Investment and Financing Decisions
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Course Introduction
Investment and Financing Decisions explores the core principles and analytical tools essential for making effective financial management decisions within organizations. The course covers the evaluation of investment opportunities, the assessment of capital budgeting techniques, and the understanding of risk and return trade-offs. Additionally, students learn about various sources of finance, capital structure considerations, and the impact of financing choices on firm value. Practical case studies and real-world applications help develop the ability to make informed investment and financing decisions in a dynamic business environment.
Recommended Textbook
Corporate Finance The Core 3rd Edition by Jonathan Berk
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Page 2
Chapter 1: The Corporation
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Q1) Which of the following organization forms accounts for the greatest number of firms?
A) "S" corporation
B) Limited partnership
C) Sole proprietorship
D) "C" corporation
Answer: C
Q2) If you buy shares of Coca-Cola on the secondary 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: B
Q3) Which of the following is/are an advantage of incorporation?
A) Access to capital markets
B) Limited liability
C) Unlimited life
D) All of the above
Answer: D
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3
Chapter 2: Introduction to Financial Statement Analysis
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Q1) Perrigo's enterprise value is closest to:
A) $952.16 million
B) $3,580.14 million
C) $4,168.06 million
D) $4,425.15 million
Answer: C
Q2) Luther's return on equity (ROE)for the year ending December 31,2009 is closest to:
A) 2.0%
B) 6.5%
C) 8.4%
D) 12.7%
Answer: C
Q3) Gross profit is calculated as:
A) Total sales - cost of sales - selling, general and administrative expensesdepreciation and amortization
B) Total sales - cost of sales - selling, general and administrative expenses
C) Total sales - cost of sales
D) None of the above
Answer: C
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Page 4
Chapter 3: Financial Decision Making and the Law of One
Price
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Sample Questions
Q1) Assuming you just purchased 10,000 Bbls of WTI crude at the current market price,the added benefit (cost)to you if you were to refine this crude oil and sell the unleaded gasoline is closest to:
A) $730,600
B) $39,400
C) $770,000
D) -$39,400
Answer: B
Q2) Without issuing the new security,the NPV for this project is closest to what amount? Should the film maker make the investment?
A) $1.7 million; Yes
B) $1.7 million; No
C) $2.7 million; Yes
D) $2.7 million; No
Answer: C
Q3) The price per share of the ETF in a normal market is:
Answer: Value of ETF = 2
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Page 5
Chapter 4: The Time Value of Money
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Sample Questions
Q1) Which of the following statements is FALSE?
A) The process of moving a value or cash flow forward in time is known as compounding.
B) The effect of earning interest on interest is known as compound interest.
C) It is only possible to compare or combine values at the same point in time.
D) A dollar in the future is worth more than a dollar today.
Q2) If the appropriate interest rate is 10%,then Nielson Motors should:
A) invest in this opportunity since the NPV is positive.
B) not invest in this opportunity since the NPV is positive.
C) invest in this opportunity since the NPV is negative.
D) not invest in this opportunity since the NPV is negative.
Q3) If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:
A) $18,519
B) $45,761
C) $9,818
D) $20,000
Q4) Draw a timeline detailing the cash flows from investment "B."
Q5) In terms of present value,how much will Joe receive for selling the family business?
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Chapter 5: Interest Rates
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Sample Questions
Q1) The effective annual rate on your firm's borrowings is closest to:
A) 6.00%
B) 6.14%
C) 6.25%
D) 6.30%
Q2) If your income tax rate is 30%,then the after-tax EAR for your home equity loan is closest to:
A) 6.0%
B) 5.9%
C) 8.6%
D) 5.8%
Q3) Floyd Ferris invested $3,000 into an account five years ago.Today his account has grown to have a balance of $3,927.50.Given that his account offered monthly compounding of interest,the APR on this account is was closest to:
A) 5.00%
B) 5.25%
C) 5.40%
D) 5.54%
Q4) What is the effective after-tax rate of each instrument,expressed as an EAR?
Q5) Should you purchase the delivery truck or lease it? Why?
Page 7
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Chapter 6: Valuing Bonds
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Sample Questions
Q1) What is the relationship between a bond's price and its yield to maturity?
Q2) How much will each semiannual coupon payment be?
A) $60
B) $40
C) $120
D) $80
Q3) Which of the following statements is FALSE?
A) By convention, practitioners always plot the yield of the most senior issued bonds, termed the on-the-run-bonds.
B) We can determine the no-arbitrage price of a coupon bond by discounting its cash flows using the zero-coupon yields.
C) If the zero coupon yield curve is upward sloping, the resulting yield to maturity decreases with the coupon rate of the bond.
D) The yield to maturity of a coupon bond is a weighted average of the yields on the zero-coupon bonds.
Q4) What is the price today of a two-year,default-free security with a face value of $1000 and an annual coupon rate of 5.75%? Does this bond trade at a discount,premium,or at par?
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Page 8
Chapter 7: Investment Decision Rules
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Q1) Assume that your capital is constrained,so that you only have $600,000 available to invest in projects.If you invest in the optimal combination of projects given your capital constraint,then the total NPV for all the projects you invest in will be closest to:
A) $65,000
B) $80,000
C) $69,000
D) $111,000
Q2) The profitability index for project A is closest to:
A) 0.12
B) 21.65
C) 0.17
D) 12.04
Q3) Assuming that your capital is constrained,which investment tool should you use to determine the correct investment decisions?
A) Profitability Index
B) Incremental IRR
C) NPV
D) IRR
Q4) If the discount rate for project A is 16%,then what is the NPV for project A?
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Chapter 8: Fundamentals of Capital Budgeting
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Q1) The incremental EBIT for Shepard Industries in year two is closest to:
A) $415
B) $875
C) $595
D) $510
Q2) The continuation value for the trucking division in year five is closest to:
A) 1,000,000
B) 1,250,000
C) 1,275,000
D) 1,375,000
Q3) What decision should Galt Motors take regarding manufacturing the armatures in house?
A) Proceed with in house manufacture since NPV is negative
B) Proceed with in house manufacture since NPV is positive
C) Reject in-house manufacture since NPV is negative
D) Reject in-house manufacture since IRR is greater than 14%
Q4) What is sensitivity analysis?
Q5) Assume that Kinston's new machine will be depreciated straight line to a salvage value of $5,000 at the end of year three.What is the after-tax salvage value of this project?
Page 10
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Chapter 9: Valuing Stocks
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Q1) Which of the following statements is FALSE?
A) Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale.
B) In the method of comparables we estimate the value of the firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future.
C) Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm.
D) A valuation multiple is a ratio of some measure of the firm's scale to the value of the firm.
Q2) Suppose you plan to hold Von Bora stock for only one year.Calculate your total return from holding Von Bora stock for the first year.
Q3) Calculate the enterprise value for DM Corporation.
Q4) What are the implications of the efficient market hypothesis for corporate managers?
Q5) What are some common multiples used to value stocks?
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Chapter 10: Capital Markets and the Pricing of Risk
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Sample Questions
Q1) The expected return on security with a beta of 0.8 is closest to:
A) 0.0%
B) 3.2%
C) 6.4%
D) 7.2%
Q2) Assume that you purchased General Electric Company stock at the closing price on December 31,2008 and sold it after the dividend had been paid at the closing price on January 26,2009.Your total return rate (yield)for this period is closest to:
A) 0.75%
B) -8.80%
C) 0.70%
D) -8.15%
Q3) The expected overall payoff to Bank B is:
A) $5,000,000
B) $6,000,000
C) $94,000,000
D) $95,000,000
Q4) Do expected returns for individual stocks increase proportionately with volatility?
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Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
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Q1) Which of the following statements is FALSE?
A) Short-term margin loans from a broker are often 1% to 2% lower than the rates paid on short-term Treasury securities.
B) In the real world investors have different information and expectations regarding securities.
C) The SML is still valid when interest rates differ.
D) When borrowing and lending occur at different rates there are different tangent portfolios identified.
Q2) Suppose that Google Stock has a beta of 1.06 and Boeing stock has a beta of 1.31.If the risk-free interest rate is 4% and the expected return from the market portfolio is 12%,then the expected return on a portfolio that consists of 30% Google stock and 70% Boeing stock is closest to:
A) 12.5%
B) 13.1%
C) 13.5%
D) 13.9%
Q3) The variance on a portfolio that is made up of a $6000 investments in Microsoft and a $4000 investment in Wal-Mart stock is closest to:
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Chapter 12: Estimating the Cost of Capital
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Sample Questions
Q1) The cost of capital for the oil exploration division is closest to:
A) 6.0%
B) 7.0%
C) 8.5%
D) 10.0%
Q2) The a<sub>i</sub> in the regression
A) measures the sensitivity of the security to market risk.
B) measures the deviation from the best fitting line and is zero on average.
C) measures the diversifiable risk in returns.
D) measures the historical performance of the security relative to the expected return predicted by the SML.
Q3) Trucks R' Us has a market capitalization of $142 billion,$78 billion in BB rated debt,and $10 billion in cash.If Trucks R' Us' equity beta is 1.68,then their underlying asset beta is closest to:
A) 1.00
B) 1.20
C) 1.32
D) 1.48
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14
Chapter 13: Investor Behavior and Capital Market Efficiency
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Sample Questions
Q1) A stock's alpha is defined as the stock's:
A) expected return minus its required return.
B) expected return minus its actual return.
C) nominal return minus its required return.
D) required return minus its actual return.
Q2) Which of the following statements is FALSE?
A) The most important example of non-tradeable wealth is human capital.
B) If investors have a significant amount of non-tradeable wealth, this wealth will be an important part of their portfolios, but will not be part of the market portfolio of tradeable securities.
C) If the entire portfolio of investments is efficient, then just the tradeable part of the portfolio should be efficient also.
D) Researchers have found evidence that the presence of human capital can explain at least part of the reason for the inefficiency of the most commonly used market proxies.
Q3) What does the existence of a positive alpha investment strategy imply?
Q4) Explain why the market portfolio proxy may not be efficient.
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Page 15
Chapter 14: Capital Structure in a Perfect Market
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Q1) The expected return for Nielson Motors stock without leverage is closest to:
A) -25.0%
B) -17.5%
C) -12.5%
D) 12.5%
Q2) Which of the following statements is FALSE?
A) The unlevered beta measures the market risk of the firm's business activities, ignoring any additional risk due to leverage.
B) If a firm holds $1 in cash and has $1 of risk-free debt, then the interest earned on the cash will equal the interest paid on the debt. The cash flows from each source cancel each other, just as if the firm held no cash and no debt.
C) The unlevered beta measures the market risk of the firm without leverage, which is equivalent to the beta of the firm's assets.
D) When a firm changes its capital structure without changing its investments, its levered beta will remain unaltered, however, its asset beta will change to reflect the effect of the capital structure change on its risk.
Q3) What is the conservation of value principle?
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Page 16
Chapter 15: Debt and Taxes
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Q1) Which of the following statements is FALSE?
A) Given a forecast of future interest payments, we can determine the interest tax shield and compute its present value by discounting it at a rate that corresponds to its risk.
B) The total value of the unlevered firm exceeds the value of the firm with leverage due to the present value of the tax savings from debt.
C) To compute the increase in the firm's total value associated with the interest tax shield, we need to forecast how a firm's debt-and therefore its interest payments.
D) There is an important tax advantage to the use of debt financing.
Q2) Wyatt's annual interest tax shield is closest to:
A) $2.8 million
B) $4.2 million
C) $7.0 million
D) $40 million
Q3) Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered all for the year 2004.
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Q1) Suppose that MI has zero-coupon debt with a $125 million face value due next year.The yield to maturity of MI's debt is closest to:
A) 12.5%
B) 7.8%
C) 25.0%
D) 5.0%
Q2) Which of the following statements is FALSE?
A) When a firm fails to make a required payment to debt holders, it is in bankruptcy.
B) With perfect capital markets, the risk of bankruptcy is not a disadvantage of debt-bankruptcy simply shifts the ownership of the firm from equity holders to debt holders without changing the total value available to all investors.
C) Bankruptcy is a long and complicated process that imposes both direct and indirect costs on the firm and its investors that the assumption of perfect capital markets ignores.
D) Bankruptcy is rarely simple and straightforward-equity holders don't just "hand the keys" to debt holders the moment the firm defaults on a debt payment.
Q3) List five general categories of indirect costs associated with bankruptcy.
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Page 18
Chapter 17: Payout Policy
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Q1) In 2006,Luther Incorporated paid a special dividend of $5 per share for the 100 million shares outstanding.If Luther has instead retained that cash permanently and invested it into treasury bills earning 5%,then the present value of the additional taxes paid by Luther would be closest to:
A) $35 million
B) $290 million
C) $175 million
D) $585 million
Q2) Which of the following statements is FALSE?
A) From an accounting perspective, dividends generally reduce the firm's current (or accumulated) retained earnings.
B) The way a firm chooses between paying dividends and retaining earnings is referred to as its payout policy.
C) Most companies that pay dividends pay them semiannually.
D) Occasionally, a firm may pay a one-time, special dividend that is usually much larger than a regular dividend.
Q3) Calculate the effective tax disadvantage for retaining cash in 1999,2001,and 2005.
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19
Chapter 18: Capital Budgeting and Valuation With Leverage
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Q1) Which of the following statements is FALSE?
A) In the real world, specific projects should differ only slightly from the average investment made by the firm.
B) We can estimate r<sub>U</sub> for a new project by looking at single-division firms that have similar business risks.
C) The project's equity cost of capital depends on its unlevered cost of capital, r<sub>U</sub>, and the debt-equity ratio of the incremental financing that will be put in place to support the project.
D) Projects may vary in the amount of leverage they will support-for example, acquisitions of real estate or capital equipment are often highly levered, whereas investments in intellectual property are not.
Q2) The NPV of this project using the WACC method is closest to:
A) $10 million
B) $13 million
C) $42 million
D) $71 million
Q3) Calculate the present value of the interest tax shield provided by Omicron's new project.
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Chapter 19: Valuation and Financial Modeling: a Case Study
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Q1) With the proper changes it is believed that Ideko's credit policies will allow for an account receivables days of 60.The forecasted accounts receivable for Ideko in 2006 is closest to:
A) $19,690
B) $16,970
C) 22,710
D) $14,525
Q2) What range for the market value of equity for Ideko is implied by the range of P/E multiples for the comparable firms?
Q3) The free cash flow to the firm in 2008 is closest to:
A) -5,005
B) -1,755
C) 5,575
D) 14,995
Q4) The amount of net working capital for Ideko in 2008 is closest to:
A) $35,195
B) $26,420
C) $22,170
D) $30,510
Q5) What is the purpose of the sensitivity analysis?
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