investments test two
"Baby blues" is a term used to refer to telecom stocks.
F
$10,000 invested in the NASDAQ Composite at the beginning of 2000 would have increased in value to about $20,000 by the end of 2005.
F
American Depositary Receipts (ADRs) are issued against shares of U.S. corporations and are traded on foreign security exchanges.
F
An increase in the value of the dollar relative to the yen has a positive effect on the returns of U.S. investors who invest in stocks of Japanese firms.
F
An ordinary annuity is defined as an annuity for which the cash flows occur at the beginning of each year or payment period.
F
Between 1956 and 2011 approximately 30% of years had positive returns.
F
Business risk is the risk associated with the amount of debt financing used by a firm
F
Business risk resulting from uncertainty over a firm's earnings is a concern for stockholders, but not for debt holders.
F
Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets.
F
For most stocks the returns from dividend income far exceed the return from capital gains.
F
Historical returns are of no use in estimating the risk of an investment.
F
Historically speaking, the standard deviation of returns on U.S. Treasury Bills is zero.
F
In the short term, stock prices tend to rise as inflation rises
F
Investors should never pay more than book value for a stock.
F
Over the period 1900 to 2011, U.S. stocks had the highest rate of return of any country.
F
Shareholders must either exercise their rights granted via a rights offering or let them expire unused.
F
Since 1960, returns on the Dow Jones Industrial Average have never been negative for 3 consecutive years.
F
So-called income stocks pay fixed dividends similar to interest on bonds.
F
The holding period return is an excellent method for comparing a short-term investment to a long-term investment.
F
The holding period return is especially useful comparing investments with unequal holding periods.
F
The investment value for a publicly traded stock can readily be found in the financial section of the newspaper or on the Internet.
F
The net present value of an investment is computed by discounting cash flows at the internal rate of return.
F
The period from late 2007 through the end of 2011 is best described as a prolonged bear market.
F
The return that fully compensates for the risk of an investment is called the risk-free rate of return.
F
The total value of an investor's holdings in a company will increase as a direct result of a stock split.
F
The total-return approach concentrates solely on capital gains over the long term.
F
The value of a stock distribution is considered taxable income at the time of the distribution.
F
There is no limit to the increase in the true rate of interest as compounding becomes more frequent.
F
Treasury stock is a means of increasing the number of shares outstanding.
F
When using a financial calculator to compute the present value of a lump sum, the future value is entered as PMT.
F
While many stocks increase in value over the long run, most of the return on stocks comes from dividends.
F
With respect to dividend payments on stocks, the date of record is the date on which the payment is actually paid.
F
Corporations often split their stocks when they believe that the price makes them less attractive to average investors.
T
Different classes of stock generally have either different voting rights or different dividends.
T
Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.
T
For a given stated rate of interest, a sum compounded monthly will earn more interest than a sum compounded annually.
T
High dividend yields are typical of rapidly growing companies.
T
If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company has a market capitalization of $50,000,000.
T
Mid-cap stocks are generally classified as those with a market capitalization between $1 and $5 billion.
T
Over the 50-year period of 1960-2010, the stock market as measured by the S&P 500 Index provided an average annual rate of return of approximately 11%.
T
Over the long term, the capital gain on most stocks will exceed the dividend income.
T
Risk can be defined as uncertainty concerning the actual return that an investment will generate.
T
Shareholders who sell their stock on or after the ex-dividend date, but before the date of record, will still receive the declared dividend.
T
Shares of publicly traded stock can be issued either through a public offering or a rights offering.
T
Stock dividends and stock splits both increase the number of shares but add nothing to the value of the company.
T
Stock dividends do not increase the value of a shareholder's position.
T
Stocks generally have produced positive inflation-adjusted rates of return over the long-term.
T
Stocks which perform well in a faltering economy are called defensive stocks.
T
Sydney invested $10,000 for an indefinite period at 5% per year. At the end of each year, she receives a a $500 check for interest earned. This type of account pays simple interest.
T
The most common reason for an investor to adopt the quality long-term growth investment strategy is for long-term accumulation of capital.
T
The rate of return on a foreign investment is affected by changes in the exchange rates.
T
The required return on a risky investment includes a real rate of return, an inflation premium and a risk premium.
T
The technology bubble of the 1990s lasted about 18 months.
T
There is a stronger tendency for the stock market to increase in value rather than decrease in value over time.
T
To calculate the interest rate or growth rate using a spreadsheet or financial calculator, the present value and the future value most have opposite signs.
T
Transaction costs can significantly reduce the rate of return on stock investments.
T
The common stock investment strategy that is the most basic strategy and is popular with conservative, quality-conscious individuals looking for competitive returns over the long run is the A) buy-and-hold strategy. B) current income strategy. C) growth strategy. D) speculation and short-term trading strategy.
A
The date on which an investor must be a registered shareholder of the firm in order to receive a dividend is called the A) date of record. B) ex-dividend date. C) payment date. D) purchase date.
A
The decision of how much money to pay out in dividends is made by the A) board of directors. B) company shareholders. C) chief executive officer. D) chief financial officer.
A
To take advantage of the opportunity to acquire additional shares of a company's stock without incurring any brokerage commissions, many investors participate in A) initial public offerings. B) dividend reinvestment plans. C) deferred equity securities. D) corporate trusts.
B
Typical characteristics of growth stocks include A) rapidly growing dividends. B) high rates of growth in operations and earnings. C) acquisitions of competing companies. D) strong performance even in market downturns.
B
What are the effects of a company repurchasing its own stock as Treasury shares? A) Usually negative in the short term but uncertain over the long term. B) Usually positive in the short term but uncertain over the long term. C) Usually positive in both the short term and the long term. D) No effect in either the short term or the long term.
B
Which of the following should be considered when deciding among alternative investments? I. time value of money II. risks associated with each investment III. risk free rate of return IV. personal risk tolerance level A) I and II only B) III and IV only C) I, II and IV only D) I, II, III and IV
C
Which one of the following is a characteristic of blue chip stocks? A) guaranteed minimum annual dividend of $2 a share B) annual dividends of more than $5 per share C) long and stable dividend and earnings records D) relatively high risk exposure
C
If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is A) $40,000,000. B) $49,000,000. C) $50,000,000. D) $60,000,000.
C
Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what average annual rate did the price of the stock increase over the 5 year period? A) about 10.61% B) about 2.12% C) about 2.03% D) about 1.64%
C
Most investors are risk-averse, which means they A) refuse to accept any financial risk. B) invest only in government insured securities. C) require an increase in return for any increase in risk. D) gain satisfaction from the excitement of risk.
C
One characteristic of mid-cap stocks is that they A) are generally new firms with high growth potential. B) tend to be highly volatile. C) are fairly good-sized companies that offer attractive return opportunities. D) are traded primarily through pink sheet bids.
C
One motive for issuing classified stock with different voting rights is to A) increase the market value of the company. B) avoid SEC reporting requirements. C) allow the company's founders to retain control of the company. D) facilitate the issue of additional shares in the future.
C
Over the period 1956-2011, stocks have provided investors with annual returns between A) 6% to 8%. B) 8% to 10%. C) 10% to 12%. D) 12% to 14%.
C
Pilgrim Corp. stock currently sells for $25 per share? The dividend yield is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the the dividend payout ratio is ________. A) 12%, .48% B) 8.33%, 25% C) 4%, 33% D) 33%,4%.
C
The U.S. stock market A) currently represents about 66% of the world's equity market. B) consistently outperforms the foreign markets once exchange rates are considered. C) is decreasing as a percentage of the world's equity market. D) lists over 25,000 stocks.
C
The common shares of the Owl Company have a book value of $10.80 and a market value of $14.30. The company pays $0.14 in dividends each quarter. What is the dividend yield? A) 1.0% B) 1.3% C) 3.9% D) 5.2%
C
Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned A) 10,000 shares worth approximately $1.50 per share. B) 10,000 shares worth approximately $0.15 per share. C) 100 shares worth approximately $15 per share. D) 100 shares worth approximately $1.50 per share.
C
Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock outstanding, its book value per share would be A) $32.33. B) $33.60. C) $43.20. D) $52.80.
C
Which of the following are advantages of the buy and hold strategy? I. rapid accumulation of wealth II. low transaction costs III. capital gains taxed at the long-term rate IV. Portfolio requires less time and energy to manage than for most other strategies. A) I and II only B) II and III only C) II, III and IV only D) I, II, III and IV
C
Which of the following are characteristics of blue-chip stocks? I. solid balance sheets II. generous dividend yields III. immunity from bear markets IV. some growth potential A) III and IV only B) II and III only C) I, II and IV only D) II, III and IV only
C
Which of the following best fits the description "blue chip stock"? A) Facebook B) Under Armour C) General Electric D) Chipotle Mexican Grill
C
David has purchased an investment that he expects to produce an annual cash flow of $3,000 for five years. He requires an 8% rate of return compounded annually. What is the maximum amount that David can pay and still earn the required rate of return? A) $19,008 B) $15,000 C) $14,764 D) $12,936
D
A capital loss is computed by A) subtracting the original cost of an investment from the proceeds received from the sale of that investment minus any income from the investment. B) subtracting the original cost of an investment from the proceeds received from the sale of that investment plus any income from the investment. C) subtracting the proceeds received from the sale of an investment from the original cost of the investment. D) subtracting the original cost of an investment from the proceeds received from the sale of that investment.
D
Alexis bought a stock for $34 a share two years ago. The stock does not pay any dividends. Today she sold the stock for $28.50 a share. What was her internal rate of return on this investment? A) 9.22% B) -9.22% C) 19.30% D) -8.44%
D
An investment costs $3,500 today. This investment is expected to produce annual cash flows of $1,200, $1,400, $1,300 and $1,100, respectively, over the next four years. What is the internal rate of return on this investment? A) 8.1% B) 9.33% C) 14.6% D) 16.2%
D
An investment paying 4% compounded quarterly will have a value at the end of one year equal to A) an investment paying 16% compounded annually at the end of 1 year. B) an investment paying 2% compounded semi-annually at the end of 1 year. C) an investment paying 4% compounded annually at the end of 4 years. D) an investment paying 1% compounded annually at the end of 4 years.
D
As a general rule, which one of the following statements concerning the various values of common stock is correct? A) Market values are usually below book values. B) Par values are usually above book values. C) Market values are usually below par values. D) Book values are usually below market values.
D
Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued A) buy-back stock. B) treasury stock. C) OTC stock. D) classified stock.
D
Characteristics of established growth companies include all of the following EXCEPT A) high operating margins. B) steady earnings growth. C) adequate cash flow to service their debt. D) high dividend payout ratios.
D
Inflation tends to have a particularly negative impact on the price of A) real estate. B) bonds. C) gold. D) crude oil.
B
Over the long term, which one of the following has historically had the lowest average annual rate of return? A) small-company stocks B) long-term government bonds C) large-company stocks D) long-term corporate bonds
B
Which one following will lower required rates of return? A) higher rates of inflation B) higher risk premiums C) lower rates of inflation D) lower dividend yields
C
Ashley purchased a stock at a price of $27 a share. She received quarterly dividends of $0.75 per share. After one year, Ashley sold the stock at a price of $29.25 a share. What is her percentage holding period return on this investment? A) 10.3% B) 11.1% C) 17.9% D) 19.4%
D
The most predictable component of stock returns is A) capital gains. B) capital losses. C) inflation adjusted return. D) dividend income.
D
Lower risk investments are associated with lower expected rates of return.
T
Meaningful measures of an investment's return must consider both income and capital gains
T
One reason that the holding period return should not be used to compare long-term investments is that it does not consider the time value of money.
T
Christopher purchased 200 shares of ABC stock at $21.25 per share. After nine months, he sold all of his shares at a price of $19.88 a share. Jake received a total of $0.55 per share in dividends during the time he owned the shares. Jake's holding period return is A) -6.4%. B) -3.9%. C) 2.6%. D) 9.7%.
A
Congress considers a bill that would eliminate the mortgage interest deduction for individuals. For the housing industry, this is an example of A) tax risk. B) interest rate risk. C) business risk. D) event risk.
A
If the present value of an investment's benefits equals the present value of the investment's costs, then the investor would earn a A) return equal to the discount rate. B) negative rate of return. C) 0% rate of return. D) return greater than the discount rate.
A
Inflation tends to have a favorable impact on A) real estate. B) common stock. C) preferred stock. D) bonds.
A
Investor's are motivated to purchase an asset because of its A) expected returns. B) past returns. C) emotional benefits. D) all of the above.
A
Josh purchased 100 shares of XOM at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. At what rate did the dividends from the end of 2007 to the end of 2011? Assume that all dividends were received at the end of the year. A) 7.8% B) 6.2% C) 13.1% D) 35%
A
Lauren purchased a stock for $28 a share and sold it six months later for $31. While she owned the stock, Lauren received two quarterly dividends of $0.35 per share. Brittany's holding period return on this stock is A) 13.2%. B) 10.7%. C) 11.9%. D) 26.4%.
A
Negative reaction to Netflix's change of billing plans is an example of A) liquidity risk. B) event risk. C) business risk. D) purchasing power risk.
A
Roy is going to receive a payment of $5,000 one year from today. He earns an average of 6% on his investments. What is the present value of this payment? A) $4,717 B) $4,821 C) $5,000 D) $5,300
A
The Sorka Corp. has paid annual dividends of $0.60, $0.63, $0.65, $0.68 and $0.72, respectively, over the past five years. What is the dividend growth rate? A) 4.7% B) 5.2% C) 5.4% D) 5.9%
A
The adage "the sooner one receives a return on a given investment, the better," reflects the financial concept known as the A) time value of money. B) total return concept. C) historical dividend theory. D) expected yield factor.
A
Which one of the following statements is correct concerning the time value of money? A) The future value of $1 at the end of two years is equal to $1 plus the first year's interest times 1 plus the annual interest rate. B) As the interest rate increases for any given year, the future value interest factor will decrease. C) The future value of $1 decreases with the passage of time. D) The future value interest factor is equal to zero if the interest rate is zero.
A
Which one of the following will tend to decrease the rate of return on an investment? A) elimination of a tax exemption relevant to the investment B) reduction in tax rates C) stabilization of inflation rates at a reasonably low level D) increased assurance of reinvestment rates at the desired rate of return
A
A holding period return is calculated by adding the current income to the capital gains and dividing this sum by the A) average investment value. B) beginning investment value. C) total income received. D) selling price of the investment.
B
An investment produced annual rates of return of 5%, 12%, 8% and 11% respectively over the past four years. What is the standard deviation of these returns? A) 2.7% B) 3.2% C) 3.6% D) 3.8%
B
Liquidity risk is defined as the risk of A) having to trade a security in a broad market. B) not being able to sell an investment conveniently and at a reasonable price. C) having inflation erode the purchasing power of your investment. D) having declining price levels affect the reinvestment rate of your current income stream.
B
The closest approximation to the real, risk-free rate of interest is A) The short-term Treasury bill rate plus the inflation rate. B) The short-term Treasury bill rate minus the inflation rate. C) The 10 year Treasury bond rate minus the inflation rate. D) The 10 year Treasury bond rate minus the 1 year Treasury bill rate.
B
The following investment cash flows have been entered into cells B5 through B9 of an EXCEL spreadsheet. B5 $(5,200 ), B6 $2,100, B7 $1,300, B8 $1,800, B9 $1,200, where $5,200 is the cost of the investment and the following amounts are cash flows at the end of years one through four. The correct function for computing the yield on this investment is A) =irr(B6:B9)+B5. B) =irr(B6:B9). C) =rate(4,0,-5200, 1200). D) =ytm(B5, B6:B9).
B
The holding period return (HPR) can appropriately be used to A) compare the yield on investments held for any time period. B) compare returns among investments that are held for the same period of time. C) isolate realized capital gains. D) determine the required reinvestment rate for long-term investments.
B
The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years is equal to A) $1,000/(1.03)5. B) $1,000/(1.05)3. C) $1,000 x (1.05)3. D) $1,000-($1,000) x .03 x 5.
B
The required rate of return on the Cosmos Corporation's common stock is 10%, the current real rate of return in the market is 1%, and the inflation rate is 3%. In this case, the risk premium associated with Cosmos stock is A) 5%. B) 6%. C) 7%. D) 8%.
B
The required return on Beta stock is 14%. The risk-free rate of return is 4% and the real rate of return is 2%. How much are investors requiring as compensation for risk? A) 8% B) 10% C) 12% D) 14%
B
The stock of Plomb Co. falls sharply on news that its CEO has drowned in a boating accident while on vacation. This is an example of A) liquidity risk. B) event risk. C) accidental risk. D) flotation risk.
B
To determine the compounded annual rate of return on investments held for more than a year, investors typically use the present-value-based measure known as yield or A) holding period return. B) internal rate of return. C) inflation-adjusted return. D) simple return.
B
Which of the following factors will increase the risk level of an investment? I. a firm's decision to use a high percentage of debt financing II. an economic situation in which consumer prices are rising at a rapid rate III. the ability to trade the investment in a broad market rather than in a thin market IV. unstable currency values A) I and II only B) I, II and IV only C) II and IV only D) I, III and IV only
B
Which of the following statements are correct concerning present value? I. The present value interest factor for a single sum is always equal to or less than 1. II. The lower the discount rate for a given year, the smaller the present value interest factor. III. The further in time, the smaller the present value interest factor. IV. The present value is equal to the future value only when the stated interest rate is 1%. A) I and II only B) I and III only C) II and III only D) I, III and IV only
B
A petroleum refinery in the Gulf region is forced to shut down for several months because of hurricane damage. This is an example of A) market risk. B) speculation. C) event risk. D) business risk.
C
An investment produced annual rates of return of 4%, 8%, 14% and 6%, respectively, over the past four years. What is the standard deviation of these returns? A) 3.7% B) 4.1% C) 4.3% D) 4.6%
C
An ordinary annuity has cash flows that occur at the ________ of each time period and are ________ in amount. A) beginning; constant B) beginning; variable C) end; constant D) end; variable
C
Kelly bought a stock at a price of $22.50. She received a $1.75 dividend and sold the stock for $24.75. What is Kelly's capital gain on this investment? A) $4.00 B) $3.75 C) $2.25 D) $1.75
C
Ryan purchased a bond for $980 at the beginning of 2007. He received annual interest payments of $$55 at the end of each year through 2012 when the bond was redeemed at its face value of $1,000. Compute the yield (internal rate of return) Ryan earned on his bond purchase. A) 5.50% B) 5.61% C) 5.91% D) .34%
C
Samantha bought a stock one year ago for $66 a share. She received a total of $2.00 in dividends. Today she sold the stock for $70 a share. Which one of the following statements is correct concerning this investment? A) Samantha has current income of $6.00. B) Samantha has a capital gain of $2.00. C) Samantha has a total return of 9.1%. D) Samantha has unrealized income of $4 a share.
C
Six years ago, Miguel invested $3,500. Today his investment is worth $5659. The yield on this investment is A) -7.69%. B) error 5. C) 8.34%. D) 10.28%.
C
The holding period is a useful way to compare investments because it considers A) the time value of money. B) only capital gains, but not income. C) both income and capital gains or losses. D) the relative size of investments being compared.
C
The present value of $10,000 discounted at 5% per year and received at the end of 5 years is A) $10,000/1.25. B) $10,000(1.05)5. C) $10,000/(1.05)5. D) $10,000 (1.05)1/5.
C
The risk that the rate of return on an investment will be less than expected due to factors that are independent of the investment, such as political, social or economic events, is called A) business risk. B) financial risk. C) market risk. D) liquidity risk.
C
Which of the following is(are) issue characteristics of an investment? I. type of investment such as stocks or bonds II. state of the economy III. coupon or dividend payments IV. time to maturity A) I and II only B) III only C) I, III and IV only D) I, II, III and IV
C
Christopher invests $400 today at a 4% rate of return which is compounded annually. What is the future value of this investment after four years? A) $342 B) $416 C) $464 D) $468
D
Each of the following investments produces the same rate of return. Which one has the greatest amount of risk? A) investment A with a standard deviation of 4% B) investment B with a standard deviation of 12% C) investment C with a standard deviation of 8% D) investment D with a standard deviation of 19%
D
If a stock is purchased at the beginning of a year, a single dividend is paid at the end of the year and the stock is sold immediately after the dividend has been received. In this case A) the internal rate of return is lower than the holding period return. B) the holding period return. is lower than the internal rate of return. C) it is not possible to calculate the internal rate of return. D) the internal rate of return equals the holding period return.
D
In which of the following circumstances would it be most appropriate to use the holding period return? A) to compare the capital gains on a house held for 8 years and a mutual fund held for 6 years B) to compare the calendar year performance of stocks purchased in March to stocks purchased in September C) to compare the dividend yield of stocks to the interest rate on bonds D) to compare the performance of several stocks, each of which was held throughout an entire year
D
Josh purchased 100 shares of XOM for $76.63 per share at the beginning of 2007. He received dividends per share of $1.37 (2007), $1.55 (2008), $1.66 (2009), $1.74 (2010), $1.85 (2011). At the end of 2011, just after receiving the last dividend, he sold the stock for $84.76. What was his average annual rate of return form both dividends and capital gains? (Hint: compute the IRR, assume that all dividends were received at the end of the year.) A) 9.831% B) 3.774% C) 3.423% D) 4.076%
D
Stocks in which of the following industries may be impacted by government actions? A) health care B) housing C) defense D) all of the above
D
The difficulty many investors experienced in selling mortgage based securities during the financial crisis of 2009 is an example of A) business risk. B) credit risk. C) market risk. D) liquidity risk.
D
The markets in general are paying a 2% real rate of return. Inflation is expected to be 3%. ABC stock commands a 6% risk premium. What is the expected rate of return on ABC stock? A) 2% B) 5% C) 8% D) 11%
D
When calculating the present value of either a future single sum or a future annuity, the applicable interest rate is usually called the A) yield to maturity. B) compound interest rate. C) internal rate of return. D) discount rate.
D
When computing an investment's yield using a financial calculator or spreadsheet such as Excel, which of the following should be entered as a negative number? A) the number of time periods B) dividend or interest payments C) the price at which the investment is sold D) the initial cost of the investment
D
When the rate of return is equal to the discount rate A) the present value of an investment's benefits must be greater than its cost. B) the cost of an investment equals the sum of its benefits. C) the cost of an investment equals the future value of its benefits. D) the cost of an investment equals the present value of its benefits.
D
Which of the following choices is in the correct order from less risk to more risk? A) corporate bonds, certificates of deposit, mutual funds that invest in stock, common stock B) certificates of deposit, corporate bonds, common stock, mutual funds that invest in stock C) certificates of deposit, mutual funds that invest in stock, common stock, corporate bonds D) certificates of deposit, corporate bonds, mutual funds that invest in stock, common stock
D
Which of the following internal characteristics should cause investors to expect the highest rate of return? A) a steady record of past dividends B) interest and principal guaranteed by the U.S. government C) a record of excellent management and consistent dividend payments D) poor management and excessive use of debt financinG
D
Which of the following statements about the standard deviation are correct? I. The standard deviation is a measure of relative dispersion. II. Standard deviations should be in conjunction with expected returns to compare investments. III. The standard deviation is calculated by taking the square root of the variance. IV. The higher the standard deviation of an investment, the lower its risk. A) I and IV only B) II and III only C) I, III and IV only D) I, II and III only
D
An investment that has earned a high rate of return over the last 5 years will not necessarily continue to perform well in the future
F
Annual yield is a less meaningful measure of an investment's performance than holding period return if the holding period is other than 1 year.
F
Investing in short-term debt is an effective strategy for managing the risk of falling interest rates.
F
Investments with lower standard deviations can be expected to produce higher rates of return.
F
Investors can be confidently predict future returns on an investment by studying its past performance
F
Investors who limit themselves to risk free and low risk investments can avoid purchasing power risk.
F
It is not possible for the nominal risk-free rate of return to be lower than the rate of inflation.
F
Most investors are risk averse, meaning they will always be willing to sacrifice higher return if they can avoid risk.
F
The present value is equal to the future value multiplied by the 1 plus the interest rate.
F
The reluctance of Congress to tinker with tax rates and deductions has virtually eliminated tax risk for U.S. businesses
F
The standard deviation is computed by dividing the sum of the squared deviations by the number of observations.
F
The yield on an investment is the discount rate that produces a present value of benefits greater than the cost of the investment.
F
An investor who requires a 7% rate of return should be willing to pay $934.58 now to receive $1,000 at the end of one year.
T
If the discount rate is appropriate for the level of risk, a satisfactory investment will have a present value of benefits equal to or greater than than the present value of costs.
T
If the risk-free rate of return is less than the inflation rate, the real rate of return is negative.
T
If you own an investment providing periodic returns, your actual yield on the investment will depend on the reinvestment rate you are able to obtain.
T
In response to the same external force, the return on one investment may increase while the return on another investment may decrease
T
The financial concept of time value of money is dependent upon the opportunity to earn interest over time.
T
The greater the dispersion around an asset's expected return, the greater the risk.
T
The internal rate of return is the correct method to use when an investor wants to determine an investment's average annual yield.
T
The yield is the rate of return that causes a project to have a zero net present value.
T
The yield on an investment is equal to its internal rate of return.
T
When using a financial calculator or electronic spreadsheet to calculate an investment's yield, the amount invested is expressed as a negative number.
T
Because common shareholders are entitled to the profits that remain after all of a corporation's other obligations have been met, common shareholders are known as A) residual owners. B) temporary owners. C) debt owners. D) owners of last resort.
A
Engines, Inc. declares a 4-for-10 stock split. The stock currently sells for $3 a share. A shareholder who owned 1000 shares of stock prior to the split will now own A) 400 shares valued at about $7.50 a share. B) 40 shares valued at about $1.20 a share. C) 250 shares valued at about $7.50 a share. D) 250 shares valued at about $1.20 a share.
A
From March 2009 to January 2012, stock prices as measured by the S&P 500 Index A) more than doubled in value. B) lost more than half their value. C) declined by nearly 10%. D) rose by nearly 25%.
A
Gypsum Corp. pays out 25% of its earnings as dividends. Earnings per share are currently $1.32, book value per share is $16.80, and the market price per share is $22.44. What is the dividend yield? A) 1.5% B) 2.0% C) 5.9% D) 7.9%
A
If a corporation declares a 10% stock dividend, then A) the share price of the stock will most likely decline by about 9%. B) the share price of the stock will most likely increase by about 10%. C) the share price of the stock will most likely remain unchanged. D) each shareholder will get a 10% cash rebate off his or her next round lot purchase of the stock.
A
In a rights offering, the A) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position. B) underwriter offers the investing public a certain number of shares at a certain price. C) total equity remains constant while the number of shares of common stock outstanding increases. D) amount of debt in the capital structure increases by the amount of the rights offering.
A
Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much money will be in the account at the end of the second year? A) $4,161.60 B) $4,160.00 C) $4080.00 D) $1161.60
A
Madison purchased a new car for $23,000. She was allowed $3,000 for her trade in and financed the remainder over 48 months at a rate of 4% per year. How much is her monthly payment? A) $451.58 B) $519.32 C) $384.91 D) $459.15
A
Stocks whose prices are expected to remain stable, or even prosper, when economic activity is slowing down are known as A) defensive stocks. B) cyclical stocks. C) growth stocks. D) speculative stocks.
A
The Limberger Corporation declared a quarterly dividend of $0.10 per share. The ex-dividend date was July 15, the date of record was July 18, and the payment date was July 28. If you had owned 100 shares of the Limberger Corporation and sold them on July 15, then A) you would collect $10.00 in dividends, and the purchaser would not collect any dividends. B) the purchaser would collect $10.00 in dividends, and you would not collect any dividends. C) you would collect $5.00 in dividends, and the purchaser would collect $5.00 in dividends. D) neither you nor the purchaser would collect any money in dividends.
A
The par or stated value of common stock is important for A) accounting purposes only. B) helping the investor determine the stock's intrinsic value. C) helping the board of directors determine the dividend payout. D) helping the market determine the trading price of the stock.
A
The risk-free rate is equal to the real rate of return plus A) an expected inflation premium. B) a risk premium. C) both an inflation and a risk premium. D) the prevailing prime rate.
A
The stated rate of interest is equal to the true rate of interest when A) interest is compounded annually and the period in questions is exactly 1 year. B) interest is compounded continuously over one or more years. C) interest is compounded annually over a period of several years. D) interest is discounted rather than compounded.
A
To compute the present value of $1,000 annuity received at the end of each of the next three years and discounted at the rate of 5% per year, you should enter the following variables into a financial calculator. A) N=3, i=5, PMT=1000 B) N=3, i=5, FV=3000 C) N=3, i=15, PMT=1000 D) N=1, i=5, PMT=3000
A
When a company, working with an underwriter, offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a A) public offering. B) rights offering. C) stock spin-off. D) treasury offering.
A
Which of the following best fits the description "speculative stock"? A) Facebook B) Apple C) Amazon D) Home Depot
A
Which of the following will tend to increase transaction costs? A) buying or selling fewer than 100 shares at a time B) buying or selling shares through an on-line broker C) buying or selling more than 1000 shares in a single trade D) buying or selling at times when volume is high and the exchanges are busy
A
Which one of the following statements about common stock is true? A) Common stock can provide attractive capital appreciation opportunities. B) Dividends generally provide the greatest rate of return on common stocks. C) Common stocks generally have a negative rate of return over a ten-year period. D) The DJIA is the best indicator of the overall performance of common stocks.
A
Which one of the following statements is correct based on the information provided? A) The market price is $21.34 per share. B) The investment value is $2.67 per share. C) The par value is $2.67 per share. D) The book value is $21.34 per share.
A
Aggressive stock management A) requires holding speculative stocks for the long term. B) involves active stock trading in the short-term in the quest for capital gains. C) concentrates on the long-term growth aspects of a security. D) concentrates on high dividend yielding stocks.
B
Aggressive stock management focuses on the pursuit of A) dividend income. B) short-term capital gains. C) long-term capital gains. D) all of the above.
B
Amanda purchased stock in a German firm at a price per share of 35 euros when the U.S. $/euro exchange rate was $1.40. After six months, Ann sold the stock for 37 euros when the U.S. $/euro exchange rate was $1.28. The stock does not pay a dividend. What is Ann's rate of return on this investment? A) 3.35% B) -3.35% C) 5.7% D) 9.2%
B
Dividend yield is calculated by dividing A) the market price of one share of stock by the annual dividend per share. B) the annual dividend per share by the market price of one share of stock. C) earnings per share by market price per share. D) annual dividend per share by earnings per share.
B
From October 2007 to March 2009, stock prices as measured by the S&P 500 Index A) nearly doubled in value. B) lost more than half their value. C) declined by nearly 10%. D) rose by nearly 25%.
B
If stocks earn an average rate of return of 12 %, their value doubles every A) 4 years. B) 6 years. C) 8 years. D) 12 years.
B
If you invest $2,000 at the end of each year for five years and you earn 7% interest compounded annually, how much will you have accumulated at the end of the fifth year? A) $10,700 B) $11,501 C) $12,307 D) $14,026
B
Investors seeking current income that tends to increase over time should purchase A) corporate bonds. B) income stocks. C) growth stocks. D) speculative stocks.
B
Pilgrim Corp. stock currently sells for $25. The dividend yield is 4% and the dividend payout ratio is 25%. The dividend is ________ and the earnings per share are ________. A) $3.00, $1.00 B) $1.00, $3.00 C) $.12, $1.00 D) $.25, $6.25
B
Reinvested dividends A) are taxed when the shares purchased with the reinvested dividend are sold. B) are taxed at the time the dividend is paid. C) do not increase the value of an investors holdings. D) are generally sold at a premium over the market price.
B
Since each share of common stock represents ownership in a company, shares of common stock are often referred to as A) illiquid investments. B) equity securities. C) fixed-income securities. D) unit-cost securities.
B
Stock which has been issued and subsequently reacquired by the issuing corporation is called A) letter stock. B) treasury stock. C) classified stock. D) book stock.
B
Stocks that are readily available to the general public and that are bought and sold on the open market are known as A) initial public offerings. B) publicly traded issues. C) treasury stocks. D) blue chip stocks.
B
The expected rate of return and standard deviations, respectively for four stocks are given below: ABC 9%, 3% CDE 11%, 9% FGH 12%, 8% IJK 14%, 10% Which stock is clearly least desirable? A) ABC B) CDE C) FGH D) IJK
B
The stock listing for a company shows a P/E of 18, a dividend yield of 2.4% and a closing price of $23.76. What is the amount of dividends per share? A) $0.03 B) $0.57 C) $1.03 D) $1.32
B
The value that investors place on a stock is called its A) book value. B) investment value. C) liquidation value. D) par value.
B
The value that represents the amount of stockholders' equity in a firm is called the A) par value. B) book value. C) liquidation value. D) market value.
B
Which of the following periods provided particularly high returns to stock investors? A) February 1972-October 1974 B) March 2009-December 2011 C) September 2000-September 2002 D) October 2007-March 2009
B
Which one of the following is an example of an annuity? A) the receipt of $50 in January, March, April, June, August, September and December B) the payment of $259 a month for three consecutive years C) the payment of $389 in January, $200 in February, and $200 in March D) the receipt of $100 a month for three months and then $150 a month for two months
B
Which strategy applies to investors who fund long-term goals with high-quality stocks which they retain for the entire investment period? A) quality long-term growth B) buy and hold C) speculation D) current income
B
A round lot consists of A) 1 share. B) 10 shares. C) 100 shares. D) 1,000 shares.
C
ADRs I. are shares of U.S. companies traded on foreign exchanges. II. are shares of foreign companies traded on U.S. exchanges. III. pay dividends in U.S. dollars if they pay dividends. IV. are subject to exchange rate risk. A) I and II only B) II and III only C) II. III and IV only D) I, II, III and IV
C
An individual stock generally provides a A) dividend payment that ensures total protection from purchasing power risk. B) refuge from event risk. C) current income that is less predictable than that available from other types of investments. D) predictable annual rate of return.
C
Another term for the stated value or face value of a stock is its A) book value. B) liquidation value. C) par value. D) proxy value.
C
Assume that $100 is deposited at the end of each year for five years at 10% compound interest and that no withdrawals are made over the five-year period. Based on this data, which one of the following statements is correct? A) The future value will be $550. B) The present value can be determined by computing the present value of $500 in five years at 10%. C) The present value can be determined by computing the present value of a $100 ordinary annuity for five years at 10%. D) The present value will be $500.
C
Between 1950 and 2010, the average return on stocks as represented by the S&P 500 Index has been 11%. Of that amount, the average return from dividends has been A) 1.8%. B) 2.7%. C) 3.6%. D) 4.6%.
C
Companies with strong earnings but limited growth opportunities A) do not generally pay any dividends. B) are called blue-chip stocks. C) generally pay high dividends. D) are speculative stocks.
C
Factors considered in making a decision on a firm's dividend include the I. cash position of the firm. II. firm's growth prospects. III. the expectations of the shareholders. IV. minimum dividends required by law. A) II and IV only B) I, II and IV only C) I, II and III only D) I, II, III and IV
C
For the period 2000 through 2009, the average annual return on stocks was A) 16%. B) 8%. C) -1%. D) -50%.
C
Companies typically issue new shares through an initial public offering (IPO).
T
Income stocks are well suited for retirees because A) dividend income is tax-free. B) the capital gains are predictable. C) dividend yields tend to exceed bond yields. D) dividends tend to increase over time.
D
Justin invests $4,000 in a savings account for two years. The account pays 2% interest compounded annually. How much interest income will Justin earn on this investment? A) $80.00 B) $81.60 C) $160.00 D) $161.60
D
Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has declared a 3-for-1 stock split effective tomorrow. After the split, Rob will own A) 100 shares valued at about $27 a share. B) 100 shares valued at about $3 a share. C) 900 shares valued at about $27 a share. D) 900 shares valued at about $3 a share.
D
Since 2003, most dividends are taxed A) at a higher rate than capital gains. B) at a lower rate than capital gains. C) at the same rate as ordinary income. D) at the same rate as capital gains.
D
Stock quotes on most Internet service providers such as Yahoo Finance include I. the highest and lowest price over the last 52 weeks. II. the closing price for the previous trading day. III. the opening price for the day. IV. the bid price and ask price. A) I and III only B) II and IV only C) I, II and III only D) II, III and IV only
D
Stock values declined sharply between A) 1994 and 1997. B) 1997 and 2000. C) 2003 and 2007. D) 2007 and 2008.
D
Stocks related to computers and the Internet are classified as A) blue-chip stocks. B) income stocks. C) cyclical stocks. D) tech stocks.
D
The Jennings Company has 4 million shares of stock outstanding. The stock has a par value of $0.10 per share and is currently trading at $18 per share. According to this information, the market capitalization of Jennings is A) $400,000. B) $7.2 million. C) $40 million. D) $72 million.
D
The expected rate of return and standard deviations, respectively for four stocks are given below: OPQ 11%, 8% RST 11%, 9% UVW 12%, 10% XYZ 12%, 8% Which stock is clearly most desirable? A) OPQ B) RST C) UVW D) XYZ
D
The extraordinary run up in stock prices during the late 1990s primarily affected A) energy stocks. B) retail stocks. C) pharmaceutical stocks. D) technology stocks.
D
The maximum rate of return that can be earned for a given rate of interest occurs when interest is compounded A) annually. B) daily. C) monthly. D) continuously.
D
To compute the present value of $1,000 annuity received at the end of each of the next three years and discounted at the rate of 5% per year, you should use he following EXCEL command. A) ANN B) TVM C) RATE D) PV
D
Treasury stock can be used to do which of the following? I. pay for an acquisition II. pay the company employees III. pay stock dividends IV. cover employee stock option plan contributions A) I and III only B) II and IV only C) III and IV only D) I, III and IV only
D
When a corporation declares a stock split, it usually does so because A) the firm's retained earnings are excessive. B) there are too many shares of stock outstanding. C) investors sometimes require nontaxable returns. D) it wants to make its stock more affordable to average investors.
D
Which category of stocks represents the highest level of risk? A) large-cap B) mid-cap C) baby blue D) small-cap
D
Which of the following are benefits related to stock ownership? I. ease of trading II. attractive inflation-adjusted rates of return III. guarantee of long-term positive returns IV. affordability A) I and II only B) II and IV only C) I and III only D) I, II and IV only
D
Which of the following are characteristics of small cap stocks? I. strong balance sheets II. annual revenues less than $250 million III. potential for high returns along with high risk IV. potentially dramatic changes in their earnings A) III and IV only B) II and III only C) I, III and IV only D) II, III and IV only
D
Which of the following best fits the description "defensive stock"? A) Facebook B) Alcoa C) Amazon D) Walmart
D
Which of the following factors should be considered when investing in foreign stocks? I. exchange rates II. differing accounting standards III. tax systems IV. ADRs A) I and II only B) I and III only C) I, II and III only D) I, II, III and IV
D
Which of the following strategies appeal to investors who place primary emphasis on the storage of value aspects of an investment? I. buy and hold II. short-term trading III. quality long-term growth IV. consistent dividend record A) I and IV only B) I and III only C) I, II and III only D) I, III and IV only
D
Which one of the following investment strategies would NOT appeal to an investor who is most concerned with storage of value? A) buy-and-hold B) high income C) quality long-term growth D) speculation and short-term trading
D
Which one of the following statements about common stock is correct? A) Each share of stock has a specified maturity date. B) Common stock gives stockholders first title to a share of the company's earnings, prior to other corporate obligations. C) Common stock typically provides higher levels of current income than do similar grade corporate bonds. D) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.
D
Compound interest is interest paid not only on the initial investment but also on any interest accumulated in prior periods.
T
$10,000 invested in the NASDAQ Composite at the beginning of 1995 would have increased in value to over $50,000 by the end of 1999.
T
A bear market is described as a stock market decline of 20% or more.
T
A company's board of directors must declare a dividend if the firm is profitable.
T
A market correction is defined as a stock market decline of 10% or more.
T
A stock can be both a tech stock and a blue chip stock at the same time.
T
A stock can have only one market value, but different investment values for different investors.
T
A stock's investment value can be much higher than its book value.
T
A stock's market value would normally be higher than it's book value.
T
Although bear markets on average occur every 3 to 4 years, the timing of bear markets is very hard to predict.
T
An increase in the dollar relative to the euro has a negative effect on the returns of U.S. investors who invest in European firms.
T
Between 1956 and 2011 approximately 70% of years had positive returns.
T
Between 2009 and 2011 the stock regained much of the value lost in 2007 and 2008.
T