Chapter 6 Common Stocks

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.

A

11) 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.

A

12) 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.

A

13) 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.

A

13) 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

A

14) 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.

A

15) You are given the following information on a company. total bv 1600k total FMV 12804K Common stock outstanding 600K 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.

A

16) Engines, Inc. declares a 4-for-10 stock split. The stock currently sells for $3 a share. A shareholder who owned 1000 shares of stock prior to the split will now own A) 400 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.

A

17) 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.

A

18) Gypsum Corp. pays out 25% of its earnings as dividends. Earnings per share are currently $1.32, book value per share is $16.80, and the market price per share is $22.44. What is the dividend yield? A) 1.5% B) 2.0% C) 5.9% D) 7.9%

A

18) Stocks whose prices are expected to remain stable, or even prosper, when economic activity is slowing down are known as A) defensive stocks. B) cyclical stocks. C) growth stocks. D) speculative stocks.

A

23) Which of the following best fits the description "speculative stock"? A) Facebook B) Apple C) Amazon D) Home Depot

A

35) The common stock investment strategy that is the most basic strategy and is popular with conservative, quality-conscious individuals looking for competitive returns over the long run is the A) buy-and-hold strategy. B) current income strategy. C) growth strategy. D) speculation and short-term trading strategy.

A

8) 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.

A

8) 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.

A

9) 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.

A

10) 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.

B

12) Stocks that are readily available to the general public and that are bought and sold on the open market are known as A) initial public offerings. B) publicly traded issues. C) treasury stocks. D) blue chip stocks.

B

15) Investors seeking current income that tends to increase over time should purchase A) corporate bonds. B) income stocks. C) growth stocks. D) speculative stocks.

B

16) 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.

B

16) The value that investors place on a stock is called its A) book value. B) investment value. C) liquidation value. D) par value.

B

18) 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.

B

20) Pilgrim Corp. stock currently sells for $25. The dividend yield is 4% and the dividend payout ratio is 25%. The dividend is ________ and the earnings per share are ________. A) $3.00, $1.00 B) $1.00, $3.00 C) $.12, $1.00 D) $.25, $6.25

B

21) To take advantage of the opportunity to acquire additional shares of a company's stock without incurring any brokerage commissions, many investors participate in A) initial public offerings. B) dividend reinvestment plans. C) deferred equity securities. D) corporate trusts.

B

21) What are the effects of a company repurchasing its own stock as Treasury shares? A) Usually negative in the short term but uncertain over the long term. B) Usually positive in the short term but uncertain over the long term. C) Usually positive in both the short term and the long term. D) No effect in either the short term or the long term.

B

22) Reinvested dividends A) are taxed when the shares purchased with the reinvested dividend are sold. B) are taxed at the time the dividend is paid. C) do not increase the value of an investors holdings. D) are generally sold at a premium over the market price.

B

22) Typical characteristics of growth stocks include A) rapidly growing dividends. B) high rates of growth in operations and earnings. C) acquisitions of competing companies. D) strong performance even in market downturns.

B

32) Aggressive stock management A) requires holding speculative stocks for the long term. B) involves active stock trading in the short-term in the quest for capital gains. C) concentrates on the long-term growth aspects of a security. D) concentrates on high dividend yielding stocks.

B

36) Aggressive stock management focuses on the pursuit of A) dividend income. B) short-term capital gains. C) long-term capital gains. D) all of the above.

B

38) Which strategy applies to investors who fund long-term goals with high-quality stocks which they retain for the entire investment period? A) quality long-term growth B) buy and hold C) speculation D) current income

B

8) 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

B

9) 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.

B

9) 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.

B

10) 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. minimum dividends required by law. A) II and IV only B) I, II and IV only C) I, II and III only D) I, II, III and IV

C

10) If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is A) $40,000,000. B) $49,000,000. C) $50,000,000. D) $60,000,000.

C

11) 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.

C

13) An individual stock generally provides a A) dividend payment that ensures total protection from purchasing power risk. B) refuge from event risk. C) current income that is less predictable than that available from other types of investments. D) predictable annual rate of return.

C

13) 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%

C

14) Which one of the following is a characteristic of blue chip stocks? A) guaranteed minimum annual dividend of $2 a share B) annual dividends of more than $5 per share C) long and stable dividend and earnings records D) relatively high risk exposure

C

16) Companies with strong earnings but limited growth opportunities A) do not generally pay any dividends. B) are called blue-chip stocks. C) generally pay high dividends. D) are speculative stocks.

C

19) Pilgrim Corp. stock currently sells for $25 per share? The dividend yield is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the the dividend payout ratio is ________. A) 12%, .48% B) 8.33%, 25% C) 4%, 33% D) 33%,4%.

C

19) 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.

C

20) Which of the following are characteristics of blue-chip stocks? I. solid balance sheets II. generous dividend yields III. immunity from bear markets IV. some growth potential A) III and IV only B) II and III only C) I, II and IV only D) II, III and IV only

C

22) One motive for issuing classified stock with different voting rights is to A) increase the market value of the company. B) avoid SEC reporting requirements. C) allow the company's founders to retain control of the company. D) facilitate the issue of additional shares in the future.

C

24) A round lot consists of A) 1 share. B) 10 shares. C) 100 shares. D) 1,000 shares.

C

25) Which of the following best fits the description "blue chip stock"? A) Facebook B) Under Armour C) General Electric D) Chipotle Mexican Grill

C

26) One characteristic of mid-cap stocks is that they A) are generally new firms with high growth potential. B) tend to be highly volatile. C) are fairly good-sized companies that offer attractive return opportunities. D) are traded primarily through pink sheet bids.

C

33) Which of the following are advantages of the buy and hold strategy? I. rapid accumulation of wealth II. low transaction costs III. capital gains taxed at the long-term rate IV. Portfolio requires less time and energy to manage than for most other strategies. A) I and II only B) II and III only C) II, III and IV only D) I, II, III and IV

C

7) 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.

C

11) 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

D

11) 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 of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.

D

12) 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.

D

14) 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.

D

14) 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.

D

15) 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.

D

17) Characteristics of established growth companies include all of the following EXCEPT A) high operating margins. B) steady earnings growth. C) adequate cash flow to service their debt. D) high dividend payout ratios.

D

17) 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) it wants to make its stock more affordable to average investors.

D

19) Which of the following are characteristics of small cap stocks? I. strong balance sheets II. annual revenues less than $250 million III. potential for high returns along with high risk IV. potentially dramatic changes in their earnings A) III and IV only B) II and III only C) I, III and IV only D) II, III and IV only

D

20) 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

D

21) Stocks related to computers and the Internet are classified as A) blue-chip stocks. B) income stocks. C) cyclical stocks. D) tech stocks.

D

23) Stock quotes on most Internet service providers such as Yahoo Finance include I. the highest and lowest price over the last 52 weeks. II. the closing price for the previous trading day. III. the opening price for the day. IV. the bid price and ask price. A) I and III only B) II and IV only C) I, II and III only D) II, III and IV only

D

24) Which of the following best fits the description "defensive stock"? A) Facebook B) Alcoa C) Amazon D) Walmart

D

25) 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.

D

27) Which category of stocks represents the highest level of risk? A) large-cap B) mid-cap C) baby blue D) small-cap

D

29) Which of the following factors should be considered when investing in foreign stocks? I. exchange rates II. differing accounting standards III. tax systems IV. ADRs A) I and II only B) I and III only C) I, II and III only D) I, II, III and IV

D

34) Which one of the following investment strategies would NOT appeal to an investor who is most concerned with storage of value? A) buy-and-hold B) high income C) quality long-term growth D) speculation and short-term trading

D

37) Which of the following strategies appeal to investors who place primary emphasis on the storage of value aspects of an investment? I. buy and hold II. short-term trading III. quality long-term growth IV. consistent dividend record A) I and IV only B) I and III only C) I, II and III only D) I, III and IV only

D

39) Income stocks are well suited for retirees because A) dividend income is tax-free. B) the capital gains are predictable. C) dividend yields tend to exceed bond yields. D) dividends tend to increase over time.

D