chapter 23
Wireless Communications is offering 2,000,000 common shares (par value $.10) at $15. Which TWO of the following choices describe the financial impact on the company? I.An increase in paid-in capital II.A reduction in the long-term debt ratio III.A reduction in liquidity IV.An increase in fixed assets by $30,000,000 a. I and II b. I and IV c. II and III d. III and IV
The company will receive cash from the sale of the stock, so liquidity will increase. The common stock account and the paid-in capital account, which are part of stockholders' equity, will also increase. The long-term debt ratio will fall as the equity capital rises and, since the company is raising cash, current assets will increase. Finally, fixed assets will be unchanged.
If a company declares a cash dividend, which of the following is TRUE? a.Shareholders' equity increases b.Shareholders' equity decreases c.Current assets decrease d.Current assets increase
b It is important to note that this question refers to the declaration of a cash dividend, not the payment of a cash dividend. If a company declares a cash dividend, dividends payable (a current liability) will increase by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. The announcement has no impact on the assets of the company; however, assets will be reduced once the company actually pays the cash dividend. Regardless of the specific corporate transaction, the balance sheet must remain balanced
When a stock is at its resistance price, a technical analyst will most likely say that it is: a. Overbought b. Oversold c. Inverted d. Upward sloping
a A stock is overbought at its resistance level and oversold at its support level.
Which of the following statements about technical analysis is TRUE? a. The advance-decline index is a good indicator of the strength of a bull or bear market b. The odd-lot theory states that the small investor is usually right c. It is bullish when volume is heavy in a declining market and bearish when volume is light in an advancing market d. A small short interest tends to make for a technically strong market
a The advance-decline index is a measurement of advancing stocks versus declining stocks over a specified period. It is a good indicator of the strength of a bull or bear market. The other technical analysis theories are just the opposite of how they should be stated.
A high put/call ratio would MOST likely be associated with a(n): a. Bullish indicator b. Bearish indicator c. Indicator that the market will trade within a narrow range d. Indicator that the trading volume will be increasing
a The put/call ratio is a technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.
Which of the following choices represent logical strategies for a technical analyst? I.Buy calls when a stock breaks through a resistance level II.Buy calls when a stock breaks through a support level III.Buy puts when a stock breaks through a resistance level IV.Buy puts when a stock breaks through a support level a. I and III b. I and IV c. II and III d. II and IV
b A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.
If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: a.Expense ratio b.Alpha c.Rating d.Beta
b Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.
A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is: a. 25% b. 40% c. 60% d. 100%
b Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%
A technical analyst does NOT review: a. The advance-decline theory b. The price-earnings ratio of the Dow Jones stocks c. Short interest d. The trendline theory
b The price-earnings ratio of the Dow Jones stocks is an indicator that a fundamental analyst will examine. A technical analyst will review the advance-decline theory, short interest, and the trendline theory.
A customer contacts a registered representative with information he found on a financial Web site. The 52-week range of a company is $233.82 - $442.40. The EPS is $8.60 and the current market price is $245.90. What is the company's price/earnings ratio? a. 27.2 b. 28.6 c. 39.3 d. 51.4
b The price/earnings ratio is found by dividing the current market price of $245.90 by the earnings per share of$8.60. This equals a price/earnings ratio of 28.6 ($245.90 / $8.60). The 52- week range of the company is not relevant in calculating the price/earnings ratio.
A corporation purchases new machinery using cash. Which of the following choices are results of this transaction? I.Working capital is reduced II.Working capital remains the same III.Total assets are reduced IV.Total assets remain the same a. I and III b. I and IV c. II and III d. II and IV
b When purchasing machinery with cash, current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets do not change. Since total assets (TA) and total liabilities (TL) remain the same, stockholders' equity (TA - TL) does not change. Working capital (current assets minus current liabilities) is reduced since current assets are reduced.
An investor has an equity portfolio that consists mainly of domestic companies. If an RR wants to diversify the client's portfolio to include foreign companies, which of the following investment products would MOST closely achieve this goal? a. A mutual fund that tracks the FTSE Index b. A mutual fund that tracks the EAFE Index c. An ETF that tracks the S&P 500 Index d. A mutual fund that tracks the Wilshire Index
bThe MSCI EAFE (Morgan Stanley Capital International Europe, Australasia, and Far East) Index follows the equity performance of the developed markets but excludes the U.S. and Canada. The FTSE Index mostly follows the stocks of companies trading on the London Stock Exchange.
A portfolio composed of five different state G.O. issues will NOT provide an investor with protection from: a.Economic downturns in specific geographical locations b.Legislative changes in different states c.Interest-rate fluctuations d.Adverse decisions by state courts
c A diversified portfolio will provide protection from a variety of risks, but cannot protect against fluctuating interest rates. All bonds, regardless of the issuer's location, are subject to interest-rate risk
A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: a. Net working capital b. Common stock ratio c. Cash flow d. Debt-to-equity ratio
c Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.
Money received by a corporation when it sells its stock above its par value is called: a. Excess capital b. Earned surplus c. Paid-in capital d. Stockholders' capital
c Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends.
The American Telephone Company announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 10% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. All of the following statements are TRUE about this redemption, EXCEPT: a. The company's outstanding debt will be reduced b. The company's interest expense will be reduced c. Dividends to the stockholders will be increased d. Investors redeeming the bonds receive a premium to the market price
c The effect of the redemption will be to reduce the company's outstanding debt, thereby also reducing the interest expense. Investors will receive 103 1/4 for redeeming the bonds, which is a premium to the 102 3/4 market price. The redemption of the bonds will not affect dividends paid to stockholders.
A customer purchased an initial public offering of stock at $38 a share. The current market price is $24 and the EPS is 19 cents. If the company has no plans to pay a cash dividend, what is the price/earnings ratio of the company? a. The company does not have a price/earnings ratio b. 2 c. 126.3 d. 200
c The price/earnings ratio is found by dividing the current market price of $24 by the earnings per share of 19 cents. This equals a price/earnings ratio of 126.3 ($24 / $.19). The IPO price and the amount of the dividend are not relevant in calculating the price/earnings ratio.
A fundamental analyst, evaluating the common stock of a corporation, will examine all of the following choices, EXCEPT the: a. Sales of the corporation b. Management of the corporation c. Current amount of earnings paid as dividends to shareholders d. Current amount of short interest positions for the stock
d A fundamental analyst will examine all the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.
What is the basic balance sheet equation? a. Total Assets + Total Liabilities = Stockholders' Equity b. Total Liabilities = Total Assets + Stockholders' Equity c. Total Assets = Total Liabilities - Stockholders' Equity d. Total Assets = Total Liabilities + Stockholders' Equity
d The balance sheet equation is: Total Assets = Total Liabilities + Stockholders' Equity.
Which of the following parties would consider the information obtained in an annual report of a corporation to be the most important factor in making an investment decision? a. A technical analyst b. A chartist c. A Dow theorist d. A fundamental analyst
d The performance of management, sales, expenses, and earnings, which are items that could be obtained from the annual report of a corporation, are considered the most important factors in making an investment decision by a fundamental analyst. A technical analyst (chartist) is concerned with forces within the market, such as new highs and new lows, trading volume, and the number of advances and declines.