Fundamentals and Technical Analysis
Which of the following choices is the formula for earnings per share? a. Current market price / Earning per share of common stock b. Net income less preferred dividends / Number of shares of common stock outstanding c. Earnings before interest and taxes / Net tangible assets d. Net income plus preferred dividends / Number of shares of common stock outstanding
B. net income less preferred dividends / number of shares of common stock outstanding
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. overbought A stock is overbought at its resistance level and oversold at its support level.
Regarding a company's financial statements, total assets are equal to: a. Total Liabilities + Stockholders' Equity b. Total Liabilities - Stockholders' Equity c. Total Liabilities + Stockholders' Equity - Depreciation d. Stockholders' Equity + Goodwill
A. total liabilities + stockholders' equity The balance sheet formula is Total Assets = Total Liabilities + Stockholders' Equity. Total Assets is, therefore, equal to Total Liabilities + Stockholders' Equity.
RSR Corporation has earned $4 per share and has paid a 75 cent dividend per share. If the stock is selling at $38 a share, what is its price/earnings ratio? a. 2.02 b. 9.5 c. 12.6 d. 50.7
B. 9.5 The price/earnings ratio is found by dividing the market price of $38 by the earnings per share of $4. This equals a price/earnings ratio of 9.5 ($38 / $4). The amount of the dividend is not relevant in calculating the price/earnings ratio.
Which of the following indicators is bullish? a. A breakout below a support level b. The bottom of a saucer pattern c. The top of an inverse saucer pattern d. A decrease in the amount of short interest
B. the bottom of a saucer pattern A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator. A breakout below the support level is a bearish signal. The term short interest refers to the amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.
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. paid-in capital 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.
Which of the following choices is another way of expressing the earnings multiple? a. Debt-to-equity ratio b. Dividend payout ratio c. Price-earnings ratio d. Operating profit ratio
C. price-earnings ratio
ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? a. $6.40 b. $7.72 c. $10.91 d. $11.80
D. $11.80 Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.
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. total assets = total liabilities + stockholder's equity The balance sheet equation is: Total Assets = Total Liabilities + Stockholders' Equity.
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
I and IV 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.
Listed below is part of the balance sheet of the MEM Corporation. ASSETS LIABILITIES Cash $2,000,000 Notes Payable $ 100,000 Accts. Rec. 3,000,000 Accts. Payable 1,400,000 Inventories 10,000,000 Taxes Payable 1,500,000 Goodwill 20,000,000 Notes due 2021 8,000,000 Land 30,000,000 Debentures 20,000,000 The net working capital is: a. $12,000,000 b. $12,100,000 c. $12,500,000 d. $13,000,000
A. $12,000,000 Net working capital is the difference between the current assets and the current liabilities. In this example, the current assets are: Cash $2,000,000 Accounts Receivable 3,000,000 Inventories 10,000,000 Total Current Assets $ 15,000,000 The current liabilities are: Notes Payable $ 100,000 Accounts Payable 1,400,000 Taxes Payable 1,500,000 Total Current Liabilities $ 3,000,000 The net working capital is, therefore, $15,000,000 minus $3,000,000, which equals $12,000,000.
If an analyst wants to determine a company's ability to pay its liabilities that will be maturing in one year with its liquid assets, he will be most interested in the: a. Current ratio b. Acid-test ratio c. Inventory turnover d. Debt-to-equity ratio
A. current ratio The current ratio is a comparison of current assets to current liabilities for a one-year period and is used as an indicator of a company's ability to pay those liabilities. On the other hand, the acid-test (quick asset) ratio excludes the company's inventories and is usually for a one- to three-month period.
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 good indicator of the strength of a bull or bear market 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.
Lindsay Depaul is a client seeking a balance between income and capital growth. Which of the following investment strategies MOST closely achieves this goal? a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund b. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund c. 50% in an ETF that follows the S&P 500 and 50% in an equity foreign index fund d. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund
B. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund An investor seeking income and capital growth would want her assets allocated evenly between equity and fixed-income investments. Choice (b) has a 60%/40% mix of equity and fixed-income. Choice (a) is 100% fixed-income, choice (c) is 100% equity, and choice (d) is 80% equity and 20% in fixed-income.
Which of the following items is NOT found by reviewing a company's balance sheet? a. The dollar value of the inventory b. The amount of interest paid on the company's bonds outstanding c. The amount of short-term debt d. The value of the treasury stock
B. the amount of interest paid on the company's bonds outstanding The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.
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 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.
An investor has invested heavily in energy stocks and the S&P Index is up by 22% from the prior year. If that sector of the S&P 500 has a beta of 1.6 and the S&P 500 increased by 10%, the investor would expect an increase in her portfolio of: a. 1.6% b. 10% c. 16% d. 22%
C. 16% Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. If the beta of a stock is greater than one, it implies a higher level of risk and volatility compared to the stock market. If the beta of the stock is less than one, it is less risky and volatile than the market. The S&P 500 is assigned a beta of +1.0. If the energy sector of the S&P 500 has a beta of 1.6, it is assumed to be more volatile than the S&P 500. An increase of 10% in the S&P 500 would translate into an increase in the energy stocks of approximately 16% (1.6 x 10%). The fact that the S&P Index is up 22% from the prior year is not relevant.
Which of the following indexes is the broadest equity market indicator? a. The Nasdaq Composite Index b. The Major Market Index c. The NYSE Index d. The Wilshire Index
D. the Wilshire Index The Wilshire 5000 Equity Index consists of more than 7,000 stocks that trade on the New York Stock Exchange and Nasdaq. The Index is referred to as the Wilshire 5,000 because, when created, it contained approximately 5,000 stocks. The Wilshire Index is considered the broadest of all indexes and averages.
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
I and II 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.
A fundamental analyst is NOT interested in which TWO of the following metrics? I. Short interest II. The P/E ratio III. Trading volume IV. EPS
I and III Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators.
A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? I. The annual interest payments are found on the balance sheet II. The annual interest payments are found on the income statement III. The interest payment is deducted from net income IV. The interest payment is deducted from EBIT
II and IV The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.
Which of the following ratios would be used by an analyst examining the capital structure of an industrial corporation? a. The current ratio b. The dividend payout ratio c. The price/earnings ratio d. The debt-to-equity ratio
D. the debt-to-equity ratio The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.
In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least. I. Utilities II. Industrials III. Transportation
II, III, I industrials -> transportation -> utilities The Dow Composite is comprised of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks.
According to technical analysis, a head and shoulders top formation indicates a trend that is: a. Bearish b. Bullish c. Neutral d. Highly unpredictable
A. bearish A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it indicates the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it indicates a reversal of a downward trend in the price movement of a particular stock (bullish indicator).
ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation pays an annual dividend per share of: a. $0.10 b. $0.20 c. $5.00 d. $10.00
B. $0.20 To determine the dividend being paid per share, divide the $1,000,000 in dividends by the 5,000,000 shares of common stock outstanding. $1,000,000 dividends divided by 5,000,000 shares equals $0.20.
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. shareholders' equity decreases 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.
The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows? a. The S&P 500 Index and the NYSE Composite Average b. The Dow Jones Industrial Average and the Dow Jones Transportation Average c. The Dow Jones Industrial Average and the Dow Jones Utility Average d. The Dow Jones Composite and the NYSE Composite Average
B. the Dow Jones Industrial Average and the Dow Jones Transportation Average The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows.
A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? a. 6.5 times b. 7.5 times c. 8 times d. 8.6 times
C. 8 times The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding.
When reviewing a company, a fundamental analyst will look at which TWO of the following choices? I. Financial reports II. Trading volume III. Management of the corporation IV. Short interest
I and III A fundamental analyst is interested in the company, not technical factors relating to the stock. He would look at financial reports and the company's management.
LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio? a. 10.9 b. 13.6 c. 21.8 d. 43.6
A. 10.9 The price/earnings ratio is found by dividing the market price of $48 by the annual earnings per share. The annual EPS is $1.10 x 4 = $4.40., The price/earnings ratio is 10.9 ($48 / $4.40 = 10.9). The amount of the dividend is not relevant in calculating the price/earnings ratio.
A sell stop order most likely will be entered by a technical analyst or chartist: a. Below a support level for the stock b. Above a resistance level for the stock c. Below a previous low for the stock d. To take advantage of a rising market
A. below a support level for the stock Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.
Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE? a. It predicts future values for the stock b. It was developed to explain the behavior of security prices c. It provides a mechanism to assess risk and return d. It is based on the efficient market theory and assumes investors act rationally
A. it predicts future values for the stock CAPM does not establish a price objective for the stock. All of the other descriptions listed are correct.
According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: a. Credit risk b. Interest-rate risk c. Business risk d. Industry risk
B. interest-rate risk Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.
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. 126.3 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.
Which of the following is NOT monitored by a technical analyst? a. Advance/decline data b. Chart patterns c. Market momentum d. Dividend payout ratios
D. dividend payout ratios Technical analysts use price and trading volume information. Advance/decline data, chart patterns, and market momentum calculations are all methods used in analyzing this type of information. Dividend payout ratios would be important to a fundamental analyst.
A client contacts an RR after reviewing the financial statements of the S-Works Carbon Company. The client is confused since the company paid a cash dividend but had a loss for the last fiscal year. Which of the following statements is TRUE? a. The company is permitted to pay a cash dividend even though it had a loss b. The company is not permitted to pay a cash dividend if it had a loss c. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from shareholders d. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from the SEC
A. the company is permitted to pay a cash dividend even though it had a loss A company is permitted to pay cash dividends in excess of its net income even if it had a loss. In terms of financial accounting, cash dividends are paid out of retained earnings that are part of shareholders' equity. Therefore, cash dividends paid will reduce shareholders' equity. The company could have paid the cash dividend easily based on retained earnings from previous years.
A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The debt-to-equity ratio is: a. 21% b. 26% c. 74% d. 79%
B. 26% The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The debt-to-equity ratio is 26% ($225 million / [the par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million]). The debt-to-equity ratio is used to analyze the capital structure of a company.
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. 40% 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%.
The theory that states that the small investor is usually wrong, buying at market peaks and selling at market bottoms, is called the: a. Dow theory b. Odd-lot theory c. Short interest theory d. Advance-decline theory
B. odd-lot theory The theory that states that the small investor is usually wrong because he is uninformed, buying at market peaks and selling at market bottoms, is called the odd-lot theory. According to this theory, the small investor can afford only to buy an odd-lot (less than 100 shares of stock). Odd-lot buying on balance (more buying than selling) is bearish and odd-lot selling on balance (more selling than buying) is bullish.
Of the following broad-based indicators, the one with the narrowest measure of the market is the: a. Standard and Poor's 500 Index b. Wilshire Associates Equity Index c. Dow Jones Composite d. New York Stock Exchange Composite Index
C. Dow Jones Composite The Dow Jones Composite contains only 65 stocks. The Wilshire Associates Equity Index shows the dollar value of approximately 7,000 stocks. The S&P 500 Index contains 500 stocks. The NYSE Composite Index consists of all common stocks listed on the NYSE.
An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers: a. Maturity diversification b. Coupon diversification c. Geographical diversification d. Type diversification
C. geographical diversification The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.
The term fast market is characterized by which TWO of the following descriptions? I. An imbalance of orders II. A very low number of trades III. Highly volatile prices IV. The quotes of market makers being updated very quickly
I and III The term fast market is characterized by very heavy trading, fast moving prices, and high volatility. There also may be an imbalance in the number or shares clients are willing to buy or sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may take a long time to update since prices and trades are moving so quickly. A client's order may take a longer time to execute, and if a market order is entered by a client, the price received may be significantly higher or lower then the quoted price.
A 28-year-old single investor has funds saved at a bank. He contacts an RR and wants to begin allocating funds to a retirement account. Which of the following choices is the most appropriate asset allocation? a. 80% stocks, 20% bonds b. 60% stocks, 40% bonds c. 50% stocks, 50% bonds d. 30% stocks, 70% bonds
A. 80% stocks, 20% bonds Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Over long periods, stocks usually keep pace or offer higher returns as measured against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the investor is many years from retirement, a large percentage of his portfolio should be allocated to stocks.
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. 28.6 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.
Which of the following terms relates to the graph that is used to determine optimal portfolios resulting from a comparison of risk and return? a. The yield curve b. Efficient frontier c. Duration d. Alpha
B. efficient frontier The key to this question is the reference to the term graph. According to the Modern Portfolio Theory, a graph of optimal portfolios can be created on what is referred to as the efficient frontier. As for the wrong answers, the yield curve (choice a) represents the plotting of a bond's yield against the length of time until its maturity. Duration (choice c) measures the sensitivity of a bond's price due to small changes in interest rates. Alpha (choice d) is a form of risk-adjusted return for an asset.
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. interest-rate fluctuations 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 husband and wife with children going to college in 2, 11, and 16 years are planning to set up an account to pay for their children's college education. Which of the following investments are most suitable for this purpose? a. Money-market funds b. Certificates of deposit maturing every 12 months c. Junk bonds with serial maturities coinciding with the children's college attendance d. Investment-grade corporate bonds with maturities coinciding with the children's college attendance
D. investment-grade corporate bonds with maturities coinciding with the children's college attendance Given these choices, the investment-grade bonds with serial maturities of 2, 11, and 16 years appear to be the most suitable investment. Money-market funds are used more as a parking place for funds until an investment decision can be made. CDs may be used, but are not as attractive as choice (d) since the CDs mature in 12 months. Junk bonds carry too much risk for their intended purpose.
Which of the following indexes or averages is made up of the largest number of stocks? a. The Dow Jones Composite Index b. The S&P 500 Index c. The NYSE Index d. The Wilshire Associates Equity Index
D. the Wilshire Associates Equity Index The Wilshire Associates Equity Index shows the market value in dollars of roughly 7,000 NYSE, NYSE MKT (formerly NYSE Amex), and Nasdaq stocks. It contains the most stocks of the choices listed.
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
I and IV 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.
A buy stop order is entered: I. Below a support level II. Above a resistance level III. To limit a loss on a long stock position IV. To limit a loss on a short stock position
II and IV A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit the loss on the short position. A technical analyst may also place a buy stop above the resistance level to purchase the stock should there be a price breakout.
If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: I. An increase in current assets II. A decrease in total liabilities III. A decrease in stockholders' equity IV. An increase in stockholders' equity
II and IV The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity.
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. bullish indicator 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.
If a company pays a cash dividend, which of the following is TRUE? a. Current assets decrease b. Current assets increase c. Shareholders' equity decreases d. Shareholders' equity increases
A. current assets decrease As it relates to the payment of a dividend, the funds being paid out come from the corporation's cash (a current asset). It is important to distinguish the difference in the treatment of a dividend being declared compared to a dividend being paid. When a company declares a cash dividend, dividends payable (a current liability) will be increased by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. Regardless of the specific corporate transaction, the balance sheet must remain balanced.
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 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.
When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to: a. A chart showing the price-earnings ratio for all automobile stocks b. A chart showing a recent history of the market price of the stock c. The company's dividend payout ratio d. The research report's past earning for the company
B. a chart showing a recent history of the market price of the stock The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).
The advance-decline theory states that: a. A bull market exists if the Dow industrials and transportations averages make new highs b. A bear market exists if more put options have been purchased by investors than call options c. It is bullish if more stocks go up than go down during the day d. A large number of shares sold short is bullish
C. it is bullish if more stocks go up than go down during the day A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day.
A customer wants preservation of capital and safety of income. Which of the following securities would best meet the customer's objectives? a. Income bonds b. Debentures c. Several municipal bonds rated AA or better d. One AAA-rated municipal bond
C. several municipal bonds rated AA or better Purchasing several AA- or better-rated municipal bonds with various maturity dates is more advantageous than purchasing just one municipal bond. The investor is diversifying his portfolio. If the investor purchased one bond and it were to default, he would no longer receive interest payments. The market value of the bond would decline considerably, causing a severe loss for the investor. Income bonds and debentures are not as safe as municipal bonds.
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. a fundamental analyst 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.
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. current amount of short interest positions for the stock 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.
Which TWO of the following choices can be calculated by examining the income statement of a company? I. The earnings before interest and tax (EBIT) II. The debt-to-equity ratio III. The operating profit margin IV. The amount of working capital
I and III EBIT may be found by subtracting the operating expenses from the sales or revenue of a company, and the operating profit margin is found by dividing the sales by the operating expenses. All of this information can be found in the income statement. The debt-to-equity ratio and amount of working capital can be calculated by examining a company's balance sheet.
Which TWO of the following metrics can be calculated by examining the balance sheet of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio
I and IV The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The current ratio is found by dividing the current assets by the current liabilities. The operating profit margin and the bond coverage ratio can be calculated by examining the income statement.
Corporations repurchase their own stock in the open market to: I. Increase the number of voting shares that the corporation holds II. Increase earnings per share III. Have stock available for stock option plans for key employees IV. Make the stock more marketable
II and III Corporations repurchase their own stock in the open market to increase earnings per share and to have stock available for stock option plans for key employees. Stock repurchased becomes treasury stock, which does not have voting rights, and its marketability is very difficult to predict.
A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate? a. A stock with a high dividend yield and a beta of less than 1.0 b. A stock with a low dividend yield and a beta of 1.5 c. A stock with no dividend and a beta between 1.5 and 2.0 d. A stock with no dividend and a beta of greater than 2.0
D. a stock with no dividend and a beta greater than 2.0 Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.
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 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.
An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta: a. Equal to 1 b. Less than 1 c. Greater than 1 d. That is negative
C. greater than 1 Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.
If the S&P 500 has been increasing on high volume for several days, what term would BEST define this situation? a. Market momentum b. An efficient market c. Market neutral d. A resistance level
A. market momentum The term market momentum is used to describe a situation where prices are moving in a certain direction and there is a high level of trading volume. There is also an expectation that this pattern will continue in the near future. For example, if the S&P 500 Index has been trading up or down significantly over a period of days along with heavy trading volume, some traders will anticipate this pattern may continue for a few more days. Market neutral is used to describe attempting to profit by buying some securities while at the same time selling short others. A resistance level is a point on a chart where the price of a security stops increasing. Efficient market is a term used to define that stock prices already represent all available information and there is no benefit that may be gained by using professional analysis.
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
B. a mutual fund that tracks the EAFE Index The 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.
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. dividends to the stockholders will be increased 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.
Mr. Green is the manager for an asset allocation fund. In May, the fund's portfolio is allocated as follows. Cash (including T-bills) 5% Convertibles 12% Corporate Bonds 18% Common Stock 65% During the first week of June, Mr. Green shifted the assets in the portfolio to reflect: Cash (including T-bills) 65% Convertibles 5% Corporate Bonds 12% Common Stock 18% The reason for the change is most likely that Mr. Green: a. Is bearish on bonds and stocks b. Anticipates a decrease in interest rates c. Is employing fundamental analysis d. Is bearish on stocks and bullish on bonds
A. is bearish on bonds and stocks The portfolio shift reflects significantly lower emphasis on stocks and a reduced position in bonds. If the manager anticipated a decrease in interest rates, he would be bullish on bonds. The bond allocation would then be expected to increase. Fundamental analysts are not market timers.
One of your clients, Kona Okemo, has a long-term objective of capital appreciation. Which of the following investment strategies will MOST closely achieve this goal? a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund b. 50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund d. 20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund
C. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund The investor is seeking long-term capital appreciation (also referred to as capital growth). The best answer is based on the asset allocation mix. An investor seeking capital appreciation would want a large percentage of his assets invested in equities. Choice (c) has a mix of 80% equities and 20% fixed-income. The largest percentage of the other choices is choice (d) with 60% equities and 40% in fixed-income.
Paid-in capital is BEST defined as which of the following? a. The amount that is equal to the stock's par value that is paid by investors for the shares that a corporation sells publicly b. The amount of earnings that is not paid out as a dividend by a corporation from its annual income after taxes c. The amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly d. The amount of any discount below the stock's par value that is paid by investors for the shares that a corporation sells publicly
C. the amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly Paid-in capital is the amount of any premium above the stock's par value that is paid by investors for the shares that a corporation sells publicly. For example, if a company's IPO is priced at $18.00 and the par value is $5.00, the paid-in capital is $13.00.
When examining an earnings report for National Corporation, a registered representative sees that earnings per share is reported on both a primary and fully diluted basis. This indicates that: I. The company has convertible bonds or convertible preferred stock outstanding II. The company has cumulative and participating preferred stock outstanding III. Earnings per share is calculated using current shares outstanding and also assuming that all convertible securities were converted IV. Earnings per share is calculated on a pretax and after-tax basis
I and III The calculation for earnings per share on a primary basis (before the possible dilution of convertible bonds, convertible preferred stock, stock options, or warrants) is computed based on the number of outstanding common shares only. The calculation for earnings per share on a fully diluted basis includes the outstanding shares if convertible bonds and preferred stock are converted into common stock.
The market price of XYZ Company's stock is $60. The price-earnings ratio is 10 and earnings per share is $6.00. If the stock were to split 2-for-1, which of the following statements are TRUE? I. The price-earnings ratio will be reduced to 5 II. The price-earnings ratio will remain at 10 III. The earnings per share will be reduced to $3.00 IV. The earnings per share will remain at $6.00
II and III A stock split will increase the number of shares outstanding while decreasing the market price of the stock. The split will also have the effect of reducing earnings per share since the number of shares outstanding will increase. The 2-for-1 split will reduce the market price to $30 ($60 x 1/2) and the earnings per share to $3.00 ($6.00 EPS x 1/2). However, the price-earnings ratio (market price/EPS), which was 10 before the split, will remain the same since both the market price and the earnings per share are reduced by the same percentage ($30/$3.00 EPS = 10).
Which TWO of the following metrics may be calculated by examining the income statement of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio
II and III The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.
Which TWO of the following metrics can be calculated by examining the balance sheet statement of a company? I. The earnings before interest and tax (EBIT) II. The debt-to-equity ratio III. The operating profit margin IV. The amount of working capital
II and IV The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). Working capital is found by subtracting current liabilities from current assets. All of these numbers may be found in a company's balance sheet. EBIT and the operating profit margin can be calculated by examining the income statement.
