Capstone Exam 1

1. A regional crowdfunding platform lets thousands of small savers put money into vetted local businesses that traditional banks consider too small to finance. Judged by the social function of capital markets, the platform's main contribution is that it:

(a) Reduces the taxes those businesses owe

(b) Channels otherwise-idle savings toward productive ideas that were going unfunded

(c) Guarantees each saver a positive return

(d) Eliminates the risk that the businesses fail

(e) Removes the need for those businesses to produce financial statements

(b) Channels otherwise-idle savings toward productive ideas that were going unfunded

2. An investor buys newly issued shares of a firm through a fund; months later, an equity analyst publishes a detailed report on that same firm. In the capital-market cycle, these two events represent, respectively:

(a) Information flowing to the firm, then capital flowing to investors

(b) Capital flowing from investors to the firm, then information flowing back to investors

(c) Two separate capital flows in the same direction

(d) Two separate information flows in the same direction

(e) Neither a capital flow nor an information flow

(b) Capital flowing from investors to the firm, then information flowing back to investors

3. An investment bank agrees to a firm-commitment underwriting: it buys a client's entire share issue and resells it to the public. Just after it commits, the market turns sharply downward. The bank's most direct exposure is that it may:

(a) Lose the interest it would have earned on customer deposits

(b) Be left holding shares it cannot resell above the price it paid

(c) Be required to audit the issuer's statements at its own expense

(d) Have to refund the issuer's mandatory filing fees

(e) Lose its license to advise on mergers

(b) Be left holding shares it cannot resell above the price it paid

4. In an online marketplace, 40% of used phones fully work (worth $600 to a buyer) and 60% are defective (worth $150), and buyers cannot tell them apart before purchase. The most a risk-neutral buyer will rationally pay, and the effect on sellers of working phones, are:

(a) $600; working-phone sellers stay while defective ones leave

(b) $330; working-phone sellers tend to withdraw, since $330 is below $600

(c) $150; only working phones remain listed

(d) $375; the midpoint price keeps both types listed

(e) $450; defective-phone sellers withdraw

(b) $330; working-phone sellers tend to withdraw, since $330 is below $600

6. (Select all that apply.) Ahead of issuing new shares, a CEO voluntarily releases detailed earnings guidance and hosts an investor day. Which motives for disclosing more than the law requires could plausibly explain this?

(a) To reduce information asymmetry and lower the cost of raising capital

(b) To preempt potential shareholder litigation

(c) To promote good news and support the share price before the issue

(d) To satisfy the regulator's mandatory 10-Q filing requirement

(e) To conceal a looming earnings shortfall from investors

(a) To reduce information asymmetry and lower the cost of raising capital

(b) To preempt potential shareholder litigation

(c) To promote good news and support the share price before the issue

7. Which pairing correctly separates a good bought for consumption from a claim on future cash?

(a) A one-year gym membership is a claim on uncertain future cash; a corporate bond is a consumption good

(b) A one-year gym membership delivers value as you use it; a corporate bond is a claim on uncertain future cash that must be discounted

(c) Both a gym membership and a corporate bond are consumption goods

(d) Both are claims on uncertain future cash flows valued by discounting

(e) A corporate bond's value is fully known and consumed at purchase, unlike a gym membership

(b) A one-year gym membership delivers value as you use it; a corporate bond is a claim on uncertain future cash that must be discounted

5. A researcher works inside a hedge fund, building models the fund never publishes and using them only to guide the fund's own trades. This researcher is best described as a ___ analyst, and the research stays unpublished because ___:

(a) sell-side; regulators forbid publishing it

(b) buy-side; it is a proprietary edge the fund wants to keep for itself

(c) sell-side; it is distributed only to the firm's brokerage clients

(d) buy-side; an auditor must approve it before release

(e) sell-side; the fund is paid commissions to release it

(b) buy-side; it is a proprietary edge the fund wants to keep for itself

8. An asset pays $2,200 at the end of year 1 and $1,210 at the end of year 2, and nothing afterward. At a required return of 10%, its value today is closest to:

(a) $2,818

(b) $3,000

(c) $3,100

(d) $3,300

(e) $3,410

(b) $3,000

9. A claim will pay a single $1,331 exactly three years from now. You require a 10% return, and it currently trades at $1,050. On a present-value basis, the claim is:

(a) Underpriced; its value is about $1,210

(b) Overpriced; its value is about $1,000

(c) Fairly priced; its value is about $1,050

(d) Underpriced; its value is about $1,100

(e) Overpriced; its value is about $908

(b) Overpriced; its value is about $1,000

10. (Select all that apply.) Two experienced analysts study the identical filings of the same company and reach opposite Buy/Sell conclusions. Which statements are consistent with Topic 0's account of why this can happen?

(a) Intrinsic value depends on forecasts of uncertain future payoffs, which the two can reasonably estimate differently

(b) They can hold different views on the firm's risk and thus use different discount rates

(c) A difference in assumptions, not a difference in arithmetic, can drive opposite calls

(d) One analyst must simply be wrong, since a stock has a single objective value

(e) The current market price settles the correct value, so disagreement is impossible

(a) Intrinsic value depends on forecasts of uncertain future payoffs, which the two can reasonably estimate differently

(b) They can hold different views on the firm's risk and thus use different discount rates

(c) A difference in assumptions, not a difference in arithmetic, can drive opposite calls

1. A specialty chemical used throughout an industry is available from only two producers, and no substitute input exists. In Porter’s framework, this describes:

(a) High threat of new entrants

(b) Low bargaining power of buyers

(c) High threat of substitutes

(d) High bargaining power of suppliers

(e) Intense rivalry among existing firms

(d) High bargaining power of suppliers

2. Value chain analysis is used to determine:

(a) Where value is added along an industry’s activities, and which links are most profitable

(b) The weighted-average cost of capital a firm should use in valuation

(c) The statutory tax rate that applies to a firm’s reported income

(d) Whether a firm’s external auditor is sufficiently independent of management

(e) The stage an industry has reached in its life cycle

(a) Where value is added along an industry’s activities, and which links are most profitable

3. Each statement below describes a condition in an industry. Which one would tend to reduce the intensity of rivalry among existing firms?

(a) Industry demand is growing only slowly

(b) Competitors are numerous and of similar size

(c) New firms can enter the industry easily

(d) Products are largely undifferentiated from one another

(e) Customers face substantial costs in switching suppliers

(e) Customers face substantial costs in switching suppliers

4. A well-managed firm exits pharmaceuticals and enters the airline business, keeping the same management team and the same operating standards. Its returns disappoint even after allowing for the difference in industry economics. The most likely explanation is:

(a) The management team’s quality must have deteriorated after the move

(b) A team well matched to one industry may be a poor match for another

(c) Airline accounting rules understate profits relative to pharmaceutical rules

(d) Airlines require less capital, so their returns are mechanically lower

(e) The firm’s strategy must have shifted from differentiation to cost leadership

(b) A team well matched to one industry may be a poor match for another

5. Two firms have effectively identical economics and rely on the same kind of proprietary technology. Firm A developed its technology in-house over several years; Firm B obtained equivalent technology by purchasing another company. Under US GAAP, what should an analyst expect?

(a) Both firms will carry the technology on the balance sheet at broadly comparable values

(b) Firm B must write the acquired intangible off immediately, so that its accounting matches Firm A’s

(c) Firm A expensed most development as incurred while Firm B carries an acquired intangible asset, so A looks less profitable

(d) Neither firm is permitted to recognize an intangible asset of any kind

(e) The difference changes the balance sheet but leaves reported profitability unaffected

(c) Firm A expensed most development as incurred while Firm B carries an acquired intangible asset, so A looks less profitable

6. A firm holds 30% of another company, enough to give it significant influence but not control. How is that stake accounted for, and with what effect on the investor’s statements?

(a) Carried at market value, with fair-value changes running through income each period

(b) Accounted for by the equity method, booking its share of the investee’s profit only

(c) Fully consolidated, adding all of the investee’s assets and liabilities to the investor’s balance sheet

(d) Left off the statements altogether until dividends are actually received in cash

(e) Recorded as goodwill and then tested for impairment each year

(b) Accounted for by the equity method, booking its share of the investee’s profit only

7. An airline enters contracts that lock in the price of jet fuel it will buy next year. A manufacturer with no fuel exposure enters the same contracts because it expects fuel prices to rise. Which assessment is best supported?

(a) Both firms are hedging, since both are using derivative contracts

(b) Both are speculating, because the value of any derivative is uncertain in advance

(c) Derivatives reduce risk in every case, so both firms have lowered their exposure

(d) Only the manufacturer is hedging, since it holds no underlying position that could lose value

(e) The airline is reducing a risk it already faces; the manufacturer is adding one

(e) The airline is reducing a risk it already faces; the manufacturer is adding one

8. A firm’s loan agreement requires it to keep interest coverage above a stated minimum, and coverage has drifted close to that limit. What should an analyst do with this information?

(a) Disregard it, since covenants are a matter between the firm and its lender

(b) Conclude that the firm has already violated generally accepted accounting principles

(c) Expect a sharper incentive to nudge earnings upward or reclassify items, and scrutinize the discretionary estimates accordingly

(d) Expect the firm to become more conservative in its estimates as the limit approaches

(e) Disregard the coverage ratio, on the ground that interest is tax-deductible anyway

(c) Expect a sharper incentive to nudge earnings upward or reclassify items, and scrutinize the discretionary estimates accordingly

9. (Select all that apply.) A firm’s net income was flat this year, yet its earnings per share rose 8%. During the year it repurchased shares, and it continues to pay a substantial part of employee compensation in stock. Which statements are supported?

(a) A buyback lifts earnings per share mechanically by shrinking the share count, even if the business earned no more

(b) Rising earnings per share on flat net income is not by itself evidence that value has been created

(c) Paying employees in stock is costless to shareholders, since no cash leaves the firm

(d) Shares issued to employees dilute existing owners and offset part of the buyback’s effect on the share count

(e) The rise in earnings per share demonstrates that operating performance improved

(a) A buyback lifts earnings per share mechanically by shrinking the share count, even if the business earned no more

(b) Rising earnings per share on flat net income is not by itself evidence that value has been created

(d) Shares issued to employees dilute existing owners and offset part of the buyback’s effect on the share count

10. (Select all that apply.) An acquisitive firm carries a large goodwill balance from several past deals. The acquired businesses have been visibly underperforming for two years, yet the firm has recorded no impairment. Which statements are supported?

(a) Goodwill is tested for impairment rather than written off on a fixed schedule, which leaves management discretion over the timing

(b) An unimpaired balance is itself evidence that the acquired businesses are performing adequately

(c) Declining to take a warranted write-down overstates assets and leaves current earnings above what the economics justify

(d) Sustained underperformance of acquired units signals that an impairment may be coming and warrants closer scrutiny

(e) Because an impairment charge is non-cash, the question is of no consequence to an analyst

(a) Goodwill is tested for impairment rather than written off on a fixed schedule, which leaves management discretion over the timing

(c) Declining to take a warranted write-down overstates assets and leaves current earnings above what the economics justify

(d) Sustained underperformance of acquired units signals that an impairment may be coming and warrants closer scrutiny

1. A supplier is deciding whether to sell to a new customer on 30-day credit terms. Which measure speaks most directly to the supplier’s concern?

(a) The price-to-book ratio

(b) The quick (acid-test) ratio

(c) The sustainable growth rate

(d) Total assets turnover

(e) Diluted earnings per share

(b) The quick (acid-test) ratio

2. An analyst compares a firm’s current ratio and gross margin this year with the same firm’s figures for each of the previous five years. This is:

(a) Cross-sectional analysis

(b) Common-size analysis

(c) Segment analysis

(d) The DuPont decomposition

(e) Time-series analysis

(e) Time-series analysis

3. A firm’s “other expenses” line rose 400% this year, while its sales rose 5%. Before treating this as a warning sign, the most useful next step is to:

(a) Conclude that the firm’s costs are out of control

(b) Recompute earnings per share on a diluted basis

(c) Express the line as a percentage of sales to see whether it is material, and check whether it is nonrecurring

(d) Compare the firm’s current ratio with the industry average

(e) Assume the increase will recur and build it into next year’s forecast

(c) Express the line as a percentage of sales to see whether it is material, and check whether it is nonrecurring

4. An analyst wants to judge which of two competitors runs its operations more profitably. One is debt free; the other finances most of its assets with debt. The more appropriate measure for this comparison is:

(a) ROCE

(b) EPS

(c) Net profit margin

(d) ROA

(e) Financial leverage

(d) ROA

5. A firm is growing at exactly its sustainable growth rate. It then raises its dividend payout ratio, while its return on equity and its debt-to-equity ratio stay the same. To keep growing at its old pace, it must now:

(a) Issue new shares or increase its leverage

(b) Do nothing, since a firm’s growth does not depend on its payout

(c) Reduce its return on equity

(d) Hold more of its assets in cash

(e) Lower its asset turnover

(a) Issue new shares or increase its leverage

6. A firm with no debt has average total assets and common equity of $200, and earns net income of $30 (pre-tax income of $40, taxed at 25%), so its ROCE is 15%. It now replaces $100 of its equity with debt at 6% interest, leaving its operations unchanged. Its new ROCE is:

(a) 15%

(b) 24%

(c) 25.5%

(d) 30%

(e) 12.75%

(c) 25.5%

7. Firm A has a net profit margin of 10%, total assets turnover of 0.8, and financial leverage of 1.5. Firm B has a net profit margin of 2%, total assets turnover of 3.0, and financial leverage of 2.0. Which statement is best supported?

(a) Both earn a 12% ROCE: A through a high margin, as a differentiator would, and B through high turnover and more leverage, as a cost leader would

(b) A earns the higher ROCE, because its margin is five times B’s

(c) B earns the higher ROCE, because it turns its assets over almost four times as fast

(d) Both earn a 12% ROCE, so their strategies and risks are essentially the same

(e) Their ROCEs cannot be compared without knowing their share prices

(a) Both earn a 12% ROCE: A through a high margin, as a differentiator would, and B through high turnover and more leverage, as a cost leader would

8. Two firms have the same interest coverage ratio today. Firm X has mostly fixed operating costs and sells a product whose demand rises and falls with the economy; Firm Y has mostly variable costs and steady demand. In a recession, which outcome is most likely?

(a) Both firms’ coverage falls by the same proportion, since it is equal today

(b) X’s coverage falls much faster toward 1, because its fixed costs magnify the drop in earnings

(c) Y’s coverage falls faster, because variable costs rise in a recession

(d) Neither firm’s coverage changes, because interest expense is fixed

(e) X’s coverage rises, because its fixed costs do not change

(b) X’s coverage falls much faster toward 1, because its fixed costs magnify the drop in earnings

9. (Select all that apply.) A fast-growing retailer reports a current ratio of 0.8 and a quick ratio of 0.3. It collects from customers before it pays its suppliers, so its cash-to-cash cycle is negative, and its operating cash flow is strong and steady. Which statements are supported?

(a) A current ratio below 1 is not by itself evidence of distress for this firm

(b) Much of its current assets consist of items, chiefly inventory, that the quick ratio excludes

(c) The firm will probably be unable to pay its bills as they come due

(d) Its suppliers are effectively financing part of its working capital

(e) Raising its current ratio above 1 by holding more idle cash would raise its ROCE

(a) A current ratio below 1 is not by itself evidence of distress for this firm

(b) Much of its current assets consist of items, chiefly inventory, that the quick ratio excludes

(d) Its suppliers are effectively financing part of its working capital

10. (Select all that apply.) Over two years a firm’s ROCE rose from 12% to 18%, while its net profit margin and total assets turnover were unchanged. Its cost of equity is 11%. Which statements are supported?

(a) The entire rise in ROCE came from higher financial leverage

(b) Because ROCE now exceeds the cost of equity by a wider margin, the change is unambiguously value-creating

(c) Shareholders now bear more risk, because leverage magnifies losses as well as gains

(d) The firm’s ROA must have increased

(e) Its financial leverage (assets per dollar of equity) must have risen by about half

(a) The entire rise in ROCE came from higher financial leverage

(c) Shareholders now bear more risk, because leverage magnifies losses as well as gains

(e) Its financial leverage (assets per dollar of equity) must have risen by about half

1. A lender is reviewing a loan application from a profitable firm with substantial unencumbered real estate. The loan officer’s credit memo emphasizes projected operating cash flows far more than the appraised value of the real estate. This approach is best explained by:

(a) Real estate cannot legally serve as collateral

(b) Equity analysts, not lenders, care about cash flow

(c) Cash flow, not collateral, is the lender’s preferred source of repayment

(d) The firm has no remaining debt capacity

(e) Collateral values are never reliable

(c) Cash flow, not collateral, is the lender’s preferred source of repayment

2. A leveraged loan contains only an incurrence covenant limiting new debt issuance, with no quarterly-tested financial ratio. A borrower whose performance steadily deteriorates, but which issues no new debt, pays no dividend, and makes no acquisition:

(a) Will automatically breach the covenant once its ratios fall below investment grade

(b) Must renegotiate the loan every quarter regardless

(c) Will receive an automatic credit-rating upgrade

(d) Is in technical default the moment its EBITDA falls

(e) Can avoid triggering any covenant at all simply by taking no further action

(e) Can avoid triggering any covenant at all simply by taking no further action

3. Spirit Airlines’ auditor issued unqualified opinions with no going-concern paragraph for fiscal 2022 and 2023, in the same filings where Spirit’s Altman Z-score sat deep in the distress zone and its Ohlson probability exceeded Ohlson’s own cutoff. The most reasonable conclusion is:

(a) The absence of a going-concern paragraph is not, by itself, evidence of financial health

(b) The distress models must have been computed incorrectly

(c) A clean audit opinion is proof a company is not at risk of bankruptcy

(d) Auditors and accounting-based distress models always reach the same conclusion

(e) Going-concern opinions are issued automatically whenever a model-based score indicates distress

(a) The absence of a going-concern paragraph is not, by itself, evidence of financial health

4. A risk team wants one model that reacts within days to new information embedded in the stock price, and a second model that relies only on audited financial statements and needs no market data at all. The team should pair:

(a) Two machine-learning models

(b) The Merton distance-to-default with the Altman Z-score

(c) Two Merton models estimated on different horizons

(d) The Merton distance-to-default with the Ohlson O-score

(e) A credit rating with a covenant

(d) The Merton distance-to-default with the Ohlson O-score

5. A bank renegotiates a loan to take a lien on easily sold equipment. The change leaves the borrower’s probability of default and the amount drawn on the facility unchanged. Which component of expected credit loss does this action most directly reduce?

(a) The probability that the borrower fails to pay as promised

(b) The fraction of the exposure the lender does not recover if default occurs

(c) The dollar amount the lender is owed at the moment of default

(d) The risk-free portion of the interest rate the lender charges

(e) The ratio of the borrower’s debt to its equity

(b) The fraction of the exposure the lender does not recover if default occurs

6. A lender holds a claim against a borrower that has just filed for Chapter 11 reorganization. In the months immediately following the filing, the lender should expect that:

(a) It can demand immediate payment of its claim, since bankruptcy accelerates all debts

(b) The borrower’s assets will be sold immediately to the highest bidder

(c) It generally cannot demand payment of its claim while the borrower operates under the court’s protection and develops a plan

(d) Its claim is automatically converted to equity in the borrower

(e) The borrower is barred from continuing normal business operations

(c) It generally cannot demand payment of its claim while the borrower operates under the court’s protection and develops a plan

7. A credit rating agency is paid by the company whose bonds it rates, rather than by the investors who rely on the rating. A lender evaluating that agency’s rating should recognize that this arrangement:

(a) Eliminates any possibility of bias, since agencies are professionally regulated

(b) Creates a potential conflict of interest, since the agency has a financial incentive to satisfy the party paying for the rating

(c) Means the rating cannot legally be used in a lending decision

(d) Guarantees the rating is more accurate than an investor-paid rating would be

(e) Has no bearing on the agency’s independence

(b) Creates a potential conflict of interest, since the agency has a financial incentive to satisfy the party paying for the rating

8. In the Merton framework, a spike in a firm’s asset volatility, holding its asset value and debt level fixed, most directly:

(a) Increases the distance to default, because volatile firms are rewarded for growth potential

(b) Has no effect on the distance to default, which depends only on asset value and debt

(c) Decreases the distance to default, because the asset value is now less certain to stay above the default point over the horizon

(d) Converts the firm’s debt into equity automatically

(e) Only affects the Altman Z-score, not the Merton model

(c) Decreases the distance to default, because the asset value is now less certain to stay above the default point over the horizon

9. Between two dates seven weeks apart, nothing in an airline’s audited financial statements changed, yet its Merton-model probability of default rose sharply, because a court blocked a pending acquisition and the stock price fell. An accounting-based model such as Altman or Ohlson could not have produced the same reaction over those seven weeks primarily because:

(a) Altman and Ohlson are computed from the financial statements and are not re-estimated until a new filing is available, while Merton’s inputs are market prices that can be observed and recomputed at any time

(b) Altman and Ohlson’s formulas do not permit negative outputs, while Merton’s probability can fall below zero

(c) Altman and Ohlson are legally prohibited from being updated more than once per fiscal year

(d) Merton’s probability of default is simply the inverse of the firm’s credit rating, which the court ruling changed directly

(e) Altman and Ohlson assign no weight at all to liabilities, so a change in the firm’s legal situation cannot affect them

(a) Altman and Ohlson are computed from the financial statements and are not re-estimated until a new filing is available, while Merton’s inputs are market prices that can be observed and recomputed at any time

10. (Select all that apply.) At the end of December 2023, three distress models applied to the same airline gave different readings: the Altman Z-score indicated distress, the Ohlson O-score indicated a probability well above its own cutoff, and the Merton model indicated a comparatively low probability of default because the stock was still priced for a pending acquisition. Which conclusions are supported?

(a) When models disagree this sharply, the disagreement itself is informative and worth investigating

(b) Because two of the three models agreed, the firm’s low Merton reading should be dismissed as simply wrong

(c) No single model family is universally superior, so combining accounting, market, and other indicators gives the most reliable early warning

(d) The Merton model’s relatively low reading was being driven by a non-fundamental, deal-specific support for the stock price rather than by genuine credit strength

(e) Because the auditor had not raised a going-concern issue, a lender could safely treat all three models as overly conservative

(a) When models disagree this sharply, the disagreement itself is informative and worth investigating

(c) No single model family is universally superior, so combining accounting, market, and other indicators gives the most reliable early warning

(d) The Merton model’s relatively low reading was being driven by a non-fundamental, deal-specific support for the stock price rather than by genuine credit strength

Which best illustrates capital markets performing their core social function?

a. A central bank prints currency to fund the government

b. pension fund buys newly issued shares that let a firm build a factory

c. A tax authority collects corporate income tax

d. An auditor certifies a company's financial statements

e. A retiree keeps cash idle in a safe-deposit box

b. pension fund buys newly issued shares that let a firm build a factory

Early Airbnb had a strong idea but little cash, while pension funds had cash but no home-sharing idea. What connects the two?

a. Consumer demand for their products

b. Capital markets and their financial intermediaries

c. Government start-up subsidies

d. The founders' personal savings

e. Word-of-mouth advertising

b. Capital markets and their financial intermediaries

A developing country has high household savings but few new firms and slow growth. Which are plausible signs of weak capital markets? (select all that apply)

a. Savers keep cash idle or send it abroad

b. Good ideas go unfunded

c. Rapid productive investment

d. Entrepreneurs struggle to raise money

e. Firms fund new projects easily and cheaply

a. Savers keep cash idle or send it abroad

b. Good ideas go unfunded

d. Entrepreneurs struggle to raise money

Which of these is a financial intermediary?

a. An audit firm (Deloitte)

b. A credit rating agency (Moody's)

c. A mutual fund (the Vanguard 500 Index Fund)

d. A sell-side equity analyst

e. A financial news outlet (the Wall Street Journal)

c. A mutual fund (the Vanguard 500 Index Fund)

You buy shares of a Fidelity mutual fund, then read an S&P credit rating before buying a bond (an IOU that pays fixed interest). Which intermediary types did you use, in order?

a. Information, then financial

b. Financial, then information

c. Both financial

d. Both information

e. Neither; both are markets, not intermediaries

b. Financial, then information

A little-known firm says 'investors just don't understand us,' so funding is scarce. Which intermediaries most directly fix that problem? (select all that apply)

a. An analyst initiating coverage

B. An auditor attesting the statements

c. A credit rating agency issuing a rating

d. A bank making a loan

e. A venture capital fund buying equity

a. An analyst initiating coverage

B. An auditor attesting the statements

c. A credit rating agency issuing a rating

Who most likely funds a risky, pre-revenue start-up that also needs guidance?

a. A commercial bank term loan

b. A venture capital firm

c. A pension fund buying shares of large, stable companies

d. An investment bank underwriting an IPO

e. A fund holding only safe short-term deposits

b. A venture capital firm

How does an investment bank such as Goldman Sachs earn fees? (select all that apply)

a. Underwriting IPOs and bond issues

b. Advising on mergers and acquisitions

c. Paying depositors interest

d. Auditing its clients' books

e. Collecting interest on retail deposit accounts

a. Underwriting IPOs and bond issues

b. Advising on mergers and acquisitions

In 2021 many firms rushed to go public in a hot market, and some later collapsed. For the underwriting bank, the main long-run cost of taking weak firms public is:

a. Lost deposit interest

b. Reputational damage that hurts future deals

c. The lost fee from that single deal

d. A one-time regulatory filing fee

e. Nothing

b. Reputational damage that hurts future deals

A used-car seller knows each car's true condition but buyers cannot tell good cars from lemons. In capital markets, the closest parallel is that:

a. Investors know more about the firm than managers do

b. Managers know more about the firm than outside investors do

c. Managers and investors are equally informed

d. Auditors know more than managers

e. Neither party has any information about the firm

b. Managers know more about the firm than outside investors do

In the used-car example, why do good cars disappear when buyers cannot judge quality?

a. Good-car owners cut their price to match the lemons

b. Buyers offer only the average price, which is too low for good-car owners

c. Lemons are worth more than good cars

d. Sellers prefer to keep lemons

e. Good cars cost more to maintain

b. Buyers offer only the average price, which is too low for good-car owners

A private company's founder knows far more than outside investors, who therefore offer a low price. Likely results? (select all that apply)

a. Good founders may refuse to sell equity at the low price

b. Investors demand a risk discount

c. The discount rate investors require rises

d. Investors pay full value anyway

e. The information gap has no effect on price

a. Good founders may refuse to sell equity at the low price

b. Investors demand a risk discount

c. The discount rate investors require rises

An analyst publishes research reports that a brokerage distributes to its many clients. This analyst is best classified as:

a. A buy-side analyst working in-house for a fund

b. A sell-side analyst at a broker or investment bank

c. An auditor

d. A credit rating analyst

e. A robo-analyst replacing human research

b. A sell-side analyst at a broker or investment bank

Why might you trust Apple's audited 10-K more than an Apple press release? (select all that apply)

a. Auditors attest conformity with GAAP

b. Auditors face litigation and regulatory oversight

c. A press release can be selective and self-serving

d. A press release is independently verified

e. Press releases are audited by the PCAOB

a. Auditors attest conformity with GAAP

b. Auditors face litigation and regulatory oversight

c. A press release can be selective and self-serving

In the classic case, Enron's auditor Arthur Andersen collapsed in 2001 after the fraud; more recently, EY faced heavy fallout after the 2020 Wirecard fraud. What do these episodes most directly show about auditors?

a. Auditors face no consequences

b. Reputation and litigation can destroy an auditor that fails

c. Auditors write GAAP

d. Auditors are appointed by the government

e. Auditors are irrelevant

b. Reputation and litigation can destroy an auditor that fails

Which of the following must a public company file because regulators require it, not because managers choose to?

a. Voluntary earnings guidance for next quarter

b. The annual report on Form 10-K

c. A CEO's post on social media

d. A sell-side analyst's note

e. An optional investor-day presentation

b. The annual report on Form 10-K

Which of the following are voluntary disclosures? (select all that apply)

a. Earnings guidance

b. The 10-Q

c. An optional investor-day forecast

d. The 10-K

e. An 8-K filed for a required material event

a. Earnings guidance

c. An optional investor-day forecast

A firm trumpets a record quarter within hours but discloses a product recall only in a late-night Friday filing. This pattern is best described as:

a. Mandated disclosure

b. Asymmetric disclosure (good news fast, bad news slow)

c. Voluntary disclosure

d. Information asymmetry

e. Full and timely disclosure

b. Asymmetric disclosure (good news fast, bad news slow)

Which is a conflict of interest for a credit rating agency?

a. It is paid by the bond issuers it rates

b. It is paid subscription fees by investors

c. It competes with other rating agencies

d. It can be sued for negligent ratings

e. It updates ratings when conditions change

a. It is paid by the bond issuers it rates

Which forces push a conflicted rating agency toward accuracy? (select all that apply)

a. Litigation risk

b. Reputation with investors

c. Competition from rival firms

d. Fees paid by the issuer

e. The issuer's desire for a high rating

a. Litigation risk

b. Reputation with investors

c. Competition from rival firms

Before the 2008 crisis, agencies rated many subprime mortgage bonds AAA while being paid by the issuers. This best illustrates:

a. That reputation always prevents bias

b. The issuer-pays conflict of interest

c. That ratings are irrelevant

d. That competition eliminates all bias

e. Information symmetry

b. The issuer-pays conflict of interest

The six-step framework begins with the broad environment before the specific firm. Which task therefore comes first?

a. Computing the firm's profitability ratios

b. Identifying the industry's economic characteristics

c. Forecasting the firm's financial statements

d. Estimating the firm's intrinsic value

e. Assessing the quality of the firm's accounting

b. Identifying the industry's economic characteristics

Which of the following belong to strategy analysis (Steps 1 and 2)? (select all that apply)

a. Identifying the industry's economic characteristics

b. Identifying the company's strategy

c. Assessing accounting quality

d. Valuing the firm

e. Preparing forecasted statements

a. Identifying the industry's economic characteristics

b. Identifying the company's strategy

An analyst builds a detailed DCF for a firm that, it turns out, aggressively capitalized ordinary expenses. Which earlier step would have caught this?

a. Step 1 (industry)

b. Step 2 (strategy)

c. Step 3 (accounting quality)

d. Step 5 (forecast)

e. Step 6 (value)

c. Step 3 (accounting quality)

Which of these is priced as a claim on uncertain future cash rather than for consumption today?

a. A burrito eaten at lunch

b. A share of Apple stock

c. A haircut

d. A concert ticket for tonight

e. A cup of coffee

b. A share of Apple stock

What is true of a share of stock but not of a burrito? (select all that apply)

a. It cannot be consumed

b. Its payoff lies in the future

c. Its payoff is uncertain

d. Its value is fully known at purchase

e. You receive its full value the moment you buy it

a. It cannot be consumed

b. Its payoff lies in the future

c. Its payoff is uncertain

If the discount rate rises while expected payoffs are unchanged, a security's value:

a. Rises

b. Falls

c. Stays the same

d. Becomes zero

e. Doubles

b. Falls

A stock's value today would rise if: (select all that apply)

a. Expected cash flows increase

b. The discount rate falls

c. Risk rises

d. The firm becomes safer

e. The required rate of return increases

a. Expected cash flows increase

b. The discount rate falls

d. The firm becomes safer

Two bonds A and B have identical expected cash flows, but bond A is issued by a riskier company. Today, bond A should trade at:

a. A higher price than B

b. A lower price than B

c. The same price as B

d. Zero

e. A price that cannot be determined

b. A lower price than B

Why value a stock that already trades on an exchange?

a. The market price is always correct

b. Your estimate may reveal the price is wrong

c. Valuation is legally required for every trade

d. To confirm the price already shown on the exchange

e. To set the firm's dividend

b. Your estimate may reveal the price is wrong

In which cases is a valuation genuinely required? (select all that apply)

a. A private firm with no market price

b. An IPO

c. Judging whether a public stock is mispriced

d. Filing a routine tax return

e. Checking today's quoted price in a brokerage app

a. A private firm with no market price

b. An IPO

c. Judging whether a public stock is mispriced

In January 2021, GameStop's price detached wildly from most fundamental valuations. For a fundamental investor, acting on a valuation gap makes sense only if:

a. Prices never change

b. Price eventually moves toward intrinsic value

c. Mispricing never corrects

d. The market price is always right

e. You can borrow without limit

b. Price eventually moves toward intrinsic value

Two analysts using the same DCF reach opposite calls mainly because of different:

a. Arithmetic mistakes

b. Assumptions about the future

c. Valuation formulas

d. Access to the current price

e. Accounting standards the firm uses

b. Assumptions about the future

From the Tesla analyst table, which conclusions are supported? (select all that apply)

a. Professionals disagree

b. A 'Hold' consensus can hide wide disagreement

c. There is one correct rating

d. Buy and Sell can be held simultaneously across analysts

e. The consensus proves Tesla is a Buy

a. Professionals disagree

b. A 'Hold' consensus can hide wide disagreement

d. Buy and Sell can be held simultaneously across analysts

On Reddit's WallStreetBets and among Wall Street analysts, Tesla is called both a 'Buy' and a 'Sell' at the same time. The deepest reason is that a stock's value:

a. Is objective and fixed

b. Depends on expectations about an uncertain future

c. Always equals the current market price

d. Is set by auditors

e. Reflects only past earnings

b. Depends on expectations about an uncertain future

An analyst forecasts a firm's cash flows without first studying its industry or strategy. What is the main risk of this shortcut?

a. The arithmetic will contain errors

b. The forecast lacks a qualitative basis, so its assumptions may be baseless

c. The forecast will ignore the time value of money

d. The discount rate cannot be calculated at all

e. The model will automatically overstate value

b. The forecast lacks a qualitative basis, so its assumptions may be baseless

Through which two channels does any macro factor affect firm value?

a. Revenue and expenses only

b. Profitability and the discount rate

c. Assets and liabilities

d. Price and volume

e. Dividends and buybacks

b. Profitability and the discount rate

How can economic growth raise a firm's profitability? (select all that apply)

a. Higher demand

b. Greater pricing power

c. Productivity gains

d. Higher corporate tax rates

e. A higher discount rate

a. Higher demand

b. Greater pricing power

c. Productivity gains

Cheap debt from low rates can lead to which value-destroying behaviors? (select all that apply)

a. Overleverage

b. Debt-funded buybacks at inflated prices

c. Empire building

d. Lower interest expense

e. Matching revenues and costs by currency (a natural hedge)

a. Overleverage

b. Debt-funded buybacks at inflated prices

c. Empire building

A firm loads up on cheap debt in a low-rate period, then a recession hits. Why is it now worse off than a less-levered rival?

a. Its interest expense fell

b. Fixed debt payments amplify the downturn and raise default risk

c. Leverage lowers its risk in a downturn

d. It has no revenue

e. Lower rates guarantee it will recover

b. Fixed debt payments amplify the downturn and raise default risk

A trade war between two countries most directly:

a. Lowers all firms' taxes

b. Disrupts supply chains, costs, and demand

c. Guarantees higher domestic profits

d. Eliminates currency risk

e. Has no effect on firms

b. Disrupts supply chains, costs, and demand

An oil-price spike affects an airline through which two distinct channels?

a. Only fuel cost

b. Fuel cost and a signal of geopolitical risk

c. Only the discount rate

d. Only demand

e. Fuel cost and a currency-translation effect

b. Fuel cost and a signal of geopolitical risk

A government ends EV purchase subsidies. Which effects on an EV maker are plausible? (select all that apply)

a. Lower demand

b. Lower expected cash flows

c. A change in its valuation

d. No effect at all

e. An automatic rise in its share price

a. Lower demand

b. Lower expected cash flows

c. A change in its valuation

A US firm sells in euros and also builds those products in Europe, paying euro costs. By doing so it has created a:

a. Financial hedge using derivatives

b. Natural hedge

c. Dividend recapitalization

d. Trade war

b. Natural hedge

How can a global firm hedge macro risk? (select all that apply)

a. Currency derivatives

b. Matching revenues and costs by country

c. Locating plants near customers

d. Ignoring exchange rates

e. Increasing unhedged foreign-currency debt

a. Currency derivatives

b. Matching revenues and costs by country

c. Locating plants near customers

A US automaker builds a plant in Europe to serve European buyers. Beyond logistics, this operating choice mainly hedges:

a. Interest-rate risk

b. Tariff and political risk

c. Audit risk

d. Inflation only

e. Only currency-translation risk

b. Tariff and political risk

Why analyze the industry, not just the firm?

a. All firms are essentially identical

b. Industry structure sets the profit potential

c. Industries do not differ in profitability

d. It replaces the need to study the firm

e. It tells you the firm's exact intrinsic value

b. Industry structure sets the profit potential

US airlines (about 1.8% EBIT/assets) earn far less than pharma (about 14.6%). The best explanation is:

a. Airlines' managers work less hard

b. Differences in industry structure and competition

c. Random luck

d. Different accounting rules

e. Pharma firms are simply larger

b. Differences in industry structure and competition

Which factors raise an industry's average profitability? (select all that apply)

a. Weak competition

b. The ability to earn abnormal profits

c. Strong bargaining power over suppliers and buyers

d. Easy entry that competes profits away

e. Many close substitute products

a. Weak competition

b. The ability to earn abnormal profits

c. Strong bargaining power over suppliers and buyers

Which conditions tend to hold an industry's prices and profits down? (select all that apply)

a. Many close substitutes

b. Powerful buyers

c. High barriers to entry

d. Easy entry

e. Strong brand loyalty that locks in customers

a. Many close substitutes

b. Powerful buyers

d. Easy entry

A patent-protected drug faces few substitutes, weak buyer power, and high entry barriers. Porter's framework predicts the industry's profitability is:

a. Low

b. High

c. Zero

d. Impossible to assess

e. Average for all industries

b. High

Renewables, electric vehicles, AI, and biotech are all new and rapidly expanding. In life-cycle terms, these are best described as:

a. Sunset industries

b. Sunrise industries

c. Fully mature industries

d. Government monopolies

e. Cyclical industries

b. Sunrise industries

Which are industry risk factors an analyst should weigh beyond profitability? (select all that apply)

a. Sensitivity to macro factors

b. Life-cycle stage

c. Disruptive technology such as AI

d. The CEO's salary

e. The firm's own dividend policy

a. Sensitivity to macro factors

b. Life-cycle stage

c. Disruptive technology such as AI

An analyst wants management's plain-English description of what the business does and its segments. Which 10-K section provides this?

a. The independent auditor's report

b. Regulation S-K Item 1 (Business)

c. The proxy statement (DEF 14A)

d. The cover page

e. The notes on income taxes

b. Regulation S-K Item 1 (Business)

McDonald's earns heavily from real estate, and airlines from loyalty programs. The lesson for an analyst is:

a. Ignore the income statement

b. Identify what business the firm is really in

c. All firms are essentially the same

d. Only revenue matters

e. Segment data can be ignored

b. Identify what business the firm is really in

A differentiator's price premium erodes over a few years. Using the five forces, what most likely happened?

a. Rivalry fell

b. Substitutes improved or entrants copied the feature

c. Buyers became weaker

d. Barriers to entry rose

e. Suppliers lost bargaining power

b. Substitutes improved or entrants copied the feature

A practical test of how much a CEO is worth is:

a. Their social-media following

b. How strongly investors would react if the CEO left, and whether they can be replaced

c. Their age

d. The length of their tenure so far

e. The number of interviews they give

b. How strongly investors would react if the CEO left, and whether they can be replaced

A quiet, low-profile CEO steadily outperforms a flashy 'superstar' peer. This best supports the idea that:

a. CEOs never matter

b. Fit between the CEO and the firm matters more than fame

c. Only founder-CEOs add value

d. Media coverage predicts returns

e. Superstar CEOs always underperform

b. Fit between the CEO and the firm matters more than fame

An independent board reviews management's decisions, and internal controls limit what executives can do unchecked. Together these are the firm's:

a. Marketing strategy

b. Corporate governance

c. Supply chain

d. Competitive advantage

e. Value chain

b. Corporate governance

Which are governance red flags for an analyst? (select all that apply)

a. Weak checks and balances

b. A 'win at all costs' culture

c. A board lacking independence

d. An independent, competent board

e. An independent audit committee and a whistleblower channel

a. Weak checks and balances

b. A 'win at all costs' culture

c. A board lacking independence