Deck 13: The Stock Market

Question 1

(I)Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders,but after that of bondholders.
(II)Firms issue preferred stock in far greater amounts than common stock.

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

Answer 1

A

Question 2

The most active stock exchange in the world is the

A) Nikkei Stock Exchange.
B) London Stock Exchange.
C) Shanghai Stock Exchange.
D) New York Stock Exchange.

Answer 2

A

Question 3

To list on the NYSE,a firm must

A) have earnings of at least $10 million per year.
B) have at least $500 million in outstanding debt.
C) have a total of $100 million in market value.
D) meet all of the above requirements.
E) meet A and C of the above requirements.

Answer 3

E

Question 4

(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.

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

Question 5

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

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 6

(I)The largest of the organized stock exchanges in the United States is the New York Stock Exchange.
(II)To be listed on the NYSE,a firm must have a minimum of $100 million in market value or $10 million in revenues.

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

Question 7

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

Question 8

In the generalized dividend valuation model,a stock's value depends only on

A) its future dividend payments and its future price.
B) its future dividend payments and the required return on equity.
C) its future price and the required return on investments on equity.
D) its future dividend payments.

Question 9

Which of the following statements about trading operations in an organized exchange is correct?

A) Floor traders all deal in a wide variety of stocks.
B) In most trades, specialists match buy and sell orders.
C) In most trades, specialists buy for or sell from their own inventories.
D) The SuperDOT system is used to expedite large trades of over 100,000 shares.

Question 10

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

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 11

Preferred stockholders hold a claim on assets that has priority over the claims of

A) both common stockholders and bondholders.
B) neither common stockholders nor bondholders.
C) common stockholders, but after that of bondholders.
D) bondholders, but after that of common stockholders.

Question 12

The riskiest capital market security is

A) preferred stock.
B) common stock.
C) corporate bonds.
D) Treasury bonds.

Question 13

In the one-period valuation model,a stock's value falls if the ________ rises.

A) dividend
B) expected future price
C) required return on equity
D) current price

Question 14

In the one-period valuation model,a stock's value will be higher

A) the higher its expected future price is.
B) the lower its dividend is.
C) the higher the required return on investments in equity is.
D) all of the above.

Question 15

A stock currently sells for $25 per share and pays $0.24 per year in dividends.What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?

A) $30.24
B) $26.30
C) $26.09
D) $27.74

Question 16

(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.

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

Question 17

Which of the following is not an element of the Gordon growth model of stock valuation?

A) The stock's most recent dividend paid
B) The expected constant growth rate of dividends
C) The required return on investments in equity
D) The stock's expected future price

Question 18

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?

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

Question 19

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

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

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

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 21

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

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 22

Which of the following is not an objective of the Securities and Exchange Commission?

A) Maintain integrity of the securities markets
B) Advise investors about which particular stocks are good buys
C) Require firms to provide specific information to investors
D) Regulate major participants in securities markets

Question 23

Suppose the average industry PE ratio for auto parts retailers is 20.What is the current price of Auto Zone stock if the retailer's earnings per share is projected to be $1.85?

A) $21.85
B) $37
C) $10.81
D) $9.25

Question 24

Which of the following is true regarding the Gordon growth model?

A) Dividends are assumed to grow at a constant rate forever.
B) The dividend growth rate is assumed to be greater than the required return on equity.
C) Both A and B of the above.
D) Neither A nor B of the above.

Question 25

A high price earnings ratio (PE)gives what interpretation?

A) The market expects earnings to fall in the future.
B) The market feels the firm's earnings are very high risk and are willing to pay a premium for them.
C) The market expects the earnings to rise in the future.
D) The firm is not paying a dividend.

Question 26

What is the primary disadvantage 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 27

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

A) publicly held corporations.
B) firms that regularly pay dividends.
C) both A and B of the above.
D) neither A nor B of the above.

Question 28

The main cause of fluctuations in stock prices is changes in

A) tax laws.
B) errors in technical stock analysis.
C) daily trading volume in stock markets.
D) information available to investors.
E) total household wealth in the economy.

Question 29

Holding other things constant,a stock's value will be highest if its most recent dividend is

A) $2.00.
B) $5.00.
C) $0.50.
D) $1.00.

Question 30

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 15 percent?

A) $20
B) $11
C) $22
D) $7.33
E) $4.40

Question 31

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?

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

Question 32

A share of common stock in a firm represents an ownership interest in that firm and allows stockholders to

A) vote.
B) receive dividends.
C) receive interest payments.
D) only A and B of the above.

Question 33

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

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 34

The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend growth to ________,investors' required return on equity to ________,and stock prices to ________.

A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; decrease
D) increase; decrease; increase

Question 35

(I)The market price of a security at a given time is the highest value any investor puts on the security.
(II)Superior information about a security increases its value by reducing its risk.

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

Question 36

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

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

Question 37

In 2013,the NYSE traded ________ shares on an average trading day.

A) 4 billion
B) 7 billion
C) 10 billion
D) 12 billion

Question 38

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

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 39

Holding other things constant,a stock's value will be highest if its dividend growth rate is

A) 15%.
B) 10%.
C) 5%.
D) 2%.

Question 40

Stock values computed by valuation models may differ from actual market prices because it is difficult to

A) estimate future dividend growth rates.
B) estimate the risk of a stock.
C) forecast a stock's future dividends.
D) all of the above are true.

Question 41

How do corporate stocks differ from bonds?

Question 42

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

Question 43

The Securities and Exchange Commission requires firms to submit various documents to increase the flow of information to investors but does not verify the accuracy of that information.

Question 44

Which of the following is not a division of the S.E.C.?

A) The Division of Fraud Investigation
B) The Division of Corporate Finance
C) The Division of Market Regulation
D) The Division of Investment Management
E) The Division of Enforcement

Question 45

More stock trading in the U.S.occurs in over-the-counter markets rather than on organized exchanges.

Question 46

All stocks pay dividends,as that is the only way an investor can profit from holding stock.

Question 47

The Securities Acts of 1933 and 1934 established the S.E.C.to enforce which of the follow laws?

A) Require firms to tell the public the truth about their businesses.
B) Require brokers, dealers, and exchanges to treat investors fairly.
C) To ensure that no investment ever loses money.
D) All of the above are laws the S.E.C. enforces.
E) A and B above are laws the S.E.C. enforces.

Question 48

How do common stocks differ from preferred stocks?

Question 49

The Dow Jones Industrial Average is the broadest and best indicator of the stock market's day-to-day performance.

Question 50

A lower than average PE may mean that the market expects earnings to rise in the future.

Question 51

The Enron financial scandal increased uncertainty about the quality of accounting information and as a result,increased required return on investment in stocks.

Question 52

About half of new equity issues are preferred stock.

Question 53

A stock's market value will be higher the higher the investor's required rate of return is,all else being equal.

Question 54

About 75% of orders to buy or sell on the NYSE are executed using SuperDOT.

Question 55

A ________ PE may indicate that the market feels the firm's earnings are very ________ risk and is therefore willing to pay a ________ for them.

A) high; low; premium
B) high; high; discount
C) low; low; discount
D) high; high; premium

Question 56

Common stock is the riskiest corporate security,followed by preferred stock and then bonds.

Question 57

The subprime financial crisis led to one of the worst bear markets in the last 50 years.Stock prices likely fell due to

A) an increase in required returns on equity investments.
B) a decline in growth prospects for U.S. companies.
C) Both A and B are likely reasons.
D) None of the above are correct.

Question 58

Electronic Communications Networks apply technology to make organized exchanges more efficient and speedy.

Question 59

In over-the-counter markets,dealers increase the liquidity of thinly traded securities.

Question 60

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

Question 61

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

Question 62

What is the role of the required return on equity investments in stock valuation models?

Question 63

Using the Gordon growth model,explain why the 2001 terrorist attacks and the Enron financial scandal caused stock prices to decline.

Question 64

What is the role of specialists on a stock exchange?

Question 65

What are American Depository Receipts (ADRs)?

Question 66

What are the objectives of the Securities and Exchange Commission?

Question 67

What are the advantages and disadvantages of Electronic Communications Networks (ECNs)for trading stocks?

Question 68

How do over-the-counter markets differ from organized exchanges?

Question 69

What are the advantages and disadvantages of exchange traded funds (ETFs)fro trading stocks?