Lesson 7: Equity Securities
Which of these market indexes is price-weighted? A) The S&P 500 B) The Russell 2000 index C) The Wilshire 5000 index D) The Dow Jones Industrial Average
D) The Dow Jones Industrial Average
A type of preferred stock whose payments, when missed, must be paid prior to paying dividends to common stock is: A) preferential preferred stock. B) participating preferred stock. C) non-cumulative preferred stock. D) cumulative preferred stock.
D) cumulative preferred stock. Preferred stock (also known as straight preferred stock) has a right to a fixed dividend. Preferred stock may also be cumulative and/or participating. Cumulative preferred stock has the right to receive unpaid dividends that are in arrears before common shareholders receive any dividends. Participating preferred stock is entitled to share in the profits of the company.
The dividend-payout ratio is equal to: A) the dividend yield. B) dividends per share divided by the par value of the stock per share. C) dividends per share divided by the current market price per share. D) dividends per share divided by earnings per share.
D) dividends per share divided by earnings per share. The dividend-payout ratio is equal to dividends per share divided by earnings per share.
Preferred stock is a hybrid of which two types of assets? A) Common stock and corporate bonds B) Treasury bills and treasury bonds C) Call options and corporate bonds D) Call options and treasury bonds
A) Common stock and corporate bonds Preferred stock has an ownership interest (like common stock) but typically pays a fixed dividend (like corporate bonds) as well.
A large firm that pays a substantial dividend and has several globally known brand names in the soft drink industry and trades on the NYSE might be categorized as all the following EXCEPT: A) Growth stock B) Income stock C) Defensive stock D) Blue-chip stock
A) Growth stock Growth firms are those with high revenue, earnings, or cash flow expectations as compared to their competitors. A large firm that has been existence for more than one-half a century with branded product lines is not likely to be a high growth firm. It is certainly an income stock with the substantial dividend payment and is very likely a blue-chip stock. It could also be a defensive stock: one whose performance does not depend on economic growth.
A ___________ index determines its value based solely on the prices of the companies included in the index and does not take market capitalization into consideration. A) Price-weighted B) Equal-weighted C) Cash-flow D) Market cap-weighted
A) Price-weighted With a price-weighted index, the stock prices are added together and the total is divided by the number of companies included in the index.
Which of the following is correct regarding defensive stocks? A) They are relatively unaffected by general fluctuations in the economy and the market. B) They consist exclusively of companies that provide machines and weapons for the armed services. C) They tend to prosper during economic expansions and tend to do poorly during economic contractions. D) The demand for these companies' products is considered elastic.
A) They are relatively unaffected by general fluctuations in the economy and the market. Defensive stocks are not affected by general fluctuations in the economy. The demand for these everyday items does not change much, so these stocks can be considered inelastic.
Blue-chip stocks are most likely: A) issued by firms that have well-known brand-name product lines. B) characterized as having high growth potential. C) expected to outperform during economic expansions. D) securities with high levels of systematic risk.
A) issued by firms that have well-known brand-name product lines Blue-chip stocks are those that are supported by famous brand names and large corporations. Blue-chip firms are stable, have generated substantial operating cash flow for many years, and are expected to continue being market and industry leaders in the future.
An order to buy or sell a certain quantity of a security at a specific or better price, but only after a specified price has been reached, is called a: A) stop-limit order. B) stop-loss order. C) stop order. D) limit order.
A) stop-limit order. A stop-limit order is an order to buy or sell a certain quantity at a specific or better price once a stop price has been reached.
Cash, Inc.'s stock pays a $0.50 dividend quarterly. Its current earnings per share is $20. If the stock is currently trading at $70, what is the dividend yield percentage? A) 0.71% B) 2.86% C) 2.50% D) 10.00%
B) 2.86% The dividend yield percentage is equal to the total annual dividends per share divided by the stock price. ($0.50 × 4) / $70 = 2.86%
Rich, Inc.'s, stock pays a $5 dividend quarterly. Its current earnings per share is $25. If the stock is currently trading at $400, what is the dividend yield percentage? A) 1.25% B) 5% C) 20% D) 25%
B) 5% The dividend yield percentage is equal to the total annual dividends per share divided by the stock price.($5 × 4) / $400 = 5%
Which of the following dates related to dividends has been most affected by recent changes in technology and brokerage policies? A) The declaration date B) The ex-dividend date C) The record date D) The payment date
B) The ex-dividend date Over the past few decades, the ex-dividend date has moved closer-and-closer to the record date. Changes in technology and in brokerage policies have reduced the time necessary to process orders, allowing investors to own securities more quickly after purchasing them.
Darrel buys Hollandaise, Inc., stock for $112 using a margin account with a 50 percent initial margin and a 35 percent maintenance margin. Assuming the price of the stock drops to $56, how much would Darrel need to pay to restore the equity in his account to the maintenance margin? A) $0 B) $14.80 C) $19.60 D) $22.40
C) $19.60 Required equity: $56 × 35% = $19.60Current equity: $56 stock price − $56 loan = $0Margin call: $19.60 - $0 = $19.60
Andre purchased shares of Latte Co. for $48 by using a margin account with a 50% initial margin rate and a 30% maintenance margin rate. At what price will Andre receive a margin call? A) $14.40 B) $24.00 C) $34.29 D) $68.57
C) $34.29 The formula to determine the price at which a margin call will occur is as follows: Debt / (1 − Maintenance Margin Rate). $24 / (1 − .30) = $34.29
Which of the following investor acts would most directly allow them to profit off a decline in a security's price? A) A purchase holder B) A stop-loss order C) A short sale D) A capital loss
C) A short sale Short sales allow investors to profit off the decline in a security's price.
Assuming you short-sell at the current market price, which of the following would be used to stop losses from a short sale? A) Limit order B) Market order C) Stop-buy order with the stop price set above the current market price D) Prevent loss order
C) Stop-buy order with the stop price set above the current market price A stop-buy order above the current market price would result in a buy order if the stock reached the stop price, which is set above the current market price.
Coyote, Inc., has net earnings of $3 billion this year. It has 500 million shares of common stock outstanding, and it paid $0.25 per share per quarter this year as a dividend. Which of the following is correct? A) The retention ratio equals 8.33%. B) The payout ratio equals 8.33%. C) The payout ratio equals 16.67%. D) The retention ratio equals 16.67%.
C) The payout ratio equals 16.67%. The dividend per share equals $1.00. The Earnings Per Share (EPS) equals $6.00, which is found by dividing net earnings by outstanding shares. The payout ratio = dividend per share / EPS.
Acme, Inc. has net earnings of $2.1 billion this year. It has 700 million shares of common stock outstanding, and it paid 25 cents per share per quarter this year as a dividend. Which of the following is correct? A) The retention ratio equals 33.33% B) The payout ratio equals 12.50% C) The payout ratio equals 33.33% D) The payout ratio equals 66.67%
C) The payout ratio equals 33.33% The dividend per share equals $1.00. The EPS equals $3.00, which is found by dividing net earnings by outstanding shares. The payout ratio = dividend per share / EPS.
All of the following indices include the stock of large corporations inside of the United States EXCEPT: A) the Wilshire 5000 Index. B) the S&P 500 Index. C) the MSCI EAFE Index. D) the Dow Jones Industrial Average.
C) the MSCI EAFE Index. The S&P 500 is a widely used index of large cap domestic corporations.
A company offers two classes of common stock: Class A shares and Class B shares. Based on the standard conventions for classes of stock, which of the following statements is true? 1) The Class A shares will sell for a higher value than the Class B shares. 2) The number of votes per share will be higher for Class A shares than for Class B shares.
Neither The standard convention for classes of stock is that each company sets its own standard. Therefore, it is impossible to know which class of shares sells for a higher value or what voting rights they offer.
