M&B Test 3 Chapter 7

A change in perceived risk of a stock changes (a) the expected dividend growth rate. (b) the expected sales price. (c) the required rate of return. (d) the current dividend.

(c)

According to the efficient markets hypothesis, the current price of a financial security: (a) is the discounted net present value of future interest payments. (b) is determined by the highest successful bidder. (c) fully reflects all available relevant information. (d) is a result of none of the above.

(c)

In the one-period valuation model, the current stock price increases if (a) the expected sales price increases. (b) the expected sales price falls. (c) the required return increases. (d) dividends are cut.

(a)

If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to (a) change the way they form expectations about future values of the variable. (b) begin to make systematic mistakes. (c) no longer pay close attention to movements in this variable. (d) give up trying to forecast this variable.

(a)

19) In the generalized dividend model, if the expected sales price is in the distant future (a) it does not affect the stock price. (b) it is the most important determinant of the current stock price. (c) it is equally important with dividends in determining the stock's price. (d) it is less important than dividends but still affects a stock's price. (e) it is more important than dividends in determining a stock's price.

(a)

Another way to state the efficient markets condition is: in an efficient market, (a) unexploited profit opportunities will be quickly eliminated. (b) unexploited profit opportunities will never exist. (c) arbitrageurs guarantee that unexploited profit opportunities never exist. (d) both (a) and (c) of the above occur.

(a)

Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that (a) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. (b) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. (c) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. (d) models that ignore expectations have little predictive power, even in the short run.

(a)

Expectations play a key role in the theories that attempt to explain the risk and term structure of interest rates. For example, expectations of future _____ interest rates play a central role in the determination of _____ interest rates. (a) short-term; long-term (b) long-term; short-term (c) market; government (d) government; market

(a)

In the Gordon growth model, a decrease in the required rate of return (a) increases the current stock price. (b) increases the future stock price. (c) has no effect on stock prices. (d) reduces the current stock price. (e) reduces the future stock price.

(a)

New information about an asset can result in a decrease in the asset's price due to (a) an expected decrease in the level of future dividends. (b) a decrease in the required rate of return. (c) an expected increase in the dividend growth rate. (d) an expected increase in the future sales price.

(a)

Payments of net earnings to shareholders are called (a) dividends. (b) capital gains. (c) profits. (d) loans. (e) interest.

(a)

Rules used to predict movements in stock prices based on past patterns are, according to the efficient markets hypothesis, (a) a waste of time. (b) profitably employed by all financial analysts. (c) the most efficient rules to employ. (d) consistent with the random walk hypothesis.

(a)

Stockholders' rights include (a) the right to vote. (b) the right to manage. (c) primary claims on all cash flows. (d) ownership of bonds.

(a)

Terrorist attacks on the United States caused a(n) (a) decrease in stock prices due to lower expected growth and greater risk. (b) decrease in stock prices due to lower expected dividend growth and reduced uncertainty. (c) decrease in stock prices due to lower future sales prices. (d) increase in stock prices due to higher expected dividend growth. (e) increase in stock prices due to an increased required return.

(a)

The assumption that people use only the information from past data on a single variable to form their expectations of that variable is called the (a) adaptive expectations hypothesis. (b) Lucas critique. (c) Ricardian equivalence theorem. (d) rational expectations hypothesis.

(a)

Using the Gordon growth model, a stock's price will increase if (a) the dividend growth rate increases. (b) the future sales price increases. (c) the required rate of return increases. (d) all of the above occur.

(a)

he major criticism of the view that expectations are formed adaptively is that (a) this view ignores that people use more information than just past data to form their expectations. (b) it is easier to model adaptive expectations than it is to model rational expectations. (c) adaptive expectations models have no predictive power. (d) people are irrational and therefore never learn from past mistakes.

(a)

ou observe that interest rates rise after an announcement by the Federal Reserve that the money supply has expanded over the past week. You might speculate that (a) market participants expect a surge in inflation in the next few months. (b) market participants do not expect inflation to surge anytime soon. (c) the efficient markets hypothesis has been refuted. (d) none of the above are true.

(a)

52) People have a strong incentive to form rational expectations because (a) they are guaranteed of success in the stock market. (b) it is costly not to do so. (c) it is costly to do so. (d) none of the above are true.

(b)

A stockholder's ownership of a company's stock gives her the right to (a) vote and be the primary claimant of all cash flows. (b) vote and be the residual claimant of all cash flows. (c) manage and assume responsibility for all liabilities. (d) vote and assume responsibility for all liabilities. (e) manage and be the residual claimant of all cash flows.

(b)

Expectations about the likelihood of _____ are probably the most important factors in determining the _____ structure of interest rates. (a) bankruptcy; time (b) bankruptcy; risk (c) inflation; time (d) inflation; risk

(b)

If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are (a) obviously formed irrationally. (b) still considered to be formed rationally. (c) formed adaptively. (d) the result of none of the above.

(b)

In the generalized dividend model, a future sales price far in the future does not affect the current stock price because (a) the present value cannot be computed. (b) the present value is almost zero. (c) the sales price does not affect the current price. (d) the stock may never be sold. (e) the company may suffer bankruptcy.

(b)

In the generalized dividend model, the current stock price is the sum of (a) the actual value of the future dividend stream. (b) the present value of the future dividend stream. (c) the present value of the future dividend stream plus the actual future sales price. (d) the future value of the dividend stream plus the sales price. (e) the present value of the future sales price.

(b)

Periodic payments of net earnings to shareholders are known as (a) capital gains. (b) dividends. (c) profits. (d) all of the above.

(b)

The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, (a) it will tend to go unnoticed for some time. (b) it will be quickly eliminated. (c) financial analysts are your best source of this information. (d) prices will reflect the unexploited profit opportunity.

(b)

The theory of rational expectations, when applied to financial markets, is known as (a) monetarism. (b) the efficient markets hypothesis. (c) the theory of strict liability. (d) the theory of impossibility.

(b)

Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is (a) $10. (b) $20. (c) $30. (d) $40. (e) $50.

(b)

Using the Gordon growth formula, if the current stock price is $25, ke is 12% or 0.12, and g is 10% or 0.10, then D1 is (a) $0.25. (b) $0.50. (c) $0.75. (d) $1.00 (e) $1.25.

(b)

Using the Gordon growth model, a stock's price will increase if (a) the future sales price falls. (b) the required rate of return falls. (c) the dividend growth rate falls. (d) the current dividend falls.

(b)

Using the one-period valuation model, assuming a year-end dividend of $11.00, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be (a) $121. (b) $110. (c) $100 (d) $99 (e) $91

(b)

Dishonest corporate accounting procedures caused stock prices to (a) remain unchanged. (b) decrease due to lower expected dividend growth and lower required return. (c) decrease due to lower expected dividend growth and higher required return. (d) increase due to higher expected dividend growth and lower required return. (e) increase due to higher expected dividend growth and higher future sales price.

(c)

Dividends are paid from (a) liabilities. (b) debts. (c) net earnings. (d) both (a) and (b) of the above.

(c)

Financial markets quickly eliminate unexploited profit opportunities through (a) changes in dividend payments. (b) changes in tax laws. (c) changes in asset prices. (d) accounting conventions. (e) changes in monetary policy.

(c)

If expectations are formed adaptively, then people (a) use more information than just past data on a single variable to form their expectations of that variable. (b) often change their expectations quickly when faced with new information. (c) use only the information from past data on a single variable to form their expectations of that variable. (d) do none of the above.

(c)

If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is (a) irrational. (b) rational. (c) adaptive. (d) the result of none of the above.

(c)

Rational expectations forecast errors will on average be _____ and therefore _____ be predicted ahead of time. (a) positive; can (b) positive; cannot (c) negative; can (d) zero; can (e) zero; cannot

(c)

Stockholders are residual claimants, meaning that they (a) have the first priority claim on all of a company's assets. (b) are liable for all of a company's debts. (c) will never share in a company's profits. (d) receive the remaining cash flow after all other claims are paid. (e) have a higher claim on cash flow than bond holders.

(c)

Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is (a) $20. (b) $50. (c) $100. (d) $150. (e) $200.

(c)

Using the one-period valuation model, assuming a year-end dividend of $0.50, an expected sales price of $50, and a required rate of return of 10%, the current price of the stock would be (a) $50.50. (b) $50.00. (c) $45.91. (d) $45.00.

(c)

Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 10%, the current price of the stock would be (a) $90.91 (b) $91.00 (c) $91.82 (d) $92.00 (e) $101.00

(c)

14) Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be (a) $110.11. (b) $121.12. (c) $100.00. (d) $100.10 (e) $100.11

(d)

17) Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be (a) $110.00. (b) $101.00. (c) $100.00. (d) $96.19. (e) $95.23.

(d)

75) During the past decade, the average rate of monetary growth has been 5%, and the average inflation rate has been 5%. If the Federal Reserve announces that the new rate of monetary growth will be 10%, the rational expectation forecast of inflation will be (a) 5%. (b) between 5 and 10%. (c) less than 5%. (d) 10%. (e) more than 10%.

(d)

A monetary contraction _____ stock prices due to a decrease in the _____ and an increase in the _____. (a) increases; dividend growth rate; required rate of return (b) increases; current dividend; future sales price (c) reduces; required rate of return; dividend growth rate (d) reduces; dividend growth rate; required rate of return (e) reduces; dividend growth rate; future sales price

(d)

According to rational expectations theory, forecast errors of expectations (a) are more likely to be negative than positive. (b) are more likely to be positive than negative. (c) tend to be persistently high or low. (d) are unpredictable.

(d)

According to rational expectations, (a) expectations of inflation are viewed as being an average of past inflation rates. (b) expectations of inflation are viewed as being an average of expected future inflation rates. (c) expectations formation indicates that changes in expectations occur slowly over time as past data change. (d) expectations will not differ from optimal forecasts using all available information.

(d)

According to the efficient markets hypothesis, the best strategy for betting on an athletic tournament, such as the NCAA basketball tournaments, is to (a) randomly pick the winners in each round. (b) watch as many games as possible on television so you are as well informed as the "experts." (c) select the teams by your favorite mascots. (d) select the highest seeded team to win each round.

(d)

An increase in uncertainty due to threat of war will (a) increase stock prices due to a higher required return. (b) not affect stock prices. (c) increase stock prices due to a lower required return. (d) depress stock prices due to a higher required return. (e) depress stock prices due to a lower required return.

(d)

Dividends are periodic payments of net earnings to (a) employees. (b) managers. (c) creditors. (d) shareholders. (e) all of the above.

(d)

In asset markets, an asset's price is (a) set equal to the average of the price all buyers are willing to pay. (b) set equal to the highest price a buyer is willing to pay. (c) set equal to the lowest price a seller is willing to accept. (d) set by the buyer willing to pay the highest price. (e) set equal to the highest price a seller will accept.

(d)

In rational expectations theory, the term "optimal forecast" is essentially synonymous with (a) correct forecast. (b) the correct guess. (c) the actual outcome. (d) the best guess.

(d)

In the one-period valuation model, an increase in the required return (a) increases the expected sales price of a stock. (b) reduces the dividend payment. (c) reduces the expected sales price of a stock. (d) reduces the current price of a stock. (e) increases the current price of a stock.

(d)

Stockholders' rights include (a) the right to manage. (b) the right to change personnel policy. (c) the right to veto management's decisions. (d) primary claim on all of a company's assets. (e) residual claim on all cash flows.

(d)

The assumption that people make the best economic forecast they can, given the information available to them at the time, is called the (a) adaptive expectations hypothesis. (b) Lucas critique. (c) Ricardian equivalence theorem. (d) rational expectations theory.

(d)

The efficient markets hypothesis (a) is an application of rational expectations to the pricing of financial securities. (b) is based on the assumption that prices of securities fully reflect all available information. (c) holds that the expected return on a security equals the equilibrium return. (d) holds that all of the above are true.

(d)

The value of an investment can be found by computing the present value of all future (a) debts. (b) sales. (c) liabilities. (d) cash flows. (e) risks.

(d)

The value of any investment is found by (a) computing the present value of all future sales. (b) computing the present value of all future liabilities. (c) computing the future value of all sales. (d) computing the present value of all future cash flows. (e) computing the future value of all future expenses.

(d)

The view that expectations change relatively slowly over time in response to new information is known in economics as (a) rational expectations. (b) irrational expectations. (c) slow-response expectations. (d) adaptive expectations.

(d)

To say that stock prices follow a "random walk" is to argue that (a) stock prices rise, then fall, then rise again. (b) stock prices rise, then fall in a predictable fashion. (c) stock prices tend to follow trends. (d) stock prices cannot be predicted based on past trends.

(d)

To say that stock prices follow a "random walk" is to argue that (a) stock prices rise, then fall. (b) stock prices rise, then fall in a predictable fashion. (c) stock prices tend to follow trends. (d) stock prices are, for all practical purposes, unpredictable.

(d)

Which of the following types of information most likely allows the exploitation of a profit opportunity? (a) Financial analysts' published recommendations (b) Technical analysis (c) Hot tips from a stockbroker (d) Insider information

(d)

A monetary expansion _____ stock prices due to a decrease in the _____ and an increase in the ____. (a) reduces; future sales price; expected rate of return (b) reduces; current dividend; expected rate of return (c) increases; required rate of return; future sales price (d) increases; dividend growth rate; future sales price (e) increases; required rate of return; dividend growth rate

(e)

In the one-period valuation model, the value of an investment depends upon (a) only the present value of the expected sales price. (b) only the present value of the future dividends. (c) the actual value of the dividends and expected sales price received in one year. (d) the future value of dividends and the actual sales price. (e) the present value of both dividends and the expected sales price.

(e)

Using the Gordon growth formula, if D1 is $1.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is (a) $10. (b) $20. (c) $30. (d) $40. (e) $50.

(e)

Using the Gordon growth model, a stock's price will increase if (a) dividends are reduced. (b) the growth rate of dividends falls. (c) the required rate of return rises. (d) the expected sales price rises. (e) the dividend growth rate increases.

(e)