Investment Analysis
Exam Answer Key
Course Introduction
Investment Analysis is a course that introduces students to the fundamental concepts, techniques, and models used in evaluating investment opportunities and managing portfolios. The course covers key topics such as risk and return, valuation of stocks and bonds, asset allocation, portfolio diversification, and the efficient market hypothesis. Students will also explore tools for analyzing securities, strategies for maximizing investment returns, and methods for managing financial risk. Case studies and real-world examples are employed to enhance understanding, equipping students with the analytical skills necessary for making informed investment decisions in a dynamic financial environment.
Recommended Textbook
Financial Reporting Financial Statement Analysis and Valuation 8th Edition by James M. Wahlen
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14 Chapters
1088 Verified Questions
1088 Flashcards
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Chapter 1: Overview of Financial Reporting, financial
Statement Analysis, and Valuation
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) Which of the following economic characteristics is consistent with a commercial bank?
A) Low barriers to entry.
B) High levels of research and development.
C) Low profit margin on lending activities.
D) Low profit margin on fee-based financial services, such as merger consulting.
Answer: C
Q2) Opinions on the effectiveness of the internal control system and the fairness of the amounts reported in the financial statements are known as:
A) Management Discussion and Analysis.
B) Assurance Opinions.
C) Notes to the Financial Statements
D) Management Assessments.
Answer: B
Q3) Obtaining a competitive advantage by being the first company to introduce new concepts or ideas is referred to as ________________________________________.
Answer: first mover advantage
Q4) Cash and cash equivalents are considered ____________________ assets.
Answer: Monetary
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Chapter 2: Asset and Liability Valuation and Income
Measurement
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Sample Questions
Q1) There are three valuation methods that reflect historical values: acquisition cost,adjusted acquisition cost,and present value of cash flows using historical interest rates.For each of three methods discuss what the valuation represents and provide an example of a balance sheet item that is valued using the method.In addition,for each of the three methods valuation methods explain its advantages and disadvantages. Answer: 1.Acquisition cost is the amount paid initially to acquire the asset,examples include prepayments,land,and intangibles with indefinite lives.The advantage is simplicity and reliability,the disadvantage is lack of relevance.2.Adjusted acquisition cost is the amount paid initially to acquire an asset less accumulated depreciation and amortization,examples include equipment and intangible assets with limited lives.The advantage is simplicity and reliability,the disadvantage is lack of relevance and subjectivity due to not being able to observe the actual consumption of the asset.3.Present value of cash flows using historical interest rates is an item in which cash receipts or cash payments will occur over time,these future cash flows are then discounted at the interest rate in effect at the time of the initial transaction.Balance sheet examples include notes receivable and notes payable.The advantage is simplicity and reliability,the disadvantage is subjectivity due to not updating the interest rate as time elapses.
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Chapter 3: Income Flows Versus Cash Flows:
Understanding the Statement of Cash Flows
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Sample Questions
Q1) Interest expense and interest revenue would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
Q2) Which of the following companies would you expect to report significant amounts of cash provided by financing activities?
A) A yet-to-be-profitable biotechnology company.
B) A mature company operating in the oil refinery industry.
C) A profitable established company in the retail industry.
D) A large multinational pharmaceutical company.
Answer: A
Q3) The receipt of dividends from an investee would be classified as ____________________ activities in the statement of cash flows.
Answer: operating
Q4) Which of the following statements is true?
A) A cash dividend is an operating cash outflow.
B) Cash paid to repurchase treasury stock is an investing cash outflow.
C) Cash paid to acquire stock in another company is a financing outflow.
D) Purchase of a patent is an investing cash outflow.
Answer: D
Page 5
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Chapter 4: Profitability Analysis
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Sample Questions
Q1) Which factor does not explain differences or changes in ROA?
A) Operating leverage
B) Cyclicality of sales
C) Product life cycle
D) Financial leverage
Q2) Which of the following scenarios is consistent with an increasing cost of goods sold to sales percentage and increasing inventory turnover?
A) Firm raises prices to increase its gross margin but inventory sells more slowly.
B) Weak economic conditions lead to reduced demand for a firm's products, necessitating price reductions to move goods.
C) Strong economic conditions lead to increased demand for a firm's products, allowing price increases.
D) Firm shifts its product mix toward lower margin, faster moving products.
Q3) Return on common equity can be disaggregated into profit margin for ROCE,capital structure leverage and
Q4) Firms with high operating leverage have a higher proportion of _________________________ in their cost structure.
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6
Chapter 5: Risk Analysis
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Sample Questions
Q1) The Johnson company has a current ratio of 1.45.The company has just sold $600,000 worth of merchandise on credit.What will the current ratio be after the sales on credit?
A) greater than 1.45
B) 1.45
C) less than 1.45
D) unable to determine without more information
Q2) Which of the following can companies use as collateral for a loan?
A) prepaid insurance
B) prepaid rent
C) property, plant, and equipment
D) retained earnings
Q3) The operating cycle must not only generate cash to supply ________________________________________ needs,it must generate sufficient cash to service debt.
Q4) The analysis of short-term liquidity risk requires an understanding of the _________________________ of a firm.
Q5) The ________________________________________ ratio indicates the number of times that net income before interest expense and income taxes exceeds interest expense.
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Chapter 6: Accounting Quality
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Sample Questions
Q1) When evaluating the quality of accounting information,an analyst should consider all of the following except:
A) reliability of the measurements made
B) adequacy of disclosures
C) comparability of estimates
D) economic faithfulness of the measurements made
Q2) Quality accounting information seeks to maximize relevance and economic faithfulness,subject to the constraints of the ____________________ of the measurements.
Q3) Which of the following are characteristics of an extraordinary item?
A) Unusual in nature
B) Infrequent in occurrence
C) Material in amount
D) All of the above
Q4) Some firms attempt to maximize the amount of restructuring charge in a particular year,analysts refer to this as the _________________________ approach.
Q5) A change in the useful life of an asset is treated as a _____________
Q6) When evaluating the quality of accounting information the user should consider the ____________________ of the measurements made.
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Chapter 7: Financing Activities
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Sample Questions
Q1) Which of the following is the typical tradeoff when issuing preferred stock?
A) The tradeoff between different accounting for an initial issuance of preferred stock as compared to a common stock issuance.
B) The tradeoff between maintaining corporate control and creating a class of shareholders with preference in all asset distributions.
C) The tradeoff of giving common shareholders priority over preferred shareholders in corporate liquidations.
D) The tradeoff of a convertibility feature of common shares into preferred shares.
Q2) Using the information provided by Santa Corporation calculate the present value of the operating leases.
A) $2,155,843
B) $2,024,945
C) $1,482,390
D) $2,854,452
Q3) One criteria that must be satisfied for a firm to recognize an obligation is that the transaction or event giving rise to the obligation has already
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9
Chapter 8: Investing Activities
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Sample Questions
Q1) You are trying to determine the functional currency of a foreign unit.For the following three factors determine what conditions would result in the foreign currency being the functional currency:a.Sales Prices
b.Financing
c.Relationships between the Parent and the Foreign Unit
Q2) Under IFRS,when an asset is revalued upwards,subsequent depreciation is based on
A) the asset's fair value.
B) the asset's original cost.
C) the method used for determining depreciation on the company's tax returns.
D) the amount of future cash flows the asset is expected to generate.
Q3) Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as ___________________________________ securities.
Q4) Unrealized holding gains and losses from investments classified as available for sale are reported in _____________________________________________.
Q5) Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.
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Page 10
Chapter 9: Operating Activities
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Sample Questions
Q1) Deferred tax assets result in future tax ____________________ when temporary differences reverse.
Q2) Dividing a company's income tax expense by its book income before income taxes provides the company's ___________________________________.
Q3) A typical defined benefit pension plan formula includes all of the following except:
A) the number of years of employee service
B) the fair market value of pension plan assets
C) a credit for each year of annual service
D) the final salary at retirement date
Q4) Based on the information provided by Falcon Networks how much cash did income taxes use during 2012?
A) $154.19 million
B) $54.17 million
C) $208.36 million
D) $284.84 million
Q5) The difference between the economic resources received from customers and the economic resources paid to suppliers,employees and other providers of goods and services is called ____________________.
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Chapter 10: Forecasting Financial Statements
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Sample Questions
Q1) All of the following are true regarding projected financial statements except:
A) The statement of cash flows is the most critical forecast since it reflects profitability rather than viability.
B) Preparing projected financial statements must incorporate a company's past performance records.
C) Preparing projected financial statements must incorporate a company's current performance records.
D) The income statement demonstrates immediate capability to service debt for banks or real potential for growth in returns for venture capital.
Q2) Given the information provided about Card Sharks,what is the company's 2012 projected year-end cash balance?
A) $966
B) $50,820
C) $15,623
D) $38,524
Q3) A company that has a cost structure in which its costs grow at a lesser rate than its sale enjoys ___________________________________.
Q4) Realistic expectations are ____________________ and ____________________.
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Chapter 11: Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
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Q1) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q2) When deriving the equity value of a firm,an analyst forecasts the real dividends expected to be paid in the future.In this case,which discount rate should be used?
A) The nominal rate of return
B) The real rate of return
C) The risk free rate of return
D) The risk adjusted rate of return
Q3) Assuming that riskless rate is 4.6% and the market premium is 7.3% calculate Zonk's cost of equity capital:
A) 10.4%
B) 7.69%
C) 11.89%
D) 8.28%
Q4) Why are dividends value-relevant to common equity shareholders?
Page 13
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Chapter 12: Valuation: Cash-Flow-Based Approaches
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Sample Questions
Q1) Changes in general price levels due to inflation or deflation cause the ______________________________ of the monetary unit to increase or decrease ______________
Q2) Which of the following is not a problem with using a dividend-based valuation formula
A) dividends are arbitrarily established
B) dividends represent a transfer of wealth to shareholders
C) some firms do not pay a regular periodic dividend
D) it is a challenge to forecast the final liquidating dividend
Q3) The analyst can use expectations of the dividends to be paid to the investor or the free cash flows to be generated by the firm (that will ultimately be paid to the investor)as equivalent approaches to measure the ____________ expected payoffs to shareholders.
Q4) Free cash flow is calculated as net cash provided by operating activities less A) dividends.
B) capital expenditures and depreciation.
C) capital expenditures.
D) capital expenditures and dividends.
Q5) What is the purpose of a free cash flow analysis?
Page 14
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Chapter 13: Valuation: Earnings-Based Approaches
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Sample Questions
Q1) Compute the value of Jarrett Corp.on January 1,2011,using the residual income valuation model.Use the half-year adjustment.
A) $112,768
B) $185,329
C) $195,540
D) $133,624
Q2) What are the three arguments economists provide against using earnings as a value-relevant attribute in valuation?
Q3) Accounting earnings numbers provide a basis for valuation because earnings are the primary measure of ______________________________ produced by the accrual accounting system.
Q4) If an analyst expects a firm to generate net income each period exactly equal to required earnings,then the value of the firm will be equal to the ______________________________ of common shareholders' equity.
Q5) Accounting principles make accrual accounting earnings closer to the firm's underlying economic performance in a given period than are
Q6) ____________________ are the fundamental,value-relevant attribute of expected future returns.
Page 15
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Chapter 14: Valuation: Market-Based Approaches
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Q1) The differences in industry market-to-book ratios may be the result of differences in growth,ROCE relative to RE,as well as differences in _______________________________________________________.
Q2) A company with a PEG ratio of lessthan one would be interpreted as having a stock price that is low relative to ______________________________.
Q3) A firm's value-to-book and market-to-book ratios may differ from one for a number of reasons.Discuss how a successful internally funded research and development program would create a situation where the value-to-book and market-to-book ratios differ from one.
Q4) In research examining market efficiency,Bernard and Thomas examined quarterly earnings announcements.Discuss how Bernard and Thomas test the issue of market efficiency and the results of their research.
Q5) Market multiples capture ____________________ valuation per dollar of book value or per dollar of earnings.
Q6) The PE multiple assumes that firm value is the present value of a constant stream of _____________________________________________,discounted at a constant expected future discount rate.
Q7) Explain the analysts' role in making the capital markets efficient.
Page 16
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