Principles of Finance - Exam 2

When assessing a mutual fund, which of the following factors is the least important: a) How the fund has performed in the last week b) Any built-in costs to the fund c) The fund's stated objective d) The fund manager's track record

a) How the fund has performed in the last week

When should an investor sell his/her investments? a) Not very often b) When the investor feels like making a change c) Frequently d) When the investments lose in the short term

a) Not very often

Which investments, in particular, should an investor sell? a) Those with the least potential for the future b) Those with the most potential for the future c) Those lacking a significant gain in the most recent quarter d) Those lacking a significant loss in the most recent quarter

a) Those with the least potential for the future

Jill bought stock directly from Coca-Cola for a very low fee. She is participating in a) a direct stock purchase plan. b) the over-the-counter-market. c) a securities exchange. d) direct trading.

a) a direct stock purchase plan.

Investing in growth stocks is a strategy that builds wealth through a) capital appreciation. b) a regular fixed income. c) paid dividends. d) buying low and selling high.

a) capital appreciation.

A class of financial ratios that compares what it owns to what it owes is called a) debt ratios. b) asset management ratios. c) liquidity ratios. d) profitability.

a) debt ratios.

Glenn has committed to investing $100 each month to buying shares of his favorite stock, Microsoft. Last month, when the stock price was $22, he bought 4.54 shares. This month the stock price is $25, so he bought just four shares. This strategy is called a) dollar cost averaging. b) growth investing. c) buy-and-hold. d) diversification.

a) dollar cost averaging.

In 2004, Amazon.com had net earnings of $588,451, assets of $3,248,508 and 405,926 outstanding shares of common stock (numbers are in thousands). Based on these figures, what is the company's 2004 EPS? a) .18 b) 1.45 c) 5.5 d) .69

b) 1.45

Which of the following is not a good way to find companies in which to invest: a) Investigate the companies behind the products and services you enjoy. b) Follow suggestions in unsolicited e-mails and phone calls. c) Read reputable investment magazines and newspapers. d) Discuss investment opportunities with family and friends.

b) Follow suggestions in unsolicited e-mails and phone calls.

When investors trade securities that have already been issued by a corporation, they are trading on a) the over-the-counter market. b) the secondary market. c) a stock exchange. d) the direct trading line.

b) the secondary market.

The benefit of fundamental analysis is that a) after choosing a stock, an investor needs to do only periodic reviews. b) it helps an investor track daily price fluctuations. c) an investor can make better short-term buy and sell decisions. d) an investor need not look closely at the company itself.

a) after choosing a stock, an investor needs to do only periodic reviews.

Dividing investment funds among broad categories of assets like stocks, bonds, and mutual funds is called a) asset allocation. b) selection strategy. c) investment averaging. d) implementation.

a) asset allocation

The Cutting Edge Company is very popular with investors, who keep buying shares even though stock price is increasing. In this case, the company's __________ value is increasing. a) market b) accounting c) underlying d) intrinsic

a) market

The most important factor to consider when choosing investments is a) whether or not the investment supports one's financial goals. b) the short-term profitability of the investment. c) whether or not the security pays an annual dividend. d) the investor's ability to influence company decisions.

a) whether or not the investment supports one's financial goals.

Return on equity (ROE) measures which of the following: a) How much equity shareholders have in the company b) How well management turns equity into profit c) How much investors are willing to pay for each dollar of earnings d) How far the company's sales growth will rise

b) How well management turns equity into profit

Which of the following is the least likely to be a valid reason for making a significant change in your personal asset allocation: a) Marriage b) New car purchase c) Significant change in inflation d) Birth of a child

b) New car purchase

Which level of profit margin considers all the costs of doing business, such as salaries, rent, and utilities, and the direct cost of bringing a product or service to market? a) Pre-tax profit margin b) Operating profit margin c) Gross profit margin d) Net profit margin

b) Operating profit margin

How should you begin researching an investment you might select? a) Compare the company's strengths and weaknesses. b) Read the company's profile and annual report. c) Visit the company's headquarters. d) Purchase a product the company produces.

b) Read the company's profile and annual report.

Which of the following is an appropriate investment objective for a mutual fund with a buy-and-hold approach: a) Covering a broad range of industries b) Seeking long-term capital appreciation c) Investing primarily in a diversified portfolio d) Selecting stocks with superior growth potential

b) Seeking long-term capital appreciation

At a stock exchange, specialists have responsibility for a) all of the trades made for institutional investors. b) all of the trades made on a particular stock. c) keeping a stock's price as low as possible. d) keeping a stock's price as high as possible.

b) all of the trades made on a particular stock.

The PEG ratio is unique because it incorporates price, earnings, and a) growth of sales. b) growth of EPS. c) gross profit. d) growth of price-earnings.

b) growth of EPS.

Maggie wants to buy stock in Pepsico, but only when the price drops to a certain amount. She is interested in placing a __________ order. a) trade b) limit c) stop d) market

b) limit

A stock exchange functions in a way that is most similar to a(n) a) online retailer. b) marketplace. c) outlet mall. d) department store.

b) marketplace.

In investing, buy and sell orders that are placed online a) are not subject to fees. b) must go through a broker. c) take place immediately. d) are directly tied to the securities markets.

b) must go through a broker.

When assessing a stock using fundamental analysis, an investor should consider a) ratios and other quantitative factors only. b) qualitative and quantitative factors. c) recent trends that might affect short-term price. d) a chart of the stock's price over the last year.

b) qualitative and quantitative factors.

When you study a company's business model, product mix, competition, and brand, you are studying a) objective characteristics b) qualitative measures c) industry characteristics d) quantitative measures

b) qualitative measures

An important advantage of using a stock screener is the ability to a) participate in online investing. b) refine your search. c) place a quick bid. d) speak with a live person.

b) refine your search.

Which of the following is a true statement about financial ratios? a) A line-by-line analysis of a company's financial statements is the best way to understand the value of its stock. b) Investors can rely on reputable, independent sources for analysis of financial statements. c) Earnings are reported according to such a strict set of rules that it is easy to compare them from year to year and from company to company. d)Financial ratios have limited use for anyone besides financial managers and investors.

b)Investors can rely on reputable, independent sources for analysis of financial statements.

For assessing a security's fundamentals, which of the following is a true statement: a) Fundamental analysis results in a reliable prediction of next year's stock price. b) Fundamental analysis is a complicated procedure that is not appropriate for beginning investors. c) Even investment experts disagree about the most important ratios to consider in fundamental analysis. d) The only valid approach to fundamental analysis is based on the work of investment guru Warren Buffett.

c) Even investment experts disagree about the most important ratios to consider in fundamental analysis.

For assessing a stock's value, which of the following is not a qualitative factor to consider: a) Paying the CEO a reasonable amount b) Employing experienced managers c) Offering more healthful food d) Staying on top of trends

c) Offering more healthful food

Which of the following does diversification by cap-size help investors to do: a) Protect their investments from a negative event b) Update their investment portfolios c) Spread out the growth rates of their investments d) Avoid buying too many investments in one category

c) Spread out the growth rates of their investments

The Coca-Cola Company's brand, which is valuable and known world-wide, is not reflected in book value because it is a) property and equipment b) a hard asset c) an intangible asset d) part of stockholders' equity

c) an intangible asset

Jack tells his broker he wants to purchase 50 shares of ABC stock. Jack is placing a __________ order. a) sell b) stop c) buy d) limit

c) buy

Too much diversification in a financial portfolio can a) prevent a stock from growing in value. b) keep fund managers from doing their jobs. c) dilute the value of big gains on an individual stock. d) cause other investors to avoid a particular stock.

c) dilute the value of big gains on an individual stock.

When you are told to "consider the cost" before selling an investment, you are being advised to a) review the costs you've incurred thus far. b) calculate the costs of prior transactions. c) estimate the effect of commissions and taxes on your purchase. d) negotiate for a better deal.

c) estimate the effect of commissions and taxes on your purchase.

Return on equity (ROE) measures management's ability to make a profit a) by becoming more efficient in operations. b) by becoming shareholders of smaller firms. c) from the money that shareholders have invested. d) from the money generated by sales.

c) from the money that shareholders have invested.

A PE ratio of 20 means that a) investors earn $20 for every dollar they invest. b) the stock price is approximately $20 dollars more than it should be. c) investors are willing to pay $20 for every dollar of earnings. d) the company has a profit margin of 20%.

c) investors are willing to pay $20 for every dollar of earnings.

Which of the following is essential for making wise investment decisions: a) wealth b) intelligence c) knowledge d) age

c) knowledge

Sales growth indicates a company's a) past stock price. b) future growth potential. c) level of quality. d) degree of diligence.

c) level of quality.

Pre-tax profit margin is a good measure of management's performance because a) a growth company's sales and EPS grow at a rate greater than that of the market. b) the percentage can be interpreted as the amount of each sales dollar left before taxes are paid. c) managers have control of all of the expenses up to the point of taxes. d) pre-tax profit margin is calculated by dividing pre-tax profit by sales.

c) managers have control of all of the expenses up to the point of taxes.

An order to buy or sell a stock immediately at the best available price is called a __________ order. a) trade b) limit c) market d) stop

c) market

When selecting an investment, a chart is most helpful in comparing a) management's performance. b) growth strategies. c) quantitative factors. d) the effect of competition.

c) quantitative factors.

Fundamental analysis estimates the value of a stock primarily so that investors can tell if it is a) a short-term or long-term investment b) run by effective managers c) undervalued or overvalued d) competitive or noncompetitive

c) undervalued or overvalued

Ratios in financial analysis are not used to measure a company's a) profitability b) efficiency c) level of debt d) brand management

d) brand management

Ratios are calculated by a) adding and subtracting. b) multiplying or dividing, depending on the ratio. c) multiplying one number by another. d) dividing one number by another.

d) dividing one number by another.

Sammy received one share of stock in Nike, Inc. as a gift. He wondered how much of the company's profit went to his single share, so he divided net income by the number of outstanding shares of common stock. This common ratio is called a) price-earnings b) gross profit margin c) return on equity d) earnings per share

d) earnings per share

Studying all aspects of a company to discover its intrinsic value is called __________ analysis. a) economic b) investment c) technical d) fundamental

d) fundamental

The price-earnings (PE) ratio measures a) stock price compared to sales. b) stock price compared to shareholders' equity. c) management's ability to streamline operations. d) investors' expectations about a company's performance.

d) investors' expectations about a company's performance.

A class of financial ratios that measures the ability of a company to turn assets into cash and to pay its bills is called a) asset management ratios. b) profitability. c) debt ratios. d) liquidity ratios.

d) liquidity ratios.

Sales figures are most helpful to investors when they are used to measure a) a company's share of the market. b) consumer response to promotions. c) one-year increases and decreases. d) long-term sales growth.

d) long-term sales growth.

Quantitative measures such as ratios are helpful because they a) are figured the same way no matter what the source. b) do not have to be used in context. c) can be used to compare companies in different industries. d) show the relationship between numbers on a company's financial statements.

d) show the relationship between numbers on a company's financial statements.

When investors' expectations (of a stock's performance) and the company's earnings are perfectly matched, the PEG ratio is a) 2 b) -2 c) 1 d) -1

c) 1

Which of the following is not a way to invest regularly: a) Making a habit of investing b) Dollar cost averaging c) Buying growth stocks d) Dividend reinvesting

c) Buying growth stocks

What type of order restriction lets a broker know the order will expire at the end of the trading day? a) Good 'til canceled b) All or none c) Day order d) Fill or kill

c) Day order

Which of the following represents one way assessing a mutual fund is different from assessing a stock: a) Minimum investment requirements are low. b) Investors' goals are important, not their abilities. c) The market reflects the company's growth potential. d) Combined value is important, not individual value.

d) Combined value is important, not individual value.

Which of the following is not an advantage of a buy-and-hold strategy: a) The ability to ignore price fluctuations b) Tax benefits c) Stocks need only passive management. d) Stocks must be carefully selected.

d) Stocks must be carefully selected.

Which of the following is a fundamental clue that it may be time to sell the stock you hold in a particular company: a) The company hires a vice president of human resources. b) The company's stock price falls significantly within a two-week period. c) The company changes its business strategy. d) The company is involved in questionable accounting practices.

d) The company is involved in questionable accounting practices.

Which of the following is a true statement about industries and sectors: a) Industries are divided into general categories. b) The economy is divided into industries. c) Industries are divided into sectors. d) The economy is divided into sectors.

d) The economy is divided into sectors.

Before you invest for the long term, determine which of the following: a) What your advisor recommends you do b) What others are doing c) What will affect your investment in the short term d) What you want to accomplish

d) What you want to accomplish