Question 1

The PE ratio approach to valuing stock is especially useful for valuing

Accepted Answer

A)  privately held firms. 
B)  firms that don't pay dividends. 
C)  both A and B of the above. 
D)  neither A nor B of the above. 
A)  privately held firms. 
B)  firms that don't pay dividends. 
C)  both A and B of the above. 
D)  neither A nor B of the above.

Question 2

How do common stocks differ from preferred stocks?

Accepted Answer

Preferred Stockholders have priority rig

Question 3

Holding other things constant,a stock's value will be highest if the investor's required return on investments in equity is

Accepted Answer

A)  20%. 
B)  15%. 
C)  10%. 
D)  5%. 
A)  20%. 
B)  15%. 
C)  10%. 
D)  5%.

Question 4

How do corporate stocks differ from bonds?

Accepted Answer

a. Corporate stocks represent ownership

Question 5

What is the primary disadvantage of an ETF?

Accepted Answer

A)  ETFs tend to have lower management fees than comparable index mutual bonds. 
B)  ETFs usually have no minimum investment amount. 
C)  Investors have to pay a broker commission each time they buy or sell shares. 
D)  None of the above are disadvantages of an ETF. 
A)  ETFs tend to have lower management fees than comparable index mutual bonds. 
B)  ETFs usually have no minimum investment amount. 
C)  Investors have to pay a broker commission each time they buy or sell shares. 
D)  None of the above are disadvantages of an ETF.

Question 6

A stock currently sells for $30 per share and pays $1.00 per year in dividends.What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?

Accepted Answer

A)  $38 
B)  $33.50 
C)  $34.50 
D)  $33.93 
A)  $38 
B)  $33.50 
C)  $34.50 
D)  $33.93

Question 7

Why would a crisis in the subprime mortgage market lead to declining prices in the U.S.equity markets?

Accepted Answer

The subprime emergency was the sharp inc

Question 8

Which of the following is not an advantage of Electronic Communications Networks (ECNs)?

Accepted Answer

A)  All unfilled orders are available for review by ECN traders. 
B)  Transactions costs are lower for ECN trades. 
C)  Trades are made and confirmed faster. 
D)  ECNs work well for thinly traded stocks. 
A)  All unfilled orders are available for review by ECN traders. 
B)  Transactions costs are lower for ECN trades. 
C)  Trades are made and confirmed faster. 
D)  ECNs work well for thinly traded stocks.

Question 9

According to the Gordon growth model,what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent?

Accepted Answer

A)  $110 
B)  $100 
C)  $11 
D)  $10 
E)  $5.24 
A)  $110 
B)  $100 
C)  $11 
D)  $10 
E)  $5.24

Question 10

(I)Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders.
(II)Bondholders hold a claim on assets that has priority over the claims of preferred stockholders.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 11

A stock's market value will be higher the higher its expected dividend stream is,all else being equal.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is false regarding Electronic Communications Networks (ECNs)?

Accepted Answer

A)  Archipelago and Instinet are two examples of ECNs. 
B)  Competition from ECNs has forced NASDAQ to cut its fees. 
C)  Traders benefit from lower trading costs and faster service. 
D)  ECNs allow institutional investors, but not individuals, to trade after hours. 
A)  Archipelago and Instinet are two examples of ECNs. 
B)  Competition from ECNs has forced NASDAQ to cut its fees. 
C)  Traders benefit from lower trading costs and faster service. 
D)  ECNs allow institutional investors, but not individuals, to trade after hours.

Question 13

Exchange traded funds (ETFs)have which of the following features?

Accepted Answer

A)  They are listed and traded as individual stocks on a stock exchange. 
B)  They are indexed rather than actively managed. 
C)  Their value is based on the underlying net asset value of the stocks held in the index basket. 
D)  All of the above. 
A)  They are listed and traded as individual stocks on a stock exchange. 
B)  They are indexed rather than actively managed. 
C)  Their value is based on the underlying net asset value of the stocks held in the index basket. 
D)  All of the above.

Question 14

What are the objectives of the Securities and Exchange Commission?

Accepted Answer

Securities and Exchange Commission regul

Question 15

(I)Firms issue common stock in far greater amounts than preferred stock.
(II)In a given year,the total volume of stock issued is much less than the volume of bonds issued.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Question 16

Securities not listed on one of the exchanges trade in the over-the-counter market.In this exchange,dealers "make a market" by

Accepted Answer

A)  buying stocks for inventory when investors want to sell. 
B)  selling stocks from inventory when investors want to buy. 
C)  doing both of the above. 
D)  doing neither of the above. 
A)  buying stocks for inventory when investors want to sell. 
B)  selling stocks from inventory when investors want to buy. 
C)  doing both of the above. 
D)  doing neither of the above.

Question 17

A weakness of the PE approach to valuing stock is that it is

Accepted Answer

A)  difficult to estimate the constant growth rate of a firm's dividends. 
B)  difficult to estimate the required return on equity. 
C)  difficult to predict how much a firm will pay in dividends. 
D)  based on industry averages rather than firm-specific factors. 
A)  difficult to estimate the constant growth rate of a firm's dividends. 
B)  difficult to estimate the required return on equity. 
C)  difficult to predict how much a firm will pay in dividends. 
D)  based on industry averages rather than firm-specific factors.

Question 18

The Gordon growth model assumes that a stock's dividend grows at a constant rate forever.

Accepted Answer

A) True 
 B)False

Question 19

A basic principle of finance is that the value of any investment is

Accepted Answer

A)  the present value of all future net cash flows generated by the investment. 
B)  the undiscounted sum of all future net cash flows generated by the investment. 
C)  unrelated to the future net cash flows generated by the investment. 
D)  unrelated to the degree of risk associated with the future net cash flows generated by the investment. 
A)  the present value of all future net cash flows generated by the investment. 
B)  the undiscounted sum of all future net cash flows generated by the investment. 
C)  unrelated to the future net cash flows generated by the investment. 
D)  unrelated to the degree of risk associated with the future net cash flows generated by the investment.

Question 20

(I)A share of common stock in a firm represents an ownership interest in that firm.
(II)A share of preferred stock is as much like a bond as it is like common stock.

Accepted Answer

A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false. 
A)  (I) is true, (II) false. 
B)  (I) is false, (II) true. 
C)  Both are true. 
D)  Both are false.

Exam 13: The Stock Market

The PE ratio approach to valuing stock is especially useful for valuing

How do common stocks differ from preferred stocks?

Holding other things constant,a stock's value will be highest if the investor's required return on investments in equity is

How do corporate stocks differ from bonds?

What is the primary disadvantage of an ETF?

A stock currently sells for $30 per share and pays $1.00 per year in dividends.What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?

Why would a crisis in the subprime mortgage market lead to declining prices in the U.S.equity markets?

Which of the following is not an advantage of Electronic Communications Networks (ECNs)?

According to the Gordon growth model,what is an investor's valuation of a stock whose current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a long period of time and the investor's required return is 11 percent?

(I)Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II)Bondholders hold a claim on assets that has priority over the claims of preferred stockholders.

A stock's market value will be higher the higher its expected dividend stream is,all else being equal.

Which of the following statements is false regarding Electronic Communications Networks (ECNs)?

Exchange traded funds (ETFs)have which of the following features?

What are the objectives of the Securities and Exchange Commission?

(I)Firms issue common stock in far greater amounts than preferred stock. (II)In a given year,the total volume of stock issued is much less than the volume of bonds issued.

Securities not listed on one of the exchanges trade in the over-the-counter market.In this exchange,dealers "make a market" by

A weakness of the PE approach to valuing stock is that it is

The Gordon growth model assumes that a stock's dividend grows at a constant rate forever.

A basic principle of finance is that the value of any investment is

(I)A share of common stock in a firm represents an ownership interest in that firm. (II)A share of preferred stock is as much like a bond as it is like common stock.

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

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