapter 22: Behavioral Finance: Implications for Financial Management
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Q1) In an efficient market,it is believed by some individuals that the actions of traders who constantly buy and sell on any perceived market mispricings will in effect cause market prices to correctly reflect asset values.A person who believes that the actions of these traders will not result in correctly valued prices are most apt to believe in which one of the following?
A)gambler's fallacy
B)limits to arbitrage
C)availability bias
D)false consensus
E)clustering illusion
Q2) Which one of the following statements is true?
A)Market crashes tend to be accompanied by low market volume.
B)The Asian market crash was followed by a quick recovery.
C)The market crash of 1929 and the crash of 1987 are very similar in both the percentage decline in market value and in the ensuing market recovery.
D)Market crashes tend to follow market bubbles.
E)Market bubbles and crashes prove that financial markets are inefficient.
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Chapter 23: Enterprise Risk Management
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Q1) An option contract:
I.can be used to hedge risk.
II.can be used to speculate in the market.
III.can be based on a futures contract to create a futures option.
IV.cannot be based on a foreign currency.
A)II and III only
B)I and II only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV
Q2) Which one of the following is the primary difference between a swap contract and a forward contract?
A)underlying asset
B)number of exchanges
C)daily marking to the market
D)option versus obligation
E)time of payment
Q3) Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge.What does the manufacturer hope to gain?
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Chapter 24: Options and Corporate Finance
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Q1) Kurt owns a convertible bond that matures in three years.The bond has an 8 percent coupon and pays interest semi-annually.The face value of the bond is $1,000 and the conversion price is $25.Similar bonds have a market return of 9.25 percent.The current price of the stock is $26.50 per share.What is the straight bond value?
A)$948.20
B)$967.89
C)$972.80
D)$987.78
E)$991.15
Q2) The assets of Uptown Stores are currently worth $138,000.These assets are expected to be worth either $120,000 or $150,000 one year from now.The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year.The risk-free rate is 4.3 percent.What is the value of the equity in this firm?
A)$11,920
B)$15,298
C)$19,507
D)$21,347
E)$26,408
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Chapter 25: Option Valuation
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Q1) Which one of the following best defines the primary purpose of a protective put?
A)ensure a maximum purchase price in the future
B)offset an equivalent call option
C)limit the downside risk of asset ownership
D)lock in a risk-free rate of return on a financial asset
E)increase the upside potential return on an investment
Q2) In the Black-Scholes model,the symbol " " is used to represent the standard deviation of the:
A)option premium on a call with a specified exercise price.
B)rate of return on the underlying asset.
C)volatility of the risk-free rate of return.
D)rate of return on a risk-free asset.
E)option premium on a put with a specified exercise price.
Q3) You invest $4,500 today at 6.5 percent,compounded continuously.How much will this investment be worth 8 years from now?
A)$6,728
B)$7,569
C)$8,311
D)$8,422
E)$8,791
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Chapter 26: Mergers and Acquisitions
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Q1) Which of the following is a form of a takeover?
I.tender offer
II.merger
III.proxy contest
IV.going private transaction
A)I and II only
B)III and IV only
C)II, III, and IV only
D)I, II, and III only
E)I, II, III, and IV
Q2) If General Electric,a highly diversified company,were to acquire Ocean Freight Limited,the acquisition would be classified as a _____ acquisition.
A)horizontal
B)longitudinal
C)conglomerate
D)vertical
E)integrated
Q3) Identify the three basic legal procedures that one firm can use to acquire another and briefly discuss the advantages and disadvantages of each.
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Page 28
Chapter 27: Leasing
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Q1) An operating lease:
A)is recorded at its net present value on the balance sheet.
B)is recorded on the balance sheet as both an asset and a liability.
C)is recorded at its estimated residual balance on the balance sheet.
D)is reflected in the footnotes rather than on the balance sheet.
E)does not appear either on a financial statement or in the footnotes.
Q2) Fargo North is considering the purchase of some new equipment costing $118,000.This equipment has a 5-year life after which it will be worthless.The firm uses straight-line depreciation and borrows funds at 9 percent interest.The company's tax rate is 33 percent.The firm also has the option of leasing the equipment.What is the amount of the break-even lease payment?
A)$30,220
B)$31,467
C)$31,775
D)$33,719
E)$34,897
Q3) Explain the differences between purchasing an asset and leasing an asset.
Q4) What are some "good" reasons for opting to lease rather than purchase an asset?
Q5) Why might a firm opt to sell and leaseback an asset which it currently owns?
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