Investment Analysis
Final Exam Questions
Course Introduction
Investment Analysis provides a comprehensive understanding of the principles and techniques used to evaluate various investment opportunities. The course covers topics such as risk and return, portfolio theory, asset pricing models, securities analysis, and the valuation of stocks and bonds. Students will learn how to assess the financial health of companies, interpret market trends, construct diversified portfolios, and make informed investment decisions. Throughout the course, both theoretical frameworks and practical applications are emphasized to prepare students for real-world investment challenges in dynamic financial markets.
Recommended Textbook
Corporate Finance 4th Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Explain the benefits of incorporation.
Answer: 1.Limited liability
2.Unlimited life
3.Access to capital markets/availability of outside funding
Q2) An investment is said to be liquid if the investment:
A)has large day to day fluctuations in price.
B)has a large bid-ask spread.
C)can easily be converted into cash.
D)is traded on a stock exchange.
Answer: C
Q3) If you buy shares of Coca-Cola on the primary market:
A)Coca-Cola receives the money because the company has issued new shares.
B)you buy the shares from another investor who decided to sell the shares.
C)you buy the shares from the New York Stock Exchange.
D)you buy the shares from the Federal Reserve.
Answer: A
Q4) Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation.
Answer: 11ea7cce_3d45_e812_928c_210991f18b30_TB1626_00
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Chapter 2: Introduction to Financial Statement Analysis
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Q1) Luther's Net Profit Margin for the year ending December 31,2008 is closest to:
A)1.8%
B)2.7%
C)5.4%
D)16.7%
Answer: A
Q2) If in 2009 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share,then using the market value of equity,the debt to equity ratio for Luther in 2009 is closest to:
A)1.47
B)1.78
C)2.31
D)4.07
Answer: B
Q3) The statement of financial performance is also known as the:
A)balance sheet.
B)income statement.
C)statement of cash flows.
D)statement of stockholder's equity.
Answer: B
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Chapter 3: Financial Decision Making and the Law of One
Price
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Q1) Which of the following statements regarding arbitrage is the most correct?
A)Any situation in which it is possible to make a profit without taking any risk is known as an arbitrage opportunity.
B)Any situation in which it is possible to make a profit without making any investment is known as an arbitrage opportunity.
C)We call a competitive market in which there are no arbitrage opportunities an arbitrage market.
D)The practice of buying and selling equivalent goods in different markets to take advantage of a price difference is known as arbitrage.
Answer: D
Q2) Suppose you have $500 today and the risk-free interest rate (r<sub>f</sub>)is
5%.The equivalent value in one year is closest to:
A)$475
B)$476
C)$500
D)$525
Answer: D
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Chapter 4: The Time Value of Money
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Q1) Since your first birthday,your grandparents have been depositing $1000 into a savings account on every one of your birthdays.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be closest to:
A)$25,645
B)$36,465
C)$12,659
D)$18,000
Q2) Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:
A)$106,230
B)$156,000
C)$137,900
D)This problem cannot be solved.
Q3) The future value at retirement (age 65)of your savings is:
Q4) Draw a timeline detailing the cash flows from investment "B."
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Chapter 5: Interest Rates
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Q1) Interest on James Taggart's credit card balances are compounded daily at an effect annual rate of 14.91%.The APR on his credit card is closest to:
A)13.90%
B)13.95%
C)14.91%
D)16.08%
Q2) The effective annual rate for a certificate of deposit that pays 3.9% APR compounded monthly is closest to:
A)3.83%
B)3.90%
C)3.97%
D)4.04%
Q3) Assuming you don't pay the points and borrow from the mortgage lender at 6.25%,then your monthly mortgage payment (with payments made at the end of the month)will be closest to:
A)$694
B)$708
C)$1540
D)$1600
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Chapter 6: Valuing Bonds
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Q1) Which of the following statements is TRUE?
A)Prices of bonds with lower durations are more sensitive to interest rate changes.
B)If a bond's yield to maturity exceeds its coupon rate,the bond trades at a premium.
C)Bonds with higher coupon rates are more sensitive to interest rate changes.
D)If a bond's yield to maturity is less than its coupon rate,the bond trades at a premium.
Q2) Which of the following statements is FALSE?
A)Because the cash flows promised by the bond are the most that bondholders can hope to receive,the cash flows that a purchaser of a bond with credit risk expects to receive may be less than that amount.
B)By consulting bond ratings,investors can assess the credit-worthiness of a particular bond issue.
C)Because the yield to maturity for a bond is calculated using the promised cash flows,the yield of bonds with credit risk will be lower than that of otherwise identical default-free bonds.
D)A higher yield to maturity does not necessarily imply that a bond's expected return is higher.
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Chapter 7: Investment Decision Rules
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Q1) Which of the following statements is FALSE?
A)The IRR investment rule will identify the correct decision in many,but not all,situations.
B)By setting the NPV equal to zero and solving for r,we find the IRR.
C)If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate.
D)The simplest investment rule is the NPV investment rule.
Q2) The payback period for project A is closest to:
A)2.0 years
B)2.4 years
C)2.5 years
D)2.2 years
Q3) What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?
Q4) The profitability index for this project is closest to:
A).44
B).26
C)0.39
D).34
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) The incremental unlevered net income of the Shepard Industries project in year one is closest to:
A)$510
B)$415
C)$600
D)$355
Q2) You are considering adding a microbrewery on to one of your firm's existing restaurants.This will entail an investment of $40,000 in new equipment.This equipment will be depreciated straight line over five years.If your firm's marginal corporate tax rate is 35%,then what is the value of the microbrewery's depreciation tax shield in the first year of operation?
A)$2800
B)$14,000
C)$5200
D)$26,000
Q3) What is sensitivity analysis?
Q4) What is an opportunity cost? Should it be included in the incremental cash flows for a project? Why or why not?
Q5) How does scenario analysis differ from sensitivity analysis?
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A)The more cash the firm uses to repurchase shares,the less it has available to pay dividends.
B)Free cash flow measures the cash generated by the firm after payments to debt or equity holders are considered.
C)We estimate a firm's current enterprise value by computing the present value of the firm's free cash flow.
D)We can interpret the enterprise value as the net cost of acquiring the firm's equity,taking its cash and paying off all debts.
Q2) Which of the following statements is FALSE?
A)We should use the general dividend discount model to value the stock of a firm with rapid or changing growth.
B)As firms mature,their growth slows to rates more typical of established companies.
C)The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
D)The simplest forecast for the firm's future dividends states that they will grow at a constant rate,g,forever.
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Chapter 10: Capital Markets and the Pricing of Risk
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Q1) The standard deviation of the overall payoff to Bank A is closest to:
A)$689,000
B)$751,000
C)$2,179,000
D)$2,375,000
Q2) Which of the following types of risk doesn't belong?
A)Market risk
B)Unique risk
C)Idiosyncratic risk
D)Unsystematic risk
Q3) The standard deviation of the returns on the Index from 2000 to 2009 is closest to:
A)19.5%
B)20.5%
C)3.8%
D)8.8%
Q4) Suppose that you want to use the 10 year historical average return on the Market to forecast the expected future return on the Market.Calculate the 95% confidence interval for your estimate of the expect return.
Q5) What is the market portfolio?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Suppose that you want to maximize your expected return without increasing your risk.How can you achieve this goal? Without increasing your risk,what is the maximum expected return you can expect?
Q2) Which of the following statements is FALSE?
A)Without trading,the portfolio weights will decrease for the stocks in the portfolio whose returns are above the overall portfolio return.
B)The expected return of a portfolio is simply the weighted average of the expected returns of the investments within the portfolio.
C)Portfolio weights add up to 1 so that they represent the way we have divided our money between the different individual investments in the portfolio.
D)A portfolio weight is the fraction of the total investment in the portfolio held in an individual investment in the portfolio.
Q3) The Sharpe ratio for the efficient portfolio is closest to: A)0.7
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Chapter 12: Estimating the Cost of Capital
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Q1) In practice which market index is most widely used as a proxy for the market portfolio in the CAPM?
A)Dow Jones Industrial Average
B)Wilshire 5000
C)S&P 500
D)U.S.Treasury Bill
Q2) The market capitalization for Wal-Mart is closest to:
A)$415 Billion
B)$276 Billion
C)$479 Billion
D)$200 Billion
Q3) The b<sub>i</sub> in the regression:
A)measures the sensitivity of the security to market risk.
B)measures the historical performance of the security relative to the expected return predicted by the SML.
C)measures the deviation from the best fitting line and is zero on average.
D)measures the diversifiable risk in returns.
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14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Q1) Assume that you are an investor with the disposition effect and you bought each of these stocks in January.Suppose that it is currently the end of March,which stocks are you most inclined to hold?
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors
A)1 only
B)1 and 3 only
C)2 only
D)2 and 4 only
Q2) Explain why the market portfolio proxy may not be efficient.
Q3) Investors that suffer from a familiarity bias:
A)prefer not to invest in companies they are familiar with.
B)favor investments in companies they are familiar with.
C)invest in the same stocks that their friends or family recommend.
D)tend to overestimate the precision of their knowledge.
Q4) What does the existence of a positive alpha investment strategy imply?
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Chapter 14: Capital Structure in a Perfect Market
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Q1) What is the conservation of value principle?
Q2) Suppose the risk-free interest rate is 4%.If Nielson borrows $150 million today at this rate and uses the proceeds to pay an immediate cash dividend,then according to MM,the expected return of Nielson's stock just after the dividend is paid would be closest to:
A)-17.5%
B)-12.5%
C)12.5%
D)17.5%
Q3) Suppose you are a shareholder in d'Anconia Copper holding 300 shares,and you disagree with the decision to lever the firm.You can undo the effect of this decision by
A)borrowing $2000 and buying 100 shares of stock.
B)selling 100 shares of stock and lending $2000.
C)borrowing $1200 and buying 60 shares of stock.
D)selling 60 shares of stock and lending $1200.
Q4) Suppose that to raise the funds for the initial investment the firm borrows $45,000 at the risk free rate and issues new equity to cover the remainder.In this situation,calculate the value of the firm's levered equity from the project.What is the cost of capital for the firm's levered equity?
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Chapter 15: Debt and Taxes
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Q1) Raceway Products has a market debt-to-equity ratio of .60,a corporate tax rate of 40%,and pays 8% interest on its debt.The interest tax shield on Raceway's debt lowers its WACC by what amount?
Q2) The interest rate tax shield for Kroger in 2004 is closest to:
A)$268 million
B)$393 million
C)$211 million
D)$94 million
Q3) After the recapitalization,the value of KD's levered equity is closest to:
A)$670 million
B)$400 million
C)$330 million
D)$470 million
Q4) The total amount available to payout to all the investors in Kroger in 2005 is closest to:
A)$190 million
B)$847 million
C)$745 million
D)$290 million
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Q1) Which of the following is NOT an indirect cost of bankruptcy?
A)Loss of suppliers
B)Fire sales of assets
C)Costs of appraisers
D)Loss of employees
Q2) A type of agency problem that results in shareholders gaining by choosing not to finance new,positive-NPV projects is:
A)asset substitution.
B)debt overhang.
C)excessive risk-taking.
D)distress costs.
Q3) What is the expected payoff to debt holders under JR's new riskier business strategy?
A)$20 million
B)$4 million
C)$15 million
D)$11 million
Q4) Suppose that MI has zero-coupon debt with a $140 million face value due next year.Calculate the value of levered equity,the value of debt,and the total value of MI with leverage.
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Chapter 17: Payout Policy
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Q1) Assume that management makes a surprise announcement that JRN will no longer pay dividends but will use the cash to repurchase stock instead.The price of a share of JRN's stock is now closest to:
A)$20.00
B)$25.00
C)$18.00
D)$24.00
Q2) Wyatt Oil pays a regular dividend of $2.50 per share.Typically the stock price drops by $2.00 per share when the stock goes ex-dividend.Suppose the capital gains tax rate is 20%,but investors pay different tax rates on dividends.Absent transactions cost,the highest dividend tax rate of an investor who could gain from trading to capture the dividend is closest to:
A)0%
B)20%
C)24%
D)36%
Q3) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) The unlevered value of Luther's Product Line is closest to:
A)$25 million
B)$60 million
C)$45 million
D)$40 million
Q2) Which of the following statements is FALSE?
A)To determine the project's debt capacity for the interest tax shield calculation,we need to know the value of the project.
B)To compute the present value of the interest tax shield,we need to determine the appropriate cost of capital.
C)Because we don't value the tax shield separately,with the APV method we need to include the benefit of the tax shield in the discount rate as we do in the WACC method.
D)A target leverage ratio means that the firm adjusts its debt proportionally to the project's value or its cash flows.
Q3) Based upon the three comparable firms,calculate that most appropriate unlevered cost of capital for Aardvark to use on this new product.
Q4) Calculate the NPV for Iota's new project.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) The unlevered beta for Oakley is closest to:
A)0.70
B)1.50
C)1.00
D)0.60
Q2) Assuming that Ideko has a EBITDA multiple of 8.5,then the continuation unlevered P/E ratio of Ideko in 2010 is closest to:
A)17.6
B)16.4
C)14.5
D)19.0
Q3) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
Q4) What is the purpose of the sensitivity analysis?
Q5) The unlevered beta for Luxottica is closest to:
A)1.00
B)0.60
C)0.70
D)1.50
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Chapter 20: Financial Options
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Q1) KD Industries stock is currently trading at $32 per share.Consider a put option on KD stock with a strike price of $30.The intrinsic value of this put option is:
A)$0
B)-$2
C)$2
D)$30
Q2) Which of the following best describes Galt's debt using a call option?
A)Long $700 million in the firm's assets and Short a call option with a $700 strike price
B)Short $700 million in the firm's assets and Long a call option with a $700 strike price
C)Long $700 million in the firm's assets and Short a call option with a $200 strike price
D)Short $700 million in the firm's assets and Long a call option with a $200 strike price
Q3) Graph the payoff at expiration of a short position in a put option with a strike price of $20.
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Chapter 21: Option Valuation
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Q1) Which of the following is a corporate application of option pricing?
A)Calculating the beta of risk-free debt
B)Calculating the agency cost of risky debt
C)Calculating the agency cost of risky equity
D)Calculating the alpha of risky equity
Q2) Using the binomial pricing model,the calculated price of a one-year put option on KD stock with a strike price of $20 is closest to:
A)-7.7
B)2.4
C)4.6
D)-1.8
Q3) Which of the following is NOT an input required by the Black-Scholes option pricing model?
A)The expected volatility of the stock
B)The expected return on the stock
C)The risk-free interest rate
D)The current stock price
Q4) Construct a binomial tree detailing the option information and payoffs for a call option with a $20 strike price that expires in one year.
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Chapter 22: Real Options
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Q1) Which of the following statements is FALSE?
A)It is tempting to use the Black-Scholes formula to value future growth options,but often there are good reasons why this formula might not price these options correctly.
B)When a firm has a real option to invest in the future it is known as a growth option.
C)Because growth options have value,they contribute to the value of any firm that has future possible investment opportunities.
D)Future growth opportunities can be thought of as a collection of real put options on potential projects.
Q2) Assuming that this project will provide Rearden with perpetual annual cash flows of $65,000,Rearden should:
A)invest today since the NPV is positive.
B)invest today since the NPV is negative.
C)invest today since the NPV using the hurdle rate is positive.
D)delay investing since the NPV using the hurdle rate is negative.
E)delay investing since the NPV using the hurdle rate is positive.
Q3) Can value can be created by waiting for uncertainty to resolve?
Q4) Describe the two factors that affect the value of an investment timing option?
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24
Chapter 23: Raising Equity Capital
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Q1) Which of the following statements is FALSE?
A)Once a company goes public,it must satisfy all of the requirements of public companies.
B)Organizations such as the Securities and Exchange Commission (SEC),the securities exchanges (including the New York Stock Exchange and the Nasdaq),and Congress (through the Sarbanes-Oxley Act of 2002)adopted new standards that focused on more thorough financial disclosure,greater accountability,and more stringent requirements for the board of directors.
C)The major advantage of undertaking an IPO is also one of the major disadvantages of an IPO: When investors diversify their holdings,the equity holders of the corporation become more concentrated.
D)Several high profile corporate scandals during the early part of the twenty-first century prompted tougher regulations designed to address corporate abuses.
Q2) What will the proceeds from the IPO be if Luther is selling 1.1 million shares?
Q3) When referring to IPOs,what is book building?
Q4) Describe the four characteristics of IPOs that puzzle financial economists.
Q5) Based upon the price/earnings ratio,what would be a reasonable value for KD?
Q6) Based upon the price/revenue ratio,what would be a reasonable value for KD?
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Chapter 24: Debt Financing
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Q1) Asset securitization is the process of creating a(n):
A)collateralized security.
B)asset-backed security.
C)municipal security.
D)payment security.
Q2) Which of the following statements is FALSE?
A)In the event of default,the assets not pledged as collateral for outstanding bonds cannot be used to pay off the holders of subordinated debentures until all more senior debt has been paid off.
B)Because more than one debenture might be outstanding,the bondholder's priority in claiming assets in the event of default,known as the bond's seniority,is important.
C)When a firm conducts a subsequent debenture issue that has lower priority than its outstanding debt,the new debt is known as a subordinated debenture.
D)Most debenture issues contain clauses restricting the company from issuing new debt with equal or lower priority than existing debt.
Q3) What is the Yield to Maturity (YTM)on this bond?
Q4) What is the Yield to Call (YTC)on this bond?
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Chapter 25: Leasing
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Q1) Assuming that Rearden's annual lease payments are $1.1 million,then Rearden Metal should
A)lease the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan.
B)buy the furnace since the amount saved in year zero from leasing is greater than the amount of the lease equivalent loan.
C)lease the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.
D)buy the furnace since the amount saved in year zero from leasing is less than the amount of the lease equivalent loan.
Q2) A lease where ownership of the asset transfers to the lessee at the end of the lease for a nominal cost is called a:
A)fair market value cap lease.
B)fixed price lease.
C)$1.00 out lease.
D)fair market value lease.
Q3) Calculate the monthly lease payments for a four year $1.00 out lease of the bulldozer.
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Chapter 26: Working Capital Management
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Q1) Which of the following statements is FALSE?
A)The aging schedule is also sometimes augmented by analysis of the payments pattern,which provides information on the percentage of monthly sales that the firm collects in each month after the sale.
B)Because accounts receivable days can be calculated from the firm's financial statement,outside investors commonly use this measure to evaluate a firm's credit management policy.
C)If the aging schedule gets "top-heavy"-that is,if the percentages in the upper half of the schedule begin to increase-the firm will likely need to revisit its credit policy.
D)Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place.
Q2) Which one of the following is NOT one of the three steps involved in establishing a credit policy?
A)Establishing credit payment patterns
B)Establishing credit standards
C)Establishing a collection policy
D)Establishing credit terms
Q3) What is a compensating balance?
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Chapter 27: Short-Term Financial Planning
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Q1) The effective annual rate for Taggart if they choose alternative #2 is closest to:
A)13.0%
B)13.9%
C)18.8%
D)27.0%
Q2) A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called:
A)a short-term mortgage loan.
B)a single,end-of-period-payment loan.
C)a bridge loan.
D)a line of credit.
Q3) A short-term bank loan that is often used until a firm can arrange for long-term financing is called:
A)a committed line of credit.
B)a short-term mortgage loan.
C)a bridge loan.
D)a single,end-of-period-payment loan.
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Chapter 28: Mergers and Acquisitions
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Q1) Which of the following statements regarding risk arbitrage is FALSE?
A)Once a tender offer is announced,the uncertainty about whether the takeover will succeed reduces the volatility of the stock price.This uncertainty creates an opportunity for investors to speculate on the outcome of the deal without bearing the risk of volatility.
B)Traders known as risk-arbitrageurs,who believe that they can predict the outcome of a deal,take positions based on their beliefs.
C)A potential profit arises from the difference between the target's stock price and the implied offer price,and is referred to as the merger-arbitrage spread.
D)It is not true arbitrage because there is a risk that the deal will not go through.If the takeover did not ultimately succeed,the risk-arbitrageur would eventually have to unwind his position at whatever market prices prevailed.
Q2) What is a white knight?
Q3) The structure of a merger transaction is summarized in a(n):
A)swap sheet.
B)term sheet.
C)exchange sheet.
D)merger sheet.
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Page 30
Chapter 29: Corporate Governance
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Q1) Which of the following statements regarding auditors is FALSE?
A)The Sarbanes-Oxley Act called on the SEC to force companies to have audit committees that are dominated by outside directors and required that at least one outside director have a financial background.
B)Whether information is material has been defined in the courts as referring to whether the information would have been a significant factor in an investor's decision about the value of the security.
C)CEOs and CFOs must return bonuses or profits from the sale of stock or the exercise of options during any period covered by statements that are later restated.
D)The law is especially strict with regard to takeover announcements,prohibiting any insider with nonpublic information about a pending or ongoing tender offer from trading on that information or revealing it to someone who is likely to trade on it.
Q2) Describe the "stakeholder" model of corporate governance.
Q3) How does a pyramid structure work?
Q4) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
Q5) What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?
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Page 31
Chapter 30: Risk Management
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Q1) The duration of a five-year bond with 8% annual coupons trading at par is closest to:
A)2.5 Years
B)4.3 Years
C)5.0 Years
D)6.2 Years
Q2) Which of the following statements is FALSE?
A)The swap contract-like forward and futures contracts-is typically structured as a "zero-cost" security.
B)An interest rate swap is a contract entered into with a bank,much like a forward contract,in which the firm and the bank agree to exchange the coupons from two different types of loans.
C)In a standard interest rate swap,one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period.
D)If short-term interest rates were to fall while long-term rates remained stable,then short-term securities would fall in value relative to long-term securities,despite their shorter duration.
Q3) What are some of the disadvantages of long-term supply contracts?
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32
Chapter 31: International Corporate Finance
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Q1) Which of the following statements is FALSE?
A)If the foreign tax rate exceeds the U.S.tax rate,companies must pay this higher rate on foreign earnings.
B)U.S.tax policy allows companies to apply the part of the tax credit that is not used to offset domestic taxes owed,so this extra tax credit is not wasted.
C)If the foreign tax rate is less than the U.S.tax rate,the company pays total taxes equal to the U.S.tax rate on its foreign earnings.
D)A full tax credit is given for foreign taxes paid up to the amount of the U.S.tax liability.
Q2) Assuming that the Irish and Mexican subsidiaries did not exist,the U.S.tax liability on the Japanese subsidiary would be closest to:
A)$0
B)$81 million
C)$103 million
D)$106 million
Q3) Calculate the pound denominated cost of capital for Luther's project.
Q4) What conditions cause the cash flows of a foreign project to be affected by exchange rate risk?
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