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Homework answers / question archive / Chapter 14 Investing in Stocks True/False Questions  1) Over the past 50 years, stocks have returned on average about 12 percent a year

Chapter 14 Investing in Stocks True/False Questions  1) Over the past 50 years, stocks have returned on average about 12 percent a year

Finance

Chapter 14 Investing in Stocks

True/False Questions 

1) Over the past 50 years, stocks have returned on average about 12 percent a year.

2. The term securities encompasses a broad range of investments that include stocks, bonds, mutual funds, options, and commodities.

3. A public corporation is a corporation whose stock is owned by relatively few people and is not traded openly in the stock market. 

4. At maturity, corporations must repay stockholders the money they invested in the company. 

5. Dividend payments on common stock are guaranteed, but the amount is determined by the board of directors.

6. A proxy is a legal form that lists the issues to be decided at a stockholders' meeting and requests that stockholders transfer their voting rights to some individual or individuals. 

7. The record date is the date that the actual dividend payment is made to stockholders. 

8. A stock split is a procedure in which a stockholder's common stock is exchanged for preferred stock.

9. The most important priority that an investor in preferred stock enjoys is receiving cash dividends before common stockholders are paid any cash dividends.

10. Par value is the dollar value that an investor must pay in order to purchase preferred stock.

11. Corporations issue preferred stock because it provides an alternative to financing through corporate bonds or common stock.

12. If an investor owns participating preferred stock, missed or omitted dividends accumulate and must be paid before any cash dividend is paid to common stockholders.

 13. Convertible preferred stock may be exchanged, at the corporation's option, for a specified number of shares of common stock.

14. A blue-chip stock is too speculative for most investors. 

15. A stock that pays higher than average dividends is called an income stock. 

16. A cyclical stock is a stock that follows the business cycle of advances and declines in the economy.

17. A defensive stock is a stock that typically sells for less than $l. 

 18. Capitalization is defined as the total amount of securities issued by a corporation.

 19. A large-cap stock is a stock issued by a company that has capitalization of $150 million or less. 

 20. If a corporation has more than one stock issue, the preferred stock is always listed first in the newspaper. 

21. Today, it is possible for investors to use the Internet to access a corporation's home page in order to evaluate an investment in its stock.

22. By using the Internet, it is possible to find market price quotations, but more detailed financial information about a corporation is unavailable to investors. 

23. It is common for professional advisory services like Mergent's, Standard & Poor's, and Value Line to charge for more detailed financial information than provided on other Internet Web sites.

24. The federal government requires corporations selling new issues of securities to disclose information about corporate earnings, assets and liabilities, products or services, and the qualifications of top management in a prospectus. 

 25. Many investors and analysts believe that a corporation's ability or inability to generate earnings in the future may be one of the most significant factors that account for an increase or decrease in the value of a stock.

26. If a corporation's earnings decline, the stock's value usually increases.

 27. Earnings per share are a corporation's after-tax earnings divided by the number of stockholders.

28. An increase in a corporation's earnings per share is a healthy sign. 

29. The price-earnings ratio is the price of a share of stock divided by the corporation's earnings per share of stock. 

 30. A low price-earnings ratio indicates that a corporation's stock may be a poor investment.

31. From an investor's standpoint, an increase in estimates for earnings per share is a good sign.

 

32. The current yield for a stock investment is calculated by dividing the yearly dollar amount of income by the investment's current market value.

33. The total return calculation includes only an increase or decrease in the original purchase price of the investment.

34. The annualized holding period yield calculation takes into account the time the investment is held.

35. The book value for a share of stock is determined by deducting all liabilities from the corporation's assets and dividing the remainder by the number of outstanding shares of common stock.

36. The beta is an index that compares the risk associated with a specific stock issue with the risk of the stock market in general.

37. The fundamental theory is based on the assumption that a stock's intrinsic or real value is determined by the future earnings of the company.

38. An investment bank is a financial institution where large corporations can deposit excess cash for short periods of time.

 39. A securities exchange is a marketplace where member brokers who are representing investors meet to buy and sell securities.

40.The Nasdaq is an electronic marketplace for over 10,000 different stocks.

 41. A limit order is a request that a stock be purchased or sold at the current market price.

42. The minimum commission charged by most full-service and discount brokerage firms for buying or selling stock is between $50 and $75.

43. State laws that regulate securities and security transactions are often called blue- sky laws.

44. The Securities Exchange Act of 1934 created the Securities and Exchange Commission.

45. Most speculators use a buy and hold technique.

46. Dollar-cost averaging enables investors to avoid the problem of buying high and selling low.

 47. When investors purchase stock on margin, they borrow stock from a stockbroker or brokerage firm.

48. A call option gives the owner the right to sell 100 shares of a stock at a guaranteed price before a definite expiration date.

Multiple Choice Questions

49. Which of the following investments had the best return over past 50 years?

A) certificates of deposit

B) U.S. Treasury bills

C) long-term government bonds

D) common stocks

E) corporate bonds

50. Because General Electric is a corporation, Todd Barrow can purchase stock with the help of an account executive through the secondary market.

A) private

B) public

C) general

D) institutional

E) securities

51. A corporation whose stock is owned by relatively few people and is not traded openly in stock markets is called a(n) corporation.

A) private

B) public

C) equity

D) debt

E) preferred

52. Dividends are paid out of profits, and

A) dividend payments must be approved by the firm's board of directors.

B) dividends are guaranteed.

C) dividends are paid before a firm's taxes are paid.

D) dividends are usually paid twice a year.

E) None of the above.

53. Equity financing is a popular choice to provide long-term financing for a corporation because

A) a lender is always available to provide this type of financing.

B) it does not have to be repaid.

C) repayment doesn't have to be made for ten years or more.

D) only interest must be paid for the first five years.

E) it does not cost anything to sell in the primary market. 

54. Apple Computer Corporation holds its annual meeting in April. Maxine Star, who owns stock in the company, cannot attend the meeting. She can vote by

A) voluntary certificate.

B) preemptive right.

C) proxy.

D) cumulative certificate.

E) participatory certificate.

55. Which of the following statements is not true?

A) Corporations are required by law to distribute annual reports.

B) Stockholders must approve any amendment of the corporate charter.

C) Stockholders must approve the sale of certain corporate assets.

D) Corporations are required by law to have two stockholder meetings each year.

E) Stockholders may vote in person or by proxy.

56. Which of the following statements is not true?

A) Most board members like to keep stockholders happy.

B) Few things will unite stockholders into a powerful opposition force more rapidly than omitted or lowered dividends.

C) Intelligent investors must be concerned about future after-tax profits.

D) If a cash dividend is declared by the board of directors, each stockholder by law receives an equal amount per share.

E) Corporate dividends are always paid in cash. 

57. Dividends remain with the stock until

A) two business days before the date of record.

B) two business days after the date of record.

C) five days before the date of record.

D) five days after the date of record.

E) five days before the actual payment date.

58. Patsy Banz owns 220 shares of General Mills Corporation. For the last calendar quarter, General Mills Corporation paid $0.47 a share. What is the total amount she received in her dividend check for this quarter?

A) $0.47

B) $47

C) $94

D) $103.40

E) It is impossible to calculate the total dividend amount with this information

59. Jo Bower owns 150 shares of Data General stock. She purchased the stock for $24 a share. She sold her stock for $30 a share. The commissions required to buy and sell her stock totaled $120. Assuming that she received no dividends during the time she owned the stock, what is her total return for this transaction?

A) $600

B) $780

C) $900

D) $2,400

E) $3,000

60. If the board of directors approves a two for one stock split, an investor who owns 150 shares before the split owns shares after the split.

A) 75

B) 150

C) 225

D) 300

E) 450

61. When the board of directors approves a two for one stock split, the price for each share of stock

A) decreases in value.

B) increases in value.

C) remains unchanged.

D) is guaranteed to go up within a short period of time.

E) increase to twice of its former value.

62. The par value for a share of preferred stock is

A) what an investor can buy a share of preferred stock for on the open market.

B) an assigned dollar value that is printed on a stock certificate.

C) always twice the actual market price that an investor pays for a share of the stock.

D) always one half the market price that an investor pays for a share of the stock.

E) no longer used.

63. The type of stock in which stockholders are assured that omitted dividends will be paid to them before other dividends are paid is stock.

A) common

B) convertible preferred

C) participating preferred

D) cumulative preferred

E) callable preferred

64. The type of stock that may earn more than the stated dividend if the firm has a good year is stock.

A) common

B) convertible preferred

C) participating preferred

D) cumulative preferred

E) callable preferred

65. The type of preferred stock that may be exchanged at the stockholder's option for common stock is

A) corporate bond.

B) convertible preferred stock.

C) participating preferred stock.

D) cumulative preferred stock.

E) callable preferred stock. 

66. A very safe investment that generally attracts conservative investors is called a(n)

  stock.

A) penny

B) cyclical

C) growth

D) small-cap

E) blue-chip

67. A stock that pays higher than average dividends is called a(n) stock.

A) defensive

B) cyclical

C) growth

D) income

E) blue-chip 

68. A stock that remains stable during declines in the economy is called a(n) 

stock.

A) defensive

B) cyclical

C) growth

D) income

E) blue-chip

69. A stock that follows the business cycle of advances and declines in the economy is called a(n) stock.

A) defensive

B) cyclical

C) growth

D) income

E) blue-chip

70. A stock issued by a corporation that has the potential of earning above-average profits when compared to other firms in the economy is called a(n) stock.

A) defensive

B) cyclical

C) growth

D) income

E) blue-chip

71. A stock that sells for less than $l a share is called a

A) fractional stock.

B) penny stock.

C) dollar stock.

D) ten-dollar stock.

E) bad investment.

72. Typically, growth companies pay out of their earnings in dividends to their stockholders.

A) over 90 percent

B) between 65 percent and 80 percent

C) between 50 and 65 percent

D) between 35 and 50 percent

E) less than 30 percent 

73. Bob Burns is looking for an investment that will provide a predictable source of income. With this goal in mind, which of the following industry groups would normally be classified as an industry to invest in for income?

A) high-tech electronics

B) public utilities

C) automobile manufacturing

D) steel manufacturing

E) paper manufacturing 

74. A stock that is issued by a corporation that has a large amount of capitalization is called a(n) stock.

A) small-cap

B) medium-cap

C) large-cap

D) unlimited-cap

E) giant-cap

75. A small-cap stock is defined as a corporation that has total capitalization of

A) more than $250 million.

B) less than $300 million.

C) less than $400 million.

D) less than $500 million.

E) no capitalization.

76. James Turbyfil purchased 100 shares of IBM for $72. James also paid $55 commission. What was the total purchase price for this transaction?

A) $55

B) $72

C) $7,237.50

D) $7,255.00

E) $7,347.50

77. Which of the following statements is not true?

A) It is possible to obtain financial information about a corporation that issues stock by using the Internet.

B) While it is possible to obtain information about a company by accessing the Internet, the information is usually out of date.

C) You can use an Internet search engine to access company financial information.

D) Most corporations have a home page that enables investors to access financial information.

E) By using the Yahoo finance Web site, investors can access financial information about a specific corporation.

78. By using the Yahoo Finance Web site, an investor can find information on all of the following except

A) historical market prices.

B) the corporation's stock symbol.

C) current market values.

D) research information.

E) future market values.

79. Which of the following is not a true statement?

A) When choosing a stock advisory service that charges fees for their investment advice, an investor must be concerned the quality of the information.

B) Mergent's Investors Service provides information about common stocks.

C) Value Line provides information about bonds and mutual funds, but not common stocks.

D) The information provided by investors' services ranges from simple alphabetical listings to detailed financial reports.

E) Online computer services may be used to research companies and to obtain current stock prices.

80. The federal government requires that a corporation selling a new issue of securities must disclose information about the company and its finances in a(n)

A) annual report.

B) quarterly report.

C) accountant's audit report.

D) prospectus.

E) stock guide.

81. Which of the following statements is false?

A) Numerical measures can help investors decide if it is time to buy or sell a stock.

B) Future earnings may be one of the most significant measures to examine when evaluating a stock.

C) Higher earnings generally equate to higher stock value.

D) Corporate earnings are reported in a firm's annual report.

E) To date, it is impossible to determine corporate earnings by using the Internet. 

82. Mellon Manufacturing has after-tax income of $3 million. It also has 2 million shares of stock outstanding. What is the firm's earnings per share?

A) $3 a share

B) $2 a share

C) $1.50 a share

D) $0.67 a share

E) None of the above answers is correct.

83. Barker Creek Clothing has after-tax income of $12.8 million. It also has 32 million shares of stock outstanding. What is the firm's earnings per share?

A) $4.48 a share

B) $3.20 a share

C) $1.28 a share

D) $0.40 a share

E) $0.80 a share

84. Masterworks Manufacturing has after-tax profits that total $625,000. If the firm has 250,000 shares, what is the amount of earnings per share?

A) $0.40

B) $1

C) $2

D) $2.50

E) It is impossible to calculate earnings per share with this information.

85. Last year, High-Tech Electronics earned $1.50 per share. If the current market value for a share of stock is $45, what is the firm's PE ratio?

A) 0.033

B) 3.3

C) 30

D) 33

E) It is impossible to calculate a PE ratio with this information.

86. Which of the following is not a true statement?

A) The price-earnings ratio is a key factor that serious investors use to evaluate stock investments.

B) The price-earnings ratio for a corporation must be studied over a period of time.

C) The price-earnings ratio is based on the company's dividends.

D) The price-earnings ratio for one firm may be compared to the price-earnings ratio for all firms.

E) A low price-earnings ratio indicates that a stock may be a good investment and a high price-earnings ratios may indicate that it is a poor investment.

87. To calculate current yield, the annual income amount is divided by

A) market value.

B) original value.

C) future return.

D) current return.

E) total return. 

88. Becky Martinez owns stock in GBX Corporation. The GBX stock has a market value of

$50 a share. If Becky receives $4.50 a year in dividends, what is the current yield?

A) 7 percent

B) 8 percent

C) 9 percent

D) 11.1 percent

E) It is impossible to calculate the current yield with the above information.

89. General Electric has a current market price of $75. The corporation has paid a dividend of

$3.75 over the last 12 months. What is the current yield?

A) 2 percent

B) 4 percent

C) 5 percent

D) 10 percent

E) 20 percent 

90. Assume that you purchased 100 shares of Exxon stock for $55 a share, that you received an annual dividend of $2.00 a share, and that you sold your Exxon stock for $65 a share at the end of one year. What is the total return for your investment? (Ignore commission amounts for this question.)

A) $200

B) $1,000

C) $1,200

D) $1,500

E) $2,200

91. Assume that you purchased 100 shares of Home Depot stock for $70 a share, that you received an annual dividend of $0.60 a share, and that you sold your Home Depot stock for $80 a share at the end of one year. What is the total return for your investment? (Ignore commission amounts for this question.)

A) $10

B) $60

C) $760

D) $860

E) $1,060

92. A yield calculation that takes into account the total return, the original investment, and the time that the investment is held is called yield.

A) current

B) dividend

C) annualized holding period

D) capital gain

E) original investment 

93. Assume the beta for the stock market in general is 1.0 and that the beta for World-Wide Television Productions is 2.4. If the stock market increases by 10 percent, how much will the stock for World-Wide Productions increase?

A) 12 percent

B) 20 percent

C) 24 percent

D) 48 percent

E) It is impossible to calculate the amount of increase with this information.

94. Book value is determined by

A) deducting liabilities from assets and dividing the remainder by owner's equity.

B) deducting liabilities from assets and dividing the remainder by the number of shares of stock outstanding.

C) dividing owner's equity by the number of shares of stock outstanding.

D) dividing assets by the number of shares of stock outstanding.

E) dividing the sum of assets and owner's equity by the number of shares of stock outstanding.

Answer: B 

95. ABC Corporation has assets that total $12 million and liabilities that total $4 million. It also has 500,000 shares of stock outstanding. What is the ABC's book value?

A) $32

B) $24

C) $16

D) $8

E) -0-

96. Quincy Martin Manufacturing has assets of $5 million and liabilities of $3 million. The company has also issued 400,000 shares of common stock. What is the company's book value per share?

A) $10.25

B) $7.50

C) $5

D) $2.50

E) $1.00

97. An investment theory based on the assumption that a stock's intrinsic or real value is determined by the future earnings of the company is called the theory.

A) fundamental

B) technical

C) efficient market

D) primary

E) market

98. An investment theory based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole is called the

  theory.

A) fundamental

B) technical analysis

C) efficient market

D) primary

E) market

99. An investment theory based on the assumption that stock price movements are purely random is called the theory.

A) fundamental

B) technical

C) efficient market

D) primary

E) market

100. A market in which an investor purchases financial securities (via an investment bank or other representative from the issuer of those securities is called the  market.

A) technical

B) fundamental

C) efficient

D) secondary

E) primary 

101. A market for existing financial securities that are currently traded between investors is called the market.

A) technical

B) fundamental

C) efficient

D) secondary

E) primary

102. Which of the following is not a true statement?

A) An investment bank is a financial firm that assists organizations in raising funds.

B) A large corporation often uses an investment bank to sell and distribute a new stock issue.

C) Analysts for the investment bank examine the corporation's financial position to determine whether the new stock issue is financially sound.

D) If the investment bank is satisfied that the new stock issue is a good risk, it will buy the stock and hold it for at least one year.

E) The investment bank resells a new stock issue to its customers-commercial banks, insurance companies, pension funds, mutual funds, and the general public.

103. The investment bank's commission or spread ranges from percent.

A) 1 to 4.5

B) 1 to 6.5

C) 4.5 to 10

D) 3.5 to 15

E) less than 1 to 25

104. In order to be listed on the New York Stock Exchange, a corporation must do all except

one of the following. Which of the statements below is incorrect?

A) A corporation's annual earnings before federal taxes must be at least $2.5 million.

B) A corporation's stock must be approved for listing on the NYSE.

C) The market value of its publicly held stock must equal or exceed $25 million.

D) A corporation must have a total of at least 1.1 million shares of its common stock publicly owned.

E) At least 2,000 stockholders must each own 100 or more shares of the corporation's stock

105. Which one of the following is not a true statement?

A) The over-the-counter market is a network of account executives who buy and sell the securities of corporations that are not listed on a securities exchange.

B) Account executives in the OTC market specialize or make a market in the securities of one or more specific firms.

C) Most OTC trading is conducted in person in the account executive's office.

D) Account executives' operating in the OTC market use an electronic quotation system called Nasdaq.

E) Nasdaq is regulated by the National Association of Securities Dealers. 

106. A request that a stock be bought or sold at the current market price is called a

  order.

A) market

B) limit

C) stop

D) round

E) discretionary

107. A request that a stock be bought or sold at a specified price is called a 

order.

A) market

B) limit

C) stop

D) round

E) discretionary

108. A request that an order be executed at the next available opportunity after the market price of the stock reaches a specified price is called a order.

A) market

B) limit

C) stop

D) round

E) discretionary

109. An order to buy or sell a security that lets the broker decide when to execute the transaction and at what price is called a order.

A) market

B) limit

C) stop

D) round

E) discretionary

110. One hundred shares or multiples of 100 shares is called a(n) lot.

A) market

B) limited

C) round

D) odd

E) executive

111. In 1911, the first state law regulating securities transactions was passed in

A) New York.

B) Illinois.

C) Texas.

D) Kansas.

E) Oklahoma.

112. Which of the following regulations provided for full disclosure and publication of a prospectus?

A) New York Securities Act of 1929

B) Securities Act of 1933

C) Securities Exchange Act of 1934

D) Maloney Act of 1938

E) Investment Advisers Act of 1940

113. Which of the following federal regulations made the top management of brokerage firms responsible for reporting transactions based on inside information?

A) Securities Act of 1933

B) Federal Securities Act of 1964

C) Securities Acts Amendments of 1975

D) Insider Trading Sanctions Act of 1984

E) Insider Trading Act of 1988

114. A long-term technique used by investors who purchase an equal dollar amount of the same stock at equal intervals in time is called a

A) dollar cost averaging.

B) dividend reinvestment plan.

C) buy and hold technique.

D) regulated transaction.

E) secured transaction. 

115. A long-term investment technique used by investors to purchase stock without paying a commission to a broker is called

A) dollar cost appreciation.

B) direct investment plan.

C) unregulated transaction.

D) regulated transaction.

E) over-the-counter transaction. 

116. Which of the following statements is not true?

A) When buying stock on margin, an investor borrows part of the money necessary to buy a particular stock.

B) Usually, the brokerage firm lends the money or arranges for the loan in a margin transaction.

C) Investors buy on margin because doing so offers them the potential for greater profits.

D) The margin requirement is regulated by the Federal Reserve Board.

E) The current margin requirement is 25 percent.

117. Which of the following statements is not true?

A) When an investor buys stocks and assumes they will increase in value, he or she is using a procedure called buying long.

B) Selling short is selling stock that has been borrowed a from brokerage firm.

C) When you sell short, you buy today, knowing that you must sell or cover your short transaction at a later date.

D) In a short transaction, if the stock increases in value, the investor loses money.

E) To make money in a short transaction, you must be correct in predicting that a stock will decrease in value.

118. To safeguard investments, stock owners who believe that the price of their stock will go down during an option period will purchase a

A) futures contract.

B) short contract.

C) call option.

D) put option.

E) margin contract.

Essay Questions

119. Describe why corporations issue common stock. Describe why investors purchase common stock.

120. What is the primary difference between common stock and preferred stock?

121. Describe the steps involved in a typical stock transaction.

122. Matthew Boyd asks for your help! He has saved $10,000 and wants to invest in common stock. Choose one of the long-term or short-term techniques described in this chapter and explain how that method could help Matthew achieve his investment goals.

Option 1

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