Chapter 12 FI

Assume a stock is initially priced at $50, and pays an annual $2 dividend. An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest. What is the return if the investor sells the stock for $55 at the end of one year? A) 50 percent B) 30 percent C) 10 percent D) 16 percent E) 8 percent

16 percent (55-25-28+2)/25 = 16

Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock, using only personal funds and not borrowing from the brokerage firm. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is _______ percent. 26.5 28.5 30.5 34.5

34.5 (65.25-50+2)/50 = 34.5

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. He can either put up the entire amount and purchase the stock, or borrow $35 from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. 9. If Mark does not borrow any money from his brokerage firm, what is the estimated return on the stock? a.) 30.00 percent b.) -42.86 percent c.) -30.00 percent d.) 42.86 percent e.) none of these

42.86 percent (100-70/70)=42.86

The present margin requirement is that at least _______ percent of an investor's invested funds must be paid in cash. 20 30 40 50 none of these

50

Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is _______ percent. 60 44 30 69

60 (65.25-25-27.25+2)/25 = 60

Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. He can either put up the entire amount and purchase the stock, or borrow $35 from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. Mark borrows from his brokerage firm, his estimated return on the stock would be _______ percent. 42.86 85.71 73.71 30.00

73.71 ( 100-35-39.2+0)/35= 73.71

Lisa would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. She can either put up the entire amount and purchase the stock, or borrow $35 from her brokerage firm at an annual interest rate of 12 percent and put up the remainder. She thinks she can sell the stock for $100 after one year. If she borrows from her brokerage firm, her estimated return on the stock would be _______ percent. A) 42.86 B) 85.71 C) 73.71 D) 30.00

73.71 (100-35-39.2+0)/35= 73.71

Karen just purchased a stock costing $33 on margin, paying $23 and borrowing the remainder from a brokerage firm at 15 percent annual interest. The stock pays an annual dividend of $2. If Karen sells the stock after one year at a price of $50, what is the return on the stock? 27.60 percent 82.61 percent 76.09 percent 58.70 percent none of these

76.09 (50-23-11.5+2)/23 = 76.09

_______ established the first fully electronic stock exchange through an alliance with the Pacific Stock Exchange. a.) Island b.) Archipelago c.) Instinet d.) CyberTrader

Archipelago

_______ facilitate transactions on the New York Stock Exchange by executing stock transactions for their clients. A) Floor brokers B) Capstone members C) Specialists D) None of these

Floor Broker

Which of the following statements is incorrect? A) Market-makers take positions to capitalize on the discrepancy between the prevailing stock price and their own valuation of a stock. B) Specialists and market-makers may take the opposite position of uninformed investors and therefore stand to benefit if their expectations are correct. C) For each stock that is traded in the NASDAQ market, there are 50 market-makers on average. D) The spread quoted for a given stock may vary among market-makers.

For each stock that is traded in the NASDAQ market, there are 50 market-makers on average.

. Which of the following statements is incorrect? A) In a short sale, investors place an order to sell a stock that they do not own. B) Investors sell a stock short when they anticipate that its price will rise. C) When investors sell short, they will ultimately have to provide the stock back to the investor from whom they borrowed it. D) Short-sellers must make payments to the investor from whom the stock was borrowed to cover the dividend payments that the investor would have received of the stock had not been borrowed.

Investors sell a stock short when they anticipate that its price will rise.

The Division of _______ of the SEC regulates the fair and orderly disclosure trading by ensuring honest practices by various organizations that facilitate the trading of securities. a.) Corporate Finance b.) Enforcement c.) Administration d.) Market Regulation

Market Regulation

The Division of _______ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms. a.) Corporate Finance b.) Enforcement c.) Administration d.) Market Regulaton

Market Regulaton

_______ facilitate transactions on the New York Stock Exchange by taking positions in specific stocks; they also stand ready to buy or sell these stocks. A) Floor brokers B) Capstone members C) Specialists D) None of these

Specialists

The transaction costs associated with international trading of stocks have been reduced by: a.) the consolidation of stock exchanges. b.) extensive computerization. c.) the Eurolist system. d.) all of these.

all of these

Until recently, international trading of stocks was limited by: a.) transaction costs. b.) information costs. c.) exchange rate risk. d.) all of these.

all of these

A short-interest ratio of 20 or more indicates that many investors: a.) believe that the stock price is currently overvalued. b.) believe that the stock price is currently undervalued. c.) are selling the stock short. d.) believe that the stock price is current overvalued and are selling the stock short.

believe that the stock price is current overvalued and are selling the stock short.

A _______ is a trading platform on a computer web site that allows investors to trade stocks without the use of a broker. a.) direct access broker b.) program trader c.) market maker d.) communication network

direct access broker

Investors can reduce their risk by purchasing a stock on margin instead of using all cash to buy the stock. A) true B) false

false

The maintenance margin is the minimum amount of the margin that investors must maintain as a percentage of the stock's initial purchase price. A) true B) false

false

The short interest ratio is commonly measured as the number of shares shorted divided by the number of shares that the firm has repurchased in the last quarter. A) true B) false

false

The _______ the trading volume of a stock, the _______ the spread. A) higher; wider B) higher; narrower C) lower; narrower D) none of these

higher; narrow

Program trading: a.) is commonly used to reduce the susceptibility of a stock portfolio to stock market movements. b.) may involve the purchase of stocks that become "underpriced." c.) may involve the sale of stocks that become "overpriced." d.) can be combined with the trading of individual bonds to create portfolio insurance. e.) none of these

is commonly used to reduce the susceptibility of a stock portfolio to stock market movements.

A short seller: a.) anticipates that the price of the stock sold short will increase. b.) earns the difference between what they initially paid for the stock versus what they later sell the stock for. c.) makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made. d.) does none of these.

makes a profit equal to the difference between the original sell price and the price paid for the stock, after subtracting any dividend payments made.

When a brokerage firm demands more collateral from investors who have borrowed from the brokerage firm to buy stocks, it is making a: A) margin call. B) short sale. C) proxy fight. D) hedge.

margin call

_______ are enforced to restrict the amount of credit extended to customers by stockbrokers. a.) Limit orders b.) Margin requirements c.) Maintenance margins d.) Initial margins

margin requirements

A _______ order to buy or sell a stock means to execute the transaction at the best possible price. A) market B) limit C) stop-loss D) stop-buy

market

The risk of a short sale is that the stock price: a.) may decrease over time. b.) will remain the same. c.) may increase over time. d.) will do none of these

may increase over time

You purchase a stock with cash, and you earn a negative return on the stock. If you had purchased the stock with 60 percent cash and 40 percent borrowed funds, your return on your investment would have been: A) positive. B) more negative than if you had covered the entire investment with cash. C) negative, but more favorable than if you had covered the entire investment with cash. D) zero.

more negative than if you had covered the entire investment with cash.

The NYSE defines _______ as the simultaneous buying and selling of a portfolio of at least 15 different stocks that are contained within the S&P 500 index values at more than $1 million. a.) direct access brokering b.) electronic communication networking c.) program trading d.) regulation of stock trading

program trading

When investors buy stock with borrowed funds, this is sometimes referred to as: A) use of proxy. B) purchasing stock on margin. C) a margin call. D) a margin residual claim.

purchasing stock on margin

An investor sold a stock short a year ago for $50 per share. The stock's price is currently $52 per share. If the investor is unwilling to accept a loss on the short sale of more than $5 per share on the transaction, she could place a: A) stop-loss order with a specified selling price of $55 per share. B) stop-buy order with a specified purchase price of $55 per share. C) stop-loss order with a specified selling price of $45 per share. D) stop-buy order with a specified purchase price of $45 per share.

stop-buy order with a specified purchase price of $55 per share.

With a _______ order, the investor specifies a purchase price that is above the current market price. A) market B) limit C) stop-loss D) stop-buy

stop-by\uy

Short-selling a stock refers to: A) poor performance from purchasing an overvalued stock. B) the new issuance of low-priced stocks by firms. C) the new issuance of stocks by financially weak firms. D) the borrowing of stock owned by someone else and selling it in the market.

the borrowing of stock owned by someone else and selling it in the market.

The exchange rate risk associated with international trading of stock has been reduced by: a.) information available on the Internet. b.) extensive computerization of stock exchanges. c.) the conversion of many European countries to a single currency. d.) the Eurolist system.

the conversion of many European countries to a single currency.

The "trade-though rule" established by the SEC requires that an order for NYSE-listed stocks must be executed on the exchange that offers the best price for the investor. A) true B) false

true

Trading halts are intended to ensure that the market has complete information before trading on news. A) true B) false

true

The phrase "noise traders" refer to: A) investors that close out their stock positions by the end of each trading day. B) brokers that execute trades on the stock exchange. C) institutional investors who closely analyze stocks. D) uniformed investors.

uninformed investors

The size of the spread on stocks that have relatively little trading is: a.) smaller to reflect the lower degree of uncertainty. b.) the same as that of stocks with higher volumes of trading. c.) wider to reflect the higher degree of uncertainty. d.) not affected by trading volume.

wider to reflect the higher degree of uncertainty.