Finance Midterm Reviewer
Zonvier, Inc. has sales of $53,800, a profit margin of 10.5 percent, and a plowback ratio of 40 percent. The company has 15,000 shares of stock outstanding. The firm uses the percentage of sales method for pro forma statements and estimates next year's sales will increase by 15 percent.What is the dividend per share expected to be next year?
$0.260
O'Hara's Market has net income of $1.6 million and 525,000 shares of stock outstanding. What is the amount of the dividends per share if the plowback ratio is 60 percent?
$1.22 (Dividends per share = [$1,600,000 × (1 - .60)]/525,000 = $1.22)
HNW Manufacturing, Inc. has 255,000 shares of stock outstanding. The firm paid out $255,000 in dividends, $195,000 in interest, and added $193,700 to retained earnings for the year. What is the amount of the earnings per share?
$1.76
Healthy Supplements, Inc. paid $7,300 in interest and $4,300 in dividends for the year. The firm also issued $15,000 worth of new equity securities. What is the amount of the financing cash flow?
$10,700 (Financing cash flow = - $7,300 + $15,000 = $10,700)
A firm has net income of $25,000 on sales of $210,000. Sales are expected to increase by 8 percent next year and the dividend payout ratio is 35 percent. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?
$17,550 (Addition to retained earnings = $25,000 × (1 + .08) × (1 - .35) = $17,550)
A firm has sales of $685,000 and cost of goods sold of $435,000. The firm expects sales to increase by 6 percent next year. What is the gross profit amount expected to be next year if the firm uses the percentage of sales approach when compiling pro forma statements?
$265,000 (Pro forma gross profit = ($685,000 - $435,000) × (1 + .06) = $265,000)
Your company has pretax income of $52,000 on sales of $506,000. Sales are expected to increase by 6 percent next year and the tax rate is 40 percent. What is the expected net income for next year if your firm uses the percentage of sales approach when compiling pro forma statements?
$33,072 (Pro forma net income = $52,000 × (1 + .06) × (1 - .40) = $33,072)
Whole Wheat Farms, Inc. has a net income of $20,000 and a dividend payout ratio of 30 percent. The firm issued $12,000 worth of common stock during the period. The firm has no long-term debt. What is the financing cash flow for the period?
$6,000 (Financing cash flow = ($20,000 × .30 × -1) + $12,000 = $6,000)
Last year, a firm had net income of $62,000 on sales of $595,000. The projected sales for next year are $654,500. Assume the firm uses the percentage of sales method for pro forma statements. What is the projected net income?
$68,200 (Percentage increase in sales = ($654,500 - $595,000)/$595,000 = .10Pro forma net income = $62,000 × (1 + .10) = $68,200)
A stock with which one of the following betas has an expected return that most resembles the overall market expected rate of return?
0.99
What is the beta of an average asset?
1
Which one of the following betas represents the greatest level of systematic risk?
1.27
A firm has net sales of $35,000, operating expenses of $6,100, depreciation of $1,700, and cost of goods sold of $18,300. What is the gross margin?
47.7 percent (Gross margin percentage = ($35,000 - $18,300)/$35,000 = 47.7 percent)
The mean plus or minus one standard deviation defines the _____ percent probability range of a normal distribution.
68
Last year, ABC stock returned 11.4 percent, the risk-free rate was 3.2 percent, and the inflation rate was 2.8 percent. What was the risk premium on ABC stock?
8.20 percent
Children's Books, Inc. has net income of $48,000 and a plowback ratio of 85 percent. There are 25,000 shares of stock outstanding at a market price of $18.64 a share. What is the price-earnings ratio?
9.7 (Price-earnings ratio = $18.64/($48,000/25,000) = 9.7)
candlestick chart
A candlestick chart tells us the open, high, low, and close values for a specified time period or # of trades The shaded or hollow portion of the candlestick is the body The lines on either side of the body are called shadows To the right is a chart depicting each component and what it tells us
Relative Strength Analysis
A comparison of the performance of one asset with the performance of another asset or a benchmark based on changes in the ratio of the securities' respective prices over time. •If the Relative Strength ration is greater than 1, then the investment is strong. • If the Ration is less than 1, then the investment is weak. •Relative Strength favors a strong market, as this helps determine a more appropriate time to make an investment. • Is more effectively used when compared as an average than one particular time frame.
Moving Average Technical Analysis
A moving average is used to help smooth out price action by filtering out "noise" from random short-term price fluctuations. It is a trend following, or lagging, indicator because it is based on past prices. Two Types: Simple moving average and Exponential moving average. Exponential Moving Average gives greater weight to more recent prices.
You are having a discussion with Kate when she mentions that she just initiated a short position on ABC stock. Given that statement, what do you know about Kate's future outlook for ABC stock?
A short position provides a positive return to an investor when a security's price declines. Thus, Kate is bearish on the stock as she is expecting the value of that stock to decline.
Which one of the following can be assumed when the SEC approves an IPO registration?
All rules have been followed to allow for full disclosure of information
Identify four causes for a decrease in a firm's sustainable rate of growth.
Any one of the following will decrease a firm's sustainable rate of growth: 1) a decrease in the retention ratio, 2) an increase in the dividend payout ratio, 3) a decrease in net income, and 4) an increase in the book value of equity, all else constant.
Which one of the following statements is correct?
Any trading based on information known to be private is illegal.
We have studied three different "average return measures" - the arithmetic average return, the geometric average return and the dollar-weighted average return. Briefly outline what information each metric provides.
Arithmetic average return is the return on investment calculated by simply adding the returns for all sub-periods and then dividing it by total number of periods. Geometric periods is the average return measure which is always lower than arithmetic average return. Dollar-weighted Rate of Return or ('DWRR) are the return produced over time by a fund independent of contributions of withdrawals.
You are helping your very rich aunt Molly decide where to invest her portfolio. She is planning to take a 10-year world tour after she invests the bulk of her portfolio. She thinks that picking a money manager is unimportant because she believes any professional money manager must be able to beat the market. She's just planning to pick a professional money manager at random. What do you tell her?
Based on historical data and looking at 1-year returns for the period of 1986 to 2011, in only 9 of the 26 years did more than half the professional money managers beat the Vanguard 500 Index Fund. The performance is slightly worse when it comes to 10-year investment periods (1986-1995 through 2002-2011). In only 5 of these 17 investment periods did more than half the professional money managers beat the Vanguard 500 Index Fund.
The residual income model for valuing a stock suffers from some of the same estimating errors as the dividend growth model. Identify and explain these estimating errors.
Both the residual income model and the dividend growth model use a growth rate and a discount rate in the computation of an estimated stock value. The discount rate is commonly based on CAPM, which uses a risk-free rate, beta, and the market risk premium. The variables are only known with certainty in hindsight. The dividend growth rate is even more susceptible to estimating errors as it is affected by changes in a firm's earnings as well as changes in the dividend payout ratio. The growth rate is particularly difficult to estimate when a firm adheres to a residual dividend policy.
Research on semistrong-form efficient markets indicates which one of the following is correct?
Buying and holding a broad market index is one of the best investment strategies.
Identify and describe each of the three components of a security's expected return according to the capital asset pricing model.
CAPM states that investors should be compensated for the time value of money (risk-free rate) plus a risk premium based on the level of systematic risk assumed (security β) and the reward-to-risk premium (market return minus the risk-free rate).
What are some of the key lessons to be learned from historical stock market crashes?
Causes of crashes are often similar -- most are caused by bubbles. The crashes happen suddenly -- there is a significant and sudden drop in the marketwide values. Crashes last generally less than a week. Variances in post-crash market behavior is similar -- the disastrous financial aftermath of a crash can last for years.
Which one of the following decisions falls under the category of asset allocation?
Determining that thirty percent of a portfolio should be invested in bonds
Which one of the following will automatically occur if all investors are rational?
Equivalent risk assets will have equal expected rates of return.
The absolute minimum initial margin requirement is set by the:
Federal Reserve
The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows
I and II only
Which of the following will affect the beta value of an individual security? I. interval of time frequency used for the data sample II. length of the time period used for the data sample III. particular time period selected for the sampling IV. choice of index used as the measure of the market
I, II, III, and IV
Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? I. amount of the next dividend II. dividend growth rate III. discount rate
III only
Which one of the following statements is true?
Investing has two dimensions: risk and return.
Which one of the following statements applies to unsystematic risk?
It can be eliminated through portfolio diversification.
Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?
January Effect
You currently have $5,000 in cash in your brokerage account. You decide to spend $8,000 to purchase shares of stock and borrow $3,000 from your broker to do so. Which type of brokerage account do you have?
Margin
The day-of-the-week effect refers to which trading day?
Monday
If the market is semistrong-form efficient, then which one of the following statements is true?
Neither technical nor fundamental analysis leads to abnormal profits.
A market centered on dealers buying and selling for their own inventories is called a(n):
OTC market.
Which one of the following is the best example of a risk associated with stock ownership?
One of the firm's patent applications was unexpectedly rejected.
Preferred stock is sometimes considered to be a cross between debt and equity. Describe the characteristics of preferred stock that make it similar to debt as well as the characteristics that make it similar to equity.
Preferred stock has a fixed payment and a fixed liquidation value, which makes it similar to a debt instrument. However, unlike interest on debt, the board of directors is not legally bound to pay preferred dividends. In addition, preferred stock does not have a maturity date, which then classifies it as an equity security.
Lauren Mitchell has a margin account with a local brokerage firm, RL Brokers. She recently purchased 200 shares of Abbot Industries common stock that trades on the New York Stock Exchange (NYSE). These shares are held in street name and are registered under the name of:
RL Brokers
The sustainable growth rate is equal to:
ROE × (1 - Payout ratio).
Briefly discuss any three (3) constraints that an investor might face in designing his investment strategy and how they affect that strategy.
Resources: The amount of money the investor has available to invest. Clearly this is an important constraint as it may affect the type of investment opportunities available.Horizon: The investment horizon refers to the planned life of the investment. Asset allocation will be affected by the investor's horizon - when the money will be needed. For example, an investor needed funds to pay for college tuition in 5 years should consider a different asset set than one planning for retirement in 25 years.Liquidity: Liquidity refers to the ability to sell an asset (turn it into cash) quickly and without significant loss in value. An investor needs to consider future needs for cash in which would impact the allocation to cash and highly liquid but lower return assets.Taxes: Different types of investments are taxed differently. The impact of taxes on an investor's asset choices will be driven by those differences along with the investor's individual tax bracket, since the goal is after-tax return.Unique circumstances: These are constraints unique to the individual investor. For example, an investor may be interested only in investing in socially or environmentally conscious firms. Another investor may be influenced by his company's investment "matching" policy or a need to avoid a conflict of interest.
Which one of the following is most commonly used as the measure of the overall market rate of return?
S&P 500
Which one of the following is the federal agency which regulates the financial markets in the U.S.?
Securities and Exchange Commission
Which one of the following describes a short position?
Selling a security that you do not own
Briefly discuss the difference between strategic and tactical asset allocation.
Strategic asset allocation describes the asset allocation an investor has defined after defining his investment policy statement. "Strategic" implies the investor's long-term, target asset allocation which will be relatively stable. Changes will be infrequent, driven by changes in objectives, constraints, or the relative performance of asset classes.A tactical asset allocation refers to a short-term change to the investor's strategic allocation in an attempt to capture added return. The benefits of tactical asset allocation are under debate as it is similar to market timing.
What are the basic differences between a T-Bill and a T-Bond? Which security(ies) are considered risk-free?
T-Bills are money market securities that mature in less than one year and are sold on a discount basis. T-Bills are considered to be risk-free. T-bonds are coupon bonds that pay interest semi-annually and are quoted on a percentage of face value basis. T-bonds are fixed-income securities as they are initially issued for periods greater than one year. T-bonds are not considered risk-free due to the longer maturities.
Briefly describe the NYSE up-tick rule, the rationale for it and the current status of the rule.
The New York Stock Exchange Uptick Rule prohibited short sales unless the last price change was an "uptick" or increase. Objective: The NYSE originally enacted the rule to make it more difficult for speculators to drive down a stock's price by repeated short sales. Note that this rule applied only to trades on the NYSE, not on other trading venues. The rule was repealed in June 2007. A new rule was approved in 2010 which does not apply any short-selling constraints until a stock declines by 10 percent in a single day. If this decline occurs, then any subsequent short sale is subject to the uptick rule.
Future stock prices that are estimated using any one of the various price ratios will be based on an assumption related to the ratio. What is that assumption?
The assumption is that the future price ratio will be relatively similar to the historical price ratio used in the estimation process.
Which one of the following statements related to the price-earnings (P/E) ratio is correct?
The earnings yield is the inverse of the P/E ratio.
What is the maximum loss you can incur if you have a long position on a stock in a cash account?
The initial investment
Which one of the following sentences is correct concerning fixed-income securities?
The price of a fixed-income security is inversely related to the current yield
What should the primary role of portfolio managers be given the research to date on their market performance and based on the assumption that markets are efficient?
The role of portfolio managers is the construction and maintenance of a diversified portfolio designed to meet the needs and risk tolerances of their investors.
A trader was found guilty of violating insider trading laws. As part of his sentencing, he had to forfeit the excessive profits earned on the illegal trades. What does this conviction indicate about the current form of market efficiency?
To earn excess profits on inside information, the market cannot be strong-form efficient. Given the fact that some inside information has entered the marketplace through illegal trading, the market is somewhere between semi-strong and strong-form efficient.
Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly.
Tracey knows her employer just received patent approval on a key new product.
Which one of the following will increase the current residual income of a firm?
a decrease in the required return on the firm's equity
A fixed-income security is defined as:
a long-term debt obligation that pays scheduled fixed payments
How is a sustainable dividend growth rate defined?
a rate that can be supported over time by a company's earnings
The risk premium is defined as the rate of return on:
a risky asset minus the risk-free rate
Where will a security plot in relation to the security market line (SML) if it is considered to be a good purchase because it is underpriced?
above the SML
Market prices tend to _____ earnings "surprises".
adjust slowly to
Money market instruments issued by a corporation:
are less liquid than those issued by the government
Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding?
ask
Brooke has decided to invest 55 percent of her money in large company stocks, 40 percent in small company stocks, and 5 percent in cash. This is a(n) _____ decision.
asset allocation
Stocks D, E, and F have actual reward-to-risk ratios of 7.1, 6.8, and 7.4, respectively. Given this, you know for certain that:
at least two of the securities are mispriced.
A discretionary account:
authorizes a broker to trade securities on your behalf
When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting.
best efforts
Which of the following correctly identifies the factors included in the Fama-French three-factor model?
beta, company size, and book-to-market ratios
Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft?
bid
Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?
bubble
If you want the right, but not the obligation, to buy a stock at a specified price you should:
buy a call option
If you want the right, but not the obligation, to sell a stock at a specified price you should:
buy a put
An American call option grants the holder the right to:
buy the underlying security at a stated price on or before the expiration date
Market timing is the:
buying and selling of securities in anticipation of the overall direction of the market.
Investing in a futures contract:
can be offset by taking an opposing position
Futures contracts:
can be resold
Independent deviations from rationality:
can create an efficient market.
The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______".
capital
Which one of the following is the theory which states that the value of a security is dependent upon the pure time value of money, the reward for bearing systematic risk, and the amount of systematic risk?
capital asset pricing model
The total dollar return on a share of stock is defined as the:
capital gain or loss plus any dividend income
Which one of the following ratios tells you the amount of assets a firm needs to generate $1 in sales?
capital intensity ratio
Which one of the following is used as an indicator that a firm has good-quality earnings?
cash flow per share that exceeds earnings per share
Which one of the following represents a residual ownership interest in the issuer?
common stock
Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency?
correctly determining the correct risk-adjustment procedure
The costs of materials used in the production of a product are recorded in which one of the following accounts?
cost of goods sold
Which one of the following is most apt to vary directly with sales?
current assets
The annual interest payment divided by the current price of a bond is called the:
current yield
Which one of the following is the best definition of a money market instrument?
debt issued by the government or a corporation that matures in one year or less
How will the price of a stock be affected if the dividend growth rate is decreased?
decrease
Which one of the following is the best example of unsystematic risk?
decrease in company sales
Which one of the following will increase the return on equity?
decrease in fixed costs
Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Ace common stock closed at $20. On the day following the announcement, Ace closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Ace stock traded at $26, a level it has maintained since then. This is an example of a(n):
delayed reaction.
A financial asset that represents a claim on another financial asset is classified as a _____ asset.
derivative
The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a:
designated market maker
Asset allocation is the
distribution of investment funds among various broad asset classes
A decrease in which one of the following will increase a firm's sustainable rate of growth?
dividend payout ratio
The January effect:
does not occur in the domestic market every year.
The average compound return earned per year over a multi-year period when inflows and outflows are considered is called the:
dollar-weighted average return
The net income per share divided by the market price per share is called the:
earnings yield.
When the total return on an investment is expressed on a per-year basis it is called the:
effective annual return
Which one of the following should be used to compare the overall performance of three different investments?
effective annual return
Which one of the following states that investors cannot consistently earn positive excess returns?
efficient market hypothesis
Retail Specialties just announced that its Chief Operating Officer is retiring at the end of this month. This announcement will cause the firm's stock price to:
either increase, decrease, or remain constant.
The price-book ratio is computed as the market value per share divided by the per share book value of:
equity.
Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?
event study
Security A and Security B have similar risks. However, Security A has a higher rate of return than Security B. The return on Security A minus the return on Security B is referred to as which one of the following?
excess return
A trading floor broker:
executes orders on behalf of commission brokers in exchange for a fee
When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.
firm commitment
A NYSE member who trades only for his or her own account is called a(n):
floor trader
The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market.
fourth
Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information?
fundamental analysis
Great Lakes Farm agreed this morning to sell General Mills 25,000 bushels of wheat six months from now at a price per bushel of $9.75. This is an example of a:
futures contract
Which one of the following is the best example of systematic risk?
gas prices rise sharply
The arithmetic average dividend growth rate is:
generally larger than the geometric average growth rate when the annual growth rates are positive.
The average compound return earned per year over a multi-year period is called the:
geometric average return
Stephen's Auto recently purchased Auto Express for $9.8 million. Auto Express had a market value of $9.5 million at the time of acquisition. The additional $0.3 million that Stephen's Auto paid for Auto Express will be treated on Stephen's Auto's balance sheet as which type of account?
goodwill
You have owned a stock for seven years. The geometric average return on this investment for those seven years is positive even though the annual rates of return have varied significantly. Given this, you know the arithmetic average return for the period is:
greater than the geometric average return.
Sales minus cost of goods sold are equal to which one of the following?
gross profit
An investor who has a resource constraint:
has insufficient funds to purchase a security
In an efficient market, stocks with similar risks will:
have similar rates of return.
The wider the distribution of an investment's returns over time, the _____ the expected average rate of return and the ______ the expected volatility of those returns.
higher; higher
If you believe that stock market prices follow a random walk, then:
historical price information provides no benefit in predicting future prices.
Kay plans to retire in two years and wishes to liquidate her account at that time. Kay has a _____ constraint.
horizon
An increase in the retention ratio will:
increase the value of a firm's stock.
If you opt to purchase shares of stock on margin rather than with cash, you will:
increase your maximum potential rate of return.
Which one of the following will increase the slope of the security market line? Assume all else constant.
increasing the market risk premium
You own a portfolio which is invested equally in two stocks and a risk-free security. The stock betas are .89 for Stock A and 1.26 for Stock B. Which one of the following will increase the portfolio beta, all else constant?
increasing the weight of Stock A and decreasing the weight of the risk-free security
Which one of the following has the highest expected risk premium?
individual stock with a beta of 1.46
Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?
informed
Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n):
initial public offering
The dividend yield is defined as the annual dividend expressed as a percentage of the:
initial stock price
The amount of common stock held in short positions is referred to as the short:
interest
Which one of the following is NOT included in operating income
interest expense
Which one of the following best describes a broker?
intermediary who arranges trades between a buyer and a seller
A firm that specializes in arranging financing for companies is called a(n):
investment banking firm
A Roth IRA
invests after-tax dollars
A short sale:
involves the borrowing of securities
The term "independent deviations from rationality" implies that:
irrational investors behave differently from one another.
The NYSE's Super Display Book is an electronic system which:
is based on NYSE's ARCA electronic trading engine
Preferred stock:
is treated like equity for both tax and accounting purposes
An order to buy shares of stock at a stated price or less is called a _____ order.
limit
The management of the Uptown Bikes recently voted to limit any future borrowing or sales of company stock. By taking this action, management has effectively done which one of the following?
limited future growth
Winter's Clothing has a loan payable to a bank which is due 18 months from now. How is this loan classified on the firm's financial statements?
long-term debt
The minimum equity that must be maintained at all times in a margin account is called the:
maintenance margin
A brokerage account in which purchases can be made using credit is referred to as which type of account?
margin
When your equity position in a security is less than the required amount, your brokerage firm will issue a:
margin call
You want to sell shares of stock at the current price. Which type of order should you place?
market
If you multiply the number of shares of outstanding stock for a firm by the price per share, you are computing the firm's:
market capitalization
Which one of the following is required for a trader to earn excess profits?
market inefficiency
Which one of the following terms is another name for systematic risk?
market risk
The slope of the security market line is equal to the:
market risk premium
Moving money in and out of the market based on your market expectations is called _____ and tends to lead to returns that are _____ than the overall market return, assuming that the market is relatively efficient.
market timing; lower
Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?
material non-public information
Money market instruments:
may be sold on a discount basis
Preferred stock:
may or may not be cumulative
If you ignore a margin call, your broker:
may sell some of your securities to repay the margin loan.
What is beta?
measure of a stock's risk relative to the stock market average
An owner of a trading license on the NYSE is called a:
member
The geometric return on an investment is approximately equal to the arithmetic return:
minus half the variance.
An investor who follows a fully active strategy will:
move money between asset classes as well as try to select the best performers in each class
Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?
net income plus depreciation
A frequency distribution, which is completely defined by its average (mean) and standard deviation, is referred to as a(n):
normal distribution
Bond trades are reported:
on TRACE
An agreement that grants the owner the right, but not the obligation, to buy or sell a specific asset at a specified price during a specified time period is called a(n) _____ contract.
option
Which one of the following is a derivative asset?
option contract
For the past year, a particular stock has a relative strength value of 1.03 as compared to the market. This means that the stock:
outperformed the market for the period.
Last week, New Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n):
over-reaction and correction.
Which one of the following is an intangible fixed asset?
patent
The constant perpetual growth model is applicable primarily to those firms which:
pay dividends that increase at a steady rate.
What is the percentage of a firm's earnings that is distributed to shareholders called?
payout ratio
Which one of the following is considered the best method of comparing the returns on various-sized investments?
percentage return
You would like to know the value of a firm's equity today in relation to the cost of that equity.Which one of the following ratios will provide you with this information?
price-book
What is the market value of a share of stock divided by the net income per share called?
price-earnings ratio
Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price?
price-weighted
High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets?
primary
A security originally sold by a business or government to raise money is called a(n):
primary asset
The document that must be prepared in order to receive approval for a stock offering is called a:
prospectus
Ted is an engineer for True Tech and has just discovered a revolutionary method for strengthening metals. He knows this knowledge will add value to True Tech's stock. Ted happens to mention this discovery and its value to his neighbor, Fred. Fred can be charged with insider trading if he:
provides this information to a friend who will trade the stock and split the profits with him.
A preliminary document provided to investors who are interested in a stock offering is called a(n):
red herring
The measure of performance of one investment compared to another investment is called the:
relative strength.
Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?
residual income
Sugar Tree Cookies has current net income of $268,000 of which $110,000 was paid out in dividends. The remaining $158,000 will be shown in which account on the firm's financial statements for next year?
retained earnings
The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts?
retained earnings
The price-sales ratio helps measure the ability of a firm to generate:
revenue growth.
Which one of the following must be equal for two individual securities with differing betas if those securities are correctly priced according to the capital asset pricing model?
reward-to-risk ratio
A public offering of securities which are offered first to current shareholders is called a(n):
rights offer
The additional return earned for accepting risk is called the:
risk premium
The rate of return earned on a U.S. Treasury bill is frequently used as a proxy for the:
risk-free rate
Which one of the following will increase the investment cash flow?
sale of a building
Which one of the following transactions occurs in the primary market?
sale of newly issued shares by the issuer to a shareholder
Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?
secondary
Jesse is researching chemical companies in an effort to determine which company's stock he should purchase. This process is known as
security selection
The determination of which individual stocks to purchase within a particular asset class is referred to as:
security selection
If you are willing to sell a stock and wish to receive the option premium you should:
sell a call
If you are willing to buy a stock and you wish to receive the option premium you should:
sell a put
A European put option grants the holder the right to:
sell the underlying asset at the strike price only on the expiration date
According to Elliott wave theory, market predictions should be based on which one of the following?
series of historical market price swings
How long is the "lock-up" period that is commonly found in an IPO underwriting contract?
six months
Which one of the following combinations will tend to produce the highest rate of return according to the Fama-French three-factor model? Assume beta is constant in all cases.
small market capitalization and high book-to-market ratio
The location on an exchange floor where a particular security trades is called a(n):
specialist's post
The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:
spread
The profit a dealer makes on a purchase and resale of shares of stock is called the:
spread
An index is valued on a daily basis. However, some stocks in this particular index have not traded recently. As a result, this index suffers from index:
staleness
An order to sell that involves a preset trigger point is called a _____ order.
stop
You are the chief financial officer of Donnelly Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?
strong-form
When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n):
syndicate
The method of valuing a stock based on the present value of the future income derived from that stock is called:
the dividend discount model.
The belief that information you hold is superior to information held by other investors best describes:
the illusion of knowledge
The risk-free rate is:
the rate of return on a riskless investment
At the time a futures contract is written:
the underlying asset is specifically identified
The off-exchange market in which exchange-listed securities trade is referred to as the _____ market.
third
What is the purpose of a margin call?
to demand funds to increase your margin position
A futures contract is an agreement:
to exchange goods on a specified date in the future at a price that is agreed upon today.
When we refer to the rate of return on an investment, we are generally referring to the:
total percentage return
A securities dealer is a(n):
trader who buys and sells from his or her inventory
The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model.
two-stage
The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.
two-stage growth model
The maximum loss you can incur on a short sale is:
unlimited
Which one of the following is the type of risk that only affects either a single firm or just a small number of firms?
unsystematic
When stocks are held in an index in proportion to their total company market value, the index is:
value-weighted
A decrease in which one of the following will increase the gross margin?
variable costs
The standard deviation is a measure of:
volatility
On August 8 of this year, Brent sold 500 shares of ADO stock for $24 a share. On September 6 of this year, he purchased 500 shares of ADO stock to cover his position. The transaction on August 8:
was a short sale
Which form of market efficiency exists if the market is efficient only in regard to historical information?
weak-form
Amy uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices. Secondly, she analyzes the financial statements of The Atwater Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Amy earns excess profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least _____ efficient but less than _____ efficient.
weak-form; semistrong-form
A portfolio beta is computed as which one of the following?
weighted average
Capital gains are included in the return on an investment:
whether or not the investment is sold.
P&F Chart (Point and Finger)
•Point and figure chart is a chart that contain column Xs and column Os on a grid of square boxes •Xs alternate and reverse with Os •Price are represented with rising X-Columns and falling O-Columns •X means price went up, O means price went down •P&F Chart is not a time-based chart; it focus on the movement of price •Therefore time is not the factor