1. For the period 2000 through 2009, the average annual return on stocks was:
a. 16%
b. 8%
c. -1%
d. -50%
2. 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.
3. The extraordinary run up in stock prices during the late 1990s primarily affected _________ stocks.
a. energy
b. retail
c. pharmaceutical
d. technology.
4. For the period 2000 through 2009, the average annual return on stocks was:
a. 16%
b. 8%
c. -1%
d. -50%
5. 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%.
6. The correct statement about common stock is:
a. each share of stock has a specified maturity date.
b. common stock gives stockholders first title to a share of 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.
7. Rob owns 300 share 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.
8. 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 ________ stock.
a. buy-back
b. treasury
c. OTC
d. classified
9. The value that represents the amount of stockholders' equity in a firm is called the ________ value.
a. par
b. book
c. liquidation
d. market
10. In regards to the various values of common stock, the general rule is that:
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.
11. You are given the following information on a company.
Total book value $1,600,000
Total market value $12,804,000
Common shares outstanding 600,000
Based on the information provided, which of the following is a correct statement?
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.
12. 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. The dividends per share would be:
a. $0.03.
b. $0.57.
c. $1.03.
d. $1.32.
13. 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.
14. 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.
15. __________ is/are 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.
16. One of the basic premises of security analysis, and in particular fundamental analysis, is that:
a. a stock's price is based on its past cash flows rather than on anticipated future cash flows.
b. market sectors do not move in concert with business cycles.
c. all securities have an intrinsic value that their market value will approach over time.
d. a security's risk has relatively little effect on the security's return.
17. Top-down security analysis:
a. starts with the fundamental analysis of a firm.
b. includes economic, industry, and fundamental analysis.
c. concentrates on the competency of the senior management of a firm.
d. centers on the past performance of a firm.
18. Investment analysts who believe that a thorough investigation of a company's financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of:
a. fundamental analysis.
b. behavioral analysis.
c. the efficient market hypothesis.
d. technical analysis.
19. _______________ is likely to have a negative effect on stock prices.
a. Falling interest rates
b. A decrease in the money supply (M2)
c. Low inflation
d. A decrease in the unemployment rate
23. ___________ will most directly influence a company's market value.
a. The state of the economy
b. The book value of its assets
c. most recent earnings per share.
d. past returns.
24. The Merry Co. has current annual sales of $350,000 and a net profit margin of 6%. Sales are expected to increase by 5% annually while the profit margin is expected to remain constant. The projected after-tax earnings for two years from now is:
a. $19,294.
b. $22,050
c. $23,100.
d. $23,153.
25. If the market multiple is 23.0 and the P/E ratio of a company is 27.4, then the stock's relative P/E is:
a. 0.84
b. 1.19
c. 3.21.
d. 4.40
26. Markhem Enterprises is expected to earn $1.34 per share this year. The company has a dividend payout ratio of 40% and a P/E ratio of 18. One share of common stock in Merkem Enterprises should be selling for _________ in the market.
a. $9.65
b. $14.47
c. $24.12
d. $33.77
27________________ stock should not be purchased
a. ABC
b. DEF
c. GHI
d. JKL
28. An investor should purchase a stock when the:
a. market price exceeds the intrinsic value.
b. expected rate of return equals or exceeds the required return.
c. capital gains rate is less than the required return and no dividends are paid.
d. Market price is greater than the justified price.
29. Stephanie is an investor who believes that the real key to a company's future stock price lies in its future earnings. When investing in a company, she's carefully studies its future earnings potential, and sells a company's stock at the first sign of any trouble. This information indicates that Stephanie would correctly be classified as a/an ____________ investor.
a. growth
b. value
c. buy-and-hold
d. index
30. James is willing to settle for a 10% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. What will happen in this situation?
a. James will have to pay more for the stock than he was willing to pay.
b. Investors with different required rates of return will pay different prices of the stock.
c. James will not be able to buy the stock unless the prices changes.
d. James will be happy to buy the stock for less than he was willing to pay.
31. Michelak's Martime Industries has relatively stable earnings and pays an annual dividend of $2.50 per share. This dividend has remained constant over the past few years and is expected to remain constant for some time to come. If you want to earn 12% on an investment in the common stock of Michelak's, you should pay ________ to purchase each share of stock.
a. $12.50
b. $18.88
c. $20.83
d. $25.00
32. Newton, Inc. just paid an annual dividend of $0.95. Their dividends are expected to increase by 4% annually. Newton Company stock is selling for $11.54 a share. The required rate of return on this stock implied by the dividend-growth model is:
a. 8.23%
b. 12.2%
c. 12.6%
d. 13.9%
33. The single most important variable in the dividends-and-earnings approach is the:
a. rate of growth.
b. applicable beta.
c. appropriate P/E multiple.
d. amount of the future dividends.
34. The dividends-and-earnings (D&E) approach to stock valuation and the variable-growth DVM approach are similar in the both approaches:
a. are present-value based.
b. consider dividends only and ignore the future selling price of the stock.
c. consider the future selling price of the stock but ignore future dividends.
d. use the historical dividend growth rate as the key input figure.
35. The Highlight Company has a book value of $56.50 per share and is currently trading at a price of $59.00 per share. you are interested in investing in Highlight, and have just used a present-value based stock valuation model to calculate a present (intrinsic) value of $55.00 per share for Highlight's stock. Assuming that your calculations are correct you should:
a. buy the stock, because the current market price per share is higher than the present value.
b. buy the stock, because the book value per share is greater than the present value.
c. not buy the stock. because the present value is less than the market price per share.
d. buy the stock, because the book value and the current trading price are very close to one another in value.
36. The dividend-growth models will work especially well for which of the following situations?
a. A mature firm with a policy of increasing its earnings and dividends at an average rate of 5% per year.
b. A company with highly variable earnings and a policy of maintaining a constant 50% payout ratio.
c. A company that intends to pay out all of its earnings as dividends.
d. A company that is widely viewed as an attractive takeover target.
37. The price-to-cash-flow method of stock valuation generally:
a. uses either EBITDA or operating cash flow from the cash flow statement as a measure of cash flow.
b. relies on historical cash flows.
c. produces a cash flow multiple that is greater than the P/E multiple.
d. applies the P/E multiple to the cash flow per share value.
38. Choose which one of the following situations the price to sales valuation model will work but the dividend cash flow models will not.
a. A mature firm with minimal growth opportunities
b. A water-powered electric utility company
c. A newly-formed biotechnology company with negative earnings
d. A top-performing firm in a mature industry.
39. In a efficient market, prices appear to move randomly because:
a. investors do not process new information correctly.
b. only new information affects stock prices.
c. insider trading has an unpredictable effect on stock prices.
d. the number of investors who can forecast prices correctly is to small to have any effect.
40. The strong form of the efficient market hypothesis contends that:
a. a select few institutional investors can earn abnormal profits.
b. abnormal profits are randomly distributed.
c. no one can consistently earn a profit.
d. no one can consistently earn abnormal profits.