Investment Analysis
Textbook Exam Questions
Course Introduction
Investment Analysis provides a comprehensive overview of the principles and techniques involved in evaluating investment opportunities in financial markets. The course covers the fundamental concepts of risk and return, portfolio theory, asset pricing models, and securities valuation. Students learn to analyze stocks, bonds, and alternative investments using quantitative and qualitative methods, and to assess the impact of economic, industry, and company-specific factors on investment decisions. Emphasis is placed on practical applications, including portfolio construction, performance evaluation, and investment strategies, equipping students with the skills necessary to make informed investment choices in a dynamic global environment.
Recommended Textbook Fundamentals of Corporate Finance 9th Canadian Edition by Richard A Brealey
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Chapter 1: Goals and Governance of the Firm
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Q1) Corporations are referred to as public companies when their:
A) shareholders have no tax liability.
B) shares are held by the federal or state government.
C) stock is publicly traded.
D) products or services are available to the public.
Answer: C
Q2) A firm with spare cash
A) should always reinvest it in new equipment.
B) should pay it out to shareholders unless the firm can earn a higher rate of return on the cash than the shareholders can earn by investing in the capital market.
C) should invest it in the safest projects available.
D) Should always invest it in U.S. equities.
Answer: B
Q3) Which one of the following gives a corporation its permanence?
A) Multiple owners
B) Limited liability
C) Corporation taxation
D) Separation of ownership and control
Answer: D
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Page 3
Chapter 2: Financial Markets and Institutions
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Q1) Long-term financing decisions commonly occur in the:
A) option markets.
B) secondary markets.
C) capital markets.
D) money markets.
Answer: C
Q2) An individual can save and invest in a corporation by lending money to it or by purchasing additional shares.
A)True
B)False
Answer: True
Q3) "Reinvestment" means:
A) new investment in new operations.
B) additional investment in existing operations.
C) new investment by new shareholders.
D) the reinvestment of earnings into new projects.
Answer: D
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Chapter 3: Accounting and Finance
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Q1) Retained earnings result from:
A) the sale of additional shares of stock to investors.
B) income not paid to shareholders.
C) an excess of assets over liabilities.
D) market values that exceed book values.
Answer: B
Q2) Which type of income is subject to "double taxation"?
A) Dividends and wages
B) Capital gains
C) Dividends
D) Wages
Answer: C
Q3) What is the marginal corporate tax rate for large companies?
A) 15%
B) 34%
C) 35%
D) 39%
Answer: C
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Chapter 4: Measuring Corporate Performance
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Q1) What is primarily responsible for the potential distortion among the ROA of different firms when net income is used in the numerator of ROA?
A) Firms have different dividend payout ratios.
B) Some firms use fully depreciated assets.
C) Financial leverage varies among firms.
D) Unprofitable firms will not have any tax liability.
Q2) Lease obligations are included in certain leverage ratios because leases:
A) require the payment of interest.
B) represent long-term fixed obligations.
C) must be financed through a bank.
D) are perpetual obligations.
Q3) What is the residual income for a firm that is entirely equity-financed with $1 million in capital,$300,000 in net income,and a 20% cost of capital?
A) $100,000
B) $140,000
C) $240,000
D) $500,000
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Chapter 5: The Time Value of Money
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Q1) Your real estate agent mentions that homes in your price range require a payment of $1,200 per month for 30 years at 0.75% interest per month.What is the size of the mortgage with these terms?
A) $128,035.05
B) $147,940.29
C) $149,138.24
D) $393,120.03
Q2) An interest rate that has been annualized using compound interest is termed the: A) discount factor.
B) annual percentage rate.
C) discounted interest rate.
D) effective annual interest rate.
Q3) To calculate present value,we discount the future value by some interest rate r,the discount rate.
A)True
B)False
Q4) The effective annual interest rate cannot be less than the annual percentage rate.
A)True
B)False
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Chapter 6: Valuing Bonds
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Q1) Assume a bond is currently selling at par value.What will happen in the future if the yield on the bond is lower than the coupon rate?
A) The price of the bond will increase.
B) The coupon rate of the bond will increase.
C) The par value of the bond will decrease.
D) The coupon payments will be adjusted to the new discount rate.
Q2) What is the rate of return for an investor who pays $1,054.47 for a 3-year bond with an annual coupon payment of 6.5% and sells the bond 1 year later for $1,037.19?
A) 4.53%
B) 5.33%
C) 5.16%
D) 4.92%
Q3) This morning,you purchased a TIPS.Which one of these should you expect to occur if you hold this bond during an inflationary period?
A) The coupon payment will increase in real terms.
B) The maturity value will increase in nominal terms.
C) The market price will remain constant at par.
D) The market price will decrease.
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Chapter 7: Valuing Stocks
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Q1) What is the expected constant-growth rate of dividends for a stock currently priced at $50,that just paid a dividend of $4,and has a required return of 18%?
A) 3.41%
B) 5.50%
C) 9.26%
D) 12.5%
Q2) What dividend yield would be reported in the financial press for a stock that currently pays a $1 dividend per quarter and the most recent stock price was $40?
A) 2.5%
B) 4.0%
C) 10.0%
D) 5.0%
Q3) The required return on an equity security is comprised of a:
A) dividend yield and ROE.
B) current yield and a terminal value.
C) sustainable growth rate and a plowback yield.
D) dividend yield and a capital gains yield.
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Chapter 8: Net Present Value and Other Investment Criteria
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Q1) A company owns a tract of timber that will keep growing for a number of years.It calculates that the timber's value less the cost of harvesting is currently $50,000 and that this figure will grow by 10% in the next year and by 5% in the following year.If the cost of capital is 8%,when should the company harvest the timber?
A) today.
B) year 1.
C) year 2.
D) harvest a third of the timber each year.
Q2) Selecting the project(s)with the highest NPV(s)is not the correct decision rule when:
A) there is capital rationing.
B) there are mutually exclusive projects.
C) projects are long-lived.
D) projects are independent.
Q3) When you have to choose between projects with different lives,you should put them on an equal footing by computing the equivalent annual annuity or benefit of the two projects.
A)True
B)False
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Chapter 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions
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Q1) Which one of the following methods will provide a correct analysis for capital budgeting purposes?
A) Discounting real cash flows with real rates.
B) Discounting real cash flows with nominal rates.
C) Discounting nominal cash flows with real rates.
D) Discounting nominal cash flows with either real or nominal rates.
Q2) The NPV of an investment proposal becomes negative solely as a result of allocating a portion of the corporation president's salary.It is most likely the case that:
A) the project should be accepted.
B) rejecting the project is the correct decision.
C) the allocation should be postponed until the project is accepted.
D) the salary should be considered an opportunity cost of the project.
Q3) In what manner does depreciation expense affect investment projects?
A) It reduces cash flows by the amount of the depreciation expense.
B) It increases cash flows by the amount of the depreciation expense.
C) It reduces taxable income by the amount of the depreciation expense.
D) It reduces taxes by the amount of the depreciation expense.
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Page 11
Chapter 10: Project Analysis
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Q1) Recognizing that it may be in managers' best interests to be overly optimistic when proposing projects,how might firms effectively control this impulse?
A) Employ capital rationing
B) Require that all proposals be initiated from the lowest possible management level
C) Fire managers if any of their proposals fail to produce the expected results
D) Fund all project proposals
Q2) Which one of the following statements is correct concerning sensitivity analysis?
A) It ignores interrelationships between variables.
B) Several variables are allowed to change concurrently.
C) It considers all feasible variable combinations.
D) It can guarantee a project's success.
Q3) The opportunity to abandon a project loses some of its value when:
A) fixed costs are high.
B) markets are extremely competitive.
C) the future is relatively certain.
D) secondary markets exist and are active.
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Chapter 11: Introduction to Risk, Return, and the Opportunity
Cost of Capital
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Q1) Which one of the following companies is most likely to be exposed to the least amount of macro risk?
A) A producer of dog biscuits
B) A regional airline
C) A major commercial bank
D) A machine tool manufacturer
Q2) A project's expected return is 15%,which represents a 35% return in a boom and a 5% return in a stagnant economy.What is the probability of a boom if these are the only two economic states?
A) 18.33%
B) 25.00%
C) 33.33%
D) 50.00%
Q3) Industries that generally perform very well when the entire economy performs well and perform very badly when the economy performs badly are called:
A) diversified industries.
B) cyclical industries.
C) risk-free industries.
D) specific-risk industries.
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Chapter 12: Risk,Return,and Capital Budgeting
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Q1) What rate of return should an investor expect for a stock that has a beta of 0.8 when the market is expected to yield 14% and Treasury bills offer 6%?
A) 9.2%
B) 11.2%
C) 12.4%
D) 12.8%
Q2) What would you recommend to an investor who is considering an investment that plots below the security market line?
A) Invest; The expected return is high relative to the risk.
B) Don't invest; The risk is high relative to the expected return.
C) Invest; All stocks revert to the SML over time.
D) Don't invest; All stocks below the SML are low-growth stocks.
Q3) The slope of the security market line equals:
A) one.
B) beta.
C) the market risk premium.
D) the expected return on the market portfolio.
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Chapter 13: The Weighted-Average Cost of Capital and Company Valuation
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Q1) If equity investors require a 20% rate of return,what is the maximum acceptable amount of equity financing for a project with cash flows of $2 million a year in perpetuity before tax and interest? The project supports debt of $3 million with a 10% coupon,and the tax rate is 35%.
A) $5.53 million
B) $5.87 million
C) $8.5 million
D) $9.03 million
Q2) Capital structure refers to a firm's mix of long-term debt and equity financing.
A)True
B)False
Q3) Suppose an analyst estimates that free cash flow will be $2.43 million in year 5.What is the present value of this free cash flow if the company cost of capital is 12%,the WACC is 10%,and the equity cost of capital is 15%?
A) $2,113,043
B) $1,208,139
C) $1,508,839
D) $1,378,847
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Chapter 14: Introduction to Corporate Financing and Governance
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Q1) Ford Motor Company and Google have issued two classes of shares with different voting rights to allow their firms to obtain fresh capital without giving up their management's controlling rights.
A)True
B)False
Q2) Convertible bonds resemble a combination of which two types of securities?
A) Investment grade bonds and junk bonds
B) Bonds and common stock
C) Bonds and warrants
D) Bonds and preferred stock
Q3) Corporations that annually retire a set portion of their long-term debt are said to be using:
A) indexed bonds.
B) sinking funds.
C) convertible debt.
D) secured debt.
Q4) The gap between internally generated cash and the cash that the company needs is called the financial deficit.
A)True B)False
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Chapter
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Q1) Who bears the bulk of the cost of underpricing an IPO?
A) The underwriters
B) The investors who purchase IPO shares
C) All of the after-IPO shareholders
D) The pre-IPO shareholders
Q2) The Securities and Exchange Commission will not permit securities to be sold:
A) if they have been overpriced.
B) prior to approval of the registration statement.
C) unless the issuer guarantees their value.
D) until a shelf registration exists.
Q3) When a new issue goes wrong and the stock price immediately crashes once trading commences,the IPO investors may:
A) sue the SEC for recommending the issue.
B) convert their shares into bonds.
C) sue the company executives who are still shareholders.
D) sue the underwriters for overhyping the issue.
Q4) When securities are issued under a firm commitment,the underwriter bears the risk of low demand from investors.
A)True
B)False
Page 17
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Chapter 16: Debt Policy
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Q1) Which ranking of financing from most preferred to least preferred is predicted by the pecking-order theory?
A) Debt issue, stock issue, internally generated funds
B) Internally generated funds, debt issue, stock issue
C) Stock issue, internally generated funds, debt issue
D) Internally generated funds, stock issue, debt issue
Q2) MM Proposition I without taxes states that:
A) firms should be all-equity financed to maximize shareholder value.
B) shareholders are unaffected by the debt policy of the firm.
C) shareholders are indifferent to a firm's value.
D) shareholders prefer to invest in all-equity firms.
Q3) If the present value of the interest tax shield on debt equals the present value of the costs of financial distress,then the trade-off theory implies that the:
A) firm is using the optimal level of debt.
B) firm is paying too high an interest rate.
C) firm's market value equals its book value.
D) firm should increase its use of debt.
Q4) Which of the following pair of firms do you think should be more highly levered: A risky company,or a safe company?
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Chapter 17: Payout Policy
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Q1) With respect to the proposition that dividend policy does not matter,in order to raise an additional $5,600 in cash by issuing stock,the stock sold must be worth:
A) more than $5,600.
B) $2,800.
C) $5,600.
D) less than $5,600.
Q2) Kappa Corp has just raised its dividend from $2.50 to $5 per share.(It plans to reduce its repurchases by a similar amount.)Caterina Chekov,who owns 100 shares of Kappa does not need the extra cash.What can she do to offset the change in dividend policy?
A) reinvest the extra dividend in Kappa stock.
B) sell $250 of Kappa stock each year.
C) borrow $250 and invest it in Kappa stock.
D) Nothing. She should sell out and invest elsewhere.
Q3) Corporate dividends are less volatile than corporate earnings.
A)True
B)False
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Chapter 18: Long-Term Financial Planning
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Q1) Percentage of sales models are planning models in which the sales forecasts are the driving variables and most other variables are proportional to sales.
A)True
B)False
Q2) A firm has a policy of not issuing debt and paying out 40% of its earnings.Its asset turnover is 2.0 and its profit margin is 10%.What is its sustainable growth rate?
A) 20.0%
B) 8.0%
C) 3.0%
D) 12.0%
Q3) Which one of these is least likely to change proportionally with sales?
A) Depreciation
B) Investment in receivables
C) Cost of goods sold
D) EBIT
Q4) Financial plans will rarely succeed unless the forecasts are perfect.
A)True
B)False
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Chapter 19: Short-Term Financial Planning
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Q1) Zeta Stores places orders for 60% of the sales forecast in the next month and for 40% of the sales forecast for the following month.It pays for these goods with a 2-month delay.If sales for August are forecast at $10 million and sales for September and October are forecast at $12 million,what will be the forecast cash outflow in September?
A) $10.8 million.
B) $15.6 million.
C) $4.8 million.
D) $9.6 million.
Q2) Which one of the following is more likely for a firm practicing the relaxed strategy of long-versus short-term borrowing at the height of sales demand?
A) It will borrow heavily on a short-term basis.
B) At the height of demand, it will invest heavily in marketable securities.
C) It will borrow on both a long-term and a short-term basis.
D) It's long-term financing will approximately equal its total capital requirements.
Q3) If the firm repurchases its own stock,its cash holdings are unaffected.
A)True
B)False
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Chapter 20: Working Capital Management
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Q1) At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10,net 60?
A) 11 days after the sale
B) 31 days after the sale
C) 61 days after the sale
D) 71 days after the sale
Q2) If goods are sold on terms of 5/10,net 90,what effective interest rate is if the purchaser pays on day 90?
A) 20.00%
B) 22.81%
C) 24.93%
D) 26.37%
Q3) A primary purpose of restricting the investment of idle cash balances to money market instruments is to:
A) obtain government guarantees on the investment.
B) minimize transaction costs.
C) minimize interest-rate risk.
D) maximize possible capital appreciation.
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Chapter 21: Mergers,Acquisitions,and Corporate Control
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Q1) A typical poison pill may give existing shareholders the right to buy the company's shares at half price as soon as a bidder acquires more than 15% of the shares.The bidder is not entitled to the discount.
A)True
B)False
Q2) The expected savings from merging two banks often come from consolidating operations and eliminating redundant costs.
A)True
B)False
Q3) It is always more efficient to integrate vertically than to outsource part of one's business.
A)True
B)False
Q4) The value of the target firm's bonds tend to decrease when a leveraged buyout is announced.
A)True
B)False
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Chapter 22: International Financial Management
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Q1) If nominal interest rates are 5% in the United States and 8% in Mexico,you should convert the expected cash flows on your Mexican project into US dollars:
A) by assuming that the Mexican peso will appreciate by about 3% a year.
B) by assuming that the Mexican peso will depreciate by 8% a year.
C) by assuming that the dollar will appreciate by 5% a year.
D) by assuming that the Mexican peso will depreciate by about 3% a year.
Q2) The spot exchange rate for the Canadian dollar is CAD1.02 = USD1.The 6-month interest rate in the United States is 2.5% and 3.0% in Canada.What is the 6-month forward rate for the Canadian dollar?
A) CAD1.005= USD1
B) CAD1.025 = USD1
C) CAD0.985= USD1
D) CAD1.02= USD1
Q3) Interest rate parity suggests that it is cheaper to borrow in a currency with a low nominal rate of interest.
A)True
B)False
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Chapter 23: Options
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Q1) If you sell a put option,your maximum payoff is equal to:
A) The maximum of zero or the stock price the exercise price.
B) The maximum of the exercise price the stock price or zero.
C) zero.
D) the exercise price.
Q2) Which one of the following is true for an investor who purchased a share of stock for $45 and purchased a put option on the stock with an exercise price of $45?
A) The investor profits when the stock decreases in value.
B) The minimum payoff on the position is $45.
C) The investor is protected against upside potential.
D) Increases in the value of the stock will go to the seller of the put.
Q3) Stock price volatility is beneficial to option holders.
A)True
B)False
Q4) The payoffs from investing in an option contract are designed so that:
A) both the buyer and the seller of the contract will profit.
B) the seller's (buyer's) gain is the buyer's (seller's) loss.
C) roughly 20% of sellers and 50% of buyers profit.
D) there are no profits but there are also no losses.
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Chapter 24: Risk Management
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Q1) The seller of a copper futures contract noticed that his account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper,what happened that day to the price of copper?
A) The price closed down $0.02 per pound.
B) The price closed up $0.02 per pound.
C) The price closed down $0.20 per pound.
D) The price closed up $0.20 per pound.
Q2) Which one of the following is not true of the financial futures markets?
A) Financial futures trade on the Chicago Mercantile Exchange.
B) When many financial future mature, the seller cannot deliver the asset to the buyer.
C) A major use of financial futures is protection from interest rate risk.
D) Trading in financial futures is significantly less than trading in financial futures.
Q3) The profit to the buyer of a futures contract is equal to the initial futures price minus the ultimate market price.
A)True
B)False
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