Corporate Finance
Question Bank
Course Introduction
Corporate Finance explores the principles and practices involved in managing a corporations financial resources to maximize shareholder value. The course covers essential topics such as financial statement analysis, valuation of securities, risk and return, capital budgeting, cost of capital, capital structure, and dividend policy. Students learn how companies make investment decisions, finance operations, and plan for long-term financial stability. Through case studies and real-world applications, the course equips students with the analytical tools and strategic insight necessary for effective financial decision-making in a corporate environment.
Recommended Textbook Fundamentals of Investments 3rd Canadian Edition by Bradford Jordan
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Page 2
Chapter 1: A Brief History of Risk and Return
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Sample Questions
Q1) You purchased 100 shares of a stock at the beginning of the year for $43.20 per share. The share price at the end of the year is $46.10 and the stock paid an annual dividend of $1.10 per share. What was your total percentage return for the year?
A) 7.16%
B) 7.73%
C) 8.68%
D) 9.26%
E) 10.39%
Answer: D
Q2) You purchased a stock at the beginning of the year for $80.25. Your total return for the year was 10.2%, and the stock had a dividend yield of 1.8%. What was the end of year stock price?
A) $84.73
B) $85.02
C) $86.99
D) $88.44
E) $89.56
Answer: C
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3
Chapter 2: Diversification and Risky Asset Allocation
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Sample Questions
Q1) The Markowitz efficient frontier is defined as the
A) Entire set of efficient portfolios given varying levels of risk
B) Highest level of return that can be obtained given any combination of tow individual assets
C) Single most efficient portfolio that can be generated from two individual assets
D) Total possible risk-return combination that can be generated from two individual assets
E) Minimum variance portfolio
Answer: A
Q2) All else the same, a correlation of __________ will result in the least diversification benefits.
A) - 100
B) - 1
C) 0
D) + 1
E) + 100
Answer: D
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Page 4
Chapter 3: The Investment Process
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Sample Questions
Q1) You purchase 800 shares of stock on margin at a price of $46 per share. If the initial margin is 60 percent, what is your margin loan?
A) $16,960
B) $22,080
C) $18,310
D) $36,800
E) $14,720
Answer: E
Q2) A broker makes ten trades on an account for the purpose of generating commissions. The broker may be guilty of _______.
A) Fraud
B) Hypothecation
C) Churning
D) money trading
E) call trading
Answer: C
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5
Chapter 4: Overview of Security Types
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Sample Questions
Q1) You are told that the prices in the table above are from yesterday's price quote for LOL. They represent the daily high, daily low, close, 52 week high and 52 week low but are mixed-up and out of order. Which one MUST be yesterday's high price?
A) $5.67
B) $9.99
C) $10.11
D) $2.56
E) $5.33
Q2) Suppose you purchase one of each of the following. In which contract does money not change hands today between you and the seller?
A) Futures contract.
B) Option contract.
C) Stock.
D) Bond.
E) Treasury bill.
Q3) Why do corporate bonds have a higher estimated rate of return than the Treasury bonds?
Q4) How do commodity and financial futures differ with respect to carrying costs?
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Chapter 5: Mutual Funds
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Sample Questions
Q1) You are in the 32 percent tax bracket. If a non-taxable money market fund has a return of 3.8 percent, what return would you require on a taxable fund?
A) 2.58%
B) 5.59%
C) 1.22%
D) 4.42%
E) 4.87%
Q2) Which of the following is not a reason to pay fees and expenses associated with mutual funds?
A) Mutual funds provide greater diversification than most investors can achieve on their own.
B) You feel the manager is a superior investor.
C) Mutual funds tend to have greater returns than the stock market as a whole.
D) The fund specializes in a particular country you want to invest in, but are unable to research particular assets because of distance, costs, etc.
E) Mutual funds provide recordkeeping for shareholders.
Q3) What is a soft-dollar transaction?
Q4) Are ETFs only for stocks?
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Page 7
Chapter 6: The Stock Market
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Sample Questions
Q1) Silver and Platinum are the only two stocks in an index. You want the beginning index value to be 1,000. What is the ending index value for the value-weighted index?
A) 1,052.78
B) 1,040.40
C) 1,021.26
D) 1,030.47
E) 1,077.01
Q2) With a market order:
A) the broker attempts to get the best possible price during a lengthy period.
B) the investors must pay cash for the trades.
C) the broker tries to obtain the best possible price at the time the order is executed.
D) the broker should decide what is the reasonable price of the securities.
E) none of the above
Q3) What are the major differences between NASDAQ and the NYSE?
Q4) Describe how a stop-limit sell order is executed.
Q5) What is the main advantage of a market order?
Q6) What role does the Ontario Securities and Exchange Commission (OSC) play in an IPO?
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Chapter 7: Common Stock Valuation
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Sample Questions
Q1) Which of the following would most likely represent a buying opportunity for a value stock investor?
A) LULU has a P/E of 35 and the company announces continued earnings growth of 20%.
B) ABX with a P/E of 12 announces an increase of 2% in its quarterly EPS.
C) RIMM pays no dividend, has recorded a loss of $0.20 a share and a positive cash flow of $0.28 a share.
D) ED's P/E is 9 compared to the industry average of 15 and its EPS growth is the same as the rest of the industry.
E) None of these represent a buying opportunity for a value stock investor.
Q2) The valuation of a company's stock based on the firm's earnings, management, products, etc. is known as _______ analysis.
A) earnings
B) technical
C) corporate
D) fundamental
E) buy-side
Q3) A number of traded stocks pay no dividends. Why would an investor buy these stocks?
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Chapter 8: Stock Price Behaviour and Market Efficiency
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Sample Questions
Q1) Approximately how long did it take the stock market to return to its highs from August 1987 once it crashed in October?
A) 3 months
B) 6 months
C) 1 year
D) 2 years
E) 3 years
Q2) Describe an example of a market which is weak-form but not strong-form efficient.
Q3) Run tests are used for investigating the weak form of market efficiency. How many runs are in the following sequence?
A) 6
B) 7
C) 8
D) 9
E) 10
Q4) You invest $10,000 in the market at the beginning of the year, and by the end of the year your account is worth $15,000. During the year the market return was 10%. Does this mean that the market is inefficient?
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Chapter 9: Behavioural Finance and the Psychology of Investing
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Sample Questions
Q1) Draw a basic Elliott Wave Pattern. Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".
Q2) Technicians believe that a stock that is outperforming the market will tend to:
A) form head and shoulder patterns.
B) meet a resistance level.
C) reverse trend.
D) return to normal.
E) continue to outperform the market.
Q3) Investors react stronger to a financial __________ than they do to a financial __________, according to prospect theory.
A) profit; loss
B) loss; profit
C) purchase; sale
D) sale; purchase
E) debt security; equity security
Q4) What is behavioral finance and how does investor behavior affect the markets according to those who support behavioral finance?
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Chapter 10: Interest Rates
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Sample Questions
Q1) Treasury _______ are short-term Canadian government debt securities.
A) bills
B) bonds
C) notes
D) paper
E) repurchase agreements
Q2) A 90-day Treasury bill has a bank discount yield of 4.2 percent. What is the effective annual rate?
A) 4.22 percent
B) 4.25 percent
C) 4.28 percent
D) 4.32 percent
E) 4.37 percent
Q3) The expected future interest rate implied by current interest rates is a(n) _________ rate.
A) discount
B) real
C) expected
D) future
E) forward
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Chapter 11: Bond Prices and Yields
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Sample Questions
Q1) 0. What is the modified duration of a bond with a coupon rate of 7.5 percent, and a yield to maturity of 8.2 percent? This bond pays interest semiannually. It has a Macaulay duration of 6.7 years.
A) 4.27 years
B) 6.83 years
C) 6.44 years
D) 5.71 years
E) 6.04 years
Q2) A bond's annual interest payment divided by its market price is the bond's ________.
A) coupon rate
B) current yield
C) yield to maturity
D) realized yield
E) par yield
Q3) Explain the concept of duration and its role in bond portfolio management.
Q4) Josh is saving money to purchase a home in 9 years. Explain why Josh should create a coupon bond portfolio with a duration of 9 years, rather than purchasing coupon bonds that mature in 9 years.
Q5) Discuss the possible impact of default risk on duration?
Page 13
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Chapter 12: Return, Risk and Security Management
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Sample Questions
Q1) Risk that affects a single company is called ______ risk.
A) Systematic
B) Market
C) Unsystematic
D) Alpha
E) Nondiversifiable
Q2) What is the beta of Stock A?
A) 1.47 B) 1.98 C)
Q3) The expected return of a stock is 13 percent, and its beta is 1.08. If the risk-free rate is 5.5 percent and the stock is correctly priced, what is the slope of the security market line?
A) 7.50%
B) 7.38%
C) 5.73%
D) 6.94%
E) 7.09%
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Chapter 13: Performance Evaluation and Risk Management
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Q1) How do you interpret this VaR statistic: Prob (R<sub>p</sub> \(\le\) -0.09) = 23%?
A) If your portfolio declines by 9% or more, that decline is expected to be followed by a 23% increase in value
B) Your portfolio is expected to lose at least 9%, but not more than 23% in any given year
C) There is a 23% chance that your portfolio will be worth at least 9% less one year from now than it is today
D) Sometime in the future, your portfolio is expected to lose 9% or more in a single year, but have an overall average rate of return of 23%
E) If your portfolio rises in value by at least 23%, you should expect a market correction of 9% or more
Q2) A passive portfolio management strategy is appropriate when
A) Capital market is inefficient
B) Investors have a unique investment philosophy
C) Investors have short investment horizons
D) Attempting to perform as well as the overall market on a risk-adjusted basis
E) All of the above
Q3) What is the importance of value-at-risk?
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Page 15
Chapter 14: Options
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Sample Questions
Q1) Which of the following is included in an option contract?
A) The delivery or settlement procedure.
B) The exercise price.
C) Whether the exercise is American or European.
D) The option contract size.
E) All of the above.
Q2) A call option sells for $0.40 and has 4 months to expiration. The current stock price is $35, and the risk-free rate is 4%. If the strike price is $35 and the stock will pay a $0.60 dividend two months from now, what is the price of a put option with the same strike and expiration? Assume that options are European style.
A) $0.38
B) $0.67
C) $0.54
D) $0.83
E) $0.17
Q3) You wrote a put with a strike price of $20 and a premium of $1. Draw a graph depicting your profits or losses for stock prices ranging from $0 to $40. Be sure to completely label your graph.
Q4) Explain how a credit default swap is used to manage risk.
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Chapter 15: Option Valuation
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Sample Questions
Q1) The risk-free rate used in the Black-Scholes-Merton model is the:
A) 30-day Treasury bill.
B) 90-day Treasury bill.
C) 1-year Treasury bill.
D) 10-year Treasury bond.
E) Treasury bill with the same maturity as the option.
Q2) Theta is commonly calibrated to a time interval of one
A) Year
B) Day
C) Month
D) Quarter
E) Week
Q3) All else the same, an increase in the time to maturity will __________ the price of a call option and __________ the price of a put option.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
E) not affect; not affect
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Page 17
Chapter 16: Futures Contracts
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Sample Questions
Q1) A stock is currently selling for $104.12, and has a continuous dividend yield of 1.8 percent. What is the price of a futures contract on the stock that expires in five months if the risk-free rate of interest is 4.5 percent?
A) $105.28
B) $102.94
C) $106.05
D) $105.73
E) $106.32
Q2) A portfolio manager wants to hedge a stock portfolio with a value of $750 million and a beta of 1.25 with S&P Canada 60 index futures. The quoted price of a six-month futures contract is 1,437.25, and the contract multiplier is $200. How many futures contracts are needed for the hedge?
A) 2,431
B) 3,261
C) 2,527
D) 2,609
E) 2,496
Q3) Why do futures contracts represent a "zero sum game"
Q4) Compare the pros and cons of a futures hedge with an option hedge.
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Chapter 17: Projecting Cash Flow and Earnings
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Sample Questions
Q1) What is the operating cash flow, given the following information? \[\begin{array} { | l r | }
\hline \text { Net income } & \$ 600 \\
\text { Depreciation } & 70 \\
\text { Issuance of new stock } & 30 \\
\text { Repayment of debt } & 20 \\
\text { Sale of old equipment } & 40 \\
\text { Purchase of new equipment } & 60 \\
\text { Dividend payments } & 70 \\
\text { Interest Payments } & 100 \\
\hline
\end{array}\]
A) $400
B) $470
C) $530
D) $540
E) $670
Q2) Simonz Co. had a ROE of 12% last year, and the ROE increased to 40% this year. At the same time, the profit margin decreased. How is this possible?
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Page 19
Chapter 18: Corporate Bonds
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Sample Questions
Q1) A firm had a major fire that hampered operations for the past year. As a result, the firm discontinued all dividends for one year. Next month, the firm will resume paying dividends. The normal quarterly payments are $1.60 for the cumulative preferred shares and $1.30 for the common shares. How much will the firm need to pay the preferred shareholders if they also pay a common dividend?
A) $0
B) $1.3
C) $1.6
D) $3.2
E) $8.0
Q2) Which of the following is an 'investment grade' credit rating from Moody's?
A) Baa1
B) 2
C) AA+
D) 1
E) Aa2
Q3) Why does the yield-to-maturity differ from the realized holding return for a bond?
Q4) How is the minimal value for a convertible bond determined?
Q5) What are some of the advantages and disadvantages of owning convertible bonds?
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Chapter 19: Government Bonds and Mortgaged-Backed Securities
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Q1) Which of the following is likely to have the highest level of default risk?
A) Canada Treasury notes.
B) Municipal securities.
C) Canada premium bonds.
D) Savings bonds.
E) Canada Treasury bonds.
Q2) The bonds in an issue having a single maturity date are called ________ bonds.
A) private activity
B) hybrid
C) plain vanilla
D) sinking fund
E) term
Q3) On a Treasury bond quote, if only the ask yield is stated, but the bid yield is not. Is the bid yield higher or lower than the ask yield?
Is it possible for the relationship between the bid and ask yields to be reversed?
Q4) Evaluate this claim: "Treasury bonds have no risk."
Q5) Why would an investor buy government-issued inflation-indexed bonds when other government bonds pay a higher coupon rate?
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Chapter 20: International Portfolio Investment
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Sample Questions
Q1) In 2010, the Hungarian stock market provided an average return of _________ in US dollars.
A) -55.1%
B) +20.7%
C) +29.1%
D) +182.2%
E) +70.5%
Q2) If one Swiss franc can purchase 1.039 Canadian dollars now, how many Swiss francs can one Canadian dollar buy?
A) $0.8005
B) $0.1626
C) $1.2323
D) $1.4124
E) $0.9625
Q3) Discuss how different accounting practices can distort the analysis for international investing.
Q4) Why has the development of information technology and the impact of globalization affect the correlation between international markets?
Q5) How can a firm lower its cost of capital through cross listing?
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