Financial Analysis
Exam Preparation Guide
Course Introduction
Financial Analysis is a comprehensive course designed to equip students with the skills and knowledge necessary to interpret and assess the financial health of businesses. The course covers key concepts such as financial statement analysis, ratio analysis, cash flow analysis, and the evaluation of profitability, liquidity, and solvency. Students will learn to apply analytical techniques to real-world scenarios, enabling them to make informed decisions about investments, creditworthiness, and corporate performance. Emphasis is placed on using both quantitative and qualitative data to gain insights into an organization's financial position, as well as developing critical thinking and communication skills for effective financial reporting and presentation.
Recommended Textbook
Corporate Finance 12th Edition by Ross
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Chapter 1: Introduction to Corporate Finance
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Q1) If a firm is currently profitable,then:
A)its current cash inflows must exceed its current cash outflows.
B)its reported sales exceed its costs.
C)its cash flows are known with certainty.
D)it will always have sufficient cash to pay its bills in a timely manner.
E)the timing of the related cash flows is irrelevant.
Answer: B
Q2) Which one of the following statements concerning a sole proprietorship is correct?
A)The ability to raise capital is limited by the owner's personal wealth.
B)The proprietorship pays taxes at the corporate tax rate.
C)The ownership of the firm is easy to transfer to another individual.
D)The company must pay income taxes separate from the taxes paid by the owner.
E)The legal costs to form a sole proprietorship are quite substantial.
Answer: A
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3
Chapter 2: Financial Statements and Cash Flow
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Q1) Which one of these is most apt to be a fixed,cash expense in the short run?
A)Raw materials cost
B)Bond interest
C)Commissions paid to sales representatives
D)Depreciation
E)Manufacturing labor costs
Answer: B
Q2) In the accounting statement of cash flows,interest expense is:
A)ignored completely.
B)included as a financing activity.
C)included both as an operating and as a financing activity.
D)included as an investing activity.
E)included in operations.
Answer: E
Q3) From a financial perspective,why is interest expense excluded from the operating cash flow?
Answer: Operating cash flow is designed to represent the cash flow a firm generates from its day-to-day operations.Interest expense arises from a financing decision and thus is considered in finance as a cash flow to creditors.
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Chapter 3: Financial Statements and Cash Flow
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Q1) Brewster Mills has total revenues of $684,350,costs of goods sold of $472,500,net income of $11,520,and average inventory of $91,600.What is the days' sales in inventory?
A)69.84 days
B)70.76 days
C)71.51 days
D)5.16 days
E)4.08 days
Answer: B
Q2) From a cash flow position,which one of the following ratios best measures a firm's ability to pay the interest on its debts?
A)Times interest earned ratio
B)Cash coverage ratio
C)Cash ratio
D)Quick ratio
E)Interval measure
Answer: B
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Chapter 4: Discounted Cash Flow Valuation
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Sample Questions
Q1) Suzette is receiving $10,000 today,$15,000 one year from today,and $25,000 four years from today.If she invests these funds immediately and earns 9.6 percent annually,how much will she have in savings 30 years from today?
A)$586,124.93
B)$591,414.14
C)$646,072.91
D)$620,008.77
E)$641,547.39
Q2) Assume an annuity will pay $1,000 a year for five years with the first payment occurring in Year 4,that is,four years from today.When you compute the present value of that annuity using the PV formula,the PV will be as of which point in time?
A)Today,Year 0
B)Year 1
C)Year 3
D)Year 4
E)Year 2
Q3) Explain the net present value formula and also explain what the net present value represents.
NPV = Cost + PV
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Chapter 5: Net Present Value and Other Investment Rules
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Q1) The modified internal rate of return:
A)is used as the discount rate for all NPV calculations.
B)applies only to profitability calculations.
C)is used to make accept/reject decisions when no discount rate can be assigned.
D)is computed by combining cash flows until only one change in sign remains.
E)assumes all projects are financing projects.
Q2) The net present value method of capital budgeting analysis does all of the following except:
A)incorporate risk into the analysis.
B)consider all relevant cash flow information.
C)discount all future cash flows to their current value.
D)consider the initial cost of the project.
E)provide a specific anticipated rate of return.
Q3) A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be worthless.What is the payback period for this cart?
A)2.83 years
B)3.14 years
C)2.78 years
D)2.57 years
E)1.57 years
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Chapter 6: Making Capital Investment Decisions
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Sample Questions
Q1) A new project with a life of four years will increase sales by $140,000 and cash expenses by $95,000 annually.The project will cost $100,000 and will be depreciated using the Year 2018 bonus depreciation method.The company has a marginal tax rate of 21 percent.What is the value of the depreciation tax shield in Year 2?
A)$0
B)$5,250
C)$2,625
D)$3,375
E)$6,500
Q2) A project is expected to create operating cash flows of $26,500 a year for four years.The fixed assets required for the project cost $62,000 and will be worthless at the end of the project.An additional $3,000 of net working capital will be required throughout the life of the project.What is the project's net present value if the required rate of return is 12 percent?
A)$19,208.11
B)$14,028.18
C)$15,306.09
D)$17,396.31
E)$21,954.17
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Chapter 7: Risk Analysis, real Options, and Capital Budgeting
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Sample Questions
Q1) Theoretically,the NPV is the most appropriate method to determine the acceptability of a project.A false sense of security can overcome the decision-maker when the procedure is applied properly but the positive NPV results are accepted blindly.Sensitivity and scenario analysis aid in the process by:
A)providing assurance that the most appropriate discount rate is being applied.
B)ensuring all estimated values are accurate.
C)ensuring the NPV value was calculated correctly.
D)providing information on a number of potential outcomes.
E)guaranteeing the NPV will be achieved.
Q2) A proposed project has estimated sales of 3,300 units per year,± 4 percent; a sales price of $23 a unit,± 1 percent; variable costs per unit of $12.60,± 2 percent; annual fixed costs of $16,200; and annual depreciation of $3,100.What is the contribution margin under the expected scenario?
A)$5.49
B)$4.55
C)$18.09
D)$10.40
E)$9.46
Q3) Discuss some potential shortcomings of the standard decision tree analysis.
Page 9
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Chapter 8: Interest Rates and Bond Valuation
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Q1) Guggenheim offers a bond with annual payments and a coupon rate of 5 percent.The yield to maturity is 5.62 percent and the maturity date is 9 years away.What is the market price of one $1,000 face value bond?
A)$942.66
B)$868.67
C)$869.67
D)$957.12
E)$1,009.59
Q2) The bonds issued by Manson and Son bear a coupon of 6 percent,payable semiannually.The bond matures in 15 years and has a $1,000 face value.Currently,the bond sells at par.What is the yield to maturity?
A)5.87 percent
B)5.97 percent
C)6.00 percent
D)6.09 percent
E)6.17 percent
Q3) Why do corporations issue 100-year bonds,knowing that interest rate risk is highest for very long-term bonds? How does the interest rate risk affect the issuer?
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Chapter 9: Stock Valuation
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Q1) Engine Builders stock sells for $24.20 a share.The firm just paid an annual dividend of $2 per share and has a long-established record of increasing its dividend by a constant 2.5 percent annually.What is the market rate of return on this stock?
A)10.97 percent
B)14.41 percent
C)10.70 percent
D)12.34 percent
E)11.46 percent
Q2) Explain the differences between a market order,a limit order,and a stop order.
Q3) The constant dividend growth model:
A)is more complex than the differential growth model.
B)requires the growth period be limited to a set number of years.
C)is never used because firms rarely attempt to maintain steady dividend growth.
D)can be used to compute a stock price at any point in time.
E)most applies to stocks with differential growth rates.
Q4) What is the difference between the EV/EBITDA ratio and the PE ratio?
Q5) What are the components of the required rate of return on a share of stock? Briefly explain each component.
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Chapter 10: Lessons From Market History
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Q1) Assume that over the last several decades,the total annual returns on large-company common stocks averaged 12.1 percent,small-company stocks averaged 16.5 percent,long-term government bonds averaged 6 percent,and U.S.T-bills averaged 3.4 percent.What was the average excess return earned by long-term government bonds,and small-company stocks respectively?
A)1.8 percent; 13.3 percent
B)2.6 percent; 13.1 percent
C)2.6 percent; 4.4 percent
D)1.9 percent; 5.1 percent
E)4.4 percent; 2.6 percent
Q2) Based on historical market performance,what can we conclude about the relationship between return and risk?
Q3) Another term that refers to the average rate of return is the:
A)variance.
B)standard deviation.
C)real return.
D)mean.
E)histogram.
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Chapter 11: Return, risk, and the Capital Asset Pricing Model
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Q1) A portfolio consists of Stocks A and B and has an expected return of 11.6 percent.Stock A has an expected return of 17.8 percent while Stock B is expected to return 8.4 percent.What is the portfolio weight of Stock A?
A)29.87 percent
B)61.98 percent
C)32.58 percent
D)34.04 percent
E)67.42 percent
Q2) The slope of the security market line is the:
A)reward-to-risk ratio.
B)portfolio weight.
C)beta coefficient.
D)risk-free interest rate.
E)market risk premium.
Q3) Which one of these is a measure of the interrelationship between two securities?
A)Covariance
B)Duration
C)Standard deviation
D)Alpha
E)Variance
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Chapter 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory
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Q1) Based on a multifactor model,systematic risk arises from:
A)a common factor,F.
B)negative betas.
C)the lack of market liquidity.
D)the variable, .
E)a positive covariance between securities.
Q2) Suppose a sizeable,fully diversified portfolio has an F<sub>1</sub> beta of .9,an F<sub>2</sub> beta of 1.4,and an expected return of 11.6 percent.If F<sub>1</sub> turns out to be 1.1 percent and F<sub>2</sub> is .8 percent,what will be the actual rate of return based on a two-factor arbitrage pricing model?
A)12.05 percent
B)11.47 percent
C)11.72 percent
D)12.32 percent
E)12.58 percent
Q3) Explain the conceptual differences in the theoretical development of the CAPM and the APT.
Q4) Explain the concept of a benchmark and why benchmarks provide value when evaluating the performance of a security or portfolio.
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Chapter 13: Risk, cost of Capital, and Valuation
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Q1) The Upper Tier has a current debt-equity ratio of .52 and a target debt-equity ratio of .45.The cost of floating equity is 9.5 percent and the flotation cost of debt is 6.6 percent.What should the firm use as their weighted average flotation cost?
A)8.01 percent
B)8.51 percent
C)8.33 percent
D)7.76 percent
E)8.60 percent
Q2) The expected net cash flows of Advantage Leasing for the next three years are $42,000,$49,000,and $64,000,respectively.After three years,the growth rate of these cash flows will be a constant 2 percent annually.The WACC is 8 percent.What is the present value of the terminal value?
A)$881,822
B)$863,689
C)$959,259
D)$910,444
E)$828,406
Q3) Explain a)the factors that determine a security's beta and b)how asset beta relates to equity beta.
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Chapter 14: Efficient Capital Markets and Behavioral Challenges
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Q1) Studies of the performance of professionally managed mutual funds find that these funds:
A)all have a tendency to consistently outperform the overall market.
B)perform in a manner consistent with semistrong form efficiency.
C)all have a tendency to underperform the market consistently year after year.
D)perform in a manner that definitely refutes both strong and semistrong form efficiency.
E)indicate that stock prices consistently adhere to a daily continuation pattern.
Q2) Ritter's study of SEO's suggests that:
A)managers appear to be able to successfully time SEO issues when the stock is overpriced.
B)managers can only successfully time SEO issuance by pure chance.
C)managers tend to be incorrect in their market assessment of the market movement of their firm's stock price.
D)returns on SEO-issuing firms are statistically the same as those of style-matched non-issuers for the five years following issuance.
E)firms are better at timing IPOs than they are at timing SEOs.
Q3) Explain the risk that often accompanies the behavioral concept of familiarity.
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Chapter 15: Long-Term Financing
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Q1) If an issuer retires a debt issue before maturity,the specific amount paid to do so is called the:
A)amortized payoff.
B)call price.
C)sinking fund amount.
D)the discount.
E)par or face amount.
Q2) Identify three key duties of a bond trustee.
Q3) There are three directors' seats up for election.If you own 1,000 shares of stock and have been granted a total of 3,000 votes to cast in a single election,then the firm uses the voting procedure referred to as:
A)cumulative voting.
B)absolute priority voting.
C)sequential voting.
D)straight voting.
E)market share voting.
Q4) Identify the general rights that are commonly granted to common stock shareholders.
Q5) Explain the main differences between debt and equity.
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Chapter 16: Capital Structure: Basic Concepts
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Q1) Your firm has a bond issue with a face value of $250,000 outstanding.These bonds have a coupon rate of 7 percent,pay interest semiannually,and have a current market price equal to 103 percent of face value.What is the amount of the annual tax shield on debt given a tax rate of 21 percent?
A)$3,675
B)$6,309
C)$4,500
D)$47,500
E)$52,500
Q2) Uptown Interior Designs is an all-equity firm that has 40,000 shares of stock outstanding.The company has decided to borrow $74,000 to buy out the 2,100 shares of a deceased stockholder.What is the total value of this firm if you ignore taxes?
A)$2,008,157
B)$1,388,056
C)$1,409,524
D)$3,885,000
E)$2,630,620
Q3) Explain homemade leverage and why it matters.
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18
Chapter 17: Capital Structure: Limits to the Use of Debt
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Q1) Which one of the following is not empirically correct?
A)Some firms use no debt.
B)The capital structure of a firm can vary significantly over time.
C)Capital structures are fairly constant across industries.
D)Debt levels across industries vary widely.
E)Debt ratios in most countries are considerably less than 100 percent.
Q2) Mary owns 100 percent of a gift shop with an equity value of $150,000.If she keeps the shop open 5 days a week,EBIT is $75,000.If the shop remains open 6 days a week,EBIT increases to $92,000 annually.Mary needs an additional $50,000 which she can raise today by either selling stock or issuing debt at an interest rate of 7 percent.The principal amount would be repaid in equal annual payments at the end of the next five years.Ignore taxes.What will be the cash flow for the next year to Mary if she issues stock to another individual,remains open 5 days a week,and distributes all the residual cash flow to the shareholders?
A)$92,000
B)$61,333
C)$69,000
D)$42,000
E)$56,250
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Chapter 18: Valuation and Capital Budgeting for the Levered Firm
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Q1) Which of these methods discount levered cash flows?
A)APV
B)FTE
C)WACC
D)both APV and WACC
E)both APV and FTE
Q2) A project has an unlevered NPV of $1.5 million.To finance the project,debt is being issued with associated flotation costs of $60,000.The flotation costs can be amortized over the project's 5-year life.The debt of $10 million is being issued at the market interest rate of 10 percent paid annually,with principal repaid in a lump sum at the end of the fifth year.If the firm's tax rate is 21 percent,calculate the project's APV.
A)$2,441,107
B)$1,494,028
C)$2,384,312
D)$2,245,618
E)$1,909,417
Q3) Explain why the flow to equity approach uses levered,not unlevered,cash flows.
Q4) Assume a project is non-scale enhancing.Describe the basic steps required to determine the net present value of the project.
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Chapter 19: Dividends and Other Payouts
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Q1) Which one of the following is not a reason why firms choose repurchases rather than dividends?
A)Provide flexibility
B)Increase the value of existing stock options
C)Provide shareholders with a tax advantage
D)Offset dilution
E)Conserve cash
Q2) Schaeffer Shippers announced on May 1 that it will pay a dividend of $1.20 per share on June 15 to all holders of record as of May 31st.The firm's stock price closed today at $42 a share.Assume all investors are in the 22 percent tax bracket.If tomorrow is the ex-dividend date,what would you expect the opening price to be tomorrow morning assuming all else is held constant?
A)$42.00
B)$43.20
C)$41.06
D)$42.94
E)$41.66
Q3) Explain why executives who hold stock options prefer stock repurchases over stock dividends.
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Chapter 20: Raising Capital
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Q1) A standby underwriting arrangement in conjunction with a rights offering provides the:
A)issuer with methods to cancel the offering should they so desire.
B)issuer with an alternate investment banker if a conflict between the issuer and the original investment banker arises.
C)investment banker with an oversubscription privilege to ensure profits are earned.
D)issuer with an alternative avenue of sale to ensure success of the rights offering.
E)investment bankers with a means of withdrawing from their firm offer.
Q2) Negotiated offers generally:
A)are used as a last resort.
B)involve an underwriting syndicate.
C)result in higher issue costs than do competitive offers.
D)involve only large issuers.
E)reduce the probability an issue will be successful.
Q3) What are venture capitalists and what is their role in raising capital for firms?
Q4) Identify six components that comprise the total costs associated with issuing securities.
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Chapter 21: Leasing
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Q1) If Alby's leases equipment directly from the equipment's manufacturer the lease must be a:
A)leveraged lease.
B)sales and leaseback arrangement.
C)capital lease.
D)sales-type lease.
E)bargain lease.
Q2) In the presence of corporate taxes,riskless cash flows should be discounted at the:
A)aftertax riskless rate of interest.
B)aftertax cost of firm debt.
C)pretax riskless rate of interest.
D)pretax cost of firm debt.
E)market rate of interest.
Q3) Discuss some of the pros and cons of leasing.
Q4) Blasco's wishes to obtain new assets that will reduce their operating costs by $3,800 a year on an aftertax basis.These assets can be either purchased or leased.Explain why these cost savings are omitted from the lease versus purchase analysis.
Q5) Explain the characteristics of both operating and financial leases.
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Chapter 22: Options and Corporate Finance
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Q1) You wrote ten call option contracts on JIG stock with a strike price of $41 and an option price of $.60.What is your total profit on this investment if the price of JIG is $46.05 on the option expiration date?
A) $5,050
B) $4,450
C)$4,100
D)$4,450
E)$5,050
Q2) The last day on which an owner of an option can elect to exercise that option is referred to as the ________ date.
A)ex-payment
B)ex-option
C)opening
D)expiration
E)intrinsic
Q3) How do options apply to capital budgeting? Explain and provide an example.
Q4) Suppose XYZ is priced at $125 a share.The 150 call has six months to expiration and is quoted at $.05.Why do you suppose investors would be willing to purchase a call that is so far out of the money?
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Chapter 23: Options and Corporate Finance: Extensions and Applications
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Q1) A stock has a market price of $25 and a standard deviation of returns of 24 percent.The $25 call option matures in 4 months and the risk-free rate is 2.89 percent.N(d<sub>1</sub>)is .555198 and N(d<sub>2</sub>)is .500096.What is the value of the call option per share of stock?
A)$1.71
B)$1.86
C)$1.50
D)$1.62
E)$2.16
Q2) Assume you are determining the risk-neutral probabilities of a price increase and decrease.In this situation,you know the expected return on the asset must equal the: A)sponsoring firm's cost of capital.
B)risk-free rate.
C)market rate of return.
D)annual inflation rate.
E)CAPM rate of return.
Q3) Why is straight NPV analysis flawed as compared to models that include option pricing in the analysis?
Q4) Why would a company pay an executive in options as opposed to salary?
Page 25
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Chapter 24: Warrants and Convertibles
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Q1) Identify five factors that help determine the value of a warrant above its lower limit.
Q2) The gain from exercising a warrant is ________ the gain from exercising a comparable call option.
A)less than
B)generally greater than C)always greater than D)equal to E)either equal to or greater than
Q3) If a corporate security can be exchanged for a fixed number of shares of stock,the security is said to be:
A)callable.
B)convertible.
C)protected.
D)putable.
E)inflated.
Q4) Discuss the factors that management must consider before calling a convertible bond.
Q5) Why are warrants and convertibles issued?
Q6) Explain how a noncallable convertible bond's value is determined.
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Chapter 25: Derivatives and Hedging Risk
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Q1) Credit default swaps are most like:
A)inverse floaters.
B)call options on fixed assets.
C)an insurance policy.
D)an interest rate swap.
E)a delinquent loan.
Q2) The duration of a pure discount bond is:
A)equal to its half-life.
B)less than that of a comparable coupon bond.
C)independent of the bond's maturity.
D)is equal to the bond's maturity.
E)always equal to one year.
Q3) Assume a firm has a floating-rate loan and purchases a 10 percent cap on that loan.As a result,the firm will receive payments equal to:
A).10 × Assets.
B).10 × Annual interest payment.
C)(LIBOR .10)× Principal loan amount.
D)(LIBOR + .10)× Principal loan amount.
E).10 × Principal loan amount.
Q4) Explain why credit default swaps act like an insurance policy.
Page 27
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Chapter 26: Short-Term Finance and Planning
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Q1) Flexible short-term financial policies tend to:
A)maintain low accounts receivable balances.
B)support few investments in marketable securities.
C)minimize the investment in inventory.
D)maintain large cash balances.
E)tightly restrict credit sales.
Q2) D & F expects credit sales of $980,$1,460,$1,730 and $950 for the months of April through July,respectively.The firm collects 25 percent of sales in the month of sale,65 percent of sales in the month following the month of sale,and 8 percent in the second month following the month of sale.The remaining sales are never collected.How much money does the firm expect to collect in the month of July?
A)$1,645.50
B)$1,478.80
C)$1,571.10
D)$1,374.20
E)$1,475.50
Q3) Identify the three primary characteristics of a restrictive short-term financial policy.
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Chapter 27: Cash Management
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Q1) Availability float Collection float includes:
Q2) Which one of these probably has reduced collection time the most?
A)Traditional lockboxes
B)Concentration accounts
C)Financial EDI
D)Zero-balance accounts
E)Depository transfer checks
Q3) Prime Bank is offering your company the use of their lockbox services.They estimate that you can reduce your average mail time by 1.5 days and they can save you a combined clearing and processing time of 1 day by putting the checks into the clearing system sooner.Your firm receives 198 checks a day with an average value of $2,300 each.The current T-Bill rate is .011 percent per day.Assume a 365-day year.Prime Bank will charge your firm an annual fee of $27,500 plus $.20 per check.What is the annual net savings from installing this system?
A)$4,115.36
B)$3,480.00
C)$2,816.00
D)$3,756.78
E)$4,108.29
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Chapter 28: Credit and Inventory Management
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Q1) Jensen's Boat Works total costs of holding inventory is $8,400 when its order sizes are optimized.If the firm places 46 orders a year,what is the fixed cost per order?
A)$106.87
B)$101.15
C)$91.30
D)$87.62
E)$79.08
Q2) When analyzing the decision to change the cash discount policy,the firm should select the policy that has the:
A)highest order size.
B)lowest variable cost per unit.
C)lowest NPV.
D)highest NPV.
E)lowest cash discount.
Q3) Identify several factors that affect the length of the credit period and provide an explanation of each.
Q4) Explain the purpose of a safety stock and how this relates to reorder points.
Q5) Explain how inventory is managed under an ABC inventory system.
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Chapter 29: Mergers,acquisitions,and Divestitures
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Q1) A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a:
A)supermajority amendment.
B)standstill agreement.
C)greenmail provision.
D)poison pill amendment.
E)white knight provision.
Q2) Suppose that General Motors makes an offer to acquire General Mills.Ignoring potential antitrust problems,this merger would be classified as a:
A)monopolistic merger.
B)horizontal merger.
C)vertical merger.
D)conglomerate merger.
E)equity carve-out merger.
Q3) Which one of these is least associated with takeovers?
A)Leveraged buyouts
B)Management buyouts
C)Proxy contests
D)Acquisition of assets
E)Spin-offs
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Chapter 30: Financial Distress
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Q1) Insolvency can be defined as:
A)not having cash.
B)having less cash than the firm needs for one year.
C)an inability to pay one's debts.
D)an inability to increase one's debts.
E)the present value of payments being less than assets.
Q2) Altman initially developed the Z-score model for publicly traded manufacturing firms.Using financial statement data and multiple discriminant analysis,he found that:
A)in actual use,a Z-score greater than 2.99 implies bankruptcy within one year.
B)in actual use,a Z-score greater than 1.81 implied a 90 percent chance of bankruptcy within one year.
C)in actual use,a Z-score of less than 1.81 would predict bankruptcy within one year.
D)in actual use,a Z-score less than 2.99 meant non-bankruptcy within one year.
E)the lower the score the lower the chance of pending bankruptcy.
Q3) Why would a firm's creditors voluntarily agree to a prepackaged reorganization that offers those creditors less than they are owed?
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Chapter 31: International Corporate Finance
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Q1) An agreement to exchange currencies at some point in the future using an exchange rate agreed upon today is called a ________ trade.
A)spot
B)forward
C)swap
D)floating
E)triangle
Q2) The camera you want to buy costs $399 in the U.S.If absolute purchasing power parity exists,the identical camera will cost ________ in Australia if the exchange rate is A$1 = $.7752.
A)A$309.30
B)A$393.23
C)A$435.09
D)A$514.71
E)A$506.67
Q3) Describe the foreign currency and home currency approaches to capital budgeting.Which is better? Which approach would you recommend a U.S.firm use? Justify your answer.
Q4) What is triangle arbitrage?
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