Finance and Investment Analysis Exam Practice Tests
Course Introduction
Finance and Investment Analysis is a comprehensive course that explores the principles and practices essential for effective financial decision-making and investment strategy. The course examines key topics including financial markets and instruments, risk assessment, portfolio management, valuation of securities, and capital budgeting. Students will learn fundamental and advanced analytical tools to evaluate investment opportunities and financial performance. Through case studies and real-world examples, learners develop the skills needed to make informed investment decisions, manage assets, and understand the dynamics that drive financial markets in both domestic and global contexts.
Recommended Textbook Fundamentals of Financial Management 15th Edition by Eugene F. Brigham
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21 Chapters
1827 Verified Questions
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Page 2
Chapter 1: An Overview of Financial Management
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Sample Questions
Q1) 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
Q2) Which of the following statements is CORRECT?
A) One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
B) Corporations face fewer regulations than proprietorships.
C) One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation,because taxes are levied at both the firm level and the owner level.
D) It is generally less expensive to form a corporation than a proprietorship because,with a proprietorship,extensive legal documents are required.
E) If a partnership goes bankrupt,each partner is exposed to liabilities only up to the amount of his or her investment in the business.
Answer: A
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Chapter 2: Financial Markets and Institutions
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Sample Questions
Q1) A share of common stock is not a derivative,but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.
A)True
B)False
Answer: True
Q2) 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
Q3) The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution)places an order to buy a stock.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Financial Statements,cash Flow and Taxes
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Sample Questions
Q1) Prezas Company's balance sheet showed total current assets of $2,500,all of which were required in operations.Its current liabilities consisted of $975 of accounts payable,$600 of 6% short-term notes payable to the bank,and $250 of accrued wages and taxes.What was its net operating working capital?
A) $1,173
B) $1,199
C) $1,301
D) $1,326
E) $1,275
Answer: E
Q2) The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends and the riskiness of those cash flows.
A)True
B)False
Answer: True
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Chapter 4: Analysis of Financial Statements
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Sample Questions
Q1) If the CEO of a large and diversified firm were filling out a fitness report on a division manager (i.e. ,"grading" the manager),which of the following situations would be likely to cause the manager to receive a better grade? In all cases,assume that other things are held constant.
A) The division's basic earning power ratio is above the average of other firms in its industry.
B) The division's total assets turnover ratio is below the average for other firms in its industry.
C) The division's total debt to total capital ratio is above the average for other firms in the industry.
D) The division's inventory turnover is 6×,whereas the average for its competitors is 8×.
E) The division's DSO (days' sales outstanding)is 40 days,whereas the average for its competitors is 30 days.
Q2) The return on invested capital measures the total return that a company has provided for its investors.
A)True
B)False
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Page 6
Chapter 5: Time Value of Money
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Sample Questions
Q1) Pace Co.borrowed $10,000 at a rate of 7.25%,simple interest,with interest paid at the end of each month.The bank uses a 360-day year.How much interest would Pace have to pay in a 30-day month?
A) $57.40
B) $47.13
C) $60.42
D) $73.10
E) $50.15
Q2) You want to quit your job and return to school for an MBA degree 3 years from now,and you plan to save $5,000 per year,beginning immediately.You will make 3 deposits in an account that pays 5.2% interest.Under these assumptions,how much will you have 3 years from today?
A) $16,614.78
B) $17,943.97
C) $17,445.52
D) $18,442.41
E) $14,953.30
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True B)False
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Chapter 6: Interest Rates
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Sample Questions
Q1) Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 7.00%.What rate of return would you expect on a 5-year Treasury security,assuming the pure expectations theory is valid? Disregard cross-product terms,i.e. ,if averaging is required,use the arithmetic average.
A) 9.50%
B) 11.59%
C) 7.70%
D) 7.41%
E) 8.46%
Q2) The four most fundamental factors that affect the cost of money are (1)production opportunities, (2)time preferences for consumption, (3)risk,and (4)weather conditions.
A)True
B)False
Q3) An upward-sloping yield curve is often call a "normal" yield curve,while a downward-sloping yield curve is called "abnormal."
A)True
B)False
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Chapter 7: Bonds and Their Valuation
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92 Verified Questions
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Sample Questions
Q1) Malko Enterprises' bonds currently sell for $1,020.They have a 6-year maturity,an annual coupon of $75,and a par value of $1,000.What is their current yield?
A) 6.91%
B) 6.62%
C) 8.46%
D) 6.40%
E) 7.35%
Q2) Which of the following statements is CORRECT?
A) If a coupon bond is selling at par,its current yield equals its yield to maturity.
B) If rates fall after its issue,a zero coupon bond could trade at a price above its maturity (or par)value.
C) If rates fall rapidly,a zero coupon bond's expected appreciation could become negative.
D) If a firm moves from a position of strength toward financial distress,its bonds' yield to maturity would probably decline.
E) If a bond is selling at a premium,this implies that its yield to maturity exceeds its coupon rate.
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Page 9
Chapter 8: Risk and Rates of Return
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Sample Questions
Q1) Which of the following is most likely to occur as you add randomly selected stocks to your portfolio,which currently consists of 3 average stocks?
A) The diversifiable risk of your portfolio will likely decline,but the expected market risk should not change.
B) The expected return of your portfolio is likely to decline.
C) The diversifiable risk will remain the same,but the market risk will likely decline.
D) Both the diversifiable risk and the market risk of your portfolio are likely to decline.
E) The total risk of your portfolio should decline,and as a result,the expected rate of return on the portfolio should also decline.
Q2) Which is the best measure of risk for a single asset held in isolation,and which is the best measure for an asset held in a diversified portfolio?
A) Variance;correlation coefficient.
B) Standard deviation;correlation coefficient.
C) Beta;variance.
D) Coefficient of variation;beta.
E) Beta;beta.
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Chapter 9: Stocks and Their Valuation
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Sample Questions
Q1) Kale Inc.forecasts the free cash flows (in millions)shown below.Assume the firm has zero non-operating assets.If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,then what is the firm's total corporate value (in millions)? Do not round intermediate calculations. \[\begin{array} { l r r }
\text { Year } & 1 & 2 \\ \hline \text { Free Cash flow } & - \$ 50 & \$ 115 \end{array}\]
?
A) $1,530
B) $1,833
C) $1,295
D) $1,446
E) $1,682
Q2) Classified stock differentiates various classes of common stock.Using it is one way companies can meet special needs,such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.
A)True
B)False
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Page 11
Chapter 10: The Cost of Capital
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Sample Questions
Q1) The MacMillen Company has equal amounts of low-risk,average-risk,and high-risk projects.The firm's overall WACC is 12%.The CFO believes that this is the correct WACC for the company's average-risk projects,but that a lower rate should be used for lower-risk projects and a higher rate for higher-risk projects.The CEO disagrees,on the grounds that even though projects have different risks,the WACC used to evaluate each project should be the same because the company obtains capital for all projects from the same sources.If the CEO's position is accepted,what is likely to happen over time?
A) The company will take on too many high-risk projects and reject too many low-risk projects.
B) The company will take on too many low-risk projects and reject too many high-risk projects.
C) Things will generally even out over time,and,therefore,the firm's risk should remain constant over time.
D) The company's overall WACC should decrease over time because its stock price should be increasing.
E) The CEO's recommendation would maximize the firm's intrinsic value.
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Chapter 11: The Basics of Capital Budgeting
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Sample Questions
Q1) The IRR of normal Project X is greater than the IRR of normal Project Y,and both IRRs are greater than zero.Also,the NPV of X is greater than the NPV of Y at the cost of capital.If the two projects are mutually exclusive,Project X should definitely be selected,and the investment made,provided we have confidence in the data.Put another way,it is impossible to draw NPV profiles that would suggest not accepting Project X.
A)True
B)False
Q2) The NPV and IRR methods,when used to evaluate two equally risky but mutually exclusive projects,will lead to different accept/reject decisions and thus capital budgets if the cost of capital at which the projects' NPV profiles cross is greater than the crossover rate.
A)True
B)False
Q3) Normal Projects S and L have the same NPV when the discount rate is zero.However,Project S's cash flows come in faster than those of L.Therefore,we know that at any discount rate greater than zero,L will have the higher NPV.
A)True
B)False
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Chapter 12: Cash Flow Estimation and Risk Analysis
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80 Flashcards
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Sample Questions
Q1) You work for Whittenerg Inc. ,which is considering a new project whose data are shown below.What is the project's Year 1 cash flow? \[\begin{array} { l r }
\text { Sales revenues, each year } & \$ 67,000 \\
\text { Depreciation } & \$ 8,000 \\
\text { Other operating costs } & \$ 25,000 \\
\text { Interest expense } & \$ 8,000 \\
\text { Tax rate } & 35.0 \%
\end{array}\]
?
A) $33,110
B) $32,809
C) $30,100
D) $35,819
E) $27,692
Q2) Since the focus of capital budgeting is on cash flows rather than on net income,changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis.
A)True
B)False
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Page 14
Chapter 13: Real Options and Other Topics in Capital
Budgeting
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Sample Questions
Q1) Weisbach Electronics is considering investing in India.Which of the following factors would make the company less likely to proceed with the investment?
A) The company would have the option to withdraw from the investment after 2 years if it turns out to be unprofitable.
B) The investment would increase the odds of the company being able to subsequently make a successful entry into China.
C) The investment would preclude the company from being able to make a profitable investment in China.
D) Competitors are considering similar investments in India,and the firm can discourage them from trying by entering now.
E) The new plant could be easily retrofitted to manufacture many of the firm's other products.
Q2) Real options are most valuable when the underlying source of risk--such as uncertainty about unit sales,or the sales price,or input costs--is very low.
A)True
B)False
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15
Chapter 14: Capital Structure and Leverage
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Sample Questions
Q1) The Modigliani and Miller (MM)articles implicitly assumed,among other things,that outside stockholders have the same information about a firm's future prospects as its managers.That was called "symmetric information," and it is questionable.The introduction of "asymmetric information" led to the development of the "signaling" theory of capital structure,which postulated that firms are reluctant to issue new stock because investors will interpret such an act as a signal that the firm's managers are worried about its future.Other actions give off different signals,and the end result is that capital structure is affected by managers' perceptions about how their financing decisions will affect investors' views of the firm and thus its value.
A)True
B)False
Q2) A major contribution of the Miller model is that it demonstrates,other things held constant,that
A) personal taxes increase the value of using corporate debt.
B) personal taxes lower the value of using corporate debt.
C) personal taxes have no effect on the value of using corporate debt.
D) financial distress and agency costs reduce the value of using corporate debt.
E) debt costs increase with financial leverage.
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Page 16
Chapter 15: Distributions to Shareholders: Dividends and Share Repurchases
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Sample Questions
Q1) The announcement of an increase in the cash dividend should,according to MM,lead to an increase in the price of the firm's stock,other things held constant.
A)True
B)False
Q2) Your firm uses the residual dividend model to set dividend policy.Market interest rates suddenly rise,and stock prices decline.Your firm's earnings,investment opportunities,and capital structure do not change.If the firm follows the residual dividend model,then its dividend payout ratio would increase.
A)True
B)False
Q3) It has been argued that investors prefer high-payout companies because dividends are more certain (less risky)than the capital gains that are supposed to come from retained earnings.However,Miller and Modigliani say that this argument is incorrect,and they call it the "bird-in-the-hand fallacy." MM base their argument on the belief that most dividends are reinvested in stocks,hence are exposed to the same risks as reinvested earnings.
A)True
B)False
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Chapter 16: Working Capital Management
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Sample Questions
Q1) Inmoo Company's average age of accounts receivable is 68 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?
A) 113 days
B) 76 days
C) 97 days
D) 104 days
E) 114 days
Q2) A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.
A)True
B)False
Q3) Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
A)True
B)False
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18
Chapter 17: Financial Planning and Forecasting
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Sample Questions
Q1) If a firm wants to maintain its ratios at their existing levels,then if it has a positive sales growth rate of any amount,it will require some amount of external funding.
A)True
B)False
Q2) When we use the AFN equation to forecast the additional funds needed (AFN),we are implicitly assuming that all financial ratios are constant.If financial ratios are not constant,regression techniques can be used to improve the financial forecast.
A)True
B)False
Q3) As a firm's sales grow,its current assets also tend to increase.For instance,as sales increase,the firm's inventories generally increase,and purchases of inventories result in more accounts payable.Thus,spontaneously generated funds arise from transactions brought on by sales increases.
A)True
B)False
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19
Chapter 18: Derivatives and Risk Management
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Sample Questions
Q1) Which of the following is NOT an example of a derivative security?
A) Futures.
B) Options.
C) Swaps.
D) Forward contracts.
E) Preferred stock.
Q2) Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.
A)True
B)False
Q3) An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)
A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
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Chapter 19: Multinational Financial Management
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Sample Questions
Q1) One year ago,a U.S.investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share.The stock's total purchase cost was 315,000 yen.At the time of purchase,in the currency market 1 yen equaled $0.00952.Today,the stock is selling at a price of 3,465 yen per share,and in the currency market $1 equals 145 yen.The stock does not pay a dividend.If the investor were to sell the stock today and convert the proceeds back to dollars,what would be his realized return on his initial dollar investment from holding the stock?
A) -22.14%
B) -20.31%
C) -18.08%
D) -23.77%
E) -22.55%
Q2) Multinational financial management requires that financial analysts consider the effects of changing currency values.
A)True
B)False
Q3) Exchange rate quotations consist solely of direct quotations.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing: Preferred
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Sample Questions
Q1) A warrant is an option,and as such it cannot be used as a "sweetener."
A)True
B)False
Q2) Which of the following statements is CORRECT?
A) Preferred stock generally has a higher component cost of capital to the firm than does common stock.
B) By law in most states,all preferred stock must be cumulative,meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.
C) From the issuer's point of view,preferred stock is less risky than bonds.
D) Whereas common stock has an indefinite life,preferred stocks always have a specific maturity date,generally 25 years or less.
E) Unlike bonds,preferred stock cannot have a convertible feature.
Q3) A warrant holder is not entitled to vote,but he or she does receive any cash dividends paid on the underlying stock.
A)True
B)False
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Page 22
Chapter 21: Mergers and Acquisitions
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Sample Questions
Q1) Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in the terms to merger agreements.
A)True
B)False
Q2) The rate used to discount projected merger cash flows should be the overall cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.
A)True
B)False
Q3) A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.
A)True
B)False
Q4) Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.
A)True
B)False
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