Deck 13: Investing in Stocks

Question 1

A proxy is a legal agreement a stockholder signs to allow someone else to vote for him or her at the corporation's annual meeting.

Answer 1

True

Question 2

Some firms have negative earnings per share numbers.

Answer 2

True

Question 3

Every company must pay dividends as a portion of the company's profits to its stockholders.

Answer 3

False

Question 4

The dividend yield is calculated by dividing the earnings per share by the market price of the stock.

Question 5

The market price of the stock is a reflection of the potential earnings per share of the firm.

Question 6

When a corporation engages in a stock repurchase, each remaining shareholder owns a smaller proportion of the firm.

Question 7

The dividend yield tells investors how much in the way of a return they would receive if the stock price and the dividend level remain constant.

Question 8

Common stockholders not only have the right to elect the board but also must approve day-to-day decisions of the chief executive officer.

Question 9

Common stockholders have a superior claim on a company's assets over creditors and bondholders.

Question 10

Stock splits increase the number of the shares you own, but decrease the value of your total holdings with the company

Question 11

A firm may decide that the price per share for its stock is getting too high for the smaller investor so the company "splits the stock".

Question 12

When a corporation repurchases its own stock, it does so in the secondary markets.

Question 13

In the event of a corporate bankruptcy, bondholder's claims are paid before shareholders' claims are paid.

Question 14

Publicly traded stocks listed on a major exchange are not very liquid investments.

Question 15

A company's dividend distribution can be in the form of cash or additional stock.

Question 16

Some companies distribute earnings per share in the form of dividends and some retain these earnings for future investment in the firm.

Question 17

Holding several types of stock can greatly reduce the risk in your portfolio.

Question 18

According to your text, over time, investing in stocks generally outperforms most other investments.

Question 19

A stock split is a tactic by a corporation to manipulate the market price of its stock.

Question 20

Limited liability associated with stock ownership means that shareholders can only lose the amount of money they have invested in the company.

Question 21

You have just purchased 10 shares of a stock selling at $50 per share. Since that time, the company was found to be in violation of several environmental laws and has several major lawsuits outstanding. Which of the following statements is most correct?

A) You could lose up to your $500 investment.
B) You could lose more than your $500 investment.
C) You cannot lose your investment based on the actions of the company.
D) By owning stock in the company, you have also technically violated the law.
E) none of the above

Question 22

Dividends are paid regardless if the company makes a profit.

Question 23

The ________ is the date on which the board of directors announces the amount of the dividend.

A) announcement date
B) declaration date
C) dividend date
D) ex-dividend date
E) maturity date

Question 24

Nathan noticed that a company that has great potential just declared a ________ because its stock price was getting too high for the small investor to buy the stock. The company will substitute more shares for the existing shares of stock without increasing the market value of the firm.

A) dividend yield
B) stock repurchase
C) claim on income
D) stock split
E) stock splice

Question 25

The firm will pay an annual dividend this year of $2 per share. The current market price of the stock is $40.00 per share. The book value of this stock is $24.00 per share. The earnings per share for this firm is $5.75. What is the current dividend yield of this stock?

A) 14.38%
B) 8.33%
C) 23.9%
D) 5%

Question 26

A ________ increases the number of stock shares outstanding by replacing each existing share of stock with a stated number of new shares.

A) dividend reinvestment
B) stock split
C) stock repurchase
D) stock reissue
E) none of the above

Question 27

The net income of the firm is $4 million dollars. The firm will pay $500,000 in dividends to the preferred shareholders. There are currently 1 million shares of common stock outstanding. What are the earnings per share for this firm?

A) $4.00
B) $3.50
C) $4.50
D) $3.00

Question 28

While you can't be assured of what you will get when you sell your stock, you will most likely not have difficulty selling it.

Question 29

Which of the following statements is most correct regarding the general relationship between stocks and interest rates?

A) There is no relationship between interest rates and stock prices.
B) As interest rates increase, stock prices should also increase.
C) As interest rates increase, stock prices should decrease.
D) Stock prices are negatively exponentially related to interest rate increases.
E) none of the above

Question 30

You cannot benefit from capital appreciation until you actually sell your stock.

Question 31

When a company buys back its own common stock it is engaging in a ________.

A) stock split
B) stock reissue
C) stock repurchase
D) stock repo
E) none of the above

Question 32

Your investment goal is to receive a stream of income from your investment. Which of the following would be important information to determine whether a particular stock purchase would suit your plan?

A) the earnings per share
B) the market-to-book ratio.
C) the book value.
D) the dividend yield

Question 33

________ are a company's distribution of its profits in the form of cash or stock to its owners.

A) Dividends
B) Coupon interest payments
C) Equity payments
D) Shareholder divestments
E) none of the above

Question 34

The ________ date is the date the stock begins trading without dividend, meaning that if you buy it after this date you will not get the dividend for that year.

A) payment date
B) declaration date
C) ex-dividend date
D) reinvestment date
E) maturity date

Question 35

You are really keen on stocks. However, you do not like stocks with regard to ________. This means that if a company you have invested in goes bankrupt, the creditors are paid first and you will be out of luck.

A) claim on income
B) limited liability
C) claims on assets
D) voting rights
E) claims on dividends

Question 36

Returns on stocks can come in the form of capital appreciation.

Question 37

You purchased 100 shares of Quantex at $150 per share for a total investment of $15,000. After your purchase the stock had a 3 for 1 split. How many shares do you now own and how much is your original investment now worth?

A) 100 shares and $150 dollars
B) 300 shares and $15,000 dollars
C) 100 shares and $45,000 dollars
D) 300 shares and $45,000 dollars

Question 38

A(n) ________ is a legal agreement signed by a stockholder allowing someone else to vote on his or her behalf at the corporation's annual meeting.

A) voting contract
B) agency contact
C) contingency contract
D) proxy
E) none of the above

Question 39

Both capital gains and dividends are guaranteed with common stock.

Question 40

Capital appreciation refers to an increase in the selling price of your shares of stock.

Question 41

What point marks the purchase of common stock without a right to a declared dividend?

A) dividend payout date
B) declaration date
C) ex-dividend date
D) cut-off point
E) end of fiscal year

Question 42

Suppose that a company feels that the price of its stock is more than the average small investor can afford. To lower the price the company could engage in a

A) stock split.
B) stock repurchase.
C) proxy vote.
D) All of the above are correct.

Question 43

Explain the purpose and value of the dividend yield ratio.

Question 44

A proxy vote means

A) filling out a voting form and having a representative turn it in for you.
B) requesting that your vote be deferred until a later date.
C) giving a representative the right to vote in your place.
D) None of the above.

Question 45

Which feature of common stock ownership allows a stockholder to share in the company's earnings after the creditors are paid?

A) limited liability
B) claim on income
C) claims on assets
D) voting rights

Question 46

Common stockholders are entitled to elect the company's board of directors. Usually one share of stock is equal to ________ vote(s).

A) one
B) two
C) 100
D) 1,000

Question 47

What are proxy fights?

A) Proxy fights are when two rival companies want the same voters.
B) Proxy fights are battles for proxy votes between rival groups of share holders in separate companies.
C) Proxy fights are battles for proxy votes between rival groups of share holders in the same company.
D) Proxy fights are when shareholders fight over who will cast their votes.
E) There is no such thing as a proxy fight.

Question 48

Figure 13.1 in your textbook compares the returns on various investments over the period 1951-2010. Which of the following is shown to exceed the inflation rate by the widest margin?

A) common stocks
B) government bonds
C) Treasury bills
D) mutual funds

Question 49

Explain the common stock features and rights as though you are speaking to a novice.

Question 50

The dividend yield on a share of common stock is ________.

A) available at most large companies.
B) the amount of annual dividends divided by the market price of the stock.
C) the taxes you pay on the reinvested dividends.
D) All of the above
E) Only A and B

Question 51

What factors can effect the market price of a stock?

Question 52

The book value of a company is calculated by ________.

A) adding the price per share to the dividends paid
B) subtracting its price per share from the dividends paid
C) subtracting the value of all the firm's assets from the value of its liabilities
D) subtracting the value of all the firm's liabilities from the value of its assets

Question 53

Which of the following investment options is not affected by a change in the market rates of interest?

A) common stocks
B) corporate bonds
C) government bonds
D) none of the above is correct; all are affected

Question 54

The dividend yield tells investors which of the following?

A) What their portfolio is worth on the open market
B) How much in the way of a return they would receive if the stock price and the dividend level remain constant
C) When the company will be releasing dividends
D) How much in total the company has available to pay out in dividends
E) none of the above

Question 55

Is a positive stock split good for the current share holders?

Question 56

Returns from shares of stock come in the form of

A) stock splits.
B) capital appreciation.
C) dividends.
D) All of the above are correct.
E) Only B and C are correct

Question 57

As a shareholder in Titanic Shipping, Inc., James Blue is one of the many actual owners. In case of the bankruptcy of the corporation, his liability would be limited to ________.

A) his ownership percentage of the actual loss
B) the amount of his investment
C) nothing at all
D) what is left after selling the stock and subtracting the debt

Question 58

Abby previously owned 200 shares of NEWAGE stock at $25 per share. Today the company split the stock in a 3:1 split. Now what is the value of Abby's stock?

A) $5,000
B) $6,000
C) $2,500
D) $200

Question 59

Dividends

A) are always paid, regardless of the company's profitability.
B) are always paid when the company makes a profit.
C) are never paid to common stockholders; only preferred stockholders receive them.
D) None of the above is true.

Question 60

Which of the following makes common stocks more risky than corporate bonds when both are issued by the same company?

A) Claims on income
B) Unlimited liability
C) Claims on assets
D) All of the above are correct.
E) Only A and C are correct

Question 61

During a "bear market" stocks prices typically fall.

Question 62

When investors talk about movements in the market, they generally refer to the Russell 1000.

Question 63

A stock market characterized by ________ prices is termed a bear market.

A) falling
B) rising
C) steady
D) none of the above

Question 64

All of the following are stock market indexes except

A) the Dow Jones Industrial Average.
B) the Standard & Poor's 500.
C) the Russell 100.
D) the Wilshire 5000.

Question 65

The stocks tracked by the Dow represent over 50% of the market value of the NYSE.

Question 66

You are looking at the stock quotes in your newspaper and you see that your stock closed up 5% yesterday. Where would you look to see how it has been doing over the last year?

A) prior day's close
B) P/E ratio
C) 52-week high and low
D) market cap

Question 67

The S&P 500

A) is the oldest and most widely quoted of the stock indexes
B) is a narrower index than the DOW
C) includes some stocks from the OTC market
D) All of the above

Question 68

The ________ is a common stock indicator, consisting of 30 large industrial firms, and is used to indicate how well stocks have done.

A) DAIA
B) CMIA
C) DJIA
D) SPFA
E) none of the above

Question 69

If you are very optimistic about the ability of firms to earn profits today and in the immediate future, what type of investor philosophy do you exhibit?

A) animalistic
B) bullish
C) bearish
D) psychic

Question 70

The Dow Jones Industrial Average has been an index since what year?

A) 1796
B) 1896
C) 1996
D) 2006

Question 71

The only time to buy stocks is in a bull market and the only times to sell stocks is during a bear market.

Question 72

The Dow Jones Industrial Average is based on the movement of 500 stocks, primarily from the NYSE.

Question 73

If you wanted information about how the entire stock market is performing, which index would provide you with information on virtually all types and sizes of companies?

A) Dow Jones Industrials
B) S&P 500
C) NASDAQ 100
D) Wilshire 5000

Question 74

The S&P 500 is a much broader index than the Dow.

Question 75

Movement in the stock market indexes determines whether it is a bear or bull market.

Question 76

When you got home after work, you saw on the news that the S&P was down by 20 points. Which of the following is true?

A) All of your stocks' market prices must have declined by 20 points.
B) Some of your stocks' market prices may have increased.
C) Some of your stocks' market prices may have decreased.
D) Both B and C are correct.

Question 77

A stock market index is a measure of the performance of a group of stocks that represent the market or a sector of the market.

Question 78

Jessica wanted to gauge stock performance in general. She found a useful tool that measured the stock prices of 30 large industrial firms, called the ________.

A) Dow Jones Industrial Average
B) Standard & Poor's Index
C) Value Line Survey
D) Moody's Index
E) none of the above

Question 79

A stock market characterized by increasing prices is termed a(n) ________ market.

A) bull
B) bear
C) animal
D) none of the above

Question 80

A ________ is a measure of the performance of a group of stocks that represent the market or a sector of the market.

A) stock market index
B) stock grouping
C) market composite
D) portfolio return
E) none of the above