Deck 8: Stock Markets

Question 1

The market in which firms sell new securities to raise cash is called the secondary market.

Answer 1

False

Question 2

Stock splits change the divisor in a price-weighted index but do not result in any net change in the divisor of a value-weighted index.

Answer 2

True

Question 3

In cumulative voting, a stockholder who owns 51% of the shares can be assured of the ability to elect the entire board of directors.

Answer 3

False

Question 4

If all preferred dividend payments that have been missed must be paid before any common stock dividend can be paid the preferred stock is called _____________ preferred stock.

A) cumulative
B) participating
C) nonparticipating
D) voting
E) dual class

Question 5

Dual class stock refers to firms with both common and preferred stock outstanding.

Question 6

Common stocks typically have which of the following that bonds do not have?
I) Voting rights
II) Fixed cash flows
III) Set maturity date
IV) Tax deductibility of cash flows to investors

A) I only
B) I, II, and IV only
C) II, III, and IV only
D) IV only
E) I, II, III, and IV

Question 7

At year-end a firm has assets of $100 and debts due of $120. In this situation, the stockholders must pay an additional $20 out of their own pocket.

Question 8

The NYSE recently merged with the London Stock Exchange to form the merged company NYSE Euronext.

Question 9

An order to buy shares of stock at a specified price or better is called a limit order.

Question 10

You buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is ___________________.

A) 8.00%
B) 10.25%
C) 12.50%
D) 9.80%
E) 8.75% [((33 - 30)* (1 - 0.20)) + (0.75 * (1 - 0.28))]/30 = 2.94/30 = 9.8%

Question 11

In the event of bankruptcy, a firm's janitor must be paid all of the salary owed to him before stockholders receive anything.

Question 12

Preferred stockholders have a claim senior to common stock but junior to bondholders.

Question 13

With ____________ voting, all directors up for election are voted on by the shareholders at the same time in one general election.

A) straight
B) participating
C) nonparticipating
D) proxy
E) cumulative

Question 14

An investor has a 38% ordinary income tax rate and a 20% long-term capital gains tax rate. The investor holds stock in a firm that could pay its usual $1 per share dividend or reinvest the cash in the firm. The stock price is currently $30 per share. If the firm does not pay the dividend, the share price will rise. If it pays the dividend, the share price will stay the same. By how much must the share price rise if the dividend is not paid in order to make the investor indifferent between receiving the dividend or not?

A) $1.00
B) $0.59
C) $0.78
D) $0.97
E) $0.50 Change in share price required = [1 * (1 - 0.38)]/(1 - (0.20) = $0.78

Question 15

A type of absentee ballot that allows a representative to vote on behalf of the stockholder is called a proxy.

Question 16

If the stock markets are semi-strong efficient, stock prices reflect all historic and current public information about a firm but prices do not reflect inside information.

Question 17

You buy a stock for $34 per share and sell it for $36 after you collect a $1.00 per share dividend. Your pre-tax capital gain yield is ________________ and your pre-tax dividend yield is ________________.

A) 2.94%; 2.78%
B) 8.82%; 0.00%
C) 5.88%; 2.94%
D) 5.56%; 2.78%
E) 4.65%; 3.17%

Question 18

A long-term investor in a high marginal tax bracket will normally prefer a dollar of capital gain to a dollar of dividend yield.

Question 19

A seasoned equity offering occurs when an issuer that already has equity publicly trading issues new shares to the public.

Question 20

The Dow Jones Industrial Average is a price-weighted index of 30 stocks chosen to represent the overall market.

Question 21

Which of the following information is NOT usually found in a Wall Street Journal stock quote?

A) Dividend yield
B) Price-earnings ratio
C) Closing price of the stock
D) Stock rating
E) Ticker symbol

Question 22

The largest single type of holder of common stock ($) is

A) pension funds
B) households
C) mutual funds
D) brokers and dealers
E) life insurance firms

Question 23

On the NASDAQ system, the inside quotes are the

A) lowest ask and lowest bid.
B) lowest bid and highest ask.
C) highest bid and highest ask.
D) highest bid and lowest ask.
E) none of the above

Question 24

A firm is using cumulative voting and four director spots are up for election. There are 3.6 million shares outstanding. How many shares must a minority owner own or control to ensure that he or she can gain control of one seat on the board of directors?

A) 900,001
B) 880,001
C) 720,001
D) 1,800,001
E) 1,750,001 [((1/(4 + 1)) * 3.6 million] + 1

Question 25

Today Stock A is worth $20 and has 1000 shares outstanding. Stock B costs $30 and has 500 shares outstanding. Stock C is priced at $50 per share and has 1200 shares outstanding. If tomorrow Stock A is priced at $22, Stock B at $35, and Stock C is worth $48, what would the value-weighted index amount equal? (The index has a base period value of 100.)

A) 35.00
B) 105.00
C) 108.44
D) 101.45
E) 102.21

Question 26

Which of the following indices are value-weighted?
I) NYSE Composite
II) S&P500
III) NASDAQ Composite
IV) Dow Jones Industrial Average

A) I, II, III, and IV
B) I only
C) II only
D) II, III, and IV only
E) I, II, and III only

Question 27

Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not:
I) weak form efficient
II) semi-strong form efficient
III) strong form efficient

A) I only
B) I and II only
C) III only
D) II and III only
E) I, II, and III

Question 28

The preemptive right is designed to

A) allow management to diffuse stock ownership any voting power.
B) allow managers to preempt a stock offering if they do not like the terms of the deal.
C) allow existing shareholders the right to sell their existing shares before the new offer.
D) allow existing shareholders to buy shares of the new offering if they desire.
E) none of the above

Question 29

In a ____________ offering the firm preregisters with SEC any securities it wishes to sell over the next two years.

A) rights
B) full underwritten
C) general cash
D) shelf
E) best efforts

Question 30

In 2007 the NYSE merged with _________________.

A) Nasdaq
B) Euronext
C) American Exchange
D) Chicago Mercantile Exchange
E) London Stock Exchange

Question 31

NYSE listing has traditionally benefited a firm by

A) improving the stock's price.
B) generating increased publicity for the firm.
C) providing easier access to primary market capital.
D) B and C only
E) A, B, and C

Question 32

Which of the following is/are true about specialists?
I) Investment banks generally cannot be specialists
II) Specialists are used by the NASDAQ system
III) Market and limit orders are transacted at specialist posts, but the specialist's own account orders are executed elsewhere
IV) Specialists help maintain continuous trading

A) I, II, and III only
B) I and IV only
C) II, III, and IV only
D) I only
E) III only

Question 33

In terms of volume of trading and market value of firms traded, the _____________ is the largest U.S. stock market. In terms of number of firms traded, the ___________ is the largest in the United States.

A) NYSE; NYSE
B) NASDAQ; NYSE
C) NYSE; AMEX
D) NYSE; NASDAQ
E) NASDAQ; AMEX

Question 34

A shelf registration allows firms the opportunity to avoid the normal ______________ day waiting period by allowing preregistration of securities for up to ______________ years.

A) 20-; 2
B) 10-; 1
C) 15-; 3
D) 20-; 1
E) 30-; 2

Question 35

If the net proceeds are greater than the gross proceeds in an underwritten offering, then

A) the investment banker made a profit on the spread.
B) the issuing company underpriced its securities.
C) the issue fails to occur.
D) the SEC rescinds the issue.
E) none of the above

Question 36

The NYSE specialists are charged with
I) trading for their own account.
II) ensuring public limit orders are executed.
III) facilitating processing public market orders.

A) I only
B) I and II only
C) II and III only
D) I and III only
E) I, II, and III

Question 37

As of December 2005, trading licenses are required to conduct trades on the floor of the NYSE. Which of the following statements about these trading licenses is/are correct?
I) Licenses are auctioned off in a special type of auction called a Dutch auction.
II) The NYSE determines the minimum bid price.
III) The SEC determines the maximum bid price.
IV) Trading licenses are good for 10 years.

A) II and III only
B) I and II only
C) I and III only
D) II and IV only
E) I, II, III, and IV

Question 38

The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a

A) final prospectus
B) shelf registration statement
C) due diligence draft
D) waiting period offer
E) red herring prospectus

Question 39

The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for sale by the SEC is called the

A) green hornet
B) seal of approval
C) red herring
D) eagle stamp
E) Regd FD

Question 40

The NASDAQ automatic order execution system for individual traders placing buy or sell orders of 1000 or fewer shares is called the

A) ECN Network
B) SOE System
C) NASDAQ/AMEX Joint Program
D) Instinet Network
E) E*Trade Online Program

Question 41

You own 500 shares of common stock in a firm that has 2 million shares outstanding. The firm announces a plan to sell an additional 500,000 shares through a rights offering.
a) How many rights to purchase new shares will you receive?
b) Suppose that the market price per share is $30, but each right allows you to purchase a share of stock for $27. What should be the value of one right?
c) If you sold your rights, how much money should you make?

Question 42

Answer the following questions concerning the given partial stock quote:

Question 43

Data shows that only 11 of 27 recessions prior to 1990 were preceded by a decline in stock prices. Although stocks are a leading economic indicator, what are some reasons why a stock price decline might not indicate an upcoming recession?

Question 44

What are the advantages and disadvantages of foreign investing? How does an ADR help overcome the disadvantages?

Question 45

Computerized markets that automatically match orders between buyers and sellers and are used primarily by institutions traders are called

A) OTC bulletin boards
B) SPIDRS
C) Index Markets
D) ECNs
E) Specialists

Question 46

The age group that holds the most stock is the ____________ group.

A) under 35
B) 35-44
C) 45-64
D) 65 and older

Question 47

In what major ways do stocks differ from bonds?

Question 48

What are ECNs? How are they changing trading in the traditional markets?

Question 49

Ethanol Lawn Mowers issued 500,000 shares to the public. The gross proceeds were $31,250,000 and the net proceeds were $30 million. Merrel Bench was the lead underwriter and deal negotiator, but 10 other investment bankers (one of which was Golden Sax) were also used to put up capital and help sell the issue. Which of the following statements is/are correct?
I) The public paid $62.50 a share.
II) Golden Sax was the originating house.
III) The spread per share was $3.50.
IV) Merrel Bench is the sole book running manager.
V) This offer was a syndicated deal.

A) I, II, and IV only
B) III and V only
C) I, IV, and V only
D) II and III only
E) I and V only

Question 50

A firm desires to sell stock to the public. The underwriter charges $0.45 million in fees and offers to buy 6 million shares from the firm at a price of $35 per share. In addition, registration and audit fees total $130,000, and marketing and miscellaneous fees add up to another $75,000. The underwriter expects to earn gross proceeds per share of $38. What is the issuing firm's out-of-pocket dollar transaction cost to issue the stock? Immediately after the stock was issued, the stock price rose to $40. What is the issuing firm's opportunity cost? What is the total issuance cost, including opportunity costs, as a percentage of the total funds available to the issuing firm?

Question 51

The electronic-based market for less actively traded U.S. securities is the

A) ADR market
B) OTC Bulletin Board
C) Pink Sheet stocks
D) NYSE Low Volume Market
E) ECN Market

Question 52

As a small (minority) stockholder would you prefer to have cumulative voting or straight voting shares? As a majority shareholder?

Question 53

When would preferred stock be a better investment choice than common stock or bonds?

Question 54

What are weak form, semi-strong form, and strong form efficiency? Does one form of efficiency imply another?

Question 55

Why have international stock prices fallen as a result of the subprime crisis in the United States?

Question 56

What are the major effects of the Sarbanes-Oxley Act (SO) of 2002 on the stock markets? What else has the NYSE done to improve corporate governance?