Investment Analysis
Final Exam
Course Introduction
Investment Analysis provides a comprehensive overview of the fundamental concepts and tools essential for evaluating investment opportunities in financial markets. The course covers topics such as risk and return, portfolio theory, asset pricing models, security analysis, and valuation techniques for stocks and bonds. Students will learn to interpret financial statements, analyze macroeconomic trends, and apply quantitative methods to assess the potential performance of various investment vehicles. The course also explores the impact of market efficiency, behavioral finance, and ethical considerations on investment decisions, equipping students with the skills to make informed and strategic investment choices.
Recommended Textbook
Intermediate Financial Management 13th Edition by Eugene
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Page 2
F. Brigham
Chapter 1: An Overview of Financial Management and the Financial Environment
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Q1) Which of the following statements is CORRECT
A) a good goal for a firm's management is maximization of expected eps.
B) most business in the u.s. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.
D) corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) the potential exists for agency conflicts between stockholders and managers.
Answer: E
Q2) Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Risk and Return-Part I
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Q1) Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?
A) 13.51%
B) 13.86%
C) 14.21%
D) 14.58%
E) 14.95%
Answer: E
Q2) When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk. A)True
B)False
Answer: True
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4
Chapter 3: Risk and Return-Part II
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Q1) Which of the following statements is CORRECT?
A) the typical R<sup>2</sup> for a stock is about 0.94 and the typicalR<sup>2</sup> for a portfolio is about 0.6.
B) the typical R<sup>2 </sup>for a stock is about 0.3 and the typical R<sup>2</sup> for a large portfolio is about 0.94.
C) the typical R<sup>2</sup> for a stock is about 0.94 and the typical R<sup>2</sup> for a portfolio is also about 0.94.
D) the typical R<sup>2</sup> for a stock is about 0.6 and the typical R<sup>2 </sup>for a portfolio is also about 0.6.
E) the typical R<sup>2</sup> for a stock is about 0.3 and the typical R<sup>2</sup> for a portfolio is also about 0.3.
Answer: B
Q2) The Y-axis intercept of the SML indicates the return on an individual asset when the realized return on an average (b = 1) stock is zero.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Bond Valuation
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Q1) Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?
A) $829.21
B) $850.47
C) $872.28
D) $894.65
E) $917.01
Q2) A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.
A)True
B)False
Q3) Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.
A)True
B)False
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Page 6
Chapter 5: Financial Options
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Q1) Which of the following statements is CORRECT?
A) as the stock's price rises, the time value portion of an option on a stock increases because the difference between the price of the stock and the fixed strike price increases.
B) issuing options provides companies with a low cost method of raising capital.
C) the market value of an option depends in part on the option's time to maturity and also on the variability of the underlying stock's price.
D) the potential loss on an option decreases as the option sells at higher and higher prices because the profit margin gets bigger.
E) an option's value is determined by its exercise value, which is the market price of the stock less its striking price. thus, an option can't sell for more than its exercise value.
Q2) The strike price is the price that must be paid for a share of common stock when it is bought by exercising a warrant.
A)True
B)False
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Chapter 6: Accounting for Financial Management
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Q1) Which of the following statements is CORRECT?
A) the primary difference between eva and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas eva represents net income before deducting the cost of the equity capital the firm uses.
B) mva gives us an idea about how much value a firm's management has added during the last year.
C) mva stands for market value added, and it is defined as follows: mva = (shares outstanding)(stock price) + book value of common equity.
D) eva stands for economic value added, and it is defined as follows: eva = ebit(1 t) (investor-supplied op. capital) × (a t cost of capital).
E) eva gives us an idea about how much value a firm's management has added over the firm's life.
Q2) The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.
A)True
B)False
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Page 8
Chapter 7: Analysis of Financial Statements
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Q1) Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
A) company heidee has a lower times interest earned (tie) ratio.
B) company heidee has a lower equity multiplier.
C) company heidee has more net income.
D) company heidee pays more in taxes.
E) company heidee has a lower roe.
Q2) Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.
A)True
B)False
Q3) Refer to the data for Pettijohn Inc.What is the firm's EPS?
A) $5.84
B) $6.15
C) $6.47
D) $6.80
E) $7.14
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Page 9
Chapter 8: Basic Stock Valuation
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Q1) The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?
\(\begin{array} { l c c c }
\text { Year: } & 1 & 2 & 3 \\
\hline\text { Free cash flow: } & - \$ 20 & 42 & \$ 45 \end{array}\)
A) $586
B) $617
C) $648
D) $680
E) $714
Q2) From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds are the most risky for the firm, preferred is next, and common is least risky.
A)True
B)False
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Page 10
Chapter 9: Corporate Valuation and Financial Planning
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Q1) The AFN equation assumes that the ratios of assets and liabilities to sales remain constant over time. However, this assumption can be relaxed when we use the forecasted financial statement method. Three conditions where constant ratios cannot be assumed are economies of scale, lumpy assets, and excess capacity.
A)True
B)False
Q2) Firms with high capital intensity ratios have found ways to lower this ratio permitting them to achieve a given level of growth with fewer assets and consequently less external capital. For example, just-in-time inventory systems, multiple shifts for labor, and outsourcing production are all feasible ways for firms to reduce their capital intensity ratios.
A)True
B)False
Q3) As long as a firm does not pay out 100% of its earnings, the firm's annual profit that is retained in the business (i.e., the addition to retained earnings) is another source of funds for a firm's expansion.
A)True
B)False
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Chapter 10: Corporate Governance
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Q1) Which one of the following statements is TRUE?
A) personal use of the corporate jet is an example of a nonpecuniary benefit.
B) a supplier substituting a lower-quality raw material without approval is an example of asset switching.
C) an agency problem occurs when an owner/manager sells stock to an outside investor and the owner/manager fears the outside investor will consume too many perquisites.
D) an agency conflict between inside owners/managers and outside owners occurs when the outside owners sell their shares to someone else.
E) a quarter-end bonus is an example of a nonpecuniary benefit.
Q2) Which of the following is NOT normally regarded as being a good reason to establish an ESOP?
A) to enable the firm to borrow at a below-market interest rate.
B) to make it easier to grant stock options to employees.
C) to help prevent a hostile takeover.
D) to help retain valued employees.
E) to increase worker productivity.
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Page 12
Chapter 11: Determining the Cost of Capital
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Q1) Refer to the data for the Collins Group. Which of the following is the best estimate for the weight of debt for use in calculating the firm's WACC?
A) 18.67%
B) 19.60%
C) 20.58%
D) 21.61%
E) 22.69%
Q2) If the expected dividend growth rate is zero, then the cost of external equity capital raised by issuing new common stock (re) is equal to the cost of equity capital from retaining earnings (rs) divided by one minus the percentage flotation cost required to sell the new stock, (1 - F). If the expected growth rate is not zero, then the cost of external equity must be found using a different formula.
A)True
B)False
Q3) The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt.
A)True
B)False
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Chapter 12: Capital Budgeting: Decision Criteria
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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) Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.
A)True
B)False
Q3) Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive NPV.
A)True
B)False
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Page 14
Chapter 13: Capital Budgeting-Estimating Cash Flows and Analyzing Risk
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Q1) Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?
A) shipping and installation costs.
B) cannibalization effects.
C) opportunity costs.
D) sunk costs that have been expensed for tax purposes.
E) changes in net working capital.
Q2) Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.
A)True
B)False
Q3) It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment is often used for such projects along with discounted cash flow analysis.
A)True
B)False
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Chapter 14: Real Options
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Q1) Refer to the data for Nationwide Pharmaceutical Corporation (NPC). Assuming that all cash flows are discounted at 10%, if NPC chooses to wait a year before proceeding, how much will this increase or decrease the project's expected NPV in today's dollars (i.e., at t = 0), relative to the NPV if it proceeds today?
A) $77.23
B) $85.81
C) $95.34
D) $105.94
E) $116.53
Q2) Which of the following is most CORRECT?
A) real options change the risk, but not the size, of projects' expected cash flows.
B) real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows.
C) very few projects actually have real options.
D) real options are less valuable when there is a lot of uncertainty about the true values future sales and costs.
E) real options change the size, but not the risk, of projects' expected cash flows.
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Chapter 15: Distributions to Shareholders-Dividends and Repurchases
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Q1) The projected capital budget of Kandell Corporation is $1,000,000, its target capital structure is 60% debt and 40% equity, and its forecasted net income is $550,000. If the company follows a residual dividend policy, what total dividends, if any, will it pay out?
A) $122,176
B) $128,606
C) $135,375
D) $142,500
E) $150,000
Q2) If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
A)True
B)False
Q3) If the shape of the curve depicting a firm's WACC versus its debt ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities or earnings from year to year.
A)True
B)False
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Page 17
Chapter 16: Capital Structure Decisions
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Q1) The trade-off theory states that the capital structure decision involves a tradeoff between the costs and benefits of debt financing.
A)True
B)False
Q2) Two operationally similar companies, HD and LD, have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also HD's return on invested capital (ROIC) exceeds its after-tax cost of debt, (1-T)rd. Which of the following statements is CORRECT?
A) hd should have a higher times interest earned (tie) ratio than ld.
B) hd should have a higher return on equity (roe) than ld, but its risk, as measured by the standard deviation of roe, should also be higher than ld's.
C) given that roic > (1-t) rd, hd's stock price must exceed that of ld.
D) given that roic > (1-t) rd, ld's stock price must exceed that of hd.
E) hd should have a higher return on assets (roa) than ld.
Q3) The Miller model begins with the MM model with corporate taxes and then adds personal taxes.
A)True
B)False
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Chapter 17: Dynamic Capital Structures and Corporate Valuation
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Q1) MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.
A)True
B)False
Q2) MM showed that in a world without taxes, a firm's value is not affected by its capital structure.
A)True
B)False
Q3) Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is the value of Kitto's tax shield?
A) $156,385
B) $164,616
C) $173,280
D) $182,400
E) $192,000
Q4) In the compressed adjusted present value model, the appropriate discount rate for the tax shield is the unlevered cost of equity.
A)True
B)False
Page 19
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Chapter 18: Initial Public Offerings-Investment Banking: and Financial Restructuring
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Q1) Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another.
A)True
B)False
Q2) The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.
A)True
B)False
Q3) If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.
A)True
B)False
Page 20
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Chapter 19: Lease Financing
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Q1) Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
A)True
B)False
Q2) In the lease versus buy decision, leasing is often preferable
A) because, generally, no down payment is required, and there are no indirect interest costs.
B) because lease obligations do not affect the firm's risk as seen by investors.
C) because the lessee owns the property at the end of the least term.
D) because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
E) because it has no effect on the firm's ability to borrow to make other investments.
Q3) Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.
A)True
B)False
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Page 21
Chapter 20: Hybrid Financing Preferred Stock-Warrants and Convertibles
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Q1) McGovern Enterprises is interested in issuing bonds with warrants attached. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?
A) 6.75%
B) 7.11%
C) 7.48%
D) 7.88%
E) 8.27%
Q2) 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
Q3) The owner of a convertible bond owns, in effect, both a bond and a call option. A)True B)False
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Chapter 21: Supply Chains and Working Capital Management
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Q1) Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.
A)True
B)False
Q2) An increase in any current asset must be accompanied by an equal increase in some current liability.
A)True
B)False
Q3) Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.
A)True
B)False
Q4) Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
A)True
B)False
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Chapter 22: Providing and Obtaining Credit
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Q1) The collection process, although sometimes difficult, is also expensive in terms of out-of-pocket expenses.
A)True
B)False
Q2) Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped. However, planting, irrigating, and harvesting must be done on a nearly continual schedule. The firm uses 90-day bank notes to finance its operations. The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually. What is the effective annual interest rate of these discount loans?
A) 11.00%
B) 15.94%
C) 11.46%
D) 13.75%
E) 12.72%
Q3) The credit period is the amount of time it takes to do a credit search on a potential customer.
A)True
B)False
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Chapter 23: Other Topics in Working Capital Management
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Q1) Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)
A) $1,000 loss
B) $1,000 benefit
C) $500 loss
D) $500 benefit
E) $0 (the change would not affect profits.)
Q2) Which of the following would cause average inventory holdings to decrease, other things held constant?
A) the purchase price of inventory items decreases by 50 percent.
B) the carrying price of an item decreases (as a percent of purchase price).
C) the sales forecast is revised downward by 10 percent.
D) interest rates fall.
E) fixed order costs double.
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Chapter 24: Enterprise Risk Management
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Q1) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract?(Assume a $1,000 par value, and round to the nearest whole dollar.)
A) $78.00
B) $82.00
C) $86.00
D) $90.00
E) $95.00
Q2) Which of the following statements is most CORRECT?
A) futures contracts generally trade on an organized exchange and are marked to market daily.
B) goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
C) there are futures contracts for currencies but no forward contracts for currencies.
D) futures contracts don't have any margin requirements but forward contracts do.
E) one advantage of forward contracts is that they are default free.
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Chapter 25: Bankruptcy-Reorganization and Liquidation
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Q1) Bankruptcy laws have been used to help reach settlements in major product liability lawsuits. By using financial projections to show that contingent claims against the company jeopardize its existence, agreements are reached, partially satisfying claimants, and allowing the firm to continue operating.
A)True
B)False
Q2) Bankruptcy plays no role in settling labor disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.
A)True
B)False
Q3) The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in the order of their legal and contractual priority.
A)True
B)False
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Chapter 26: Mergers and Corporate Control
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Q1) Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers. These strategies are known as "poison pills."
A)True
B)False
Q2) Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.
A)True
B)False
Q3) Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.
A)True
B)False
Q4) Synergistic benefits can arise from a number of different sources, including operating economies of scale, financial economies, and increased managerial efficiency.
A)True
B)False
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Chapter 27: Multinational Financial Management
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Q1) Which of the following statements is NOT CORRECT?
A) foreign bonds and eurobonds are two important types of international bonds.
B) foreign bonds are bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold.
C) the term eurobond applies only to foreign bonds denominated in u.s. currency.
D) a foreign bond might pay a higher nominal interest rate than a u.s. bond.
E) any bond sold outside the country of the borrower is called an international bond.
Q2) The Eurodollar market is essentially a long-term market; most loans and deposits in this market have maturities longer than one year.
A)True
B)False
Q3) When considering the risk of a foreign investment, a higher risk might arise from exchange rate risk and political risk while lower risk might result from international diversification.
A)True
B)False
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Chapter 28: Time Value of Money
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168 Verified Questions
168 Flashcards
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Sample Questions
Q1) What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?
A) $16,806
B) $17,690
C) $18,621
D) $19,601
E) $20,633
Q2) You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?
A) $18,369
B) $19,287
C) $20,251
D) $21,264
E) $22,327
Q3) A time line is not meaningful unless all cash flows occur annually.
A)True
B)False
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Page 30
Chapter 29: Basic Financial Tools: A review
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249 Verified Questions
249 Flashcards
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Sample Questions
Q1) The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
A)True
B)False
Q2) A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = 5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
A) the company's dividend yield 5 years from now is expected to be 10%.
B) the constant growth model cannot be used because the growth rate is negative.
C) the company's expected capital gains yield is 5%.
D) the company's expected stock price at the beginning of next year is $9.50.
E) the company's current stock price is $20.
Q3) A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.
A)True
B)False
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Page 31
Chapter 30: Pension Plan Management
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10 Verified Questions
10 Flashcards
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Sample Questions
Q1) Which of the following statements about pension plan portfolio performance is incorrect?
A) alpha analysis, which relies on the capital asset pricing model, considers the risk of the portfolio when measuring performance.
B) peer comparison examines the relative performance of portfolio managers with similar investment objectives.
C) a portfolio annual return of 12 percent from one investment advisor is not necessarily better than a return of 10 percent from another advisor.
D) in managing the retiree portfolio, fund managers often use immunization techniques such as alpha analysis to eliminate, or at least significantly reduce, the risk associated with changing interest rates.
E) pension fund sponsors must evaluate the performance of their portfolio managers periodically as a basis for future asset allocations.
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Chapter 31: Financial Management in Not for Profit
Businesses
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Sample Questions
Q1) The primary goal of investor-owned firms is shareholder wealth maximization, while the primary goal of not-for-profit firms is typically stated in terms of some mission; for example, to provide health care services to the communities served.
A)True
B)False
Q2) Not-for-profit firms have fund capital in place of equity capital. Since fund capital does not have to provide a return to stockholders, the appropriate cost of fund capital in a cost of capital estimate is zero.
A)True
B)False
Q3) The net present social value model formally recognizes that not-for-profit firms must consider the social value along with the financial value of proposed new projects. A)True
B)False
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