Deck 6: Common Stocks

Question 1

Over the 50-year period of 1953-2002, the stock market provided an average annual rate of return of approximately 11%.

Answer 1

True

Question 2

A market correction is defined as a stock market decline of 10% or more.

Answer 2

True

Question 3

Over the long term, the capital gain on most stocks will exceed the dividend income.

Answer 3

True

Question 4

Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets.

Question 5

While many stocks increase in value over the long run, most of the return on stocks comes from dividends.

Question 6

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.

Question 7

$10,000 invested in the Nasdaq Composite at the beginning of 2000 would have increased in value to about $20,000 by the end of 2005.

Question 8

An individual who invested $100,000 in average stocks early in the year 2000 would have approximately how much money at the end of 2008?

A) $137,500
B) $96,400
C) $74,000
D) $37,500

Question 9

There is a stronger tendency for the stock market to increase in value rather than decrease in value over time.

Question 10

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.

Question 11

Between 1956 and 2005 the stock market, as measured by the Dow-Jones industrial average, had more than twice as many up years as down years.

Question 12

$10,000 invested in the Nasdaq Composite at the beginning of 1995 would have increased in value to over $50,000 by the end of 1999.

Question 13

The technology bubble of the 1990s lasted about 18 months.

Question 14

As evidenced in the late 1990s and early 2000s, the S&P 500 Index is more volatile than the Nasdaq Composite Index.

Question 15

Which of the following periods provided particularly high returns to stock investors?

A) February 1972-October 1974
B) August 1998-March 2000
C) September 2000-September 2002
D) October 2007-March 2009

Question 16

A bear market is described as a stock market decline of 25% or more.

Question 17

A bear market similar to that of 2000-03 generally occurs once every decade.

Question 18

Since 1960, returns on the Dow Jones Industrial Average have never been negative for 3 consecutive years.

Question 19

If stocks earn an average rate of return of 12 %, their value doubles every

A) 4 years.
B) 6 years.
C) 8 years.
D) 12 years.

Question 20

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

Question 21

Shareholders have the option of selling their rights granted via a rights offering.

Question 22

Treasury stock is a means of increasing the number of shares outstanding.

Question 23

Stocks that are readily available to the general public and that are bought and sold on the open market are known as

A) sustained stocks.
B) publicly traded issues.
C) treasury stocks.
D) split issues.

Question 24

Different classes of stock generally have either different voting rights or different dividends.

Question 25

Over the long run, stocks have provided investors with annual returns of around

A) 6% to 8%.
B) 8% to 10%.
C) 10% to 12%.
D) 12% to 14%.

Question 26

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 entitles the holder to an equal ownership position and an equal vote in the corporation.

Question 27

An individual stock generally provides a

A) dividend payment that ensures total protection from purchasing power risk.
B) refuge from event risk.
C) lower current income than that available from other types of investments.
D) predictable annual rate of return.

Question 28

The total value of an investor's holdings in a company will not change as a direct result of a stock split.

Question 29

Shares of publicly traded stock can be issued either through a public offering or a rights offering.

Question 30

Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.

Question 31

Companies typically issue new shares through an initial public offering (IPO).

Question 32

Stock values declined sharply between

A) 1994 and 1997.
B) 1997 and 2000.
C) 2003 and 2007.
D) 2007 and 2008.

Question 33

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.

Question 34

The extraordinary run up in stock prices during the late 1990's primarily affected

A) energy stocks.
B) retail stocks.
C) pharmaceutical stocks.
D) technology stocks.

Question 35

Transaction costs can significantly reduce the rate of return on stock investments.

Question 36

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.

Question 37

Describe the bear market of 2008 through 2009 and put it in historical context.

Question 38

Stocks generally have produced positive inflation-adjusted rates of return over the long-term.

Question 39

Stock splits may be used when a firm, believing the price of its stock is too high, wants to enhance the stock's trading appeal.

Question 40

When a company, working with an underwriter, 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.

Question 41

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.

Question 42

Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding.If the company has 250,000 shares of common stock outstanding, its book value per share would be

A) $32.33.
B) $33.60.
C) $43.20.
D) $52.80.

Question 43

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) the stock price is too high.

Question 44

A stock's market value would normally be higher than it's book value.

Question 45

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.

Question 46

A round lot consists of

A) 1 share.
B) 10 shares.
C) 100 shares.
D) 1,000 shares.

Question 47

If a firm has a 2 million shares outstanding and its stock trades at $25, the company has a market capitalization of $50,000,000.

Question 48

Wall Street Journal Stock quotations include
I)the highest and lowest price over the last 52 weeks
II)dividend and dividend yield
III)PE (price/earnings)ratio
IV)the stock's beta

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

Question 49

Treasury stock can be used to do which of the following?
I)pay for an acquisition
II)pay the company employees
III)pay stock dividends
IV)cover employee stock option plan contributions

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

Question 50

The value that represents the amount of stockholders' equity in a firm is called the

A) par value.
B) book value.
C) liquidation value.
D) market value.

Question 51

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.

Question 52

The par or stated value of common stock is important for

A) accounting purposes only.
B) helping the investor determine the stock's intrinsic value.
C) helping the board of directors determine the dividend payout.
D) helping the market determine the trading price of the stock.

Question 53

Treasury stock can be used to do which of the following?
I)pay for an acquisition
II)pay the company employees
III)pay stock dividends
IV)cover employee stock option plan contributions

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

Question 54

The investment value for a publicly traded stock can readily be found in the financial section of the newspaper or on the internet.

Question 55

Rob owns 300 shares of Blackwood common stock valued at $9 a share.Blackwood has declared a 3-for-1 stock split effective tomorrow.After the split, Rob will own

A) 100 shares valued at about $27 a share.
B) 100 shares valued at about $3 a share.
C) 900 shares valued at about $27 a share.
D) 900 shares valued at about $3 a share.

Question 56

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.

Question 57

Why do some companies split their stock?

Question 58

Engines, Inc.declares a 2-for-5 stock split.The stock currently sells for $3 a share.A shareholder who owned 100 shares of stock prior to the split will now own

A) 40 shares valued at about $7.50 a share.
B) 40 shares valued at about $1.20 a share.
C) 250 shares valued at about $7.50 a share.
D) 250 shares valued at about $1.20 a share.

Question 59

Investors should never pay more than par value for a stock.

Question 60

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.

Question 61

The Limberger Corporation declared a quarterly dividend of $0.10 per share.The ex-dividend date was July 15, the date of record was July 18, and the payment date was July 28.If you had owned 100 shares of the Limberger Corporation and sold them on July 15, then

A) you would collect $10.00 in dividends, and the purchaser would not collect any dividends.
B) the purchaser would collect $10.00 in dividends, and you would not collect any dividends.
C) you would collect $5.00 in dividends, and the purchaser would collect $5.00 in dividends.
D) neither you nor the purchaser would collect any money in dividends.

Question 62

With respect to dividend payments on stocks, the date of record is the date on which the payment is actually paid.

Question 63

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 $21.34 per share.
B) The investment value is $2.67 per share.
C) The par value is $2.67 per share.
D) The book value is $21.34 per share.

Question 64

Stock dividends do not increase the value of a shareholder's position.

Question 65

A company's board of directors must declare a dividend if the firm is profitable.

Question 66

Over the last 10 years, what percentage of the total return on typical stocks in the Dow Jones average has come from dividends?

A) 0% to 1.0%
B) 2% to 4%
C) 8% to 10%
D) More than 10%

Question 67

Shareholders who sell their stock on or after the ex-dividend date, but before the date of record, will still receive the declared dividend.

Question 68

Which of the following will tend to increase transaction costs?

A) Buying or selling fewer than 100 shares at a time.
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.

Question 69

If a corporation declares a 10% stock dividend, then

A) the share price of the stock will most likely decline by about 9%.
B) the share price of the stock will most likely increase by about 10%.
C) the share price of the stock will most likely remain unchanged.
D) each shareholder will get a 10% cash rebate off his or her next round lot purchase of the stock.

Question 70

The value that investors place on a stock is called its

A) book value.
B) investment value.
C) liquidation value.
D) par value.

Question 71

The common shares of the Owl Company have a book value of $10.80 and a market value of $14.30.The company pays $0.14 in dividends each quarter.What is the dividend yield?

A) 1.0%
B) 1.3%
C) 3.9%
D) 5.2%

Question 72

The Jennings Company has 4 million shares of stock outstanding.The stock has a par value of $0.10 per share and is currently trading at $18 per share.According to this information, the market capitalization of Jennings is

A) $400,000.
B) $7.2 million.
C) $40 million.
D) $72 million.

Question 73

High dividend yields are typical of rapidly growing companies.

Question 74

Factors considered in making a decision on a firm's dividend include the
I)cash position of the firm.
II)firm's growth prospects.
III)the expectations of the shareholders.
IV)restrictive covenants in loan agreements.

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

Question 75

The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the

A) date of record.
B) ex-dividend date.
C) payment date.
D) purchase date.

Question 76

Since 2003, most dividends are taxed

A) at a higher rate than capital gains.
B) at a lower rate than capital gains.
C) at the same rate as ordinary income.
D) at the same rate as capital gains.

Question 77

The stock listing for a company shows a P/E of 18, a dividend yield of 2.4% and a closing price of $23.76.What is the amount of dividends per share?

A) $0.03
B) $0.57
C) $1.03
D) $1.32

Question 78

The decision of how much money to pay out in dividends is made by the

A) board of directors.
B) company shareholders.
C) chief executive officer.
D) chief financial officer.

Question 79

The value of a stock distribution is considered taxable income at the time of the distribution.

Question 80

Dividend yield is calculated by dividing

A) the market price of one share of stock by the annual dividend per share.
B) the annual dividend per share by the market price of one share of stock.
C) earnings per share by market price per share.
D) annual dividend per share by earnings per share.