CE 2

Question 1

Which of the following statements about collective investment funds is correct?
A. Income funds typically invest in companies that generate high abnormal earnings.
B. Growth funds typically invest in companies with high sales growth.
C. Market neutral funds typically hold security portfolios with betas close to zero.
D. A, B, and C are correct.

Answer 1

C. Market neutral funds typically hold security portfolios with betas close to zero.

Question 2

Consider the following statement: “According to the Efficient Markets Hypothesis investment strategies that are purely based on publicly available information cannot systematically generate positive abnormal returns.” This statement is

Answer 2

A. True

Question 3

Consider the following statement: “Active portfolio management relies more heavily on financial statement analysis than passive portfolio management.” This statement is

Answer 3

A. True

Question 4

Consider the following statement: “Technical security analysis relies more heavily on financial statement information than fundamental security analysis.” This statement is

Answer 4

B. False

Question 5

Consider the following statement: “In contrast with formal valuation methods, informal valuation methods ignore financial statement information.” This statement is

Answer 5

B. False

Question 6

On January 1, 2022, Company Z’s share price is €11.25 per share. The company’s book value of equity per share is €5, expected profit or loss per share for fiscal year 2022 is €5, and the cost of equity is 10 percent. What are the market’s expectations about the long-term abnormal profit growth rate for company Z?
A. 0 percent
B. 1 percent
C. 2 percent
D. 3 percent

Answer 6

C. 2 percent

Question 7

Which of the following statements is not correct? Research has shown that
A. Analysts’ forecasts and recommendations tend to be systematically biased.
B. Analysts tend to be more accurate in forecasting near-term performance than in forecasting long-term performance.
C. Analysts’ forecasts are generally more accurate than time-series forecasts.
D. Analysts’ optimism (in forecasts and recommendations) has substantially increased during the late 1990s.
E. None of the above.

Answer 7

D. Analysts’ optimism (in forecasts and recommendations) has substantially increased during the late 1990s.

Question 8

Consider the following statement: “Past research findings have consistently shown that collective investment and pension funds systematically outperform the market index.” This statement is

Answer 8

False

Question 9

Which of the following industries is the least debt intensive industry?
A. Pharmaceutical industry
B. Air transportation industry
C. Electric services industry
D. Hotel industry

Answer 9

A. Pharmaceutical industry

Question 10

Consider the following statement: “Large firms tend to have higher leverage than small firms because they have lower business risks (on average).” This statement is

Answer 10

A. True

Question 11

Multiple bank borrowing is
A. Most common in countries with strong legal protection of creditors.
B. Most common in countries with weak legal protection of creditors.
C. Not associated with the degree of legal protection of creditors.

Answer 11

B. Most common in countries with weak legal protection of creditors.

Question 12

Supplier financing is
A. Most common in countries with strong legal protection of creditors.
B. Most common in countries with weak legal protection of creditors.

Answer 12

B. Most common in countries with weak legal protection of creditors.

Question 13

Consider the following statement: “One mechanism that commercial lenders use to reduce credit risk is to lengthen the maturity of the loans they extend.” This statement is

Answer 13

B. False

Question 14

In cases where a borrower’s cash needs are difficult to anticipate, it is most likely to make use of
A. Term loans
B. Lease financing
C. Open lines of credit
D. Mortgage loans

Answer 14

C. Open lines of credit

Question 15

Which of the following types of collateral is generally the most desirable form of security?
A. Inventory
B. Real estate
C. Equipment
D. Receivables

Answer 15

D. Receivables

Question 16

Which of the following is not a financial covenant that is commonly used in loan contracts?
A. Maintenance of a minimum fund flow coverage ratio
B. Maintenance of a maximum ratio of total liabilities to net worth
C. Maintenance of a minimum return on assets
D. Maintenance of a minimum net working capital balance

Answer 16

C. Maintenance of a minimum return on assets

Question 17

Consider the following statement: “The number of European firms that receives an ‘A’ rating typically exceeds the number of European firms that receives an ‘AA’ rating.” This statement is

Answer 17

A. True

Question 18

Which of the following variables is positively associated with a firm’s debt rating?
A. Net debt to net capital
B. Firm size
C. NOPAT to net capital
D. A, B and C
E. B and C

Answer 18

E. B and C

Question 19

Company X has a significantly lower Altman Z score than company Y. This implies that
A. Company X’s bankruptcy probability exceeds company Y’s bankruptcy probability.
B. Company Y’s bankruptcy probability exceeds company X’s bankruptcy probability.

Answer 19

A. Company X’s bankruptcy probability exceeds company Y’s bankruptcy probability.

Question 20

Consider the following statement: “A merger between a pharmaceutical firm with a strong research department and a pharmaceutical firm with a strong sales force is a typical example of mergers that aim to take advantage of economies of scale.” This statement is

Answer 20

B. False

Question 21

Consider the following statement: “Mergers that help to provide low-cost financing to a financially constrained target are more likely to occur if the degree of information asymmetry between the target’s management and public capital markets is high.” This statement is

Answer 21

A. True

Question 22

Consider the following statement: “In the EU, mergers that increase product-market rents are more likely to be disallowed by the European Commission than mergers that do not.” This statement is

Answer 22

A. True

Question 23

Which of the following motivations for mergers is typically not valued by the acquirer’s shareholders?
A. Capturing tax benefits that arise from operating tax loss carryforwards
B. Improving target management
C. Increasing product-market rents
D. Reducing business risk through diversification of operations

Answer 23

D. Reducing business risk through diversification of operations

Question 24

Which of the following statements is not correct?
A. Acquisition premiums tend to be greater in hostile takeovers than in friendly takeovers.
B. Acquisition premiums tend to be greater in share-for-share mergers (i.e., equity-financed takeovers) than in cash-financed takeovers.
C. Acquisition premiums tend to be greater if the target company is located in a country with strict takeover rules than if the target company is located in a country with weak takeover rules.

Answer 24

B. Acquisition premiums tend to be greater in share-for-share mergers (i.e., equity-financed takeovers) than in cash-financed takeovers.

Question 25

Consider the following statement: “An advantage of using price-earnings multiples to estimate the value of a target to the acquirer is that it focuses on the near-term benefits of the merger.” This statement is

Answer 25

B. False

Question 26

Acquisitions financed with debt or surplus cash are more likely to occur if
A. The acquiring firm is close to financial distress.
B. There is low information asymmetry regarding the acquisition benefits between the acquirer’s management and its shareholders.
C. If the acquiring firm has a primary shareholder who controls between 40 and 60 percent of the equity votes.
D. None of the above.

Answer 26

C. If the acquiring firm has a primary shareholder who controls between 40 and 60 percent of the equity votes.

Question 27

Consider the following statement: “A potential acquisition is more likely to be completed if the target company has not implemented golden parachutes for its management.” This statement is

Answer 27

B. False

Question 28

Which of the following mechanisms can be used as takeover defenses?
A. A voting cap
B. The issuance of depository receipts
C. Squeeze-out rules
D. A, B, and C
E. A and B

Answer 28

E. A and B

Question 29

Which of the following rules have been included in the EU Takeover Directive to prevent management entrenchment and protect minority shareholders during European takeovers?
A. The board-neutrality rule
B. The equal-treatment rule
C. The maximum-bid rule
D. A and B
E. A and C

Answer 29

D. A and B