Deck 6: Common Stocks
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Deck 6: Common Stocks
1
Benefits of common stock ownership include
A) easy to buy and sell.
B) low trading costs.
C) potential for high returns.
D) all of these are benefits.
A) easy to buy and sell.
B) low trading costs.
C) potential for high returns.
D) all of these are benefits.
D
2
Between 1930 and 2017, the average return on stocks exceeded 10%.
True
3
Although bear markets on average occur about once a decade, the timing of bear markets is very hard to predict.
True
4
Over the long term, the capital gain on most stocks will exceed the dividend income.
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5
Which type of investment return should result in the highest investment return over time?
A) dividends
B) preferred dividends
C) capital gains
D) bond interest
A) dividends
B) preferred dividends
C) capital gains
D) bond interest
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6
Over the period beginning in January 2000 to the present, global stock markets have been relatively stable.
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7
For stocks in the S&P 500 index, returns from dividends exceeded capital gains over the period 2008-2017.
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8
Stock returns that are higher than 16%
A) are impossible to achieve.
B) can be achieved but require accepting higher risk.
C) are commonly achieved by most investors.
D) are only possible in the long-run.
A) are impossible to achieve.
B) can be achieved but require accepting higher risk.
C) are commonly achieved by most investors.
D) are only possible in the long-run.
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9
A market correction is defined as a stock market decline of 10% or more.
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10
Which of the following are benefits related to stock ownership?
I) ease of trading
II) attractive inflation-adjusted rates of return
III) guarantee of long-term positive returns
IV) affordability
A) I and II only
B) II and IV only
C) I and III only
D) I, II and IV only
I) ease of trading
II) attractive inflation-adjusted rates of return
III) guarantee of long-term positive returns
IV) affordability
A) I and II only
B) II and IV only
C) I and III only
D) I, II and IV only
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11
If stocks earn an average rate of return of 11 %, their value doubles approximately every
A) 5.8 years.
B) 6.6 years.
C) 7.2 years.
D) 9.1 years.
A) 5.8 years.
B) 6.6 years.
C) 7.2 years.
D) 9.1 years.
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12
Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets.
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13
Since the financial crisis of 2008. the major indexes have not yet recovered to their 2007 levels.
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14
There is a stronger tendency for the stock market to increase in value rather than decrease in value over time.
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15
Over the long term, most of the return on stocks has come from price increases.
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16
A decline of 5% in the S&P 500 would be considered a correction.
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17
Because common shareholders are entitled to the profits that remain after all of a corporation's other obligations have been met, common shareholders are known as
A) residual owners.
B) temporary owners.
C) debt owners.
D) owners of last resort.
A) residual owners.
B) temporary owners.
C) debt owners.
D) owners of last resort.
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18
A weakness in the real estate market is very unlikely to affect the stock market.
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19
Which one of the following statements about common stock is true?
A) Common stock can provide attractive capital appreciation opportunities.
B) Dividends generally provide the greatest rate of return on common stocks.
C) Common stocks generally have a negative rate of return over a ten-year period.
D) The DJIA is the best indicator of the overall performance of common stocks.
A) Common stock can provide attractive capital appreciation opportunities.
B) Dividends generally provide the greatest rate of return on common stocks.
C) Common stocks generally have a negative rate of return over a ten-year period.
D) The DJIA is the best indicator of the overall performance of common stocks.
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20
Between 1926 and 2017 ,approximately 26% of years had positive returns.
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21
Shares of publicly traded stock can be issued either through a public offering or a rights offering.
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22
Which of these asset classes is more likely to generate the highest returns over time?
A) government bonds
B) common stocks
C) corporate bonds
D) preferred stocks
A) government bonds
B) common stocks
C) corporate bonds
D) preferred stocks
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23
When residential real estate values fell sharply from 2006 to 2009, the stocks of financial institutions were hardly impacted at all.
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24
Stock held in treasury is a means of increasing the number of shares outstanding.
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25
The total value of an investor's holdings in a company will increase in proportion to the magnitude of a stock split.
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26
Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.
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27
Describe the bear market of 2008 through early 2009 and the trend of stock prices in subsequent years.
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28
Stocks generally have produced positive inflation-adjusted rates of return over the long- term.
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29
Corporations often split their stocks when they believe that the price makes them less attractive to average investors.
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30
One reason that common stock selection is difficult is because numerous factors can potentially impact future performance.
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31
Since each share of common stock represents ownership in a company, shares of common stock are often referred to as
A) illiquid investments.
B) equity securities.
C) fixed-income securities.
D) unit-cost securities.
A) illiquid investments.
B) equity securities.
C) fixed-income securities.
D) unit-cost securities.
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32
One advantage that bonds have over stocks is
A) a better chance for capital gains.
B) better diversification because they move opposite from stocks.
C) less risk.
D) higher rates of return.
A) a better chance for capital gains.
B) better diversification because they move opposite from stocks.
C) less risk.
D) higher rates of return.
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33
The extraordinary run up in stock prices during the late 1990s primarily affected
A) energy stocks.
B) retail stocks.
C) pharmaceutical stocks.
D) technology stocks.
A) energy stocks.
B) retail stocks.
C) pharmaceutical stocks.
D) technology stocks.
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34
Shareholders can either exercise their rights granted via a rights offering or sell them to another investor.
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35
Different classes of stock generally have either different voting rights or different dividends.
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36
Some investors prefer bonds over commons stocks because
A) stocks are too risky for their level of risk tolerance.
B) they are concerned about preservation of wealth.
C) bond income is more predictable.
D) all of these
A) stocks are too risky for their level of risk tolerance.
B) they are concerned about preservation of wealth.
C) bond income is more predictable.
D) all of these
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37
Companies typically issue new shares through an initial public offering (IPO).
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38
An individual stock generally provides a
A) dividend payment that ensures total protection from purchasing power risk.
B) refuge from event risk.
C) current income that is less predictable than that available from other types of investments.
D) predictable annual rate of return.
A) dividend payment that ensures total protection from purchasing power risk.
B) refuge from event risk.
C) current income that is less predictable than that available from other types of investments.
D) predictable annual rate of return.
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39
Many companies increased their dividends
A) whenever necessary to compensate shareholders for declining stock values.
B) in every year since 1950.
C) during the market decline of 2007-2008.
D) during the market recovery of 2009-2011.
A) whenever necessary to compensate shareholders for declining stock values.
B) in every year since 1950.
C) during the market decline of 2007-2008.
D) during the market recovery of 2009-2011.
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40
Electronic trading systems have reduced transaction costs of odd-lot trades.
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41
A round lot consists of
A) 1 share.
B) 10 shares.
C) 100 shares.
D) 1,000 shares.
A) 1 share.
B) 10 shares.
C) 100 shares.
D) 1,000 shares.
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42
A stock can have only one market value, but different investment values for different investors.
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43
Which of the following is unlikely to be found in an internet stock quotation?
A) earning per share (EPS)
B) beta
C) previous day's closing price
D) broker's commission per 100 shares
A) earning per share (EPS)
B) beta
C) previous day's closing price
D) broker's commission per 100 shares
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44
Why do some companies split their stock?
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45
In a rights offering, the
A) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position.
B) underwriter offers the investing public a certain number of shares at a certain price.
C) total equity remains constant while the number of shares of common stock outstanding increases.
D) amount of debt in the capital structure increases by the amount of the rights offering.
A) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position.
B) underwriter offers the investing public a certain number of shares at a certain price.
C) total equity remains constant while the number of shares of common stock outstanding increases.
D) amount of debt in the capital structure increases by the amount of the rights offering.
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46
The investment value for a publicly traded stock can readily be found in the financial section of the newspaper or on the Internet.
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47
One motive for issuing classified stock with different voting rights is to
A) increase the market value of the company.
B) avoid SEC reporting requirements.
C) allow the company's founders to retain control of the company.
D) facilitate the issue of additional shares in the future.
A) increase the market value of the company.
B) avoid SEC reporting requirements.
C) allow the company's founders to retain control of the company.
D) facilitate the issue of additional shares in the future.
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48
When a corporation declares a stock split, it usually does so because
A) the firm's retained earnings are excessive.
B) there are too many shares of stock outstanding.
C) investors sometimes require nontaxable returns.
D) it wants to make its stock more affordable to average investors.
A) the firm's retained earnings are excessive.
B) there are too many shares of stock outstanding.
C) investors sometimes require nontaxable returns.
D) it wants to make its stock more affordable to average investors.
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49
Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned
A) 10,000 shares worth approximately $1.50 per share.
B) 10,000 shares worth approximately $0.15 per share.
C) 100 shares worth approximately $15 per share.
D) 100 shares worth approximately $1.50 per share.
A) 10,000 shares worth approximately $1.50 per share.
B) 10,000 shares worth approximately $0.15 per share.
C) 100 shares worth approximately $15 per share.
D) 100 shares worth approximately $1.50 per share.
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50
When a company offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a
A) public offering.
B) rights offering.
C) stock spin-off.
D) treasury offering.
A) public offering.
B) rights offering.
C) stock spin-off.
D) treasury offering.
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51
Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued
A) buy-back stock.
B) treasury stock.
C) OTC stock.
D) classified stock.
A) buy-back stock.
B) treasury stock.
C) OTC stock.
D) classified stock.
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52
VGG, Inc. declares a 2-for-5 stock split. The stock currently sells for $4 a share. A shareholder who owned 1000 shares of VGG stock prior to the split will now own
A) 400 shares valued at about $10.00 a share.
B) 440 shares valued at about $1.60 a share.
C) 2500 shares valued at about $1.60 a share.
D) 250 shares valued at about $11.60 a share.
A) 400 shares valued at about $10.00 a share.
B) 440 shares valued at about $1.60 a share.
C) 2500 shares valued at about $1.60 a share.
D) 250 shares valued at about $11.60 a share.
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53
Stock quotes on most Internet service providers such as Yahoo Finance include
I) the highest and lowest price over the last 52 weeks.
II) the closing price for the previous trading day.
III) the opening price for the day.
IV) date of the most recent stock split.
A) I and III only
B) II and IV only
C) I, II and III only
D) II, III and IV only
I) the highest and lowest price over the last 52 weeks.
II) the closing price for the previous trading day.
III) the opening price for the day.
IV) date of the most recent stock split.
A) I and III only
B) II and IV only
C) I, II and III only
D) II, III and IV only
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54
Stocks that are readily available to the general public and that are bought and sold on the open market are known as
A) initial public offerings.
B) publicly traded issues.
C) treasury stocks.
D) blue chip stocks.
A) initial public offerings.
B) publicly traded issues.
C) treasury stocks.
D) blue chip stocks.
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55
A stock's book value and par value are normally the same or nearly the same.
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56
Which one of the following statements about common stock is correct?
A) Each share of stock has a specified maturity date.
B) Common stock gives stockholders first title to a share of the company's earnings, prior to other corporate obligations.
C) Common stock typically provides higher levels of current income than do similar grade corporate bonds.
D) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.
A) Each share of stock has a specified maturity date.
B) Common stock gives stockholders first title to a share of the company's earnings, prior to other corporate obligations.
C) Common stock typically provides higher levels of current income than do similar grade corporate bonds.
D) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.
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57
A stock's market value would normally be higher than it's book value.
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58
A stock's investment value and market value are normally not far apart.
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59
Stock which has been issued and subsequently reacquired by the issuing corporation is called
A) letter stock.
B) treasury stock.
C) classified stock.
D) book stock.
A) letter stock.
B) treasury stock.
C) classified stock.
D) book stock.
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60
Kayla owns 200 shares of Blackwood common stock valued at $330 a share. Blackwood has declared a 3-for-2 stock split effective tomorrow. After the split, Kayla will own
A) 600 shares valued at about $220 a share.
B) 133 shares valued at about $495 a share.
C) 600 shares valued at about $$110 a share.
D) 300 shares valued at about $220 a share.
A) 600 shares valued at about $220 a share.
B) 133 shares valued at about $495 a share.
C) 600 shares valued at about $$110 a share.
D) 300 shares valued at about $220 a share.
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61
Shareholders who sell their stock on or after the ex-dividend date, but before the date of record, will still receive the declared dividend.
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62
Which of the following would be typical for a successful company?
A) Market value greater than book value.
B) Par value greater than book value.
C) Book value greater than market value.
D) None of the above.
A) Market value greater than book value.
B) Par value greater than book value.
C) Book value greater than market value.
D) None of the above.
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63
Ostend Industries has total assets of $85 million, total debt of $58.6 million, and $4.8 million of 5% preferred stock outstanding. If the company has 500,000 shares of common stock outstanding, its book value per share would be
A) $32.33.
B) $33.60.
C) $43.20.
D) $52.80.
A) $32.33.
B) $33.60.
C) $43.20.
D) $52.80.
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64
Stock dividends and stock splits both increase the number of shares but only stock dividends increase the value of the company.
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65
The balance sheet value of a firm's assets minus the balance sheet amount of its liabilities is known as
A) par value.
B) book value.
C) liquidation value.
D) market value.
A) par value.
B) book value.
C) liquidation value.
D) market value.
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66
A company's board of directors must declare a dividend if the firm is profitable.
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67
Under current laws, cash dividends are taxed at the same rate as capital gains.
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68
Dividend payments are usually more stable than capital gains.
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69
The value that investors place on a stock is called its
A) book value.
B) investment value.
C) liquidation value.
D) par value.
A) book value.
B) investment value.
C) liquidation value.
D) par value.
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70
You are given the following information on a company.
Which one of the following statements is correct based on the information provided?
A) The market price is $42.68 per share.
B) The investment value is $5.34 per share.
C) The par value is $5.34 per share.
D) The book value is $48.01 per share.
Which one of the following statements is correct based on the information provided?
A) The market price is $42.68 per share.
B) The investment value is $5.34 per share.
C) The par value is $5.34 per share.
D) The book value is $48.01 per share.
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71
The stock listing for a company shows a P/E of 22, a dividend yield of 3.4% and a closing price of $33.67. What is the amount of dividends per share?
A) $1.53
B) $1.14
C) $0.75
D) $0.05
A) $1.53
B) $1.14
C) $0.75
D) $0.05
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72
High dividend yields are typical of rapidly growing companies.
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73
What is the relationship between a stock's market value and its investment value?
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74
Which of the following will tend to increase transaction costs?
A) using a full service broker
B) buying or selling shares through an on-line broker
C) buying or selling more than 1000 shares in a single trade
D) buying or selling at times when volume is high and the exchanges are busy
A) using a full service broker
B) buying or selling shares through an on-line broker
C) buying or selling more than 1000 shares in a single trade
D) buying or selling at times when volume is high and the exchanges are busy
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75
Another term for the stated value or face value of a stock is its
A) book value.
B) liquidation value.
C) par value.
D) proxy value.
A) book value.
B) liquidation value.
C) par value.
D) proxy value.
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76
The Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of $1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value of this stock at $38.50. According to this information, the market capitalization of Charbridge is
A) $144,000,000.
B) $154,000,000.
C) $4,000,000.
D) $72 million.
A) $144,000,000.
B) $154,000,000.
C) $4,000,000.
D) $72 million.
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77
As a general rule, which one of the following statements concerning the various values of common stock is correct?
A) Market values are usually below book values.
B) Par values are usually above book values.
C) Market values are usually below par values.
D) Book values are usually below market values.
A) Market values are usually below book values.
B) Par values are usually above book values.
C) Market values are usually below par values.
D) Book values are usually below market values.
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78
If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is
A) $40,000,000.
B) $49,000,000.
C) $50,000,000.
D) $60,000,000.
A) $40,000,000.
B) $49,000,000.
C) $50,000,000.
D) $60,000,000.
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79
Stock dividends do not increase the value of a shareholder's position.
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80
If a firm has a 4 million shares outstanding and its stock trades at $50 per share, the company has a market capitalization of $200,000,000.
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