Question 1

What is the current price of a telecommunication company's stock if the current dividend is $0.80, the expected constant growth rate in dividends is 5% and the required return is 10%?

Accepted Answer

A)  $16.00 
B)  $16.80 
C)  $8.00 
D)  $8.40

Question 2

In the one-period valuation model, an increase in the required return on investments in equity ________.

Accepted Answer

A)  increases the expected sales price of a stock 
B)  increases the current price of a stock 
C)  reduces the expected sales price of a stock 
D)  reduces the current price of a stock

Question 3

The analysts predict that the price of corporation's XYZ stock one year from now will be $20. XYZ announced that is not going to pay dividends next year. You decide that you would be satisfied to earn a 10 percent on the investment on this stock, thus, this stock is worth ________ for you now.

Accepted Answer

A)  $18.00 
B)  $18.18 
C)  $21.10 
D)  $21.00

Question 4

Stockholders' rights include ________.

Accepted Answer

A)  the right to manage 
B)  the right to change personnel policy 
C)  the right to veto management's decisions 
D)  residual claim on all of a company's assets

Question 5

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because ________.

Accepted Answer

A)  the present value cannot be computed 
B)  the present value is almost zero 
C)  the sales price does not affect the current price 
D)  the stock may never be sold

Question 6

A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant.

Accepted Answer

A)  reduces; future sales price; expected rate of return 
B)  reduces; current dividend; expected rate of return 
C)  increases; required rate of return; future sales price 
D)  increases; required rate of return; dividend growth rate

Question 7

If expectations are formed adaptively, then people ________.

Accepted Answer

A)  use more information than just past data on a single variable to form their expectations of that variable 
B)  often change their expectations quickly when faced with new information 
C)  use only the information from past data on a single variable to form their expectations of that variable 
D)  never change their expectations once they have been made

Question 8

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10 percent, the current price of the stock would be ________.

Accepted Answer

A)  $110.11 
B)  $121.12 
C)  $100.10 
D)  $100.11

Question 9

The efficient markets hypothesis indicates that investors ________.

Accepted Answer

A)  can use the advice of technical analysts to outperform the market 
B)  do better on average if they adopt a "buy and hold" strategy 
C)  let too many unexploited profit opportunities go by if they adopt a "buy and hold" strategy 
D)  do better if they purchase loaded mutual funds

Question 10

For small investors, the best way to pursue a "buy and hold" strategy is to ________.

Accepted Answer

A)  buy and sell individual stocks frequently 
B)  buy no-load mutual funds with high management fees 
C)  buy no-load mutual funds with low management fees 
D)  buy load mutual funds

Question 11

A stockholder's ownership of a company's stock gives her the right to ________.

Accepted Answer

A)  vote and be the primary claimant of all cash flows 
B)  vote and be the residual claimant of all cash flows 
C)  manage and assume responsibility for all liabilities 
D)  vote and assume responsibility for all liabilities

Question 12

Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100 percent chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not?

Accepted Answer

The answer of Suppose Barbara looks out in the morning...

Question 13

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that ________.

Accepted Answer

A)  expectations influence the behavior of participants in the economy and thus have a major impact on economic activity 
B)  expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets 
C)  expectations influence many individuals, have little impact on the overall economy, but can have distributional effects 
D)  models that ignore expectations have little predictive power, even in the short run

Question 14

Stockholders' rights include ________.

Accepted Answer

A)  the right to vote 
B)  the right to manage 
C)  primary claims on all cash flows 
D)  ownership of bonds

Question 15

The value of any investment is found by computing the ________.

Accepted Answer

A)  present value of all coupon payments 
B)  present value of all future liabilities 
C)  future value of all dividends 
D)  value in today's dollars of all future cash flows

Question 16

Common stock is the principal way that corporations raise ________.

Accepted Answer

A)  short-term debt 
B)  foreign exchange 
C)  long-term debt 
D)  equity capital

Question 17

In asset markets, an asset's price is ________.

Accepted Answer

A)  set equal to the highest price a seller will accept 
B)  set equal to the highest price a buyer is willing to pay 
C)  set equal to the lowest price a seller is willing to accept 
D)  set by the buyer willing to pay the highest price

Question 18

Using the Gordon growth formula, if D1 is $1.00, ke is 10 percent or 0.10, and g is 5 percent or 0.05, then the current stock price is ________.

Accepted Answer

A)  $10 
B)  $20 
C)  $30 
D)  $40

Question 19

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Accepted Answer

The answer of Your best friend calls and gives you...

Question 20

Dishonest corporate accounting procedures would cause stock prices to ________.

Accepted Answer

A)  remain unchanged 
B)  decrease due to lower expected dividend growth and lower required return 
C)  decrease due to lower expected dividend growth and higher required return 
D)  increase due to higher expected dividend growth and lower required return

Exam 7: The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

What is the current price of a telecommunication company's stock if the current dividend is $0.80, the expected constant growth rate in dividends is 5% and the required return is 10%?

In the one-period valuation model, an increase in the required return on investments in equity ________.

The analysts predict that the price of corporation's XYZ stock one year from now will be $20. XYZ announced that is not going to pay dividends next year. You decide that you would be satisfied to earn a 10 percent on the investment on this stock, thus, this stock is worth ________ for you now.

Stockholders' rights include ________.

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because ________.

A monetary expansion stock prices due to a decrease in the and an increase in the , everything else held constant.

If expectations are formed adaptively, then people ________.

Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10 percent, the current price of the stock would be ________.

The efficient markets hypothesis indicates that investors ________.

For small investors, the best way to pursue a "buy and hold" strategy is to ________.

A stockholder's ownership of a company's stock gives her the right to ________.

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that ________.

Stockholders' rights include ________.

The value of any investment is found by computing the ________.

Common stock is the principal way that corporations raise ________.

In asset markets, an asset's price is ________.

Using the Gordon growth formula, if D₁ is $1.00, k_e is 10 percent or 0.10, and g is 5 percent or 0.05, then the current stock price is ________.

Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?

Dishonest corporate accounting procedures would cause stock prices to ________.