Chapter 19

the dow jones composite average is composed of

a) 65 common stocks from the industrial, transportation, and utility averages b) 500 common stocks from the industrial, transportation, and utility averages c) 30 selected common stocks divided by a constant d) 425 selected common stocks divided by a constant A) the dow jones composite average contains 65 common stocks from the industrial, transportation, and utility indices

all of the following would be considered broad based stock indexes except

a) S&P 100 index b) major market index c) computer technology index d) S&P 500 index C) this would be a narrow based index, bc it focuses on only one industry

the earnings per share of common stockholders will be diluted by

a) a 3-for-1 split of the common stock b) the conversion of convertible bonds by their holders into common stock c) a 10-for-1 reverse split of common stock d) a 25% stock dividend on common B) dilution is a decrease in the earnings per share resulting from additional shares created bc of a new issue or the exercise of options, warrants, or convertibles. stock splits and dividends affect only existing shareholders and do not cause dilution

if the amount on the balance sheet representing shareholders' equity declines as a result of corporate transaction while assets remain unchanged, which of the following must have occured?

a) a decrease in prepaid expenses b) an increase in total net worth accounts c) an increase in total liabilities d) a decrease in accrued expenses C) if shareholders' equity declines while assets remain unchanged, an increase in total liabilities must have occurred. there are only 3 major categories on a balance sheet -- assets, liabilities, shareholders' equity

a technical analysis of the stock market would be based on all of the following except:

a) advances and declines b) new highs and new lows c) the amount of Dow Jones Industrial stocks sold short d) an in depth analysis of the 30 stocks in the Dow Jones Industrial Average relating to price-earnings ratios and management ability D) technical analysis looks at the market as a whole, and applies such theories as the odd lot theory, the breadth of the market theory, or the short interest theory. fundamental analysis focuses on the specifics of the corporations themselves, such as P/E, ratio, earnings per share, etc

on which of the following financial statements would an "extraordinary item" appear

a) balance sheet b) trial balance c) retained earnings statement d) income statement D) extraordinary items or expenses are always carried on the income statement

assume that for the past week, the number and dollar value of shares purchased by odd lotters have been approx 25% less than the number and dollar value of shares sold by odd lotters. if this trend continues according to the odd lot theory, it would be

a) bullish b) bearish c) meaningless d) an indication that the total trading volume has increased A) the odd lot theory believes that odd lot investors are always wrong. therefore, you should buy when odd lot investors are selling and sell when odd lot investors are buying so this trend would be considered bullish

a head and shoulders bottom formation would indicate that prices will be

a) bullish b) bearish c) neutral d) insignificant A) a head and shoulders bottom formation indicates a bullish trend, and reversal of a downward move

a sharp drop in stock prices accompanied by increasing volume after a lengthy period of market decline is described as a

a) climax b) breakthrough c) washout d) sell out A) a selling climax normally occurs at the end of a bear market. it is a sharp drop in stock prices accompanied by increasing volume after a lengthy market decline

to analyze the capital structure of a company, which of the following ratios should be used

a) current ratio b) return on shareholder's equity c) total debt to earnings before interest and taxes d) debt to equity D) to analyze the capital structure of a company you would look at the debt to equity ratio which indicates how much money the company received from issuing bonds vs stock. if most of the money came from the issuance of stock the company would have a conservative capital structure. if most of the money came from bonds then the company would have a speculative capital structure

the support level is the price at which a(n)

a) downward trend is expected to level off b) upward trend is expected to level off c) downward trend is expected to accelerate d) upward trend is expected to continue A) the support level is the price at which a downward trend is expected to level off bc buyers usually enter the market at the low or support level

under which of the following conditions could the average cost per share to the investor, over a period of time, be higher than the average price per share?

a) if a fixed dollar amount is regularly invested b) if the investor follows a constant dollar plan c) if a fixed number of shares is regularly purchased d) if the price of the stock fluctuates C) under dollar cost averaging, the average cost per share to an investor over a period of time will always be lower than the average price per share if a fixed dollar amount is regularly invested and the price of the stock fluctuates. if a fixed number of shares is regularly purchased, the average cost per share might be higher than the average price per share

according to technical analysis, all of the following would track investor sentiment except:

a) investment advisory census surveys b) amount of short selling c) revisions of earnings estimates by a corporation d) number of small investors trading on margin C) revisions of earnings estimates by a corporation would not be a measure of investor sentiment. earnings are fundamental

if a corp refinanced an 8% preferred stock issue with an 8% subordinated debenture, what would be the immediate effect on the earnings per share on the common stock

a) it would lower earnings b) it would raise earnings c) it would have no effect on earnings d) the effect can not be determined B) if a company refinanced by calling in preferred stock, which is an after tax deduction on the companies income statement, with money obtained from the issuance of a bond issue with the same %, the immediate effect would cause the earnings per share on common stock to be increased, bc the interest payments on the bonds are a pre-tax deduction therefore the company would end up paying less tax and then have more money carried down to net earnings. whenever a company goes from an after tax deduction to a pre tax deduction on their income statement there would be an immediate increase in the earnings of the company

from a chartist's point of view, which of the following is not correct

a) once a trend line has been established, the stock tends to move in the same trend line b) a head and shoulders top formation indicates the reversal of an upward trend c) the support level is the price at which a downward trend is expected to level off d) a selling climax normally occurs at the end of a bull market D) from the chartist's POV, once a trend line has been established, the stock tends to move in the same trend line, a head and shoulders top formation indicates a breakout on the downside from an upward trend, and the support level is the price at which a downward trend is expected to level off. a selling climax normally occurs at the end of a BEAR market, not a bull market

when compared to other types of securities, small cap companies will often have a higher level of which of the following

a) small cap companies will often have a greater amount of timing risk to investors b) small cap companies will often have a higher level of risk associated with inflation c) small cap companies will often have a higher level of liquidity risk to investors d) small cap companies often will have a higher level of risk associated with changes in interest rates C) by nature and even by name, small cap companies have a relatively low amount of capitalization. this would mean that relative to other companies, a small cap company will have fewer shares trading on the open market. this can lead to concerns with liquidity if an investor wants to buy or sell and there is not currently a market for the small cap security

which of the following contains the narrowest sampling of stocks

a) standard & poor's composite index b) NYSE composite index c) dow jones industrial average d) value line C) the dow jones industrial average is the market price of 30 selected common stocks divided by a constant

the dow jones industrial average is

a) the market price of 60 selected common stocks divided by a constant b) the market price of 30 selected common stocks divided by a constant c) the market price of 500 industrial stocks divided by a constant d) the market price of 65 selected stocks divided by a constant B) the dow jones industrial average is the market price of 30 selected common stocks divided by a constant