Investing
Dante555
investing.docxThe Stock Market
Multiple Choice Questions
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1. |
High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets?
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2. |
Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?
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3. |
Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n):
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4. |
A firm that specializes in arranging financing for companies is called a(n):
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5. |
The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called:
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6. |
The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______".
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7. |
Marco Painting Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n):
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8. |
Under the provisions of a general cash offer, shares of stock are offered to:
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9. |
A public offering of securities which are offered first to current shareholders is called a(n):
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10. |
The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:
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11. |
When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n):
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12. |
When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.
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13. |
When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting.
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14. |
When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting.
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15. |
Which one of the following is the federal agency which regulates the financial markets in the U.S.?
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16. |
The document that must be prepared in order to receive approval for a stock offering is called a:
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17. |
A preliminary document provided to investors who are interested in a stock offering is called a(n):
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18. |
A securities dealer is a(n):
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19. |
Which one of the following best describes a broker?
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20. |
Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft?
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21. |
Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding?
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22. |
The profit a dealer makes on a purchase and resale of shares of stock is called the:
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23. |
A private equity fund: I. is set up as a limited partnership II. usually use a 2/20 fee structure III. place no constraints on manager compensation IV. typically have a stated life of 7 to 10 years
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24. |
Which of the following is correct regarding the compensation paid to private equity fund managers?
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25. |
An owner of a trading license on the NYSE is called a:
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26. |
An NYSE Supplemental Liquidity Provider: I. can trade the same stocks as designated market makers II. can trade only from offices outside the exchange III. must quote bid or ask quotes a certain % of the day IV. are paid 30 cents per 100 shares traded
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27. |
The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a:
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28. |
A trading floor broker:
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29. |
The NYSE's Super Display Book is an electronic system which:
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30. |
A NYSE member who trades only for his or her own account is called a(n):
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31. |
The location on an exchange floor where a particular security trades is called a(n):
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32. |
You want to sell shares of stock at the current price. Which type of order should you place?
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33. |
An order to buy shares of stock at a stated price or less is called a _____ order.
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34. |
An order to sell that involves a preset trigger point is called a _____ order.
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35. |
A market centered on dealers buying and selling for their own inventories is called a(n):
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36. |
Which one of the following describes an ECN?
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37. |
Inside quotes are the:
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38. |
The off-exchange market in which exchange-listed securities trade is referred to as the _____ market.
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39. |
The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market.
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40. |
Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price?
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41. |
When stocks are held in an index in proportion to their total company market value, the index is:
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42. |
An index is valued on a daily basis. However, some stocks in this particular index have not traded recently. As a result, this index suffers from index:
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43. |
Which one of the following statements concerning the NYSE is correct?
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44. |
Which of the following are common sources of venture capital? I. private individuals II. NASDAQ III. university endowment funds IV. insurance companies
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45. |
Which one of the following statements concerning venture capital is correct?
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46. |
How long is the "lock-up" period that is commonly found in an IPO underwriting contract?
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47. |
Which one of the following can be assumed when the SEC approves an IPO registration?
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48. |
Which one of the following transactions occurs in the primary market?
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49. |
Trevor currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trevor is a securities:
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50. |
Anna is an individual investor. She purchases shares at the _____ price and sells at the _____ price.
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51. |
What is the current structure of the NYSE?
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52. |
In 2007, NYSE Holdings merged with which one of the following?
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53. |
In order to currently trade on the floor of the NYSE, members must:
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54. |
Which one of the following has the greatest duty to provide liquidity to the financial market?
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55. |
The SuperDOT system has lessened the role of which one of the following?
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56. |
Which one of the following statements related to the NYSE Hybrid market is correct?
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57. |
To be listed on the NYSE, a firm must have at least:
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58. |
Lucas wants to sell 9,000 shares of stock and places a market order. The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to "stop" the stock. What has the specialist agreed to do?
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59. |
The duties of a specialist include which of the following? I. maintain an orderly market II. offer a higher bid price than the floor brokers III. provide liquidity to the market IV. purchase all shares offered as limit sells
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60. |
Faith placed an order to sell 7,500 shares of stock she currently owned. As soon as the order reached the trading floor, the shares were immediately sold. Which type of order did Faith place?
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61. |
Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve know for sure? I. His order will execute but the time of execution is unknown. II. His order may never execute. III. He will receive exactly $7,000 if his order executes. IV. He could receive more, but not less, than $14 a share.
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62. |
Kelly wants to sell 600 shares of DeLux stock at the going market price after the stock reaches $42 a share. Which type of order should she place?
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63. |
After the trigger point is reached, a stop-loss order will be executed at the:
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64. |
Which one of the following orders is frequently used as a means to limit losses resulting from a short sale?
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65. |
Marcus just placed a stop limit order to sell 100 shares at $21 stop, $18 limit. Which one of the following statements is correct concerning this order if the current market price is $16?
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66. |
NASDAQ dealers post which one of the following in addition to their bid and ask prices?
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67. |
NASDAQ has which of the following characteristics? I. trading floor II. computer network III. specialist system IV. multiple market makers
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68. |
Which one of the following statements concerning NASDAQ is correct?
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69. |
The orders displayed on NASDAQ are placed by:
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70. |
Stocks which are listed on the NYSE can:
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71. |
The stocks listed on the Pink Sheets:
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72. |
Which of the following are common characteristic of the OTCBB market? I. low stock prices II. dual listings with NASDAQ III. high percentage price changes IV. thinly traded securities
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73. |
The DJIA is an index of the stock prices of _____ firms.
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74. |
Stock market indexes:
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75. |
Which one of the following is the primary flaw of a price-weighted index?
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76. |
Which one of the following statements related to stock indexes is correct?
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77. |
Alco Metals just sold 2.5 million shares through an IPO offering. The shares were offered at $25.50 a share and all shares were sold. The firm received a total of $67,250,000 for this issue. What was the spread?
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78. |
Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold?
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79. |
In a recent IPO, the Sausage Co. offered 1.4 million shares of stock at an offer price of $16 a share. The underwriting was conducted on a best efforts basis with a spread of 7.0 percent. The Sausage Co. received a total of $20,079,868.00 in sale proceeds. How many shares were sold?
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80. |
A best efforts IPO underwriting consisted of 2.2 million shares at an offer price of $17 a share. The underwriter's fee was set at 6.65 percent. How many shares were sold if the issuer received $31,926,260.10?
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81. |
ML Underwriters paid an issuer $37,694,528 as IPO proceeds. The IPO offered 1.86 million shares of which 1.835 million were sold at an offer price of $21.85 a share. The underwriting spread was 7.25 percent. What type of underwriting was this?
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82. |
DT Metals is offering 700 shares in a Dutch auction IPO. The following bids have been received:
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83. |
Cee The Moon is offering 700 shares in a Dutch auction IPO. The following bids have been received:
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84. |
Mason Materials is offering 800 shares in a Dutch auction IPO. The following bids have been received:
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85. |
Juno Markets is offering 900 shares in a Dutch auction IPO. The following bids have been received:
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86. |
An index consists of the following securities and has an index divisor of 3.0. What is the price-weighted index return?
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87. |
An index consists of the following securities and has an index divisor of 3.0. What is the price-weighted index return?
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88. |
An index consists of the following securities and has an index divisor of 3.0. What is the price-weighted index return?
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89. |
An index consists of the following securities and has an index divisor of 2.0. What is the price-weighted index return?
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90. |
A price-weighted index consists of stocks A, B, and C which are priced at $38, $21, and $26 a share, respectively. The current index divisor is 2.7. What will the new index divisor be if stock B undergoes a 3-for-1 stock split?
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91. |
A price-weighted index consists of stocks A, B, and C which are priced at $50, $35, and $15 a share, respectively. The current index divisor is 2.75. What will the new index advisor be if stock A undergoes a 5-for-1 stock split?
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92. |
A price-weighted index consists of stocks A, B, and C which are priced at $27, $11, and $18 a share, respectively. The current index divisor is 2.24. If stock B undergoes a 1-for-3 reverse stock split, the new index divisor will be:
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93. |
An index consists of the following securities. What is the value-weighted index return?
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94. |
An index consists of the following securities. What is the value-weighted index return?
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95. |
An index consists of the following securities. What is the value-weighted index return?
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96. |
You have the following information:
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97. |
You have the following information:
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98. |
An index has a market value of $689,400 at the beginning of the period and $722,009 at the end of the period. If you want the beginning index value to be 100, what is the ending index value?
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99. |
Assume the DJIA closed at 15,150 last night. The divisor is 0.123017848. Assume that 29 of the stocks in the index were unchanged today. One stock increased in value from $44.80 a share yesterday to $47.90 a share today. What is the DJIA index value at the close of trading today?
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100. |
Yesterday, the DJIA closed at 12,309.16. The divisor is 0.123017848. Today, every one of the stocks in the index increased in value by $0.40 a share. What is the value of today's closing DJIA?
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101. |
An order book displays the following information:
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102. |
An order book displays the following information:
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Essay Questions
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103. |
Describe some of the recent changes in the structure and operations of the NYSE.
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104. |
Describe the primary advantage and disadvantage of a limit sell order.
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Chapter 05 The Stock Market Answer Key
Multiple Choice Questions
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1. |
High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Primary Market |
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2. |
Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Secondary Market |
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3. |
Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Initial Public Offering |
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4. |
A firm that specializes in arranging financing for companies is called a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Investment Banking Firm |
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5. |
The process of purchasing newly issued shares from the issuer and reselling those shares to the general public is called:
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Underwriting |
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6. |
The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______".
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Venture Capital |
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7. |
Marco Painting Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Seasoned Equity Offering |
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8. |
Under the provisions of a general cash offer, shares of stock are offered to:
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: General Cash Offer |
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9. |
A public offering of securities which are offered first to current shareholders is called a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Rights Offer |
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10. |
The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Spread |
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11. |
When a group of underwriters jointly work together to sell a new issue of securities, the underwriters form a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Syndicate |
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12. |
When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Firm Commitment Underwriting |
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13. |
When the issuer assumes the risk for any shares the underwriters cannot sell, the underwriting is known as a _____ underwriting.
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Best Efforts Underwriting |
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14. |
When the price of newly issued shares is determined by competitive bidding the underwriting is known as a _____ underwriting.
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dutch Auction Underwriting |
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15. |
Which one of the following is the federal agency which regulates the financial markets in the U.S.?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Securities and Exchange Commission (Sec) |
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16. |
The document that must be prepared in order to receive approval for a stock offering is called a:
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Prospectus |
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17. |
A preliminary document provided to investors who are interested in a stock offering is called a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Red Herring |
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18. |
A securities dealer is a(n):
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dealer |
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19. |
Which one of the following best describes a broker?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Broker |
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20. |
Which one of the following prices will an individual investor receive if he or she sells shares of Microsoft?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Bid Price |
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21. |
Which one of the following prices will an investor pay to purchase shares of stock that are currently outstanding?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Ask Price |
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22. |
The profit a dealer makes on a purchase and resale of shares of stock is called the:
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Spread |
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23. |
A private equity fund: I. is set up as a limited partnership II. usually use a 2/20 fee structure III. place no constraints on manager compensation IV. typically have a stated life of 7 to 10 years
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Private Equity Fund |
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24. |
Which of the following is correct regarding the compensation paid to private equity fund managers?
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Private Equity Fund |
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25. |
An owner of a trading license on the NYSE is called a:
See Section 5.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Nyse Member |
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26. |
An NYSE Supplemental Liquidity Provider: I. can trade the same stocks as designated market makers II. can trade only from offices outside the exchange III. must quote bid or ask quotes a certain % of the day IV. are paid 30 cents per 100 shares traded
See Section 5.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Supplemental Liquidity Provider |
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27. |
The party who serves as a dealer for a few securities on an exchange floor and is obligated to maintain an orderly market for those securities is called a:
See Section 5.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Specialist |
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28. |
A trading floor broker:
See Section 5.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Floor Broker |
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29. |
The NYSE's Super Display Book is an electronic system which:
See Section 5.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Sdbk |
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30. |
A NYSE member who trades only for his or her own account is called a(n):
See Section 5.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Floor Trader |
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31. |
The location on an exchange floor where a particular security trades is called a(n):
See Section 5.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Specialist's Post |
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32. |
You want to sell shares of stock at the current price. Which type of order should you place?
See Section 5.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Market Order |
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33. |
An order to buy shares of stock at a stated price or less is called a _____ order.
See Section 5.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Limit Order |
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34. |
An order to sell that involves a preset trigger point is called a _____ order.
See Section 5.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Stop Order |
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35. |
A market centered on dealers buying and selling for their own inventories is called a(n):
See Section 5.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Otc Market |
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36. |
Which one of the following describes an ECN?
See Section 5.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Ecn |
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37. |
Inside quotes are the:
See Section 5.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Inside Quotes |
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38. |
The off-exchange market in which exchange-listed securities trade is referred to as the _____ market.
See Section 5.5 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.5 Topic: Third Market |
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39. |
The market where individual investors directly trade exchange-listed securities with other individual investors is referred to as the _____ market.
See Section 5.5 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.5 Topic: Fourth Market |
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40. |
Which of the following types of indexes is a stock market index in which stocks are held in proportion to their share price?
See Section 5.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Price-Weighted Index |
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41. |
When stocks are held in an index in proportion to their total company market value, the index is:
See Section 5.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Value-Weighted Index |
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42. |
An index is valued on a daily basis. However, some stocks in this particular index have not traded recently. As a result, this index suffers from index:
See Section 5.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Index Staleness |
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43. |
Which one of the following statements concerning the NYSE is correct?
See Section Introduction |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: introduction Topic: Nyse Euronext |
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44. |
Which of the following are common sources of venture capital? I. private individuals II. NASDAQ III. university endowment funds IV. insurance companies
See Section 5.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Venture Capital |
|
45. |
Which one of the following statements concerning venture capital is correct?
See Section 5.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 2 Medium Section: 5.1 Topic: Venture Capital |
|
46. |
How long is the "lock-up" period that is commonly found in an IPO underwriting contract?
See Section 5.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Lock-Up Period |
|
47. |
Which one of the following can be assumed when the SEC approves an IPO registration?
See Section 5.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Sec Registration |
|
48. |
Which one of the following transactions occurs in the primary market?
See Section 5.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Primary Market |
|
49. |
Trevor currently owns 545,000 shares of ABC stock. He will sell those shares for $17.10 a share. He is also willing to purchase additional shares for $17.07 a share. Trevor is a securities:
See Section 5.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dealer |
|
50. |
Anna is an individual investor. She purchases shares at the _____ price and sells at the _____ price.
See Section 5.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Ask Price |
|
51. |
What is the current structure of the NYSE?
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Nyse |
|
52. |
In 2007, NYSE Holdings merged with which one of the following?
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Nyse |
|
53. |
In order to currently trade on the floor of the NYSE, members must:
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Nyse |
|
54. |
Which one of the following has the greatest duty to provide liquidity to the financial market?
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Specialist |
|
55. |
The SuperDOT system has lessened the role of which one of the following?
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Superdot |
|
56. |
Which one of the following statements related to the NYSE Hybrid market is correct?
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.2 Topic: Nyse Hybrid |
|
57. |
To be listed on the NYSE, a firm must have at least:
See Section 5.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 2 Medium Section: 5.2 Topic: Nyse Listing |
|
58. |
Lucas wants to sell 9,000 shares of stock and places a market order. The floor broker is unable to arrange the sale with another floor broker so the specialist agrees to "stop" the stock. What has the specialist agreed to do?
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Specialist "Stop" |
|
59. |
The duties of a specialist include which of the following? I. maintain an orderly market II. offer a higher bid price than the floor brokers III. provide liquidity to the market IV. purchase all shares offered as limit sells
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Specialist |
|
60. |
Faith placed an order to sell 7,500 shares of stock she currently owned. As soon as the order reached the trading floor, the shares were immediately sold. Which type of order did Faith place?
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Market Order |
|
61. |
Steve placed a limit order to sell 500 shares of stock at $14 a share. Which of the following does Steve know for sure? I. His order will execute but the time of execution is unknown. II. His order may never execute. III. He will receive exactly $7,000 if his order executes. IV. He could receive more, but not less, than $14 a share.
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Limit Order |
|
62. |
Kelly wants to sell 600 shares of DeLux stock at the going market price after the stock reaches $42 a share. Which type of order should she place?
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Stop Order |
|
63. |
After the trigger point is reached, a stop-loss order will be executed at the:
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Stop Order |
|
64. |
Which one of the following orders is frequently used as a means to limit losses resulting from a short sale?
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Stop-Buy Order |
|
65. |
Marcus just placed a stop limit order to sell 100 shares at $21 stop, $18 limit. Which one of the following statements is correct concerning this order if the current market price is $16?
See Section 5.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Stop-Limit Order |
|
66. |
NASDAQ dealers post which one of the following in addition to their bid and ask prices?
See Section 5.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Nasdaq |
|
67. |
NASDAQ has which of the following characteristics? I. trading floor II. computer network III. specialist system IV. multiple market makers
See Section 5.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Nasdaq |
|
68. |
Which one of the following statements concerning NASDAQ is correct?
See Section 5.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Nasdaq |
|
69. |
The orders displayed on NASDAQ are placed by:
See Section 5.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Nasdaq |
|
70. |
Stocks which are listed on the NYSE can:
See Section 5.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.5 Topic: Dual Listings |
|
71. |
The stocks listed on the Pink Sheets:
See Section 5.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.4 Topic: Pink Sheets |
|
72. |
Which of the following are common characteristic of the OTCBB market? I. low stock prices II. dual listings with NASDAQ III. high percentage price changes IV. thinly traded securities
See Section 5.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.4 Topic: OTCBB |
|
73. |
The DJIA is an index of the stock prices of _____ firms.
See Section 5.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Djia |
|
74. |
Stock market indexes:
See Section 5.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Market Indexes |
|
75. |
Which one of the following is the primary flaw of a price-weighted index?
See Section 5.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Price-Weighted Index |
|
76. |
Which one of the following statements related to stock indexes is correct?
See Section 5.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 1 Easy Section: 5.6 Topic: Stock Indexes |
|
77. |
Alco Metals just sold 2.5 million shares through an IPO offering. The shares were offered at $25.50 a share and all shares were sold. The firm received a total of $67,250,000 for this issue. What was the spread?
Spread = [$67,250,000/($25.50 × 2,500,000)] - 1 = 5.49 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Spread |
|
78. |
Reliant Underwriters has agreed to a firm commitment underwriting in which they will pay $36.75 million in exchange for 3 million shares of stock for an IPO offering. The offering price is expected to be $13.50 a share. How much will the underwriters earn if all of the shares can be sold?
Underwriting fees = ($13.50 × 3,000,000) - $36,750,000 = $3.75 million |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Spread |
|
79. |
In a recent IPO, the Sausage Co. offered 1.4 million shares of stock at an offer price of $16 a share. The underwriting was conducted on a best efforts basis with a spread of 7.0 percent. The Sausage Co. received a total of $20,079,868.00 in sale proceeds. How many shares were sold?
Number of shares = [$20,079,868/(1 - .07)]/$16 = 1,349,453 shares |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Best Efforts |
|
80. |
A best efforts IPO underwriting consisted of 2.2 million shares at an offer price of $17 a share. The underwriter's fee was set at 6.65 percent. How many shares were sold if the issuer received $31,926,260.10?
Number of shares = [$31,926,260.10/(1 - .0665)]/$17 = 2,011,800 shares |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Best Efforts |
|
81. |
ML Underwriters paid an issuer $37,694,528 as IPO proceeds. The IPO offered 1.86 million shares of which 1.835 million were sold at an offer price of $21.85 a share. The underwriting spread was 7.25 percent. What type of underwriting was this?
Number of shares = [$37,694,528/(1 - .0725)]/$21.85 = 1,860,000 shares. This was a firm commitment underwriting since the issuer was paid for all of the shares, even though the underwriter did not sell the entire issue. |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Firm Commitment |
|
82. |
DT Metals is offering 700 shares in a Dutch auction IPO. The following bids have been received:
Proceeds = 700 × $21 = $14,700 |
|
Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dutch auction |
|
83. |
Cee The Moon is offering 700 shares in a Dutch auction IPO. The following bids have been received:
(700 × $17) × (1 - .055) = $11,245.50 |
|
Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dutch auction |
|
84. |
Mason Materials is offering 800 shares in a Dutch auction IPO. The following bids have been received:
Allocation = 200 × [800/(200 + 300 + 100 + 500)] = 145 shares |
|
Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dutch auction |
|
85. |
Juno Markets is offering 900 shares in a Dutch auction IPO. The following bids have been received:
Cost = 300 × [900/(100 + 300 + 400 + 200)] × $15 = $4,050 |
|
Blooms: Apply Learning Objective: 05-01 The differences between private and public equity; and primary and secondary stock markets. Level of Difficulty: 1 Easy Section: 5.1 Topic: Dutch auction |
|
86. |
An index consists of the following securities and has an index divisor of 3.0. What is the price-weighted index return?
Price-weighted index = {[($19 + $11 + $33)/3] - [($17 + $14 + $26)/3]}/[($17 + $14 + $26)/3] = 10.53 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Index |
|
87. |
An index consists of the following securities and has an index divisor of 3.0. What is the price-weighted index return?
Price-weighted index = {[($32 + $28 + $22)/3] - [($26 + $30 + $19)/3]}/[($26 + $30 + $19)/3] = 9.33 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Index |
|
88. |
An index consists of the following securities and has an index divisor of 3.0. What is the price-weighted index return?
Price-weighted index = {[($16 + $61 + $38)/3] - [($21 + $49 + $37)/3]}/[($21 + $49 + $37)/3] = 7.48 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Index |
|
89. |
An index consists of the following securities and has an index divisor of 2.0. What is the price-weighted index return?
Price-weighted index = {[($51 + $36)/2] - [($55 + $32)/2]}/[($55 + $32)/2] = 0 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Index |
|
90. |
A price-weighted index consists of stocks A, B, and C which are priced at $38, $21, and $26 a share, respectively. The current index divisor is 2.7. What will the new index divisor be if stock B undergoes a 3-for-1 stock split?
[38 + (21/3) + 26]/x = (38 + 21 + 26)/2.7; x = 2.2553 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Divisor |
|
91. |
A price-weighted index consists of stocks A, B, and C which are priced at $50, $35, and $15 a share, respectively. The current index divisor is 2.75. What will the new index advisor be if stock A undergoes a 5-for-1 stock split?
[(50/5) + 35 + 15]/x = (50 + 35 + 15)/2.75; x = 1.65 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Divisor |
|
92. |
A price-weighted index consists of stocks A, B, and C which are priced at $27, $11, and $18 a share, respectively. The current index divisor is 2.24. If stock B undergoes a 1-for-3 reverse stock split, the new index divisor will be:
[27 + (11 × 3) + 18]/x = [(27 + 11 + 18)/2.24]; x = 3.12 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Price-Weighted Divisor |
|
93. |
An index consists of the following securities. What is the value-weighted index return?
Beginning value = (5,000 × 20) + (2,000 × 38) = 176,000 Ending value = (5,000 × 28) + (2,000 × 40) = 220,000 Return = (220,000 - 176,000)/176,000 = 25.00 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Value-Weighted Index |
|
94. |
An index consists of the following securities. What is the value-weighted index return?
Beginning value = (1,000 × 32) + (4,000 × 22) + (6,000 × 57) = 462,000 Ending value = (1,000 × 38) + (4,000 × 23) + (6,000 × 55) = 460,000 Return = (460,000 - 462,000)/462,000 = -0.43 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Value-Weighted Index |
|
95. |
An index consists of the following securities. What is the value-weighted index return?
Beginning value = (3,000 × 18) + (8,000 × 12) + (4,000 × 32) = 278,000 Ending value = (3,000 × 26) + (8,000 × 10) + (4,000 × 37) = 306,000 Return = (306,000 - 278,000)/278,000 = 10.07 percent |
|
Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Value-Weighted Index |
|
96. |
You have the following information:
Beginning price-weighted index = [(35 + 22)/(35 + 22)] × 100 = 100 Ending price-weighted index = [(38 + 23)/(35 + 22)] × 100 = 107.02 |
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Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Reindexing |
|
97. |
You have the following information:
Beginning price-weighted index = [(15 + 31)/(15 + 31)] × 500 = 500 Ending price-weighted index = [(18 + 35)/(15 + 31)] × 500 = 576.09 |
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Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Reindexing |
|
98. |
An index has a market value of $689,400 at the beginning of the period and $722,009 at the end of the period. If you want the beginning index value to be 100, what is the ending index value?
Beginning value-weighted index = (689,400/689,400) × 100 = 100 Ending value-weighted index = (722,009/689,400) × 100 = 104.73 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Reindexing |
|
99. |
Assume the DJIA closed at 15,150 last night. The divisor is 0.123017848. Assume that 29 of the stocks in the index were unchanged today. One stock increased in value from $44.80 a share yesterday to $47.90 a share today. What is the DJIA index value at the close of trading today?
Old SP = 15,150 × 0.123017848 = 1,863.72 New SP = 1,863.72 + (47.90 - 44.80) = 1,866.82 New DJIA = 1,866.82.22/0.123017848 = 15,175.20 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Djia |
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100. |
Yesterday, the DJIA closed at 12,309.16. The divisor is 0.123017848. Today, every one of the stocks in the index increased in value by $0.40 a share. What is the value of today's closing DJIA?
Old SP = 12,309.16 × 0.123017848 = 1,514.25 New SP = 1,514.25 + (.40 × 30) = 1,526.25 New DJIA = 1,526.25/0.123017848 = 12,407 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 05-04 How to calculate index returns. Level of Difficulty: 2 Medium Section: 5.6 Topic: Djia |
|
101. |
An order book displays the following information:
You will pay the lowest selling price, which is $18.17. |
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Blooms: Apply Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Order Book |
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102. |
An order book displays the following information:
You will receive the highest buying price, which is $18.07. |
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Blooms: Apply Learning Objective: 05-03 How NASDAQ operates. Level of Difficulty: 1 Easy Section: 5.4 Topic: Order Book |
Essay Questions
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103. |
Describe some of the recent changes in the structure and operations of the NYSE. Answer will vary Feedback: The NYSE has gone from a not-for-profit entity to its current for-profit structure as NYSE Euronext. Its operations are changing from a trading floor based specialist system to a hybrid system. The hybrid system is based more on an automated trading platform, allowing the majority of orders to be executed electronically. NYSE's historic specialist system has been replaced by a system based on designated market makers (DMMs). DMMs are still required to maintain a fair and orderly market but they do not face the same restrictions on trading previously imposed on specialists. DMMs can compete against other exchange members for trades but no longer receive advance notice of incoming orders. DMMs are complemented by a newly created class of market maker called a supplemental liquidity provider. (SLP). SLP's are allowed to trade only from outside the exchange and face less stringent quoting requirements than DMMs but receive lower compensation. |
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Blooms: Understand Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 2 Medium Section: 5.2 Topic: Nyse Changes |
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104. |
Describe the primary advantage and disadvantage of a limit sell order. Answer will vary Feedback: A limit sell order guarantees that a security will be sold for no less than the limit price, which is considered an advantage. The disadvantage is that the order may not execute. This is particularly disadvantageous if the stock price is rapidly deteriorating. |
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Blooms: Understand Learning Objective: 05-02 The workings of the New York Stock Exchange. Level of Difficulty: 1 Easy Section: 5.3 Topic: Limit Order |
Chapter 06
Common Stock Valuation
Multiple Choice Questions
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1. |
Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information?
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2. |
The method of valuing a stock based on the present value of the future income derived from that stock is called:
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3. |
The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.
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4. |
How is a sustainable dividend growth rate defined?
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5. |
The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts?
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6. |
What is the percentage of a firm's earnings that is distributed to shareholders called?
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7. |
What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?
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8. |
The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model.
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9. |
What is beta?
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10. |
What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called?
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11. |
The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows III. requires that a firm pay a dividend IV. directly estimates a value for a firm's equity
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12. |
What is the market value of a share of stock divided by the net income per share called?
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13. |
The net income per share divided by the market price per share is called the:
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14. |
Growth stocks are frequently described as having which one of the following characteristics?
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15. |
The price-book ratio is computed as the market value per share divided by the per share book value of:
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16. |
A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios?
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17. |
An analysis of which of the following are commonly included as part of fundamental analysis? I. sales II. book value III. earnings per share IV. cash flow
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18. |
Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? I. amount of the next dividend II. dividend growth rate III. discount rate
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19. |
The dividend discount model assumes that:
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20. |
The constant perpetual growth model assumes the:
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21. |
The constant perpetual growth model is applicable primarily to those firms which:
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22. |
Which one of the following is a correct formula for computing a geometric average dividend growth rate?
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23. |
The arithmetic average dividend growth rate is:
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24. |
The retention ratio is the:
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25. |
An increase in the retention ratio will:
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26. |
A decrease in which one of the following will increase a firm's sustainable rate of growth?
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27. |
The sustainable growth rate is equal to:
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28. |
Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock?
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29. |
Which one of the following is a requirement of the two-stage dividend growth model?
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30. |
Which one of the following statements concerning beta is correct?
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31. |
Which one of the following is correct concerning the two-stage dividend growth model?
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32. |
How will the price of a stock be affected if the dividend growth rate is decreased?
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33. |
Which one of the following will increase the current residual income of a firm?
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34. |
Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?
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35. |
Which of the following have the same meaning as the term "economic value added"? I. abnormal earnings II. residual income III. value created by a firm in period t IV. EPSt - Bt-1 × k
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36. |
Which one of the following correctly expresses the clean surplus relationship?
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37. |
Which one of the following statements related to the price-earnings (P/E) ratio is correct?
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38. |
Which one of the following is used as an indicator that a firm has good-quality earnings?
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39. |
Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?
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40. |
The price-sales ratio helps measure the ability of a firm to generate:
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41. |
You would like to know the value of a firm's equity today in relation to the cost of that equity. Which one of the following ratios will provide you with this information?
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42. |
PT Boats plans to pay a $2.25 a share dividend at the end of each of the next 2 years. At the end of year 3, it will pay a final liquidating dividend of $15 a share. After that, the company plans to close its doors permanently. What is the current value of this stock at a discount rate of 15 percent?
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43. |
Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now. Two years from now, the company expects to pay a $28 a share liquidating dividend. After that, the company will cease operations. What is the current value per share at a discount rate of 12.5 percent?
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44. |
Lakeside Sheet Metal is downsizing and plans on completely closing 3 years from now. The firm's liquidation plan calls for annual dividends of $3, $6, and $36 over the next 3 years, respectively. What is the current value of this stock given a discount rate of 14 percent?
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45. |
Barn Wood Interiors announced today that it is going out of business. As of today, no more regular dividends will be paid. The firm will, however, pay two liquidating dividends. The first will be paid one year from now in the amount of $14 a share. The second and final payment will be paid two years from now at an estimated $38 a share. What is the value of this stock today at a discount rate of 18.7 percent?
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46. |
Blue Water Tours just paid an annual dividend of $0.80 a share. The firm has a policy of increasing the dividend by 3.5 percent annually. What is the current value of this stock at a discount rate of 11.5 percent?
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47. |
Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return?
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48. |
The Fish House increases its dividend each year. The next annual dividend is expected to be $2.32 a share. Future dividends will increase by 4.0 percent annually. What is the current value of this stock if the discount rate is 12 percent?
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49. |
Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually. The discount rate is 15 percent. What will the value of this stock be 5 years from today?
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50. |
Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year. The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount. The discount rate is 10 percent. What will the value of this stock be four years from now?
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51. |
The Back Room just paid an annual dividend of $1.65 a share. The firm expects to pay dividends forever and to increase the dividend by 3 percent annually. What is the expected value of this stock five years from now if the discount rate is 14 percent?
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52. |
Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year. The company is slowly downsizing and is decreasing its dividend by 3 percent annually. What is the current value of this stock at a discount rate of 8 percent?
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53. |
You are considering buying shares of stock in the Steel Mill. The forecast for the firm is steady growth over the next decade. The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely. You require a 12.5 percent return on this type of security. What is your estimate of the value of this stock ten years from now?
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54. |
DT Industries stock is valued at $10.40 a share. The firm pays annual dividends at an increasing rate of 2.5 percent annually. Next year's dividend will be $1.05 per share. What is the required return on this stock?
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55. |
Wholesale Foods common stock is valued at $11.05 per share. The firm pays annual dividends which increase at a constant rate. The last dividend paid was $1.20. The required return is 12 percent. What is the dividend growth rate?
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56. |
A stock sells for $12.36 a share and has a required return of 9 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid?
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57. |
Factory Stores pays annual dividends and increases those dividends by 2 percent each year. The stock is currently valued at $12 a share and has a required return of 16 percent. You own 400 shares of this stock. What is the total amount of dividend income you should expect to receive next year?
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58. |
The common stock of JL Recyclers has a required return of 12 percent and a current value of $18.72. The company pays its dividend annually and increases the amount by 4 percent each year. You own 300 shares of this stock. What was the total amount of the last dividend you received?
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59. |
The Rug Barn has paid annual dividends of $1.30, $1.36, $1.40, $1.42, and $1.45 over the last 5 years, respectively. What is the geometric average dividend growth rate?
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60. |
A firm has paid annual dividends of $1.32, $1.43, $1.55, $1.62, $1.64, and $1.70 per share over the past 6 years, respectively. What is the geometric average growth rate for these dividends?
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61. |
Over the past 5 years, DL Insulation has paid annual dividends of $1.40, $1.55, $1.70, $1.73, and $1.77 per share. What is the geometric average dividend growth rate for this period?
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62. |
The Brown Jug has paid annual dividends of $0.61, $0.64, $0.71, $0.82, and $0.88 per share over the past 5 years, respectively. What is the geometric average dividend growth rate for this period?
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63. |
Dennison Mfg. pays annual dividends. For the past six years, the firm has paid dividends of $1.10, $1.12, $1.25, $1.28, $1.30, and $1.40, respectively. What is the geometric average dividend growth rate for this time period?
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64. |
Over the past 4 years, a local firm has paid annual dividends of $1.52, $1.55, $1.60, and $1.68. What is the arithmetic average dividend growth rate?
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65. |
Blue Water Tours has paid annual dividends of $2.10, $2.12, $2.15, $2.15, and $2.22 over the past 5 years, respectively. What is the arithmetic average growth rate for these dividends?
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66. |
Knit ‘n Needle started paying dividends 4 years ago. The annual dividends thus far have been $0.25, $0.27, $0.30, and $0.33, respectively. What is the arithmetic average dividend growth rate?
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67. |
Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock outstanding. The dividend for this year is $0.61 per share. What is the retention ratio?
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68. |
Detroit Imports has a dividend payout ratio of 40 percent and annual dividends of $2.60 per share. What is the retention ratio?
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69. |
Home Interiors has net income of $248,000. The firm has decided to pay $160,000 of that income out to the shareholders. What is the firm's retention ratio?
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70. |
Art Supplies has a net income of $138,600. The firm has $1.25 million in assets and $500,000 in liabilities. What is the return on equity?
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71. |
Oak Supply has earnings per share of $1.22. The firm has $840,000 in equity and 60,000 shares of stock outstanding. What is the return on equity?
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72. |
Wilderness Adventures has earnings per share of $2.45 and dividends per share of $1.05. The total equity of the firm is $850,000. There are 40,000 shares of stock outstanding. What is the sustainable rate of growth?
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73. |
The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share. The book value per share is $12.08. The firm has earnings per share of $1.86 and a dividend payout ratio of .40. What is the firm's sustainable rate of growth?
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74. |
Wilkinson and Daughters has net income of $415,400, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $270,000 in dividends. What is the firm's sustainable rate of growth?
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75. |
The Potato Patch has a retention ratio of .80, dividends of $52,000, and total equity of $3.3 million. What is the firm's sustainable rate of growth?
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76. |
Southern Foods just paid an annual dividend of $1.10 a share. Management estimates the dividend will increase by 10 percent a year for the next four years. After that, the annual dividend growth rate is estimated at 3.2 percent. The required rate of return is 12 percent. What is the value of this stock today?
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77. |
The common stock of A.G. Tailor has a required return of 16 percent. The latest press release stated that last year's dividend was $0.90 per share and that future dividends will increase by 15 percent for the following 3 years. After that, the dividend growth rate will be 3 percent indefinitely. What is one share of this stock worth to you today?
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78. |
Mountain Top Nursery is a relatively young firm which just paid its first annual dividend of $0.30 a share. Management projects dividend increases of 15 percent per year for five years followed by a constant growth rate of 3.0 percent annually. What is this stock worth today if the applicable discount rate is 12.5 percent?
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79. |
The last dividend paid by New Technologies was an annual dividend of $1.40 a share. Dividends for the next 3 years will be increased at an annual rate of 8 percent. After that, dividends are expected to increase by 3 percent each year. The discount rate is 16 percent. What is the current value of this stock?
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80. |
Ultra Fine Furnishings is in the process of selling its peripheral businesses and focusing on its upscale clients. In conjunction with this reorganization, the dividend will be decreased by 10 percent for the next three years. After that, the dividend will resume increasing at an annual rate of 5 percent. The required return on this stock is 14 percent and the last dividend paid was $2.40 a share. What is one share of this stock worth today?
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81. |
Periscope Adventures last annual dividend was $0.63 a share. The firm will increase the dividend by 7 percent for the next 4 years and thereafter increase the dividend by 4 percent annually. What is this stock worth today if the required return is 11 percent?
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82. |
Newcomer Mills is a relatively new firm which will retain all of its earnings for the next four years. Four years from now, the firm expects to pay its first dividend of $0.25 a share. After that, it intends to increase the dividend by 4 percent annually. What is the value of this stock today at a discount rate of 12 percent?
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83. |
Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 percent annually. What is the current value of this stock if the applicable discount rate is 13.5 percent?
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84. |
Quality Home Made Ice Cream has plans to pay decreasing annual dividends of $1.50, $1.25, and $1.00 over the next three years, respectively. After that, the firm will increase the dividend by 4 percent each year. What is the value of this stock today at a discount rate of 9 percent?
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85. |
The Shoe Box will not pay a dividend for the next two years. The following two years, it will pay annual dividends of $1 per share. Starting in year 5, the dividends will increase by 4 percent annually. The discount rate is 8 percent. What is the value of this stock today?
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86. |
The current book value per share of B.L. Black & Sons is $5.35 and the required return on the stock is 15.5 percent. The firm expects earnings per share of $2.25 next year with annual earnings growth of 4.5 percent. What is the current market value of this stock?
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87. |
The Diamond Outlet has current earnings per share of $1.96 and an expected earnings growth rate of 2.2 percent. The required return on the stock is 13 percent and the current book value per share is $12.70. What is the current market value of this stock?
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88. |
Leslie Apparel has a current book value per share of $5.15 and current earnings per share of $1.13. The required return is 14 percent and the expected earnings growth rate is 4.5 percent. What is one share of this stock worth today?
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89. |
A firm has a current book value per share of $21.10 and a market price per share of $37.57. Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is 2.5 percent. What is the required rate of return on this stock?
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90. |
Lambert Corporation reported net income of $60 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 4.5% for the foreseeable future. Lambert faces a 40% tax rate and has a 0.45 debt to equity ratio with $185 million (market value) in debt outstanding. Lambert's equity beta is 1.25, the risk-free rate is currently 5% and the market risk premium is estimated to be 6.5%. What is the current total value of Lambert's equity (in millions)?
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91. |
Beach & Company reported net income of $40 million for last year. Depreciation expense totaled $18 million and capital expenditures came to $8 million. Free cash flow is expected to grow at a rate of 5% for the foreseeable future. Beach faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Beach's equity beta is 1.25, the risk-free rate is currently 4.5% and the market risk premium is estimated to be 8.0%. What is the current total value of Beach & Company (in millions)?
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92. |
McKenzie, Inc. reported net income of $8.5 million for last year. Depreciation expense totaled $5 million and capital expenditures came to $2 million. Free cash flow is expected to grow at a rate of 2.5% for the foreseeable future. McKenzie faces a 40% tax rate and has a 0.50 debt to equity ratio with $20 million (market value) in debt outstanding. McKenzie's equity beta is 1.4, the risk- free rate is currently 5% and the market risk premium is estimated to be 7.5%. McKenzie has 10 million shares of common stock outstanding. What is the current value of a share of McKenzie stock?
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93. |
Stuart, Inc. reported net income of $20 million for last year. Depreciation expense totaled $15 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 6% for the foreseeable future. Stuart faces a 40% tax rate and has a 0.30 debt to equity ratio with $75 million (market value) in debt outstanding. Stuart's equity beta is 1.1, the risk-free rate is currently 6% and the market risk premium is estimated to be 8.0%. What is the current value (in millions) of Stuart's equity?
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94. |
A firm has net income of $198,500 and total equity of 1.15 million. There are 220,000 shares of stock outstanding at a price per share of $14.80. What is the firm's price-earnings ratio?
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95. |
L.B. Jay has net income of $38,000, total assets of $437,000, total liabilities of $208,000, and a price-book ratio of 3.8. There are 60,000 shares of stock outstanding. What is the firm's price-earnings ratio?
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96. |
Miller's Farm has 120,000 shares of stock outstanding, sales of $850,000, and net income of $55,000. Financial analysts believe the price-earnings ratio for this firm should be 15.8. Given this information, what should be the current stock price?
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97. |
Electronics Galore has historically had a P/E ratio of 23.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $1.68. These earnings are expected to increase by 4.2 percent next year. What is the expected price of this stock one year from now?
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98. |
Historically, Jones Trucking has had a P/E ratio of 14.6. The firm has current net income of $92,000 with 85,000 shares of stock outstanding. The EPS growth rate is 4.5 percent. What is the expected price of this stock one year from now?
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99. |
The Retail Box has an historical P/CF ratio of 21.5. The current CFPS is $1.42 and the projected CFPS growth rate is 5.6 percent. The current EPS is $1.02. What is the expected price of this stock one year from now?
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100. |
The Satellite Shoppe has current sales per share of $8.40. The sales per share are expected to increase at an annual rate of 12 percent. The historical P/E ratio is 16.2 and the historical P/S ratio is 7.6. What is the expected price of this stock one year from now?
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101. |
Currently, Southern Foods has sales of $1.32 million, net profit of $521,400, and 125,000 shares of stock outstanding. The sales and net profit are each expected to grow by 6 percent annually. The historical P/S ratio is 7.8. What is the expected price of this stock one year from now?
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Essay Questions
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102. |
Future stock prices that are estimated using any one of the various price ratios will be based on an assumption related to the ratio. What is that assumption?
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103. |
Identify three causes for a decrease in a firm's sustainable rate of growth.
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104. |
The residual income model for valuing a stock suffers from some of the same estimating errors as the dividend growth model. Identify and explain these estimating errors.
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Chapter 06 Common Stock Valuation Answer Key
Multiple Choice Questions
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1. |
Which one of the following terms is used to identify the evaluation method that determines the value of a stock by reviewing a firm's financial statement in conjunction with other financial and economic information?
See Section 6.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.1 Topic: Fundamental Analysis |
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2. |
The method of valuing a stock based on the present value of the future income derived from that stock is called:
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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3. |
The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth Model |
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4. |
How is a sustainable dividend growth rate defined?
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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5. |
The portion of net income that is held by a firm, for future growth, comprises which one of the following balance sheet accounts?
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retained Earnings |
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6. |
What is the percentage of a firm's earnings that is distributed to shareholders called?
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Payout Ratio |
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7. |
What is the percentage of a firm's net income which is reinvested in the firm to support future growth called?
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retention Ratio |
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8. |
The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model.
See Section 6.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 1 Easy Section: 6.3 Topic: Two-Stage Dividend Growth Model |
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9. |
What is beta?
See Section 6.3 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.3 Topic: Beta |
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10. |
What is the accounting relationship in which earnings per share minus dividends equal the change in book value per share called?
See Section 6.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 1 Easy Section: 6.4 Topic: Clean Surplus Relationship |
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11. |
The Free Cash Flow Model: I. can be used to value a company with negative earnings II. is based on a firm having positive cash flows III. requires that a firm pay a dividend IV. directly estimates a value for a firm's equity
See Section 6.4 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 1 Easy Section: 6.4 Topic: Free Cash Flow Model |
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12. |
What is the market value of a share of stock divided by the net income per share called?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Earnings Ratio |
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13. |
The net income per share divided by the market price per share is called the:
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Earnings Yield |
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14. |
Growth stocks are frequently described as having which one of the following characteristics?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Growth Stocks |
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15. |
The price-book ratio is computed as the market value per share divided by the per share book value of:
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Book Ratio |
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16. |
A firm's current stock price divided by the firm's revenue per share is referred to as which one of the following ratios?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Sales Ratio |
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17. |
An analysis of which of the following are commonly included as part of fundamental analysis? I. sales II. book value III. earnings per share IV. cash flow
See Section 6.1 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.1 Topic: Fundamental Analysis |
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18. |
Based on the dividend discount model, an increase in which of the following will lower the current value of a stock? I. amount of the next dividend II. dividend growth rate III. discount rate
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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19. |
The dividend discount model assumes that:
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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20. |
The constant perpetual growth model assumes the:
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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21. |
The constant perpetual growth model is applicable primarily to those firms which:
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth Model |
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22. |
Which one of the following is a correct formula for computing a geometric average dividend growth rate?
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Geometric Average Growth |
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23. |
The arithmetic average dividend growth rate is:
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Arithmetic Average Growth |
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24. |
The retention ratio is the:
See Section 6.2 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retention Ratio |
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25. |
An increase in the retention ratio will:
See Section 6.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retention Ratio |
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26. |
A decrease in which one of the following will increase a firm's sustainable rate of growth?
See Section 6.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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27. |
The sustainable growth rate is equal to:
See Section 6.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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28. |
Hypo Tech expects its net income to grow at 20 percent a year for the next two years and then taper off to a constant 5 percent annual rate of growth. The firm maintains a constant dividend payout ratio. Which one of the following models is best suited for computing the current value of this firm's stock?
See Section 6.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 1 Easy Section: 6.3 Topic: Two-Stage Dividend Growth Model |
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29. |
Which one of the following is a requirement of the two-stage dividend growth model?
See Section 6.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 1 Easy Section: 6.3 Topic: Two-Stage Dividend Growth Model |
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30. |
Which one of the following statements concerning beta is correct?
See Section 6.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 1 Easy Section: 6.3 Topic: Beta |
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31. |
Which one of the following is correct concerning the two-stage dividend growth model?
See Section 6.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 1 Easy Section: 6.3 Topic: Two-Stage Dividend Growth |
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32. |
How will the price of a stock be affected if the dividend growth rate is decreased?
See Section 6.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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33. |
Which one of the following will increase the current residual income of a firm?
See Section 6.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 1 Easy Section: 6.4 Topic: Residual Income |
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34. |
Which one of the following models can be used to value the stock of a firm that maintains a one hundred percent retention ratio?
See Section 6.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 1 Easy Section: 6.4 Topic: Residual Income Model |
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35. |
Which of the following have the same meaning as the term "economic value added"? I. abnormal earnings II. residual income III. value created by a firm in period t IV. EPSt - Bt-1 × k
See Section 6.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 1 Easy Section: 6.4 Topic: Economic Value Added |
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36. |
Which one of the following correctly expresses the clean surplus relationship?
See Section 6.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 1 Easy Section: 6.4 Topic: Clean Surplus |
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37. |
Which one of the following statements related to the price-earnings (P/E) ratio is correct?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Earnings Ratio |
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38. |
Which one of the following is used as an indicator that a firm has good-quality earnings?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Cash Flow |
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39. |
Which one of the following is the most common definition of cash flow as used in the price-cash flow ratio?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Cash Flow |
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40. |
The price-sales ratio helps measure the ability of a firm to generate:
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Sales Ratio |
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41. |
You would like to know the value of a firm's equity today in relation to the cost of that equity. Which one of the following ratios will provide you with this information?
See Section 6.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Book Ratio |
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42. |
PT Boats plans to pay a $2.25 a share dividend at the end of each of the next 2 years. At the end of year 3, it will pay a final liquidating dividend of $15 a share. After that, the company plans to close its doors permanently. What is the current value of this stock at a discount rate of 15 percent?
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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43. |
Upwind Tours just announced that it will pay an annual dividend of $3.60 a share one year from now. Two years from now, the company expects to pay a $28 a share liquidating dividend. After that, the company will cease operations. What is the current value per share at a discount rate of 12.5 percent?
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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44. |
Lakeside Sheet Metal is downsizing and plans on completely closing 3 years from now. The firm's liquidation plan calls for annual dividends of $3, $6, and $36 over the next 3 years, respectively. What is the current value of this stock given a discount rate of 14 percent?
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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45. |
Barn Wood Interiors announced today that it is going out of business. As of today, no more regular dividends will be paid. The firm will, however, pay two liquidating dividends. The first will be paid one year from now in the amount of $14 a share. The second and final payment will be paid two years from now at an estimated $38 a share. What is the value of this stock today at a discount rate of 18.7 percent?
|
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Dividend Discount Model |
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46. |
Blue Water Tours just paid an annual dividend of $0.80 a share. The firm has a policy of increasing the dividend by 3.5 percent annually. What is the current value of this stock at a discount rate of 11.5 percent?
|
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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47. |
Precision Engineering recently announced that its next annual dividend will be $1.20 per share with later dividends increasing by 2.5 percent annually. What is the current value of this stock to you if you require a 12 percent rate of return?
|
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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48. |
The Fish House increases its dividend each year. The next annual dividend is expected to be $2.32 a share. Future dividends will increase by 4.0 percent annually. What is the current value of this stock if the discount rate is 12 percent?
|
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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49. |
Long Life Floors just paid an annual dividend of $0.82 a share and plans on increasing future dividends by 2 percent annually. The discount rate is 15 percent. What will the value of this stock be 5 years from today?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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50. |
Wilson's Furniture is experiencing good growth so has decided to commence paying dividends starting next year. The first dividend will be $0.50 a share with annual increases of 4 percent in the dividend amount. The discount rate is 10 percent. What will the value of this stock be four years from now?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
|
51. |
The Back Room just paid an annual dividend of $1.65 a share. The firm expects to pay dividends forever and to increase the dividend by 3 percent annually. What is the expected value of this stock five years from now if the discount rate is 14 percent?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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52. |
Main Street Antiques is planning on paying an annual dividend of $2.20 per share next year. The company is slowly downsizing and is decreasing its dividend by 3 percent annually. What is the current value of this stock at a discount rate of 8 percent?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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53. |
You are considering buying shares of stock in the Steel Mill. The forecast for the firm is steady growth over the next decade. The firm just paid its annual dividend of $1.42 per share and has plans to increase that amount by 4 percent annually indefinitely. You require a 12.5 percent return on this type of security. What is your estimate of the value of this stock ten years from now?
|
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Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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54. |
DT Industries stock is valued at $10.40 a share. The firm pays annual dividends at an increasing rate of 2.5 percent annually. Next year's dividend will be $1.05 per share. What is the required return on this stock?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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55. |
Wholesale Foods common stock is valued at $11.05 per share. The firm pays annual dividends which increase at a constant rate. The last dividend paid was $1.20. The required return is 12 percent. What is the dividend growth rate?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
|
56. |
A stock sells for $12.36 a share and has a required return of 9 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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57. |
Factory Stores pays annual dividends and increases those dividends by 2 percent each year. The stock is currently valued at $12 a share and has a required return of 16 percent. You own 400 shares of this stock. What is the total amount of dividend income you should expect to receive next year?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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58. |
The common stock of JL Recyclers has a required return of 12 percent and a current value of $18.72. The company pays its dividend annually and increases the amount by 4 percent each year. You own 300 shares of this stock. What was the total amount of the last dividend you received?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Constant Perpetual Growth |
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59. |
The Rug Barn has paid annual dividends of $1.30, $1.36, $1.40, $1.42, and $1.45 over the last 5 years, respectively. What is the geometric average dividend growth rate?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Geometric Dividend Growth |
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60. |
A firm has paid annual dividends of $1.32, $1.43, $1.55, $1.62, $1.64, and $1.70 per share over the past 6 years, respectively. What is the geometric average growth rate for these dividends?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Geometric Dividend Growth |
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61. |
Over the past 5 years, DL Insulation has paid annual dividends of $1.40, $1.55, $1.70, $1.73, and $1.77 per share. What is the geometric average dividend growth rate for this period?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Geometric Dividend Growth |
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62. |
The Brown Jug has paid annual dividends of $0.61, $0.64, $0.71, $0.82, and $0.88 per share over the past 5 years, respectively. What is the geometric average dividend growth rate for this period?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Geometric Dividend Growth |
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63. |
Dennison Mfg. pays annual dividends. For the past six years, the firm has paid dividends of $1.10, $1.12, $1.25, $1.28, $1.30, and $1.40, respectively. What is the geometric average dividend growth rate for this time period?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Geometric Dividend Growth |
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64. |
Over the past 4 years, a local firm has paid annual dividends of $1.52, $1.55, $1.60, and $1.68. What is the arithmetic average dividend growth rate?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Arithmetic Dividend Growth |
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65. |
Blue Water Tours has paid annual dividends of $2.10, $2.12, $2.15, $2.15, and $2.22 over the past 5 years, respectively. What is the arithmetic average growth rate for these dividends?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Arithmetic Dividend Growth |
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66. |
Knit ‘n Needle started paying dividends 4 years ago. The annual dividends thus far have been $0.25, $0.27, $0.30, and $0.33, respectively. What is the arithmetic average dividend growth rate?
|
|
Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Arithmetic Dividend Growth |
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67. |
Roy's Markets has net income of $164,000. The firm has 200,000 shares of common stock outstanding. The dividend for this year is $0.61 per share. What is the retention ratio?
Retention ratio = [$164,000 - (200,000 × $.61)]/$164,000 = .256 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retention Ratio |
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68. |
Detroit Imports has a dividend payout ratio of 40 percent and annual dividends of $2.60 per share. What is the retention ratio?
Retention ratio = 1 - .40 = .60 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retention Ratio |
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69. |
Home Interiors has net income of $248,000. The firm has decided to pay $160,000 of that income out to the shareholders. What is the firm's retention ratio?
Retention ratio = ($248,000 - $160,000)/$248,000 = .355 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Retention Ratio |
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70. |
Art Supplies has a net income of $138,600. The firm has $1.25 million in assets and $500,000 in liabilities. What is the return on equity?
Return on equity = $138,500/($1,250,000 - $500,000) = 18.48 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Return on Equity |
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71. |
Oak Supply has earnings per share of $1.22. The firm has $840,000 in equity and 60,000 shares of stock outstanding. What is the return on equity?
Return on equity = ($1.22 × 60,000)/$840,000 = 8.71 percent |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Return on Equity |
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72. |
Wilderness Adventures has earnings per share of $2.45 and dividends per share of $1.05. The total equity of the firm is $850,000. There are 40,000 shares of stock outstanding. What is the sustainable rate of growth?
Sustainable growth rate = [($2.45 × 40,000)/$850,000] × [1 - ($1.05/$2.45)] = 6.59 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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73. |
The Grand Isle has 12,000 shares of stock outstanding at a market price of $31.60 per share. The book value per share is $12.08. The firm has earnings per share of $1.86 and a dividend payout ratio of .40. What is the firm's sustainable rate of growth?
Sustainable growth rate = ($1.86/$12.08) × (1 - .40) = 9.24 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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74. |
Wilkinson and Daughters has net income of $415,400, total assets of $2.2 million, and total liabilities of $1.08 million. The company paid $270,000 in dividends. What is the firm's sustainable rate of growth?
Sustainable growth rate = [$415,400/($2.2m - $1.08m)] × [($415,400 - $270,000)/$415,400] = 12.98 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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75. |
The Potato Patch has a retention ratio of .80, dividends of $52,000, and total equity of $3.3 million. What is the firm's sustainable rate of growth?
Sustainable growth rate = {[($52,000/(1 - .80)]/$3.3m} × .80 = 6.30 percent |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 1 Easy Section: 6.2 Topic: Sustainable Growth Rate |
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76. |
Southern Foods just paid an annual dividend of $1.10 a share. Management estimates the dividend will increase by 10 percent a year for the next four years. After that, the annual dividend growth rate is estimated at 3.2 percent. The required rate of return is 12 percent. What is the value of this stock today?
|
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Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Two-Stage Dividend Growth |
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77. |
The common stock of A.G. Tailor has a required return of 16 percent. The latest press release stated that last year's dividend was $0.90 per share and that future dividends will increase by 15 percent for the following 3 years. After that, the dividend growth rate will be 3 percent indefinitely. What is one share of this stock worth to you today?
|
|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Two-Stage Dividend Growth |
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78. |
Mountain Top Nursery is a relatively young firm which just paid its first annual dividend of $0.30 a share. Management projects dividend increases of 15 percent per year for five years followed by a constant growth rate of 3.0 percent annually. What is this stock worth today if the applicable discount rate is 12.5 percent?
|
|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Two-Stage Dividend Growth Model |
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79. |
The last dividend paid by New Technologies was an annual dividend of $1.40 a share. Dividends for the next 3 years will be increased at an annual rate of 8 percent. After that, dividends are expected to increase by 3 percent each year. The discount rate is 16 percent. What is the current value of this stock?
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|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Two-Stage Dividend Growth |
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80. |
Ultra Fine Furnishings is in the process of selling its peripheral businesses and focusing on its upscale clients. In conjunction with this reorganization, the dividend will be decreased by 10 percent for the next three years. After that, the dividend will resume increasing at an annual rate of 5 percent. The required return on this stock is 14 percent and the last dividend paid was $2.40 a share. What is one share of this stock worth today?
|
|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Two-Stage Dividend Growth |
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81. |
Periscope Adventures last annual dividend was $0.63 a share. The firm will increase the dividend by 7 percent for the next 4 years and thereafter increase the dividend by 4 percent annually. What is this stock worth today if the required return is 11 percent?
|
|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Two-Stage Dividend Growth |
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82. |
Newcomer Mills is a relatively new firm which will retain all of its earnings for the next four years. Four years from now, the firm expects to pay its first dividend of $0.25 a share. After that, it intends to increase the dividend by 4 percent annually. What is the value of this stock today at a discount rate of 12 percent?
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Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Nonconstant Growth Stage One |
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83. |
Best Value Outlet recently announced that it intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share over the next four years, respectively. After that, the plan is to increase the dividend by 3.5 percent annually. What is the current value of this stock if the applicable discount rate is 13.5 percent?
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Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Nonconstant Growth Stage One |
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84. |
Quality Home Made Ice Cream has plans to pay decreasing annual dividends of $1.50, $1.25, and $1.00 over the next three years, respectively. After that, the firm will increase the dividend by 4 percent each year. What is the value of this stock today at a discount rate of 9 percent?
|
|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Nonconstant Growth Stage One |
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85. |
The Shoe Box will not pay a dividend for the next two years. The following two years, it will pay annual dividends of $1 per share. Starting in year 5, the dividends will increase by 4 percent annually. The discount rate is 8 percent. What is the value of this stock today?
|
|
Blooms: Apply Learning Objective: 06-02 The two-stage dividend growth model. Level of Difficulty: 2 Medium Section: 6.3 Topic: Nonconstant Growth Stage One |
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86. |
The current book value per share of B.L. Black & Sons is $5.35 and the required return on the stock is 15.5 percent. The firm expects earnings per share of $2.25 next year with annual earnings growth of 4.5 percent. What is the current market value of this stock?
|
|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.4 Topic: Residual Income Model |
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87. |
The Diamond Outlet has current earnings per share of $1.96 and an expected earnings growth rate of 2.2 percent. The required return on the stock is 13 percent and the current book value per share is $12.70. What is the current market value of this stock?
|
|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.4 Topic: Residual Income Model |
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88. |
Leslie Apparel has a current book value per share of $5.15 and current earnings per share of $1.13. The required return is 14 percent and the expected earnings growth rate is 4.5 percent. What is one share of this stock worth today?
|
|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.4 Topic: Residual Income Model |
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89. |
A firm has a current book value per share of $21.10 and a market price per share of $37.57. Next year's earnings are expected to be $5.60 per share and the expected earnings growth rate is 2.5 percent. What is the required rate of return on this stock?
|
|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.4 Topic: Residual Income Model |
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90. |
Lambert Corporation reported net income of $60 million for last year. Depreciation expense totaled $20 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 4.5% for the foreseeable future. Lambert faces a 40% tax rate and has a 0.45 debt to equity ratio with $185 million (market value) in debt outstanding. Lambert's equity beta is 1.25, the risk-free rate is currently 5% and the market risk premium is estimated to be 6.5%. What is the current total value of Lambert's equity (in millions)?
|
|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.5 Topic: Free Cash Flow Model |
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91. |
Beach & Company reported net income of $40 million for last year. Depreciation expense totaled $18 million and capital expenditures came to $8 million. Free cash flow is expected to grow at a rate of 5% for the foreseeable future. Beach faces a 40% tax rate and has a 0.40 debt to equity ratio with $200 million (market value) in debt outstanding. Beach's equity beta is 1.25, the risk-free rate is currently 4.5% and the market risk premium is estimated to be 8.0%. What is the current total value of Beach & Company (in millions)?
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|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.5 Topic: Free Cash Flow Model |
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92. |
McKenzie, Inc. reported net income of $8.5 million for last year. Depreciation expense totaled $5 million and capital expenditures came to $2 million. Free cash flow is expected to grow at a rate of 2.5% for the foreseeable future. McKenzie faces a 40% tax rate and has a 0.50 debt to equity ratio with $20 million (market value) in debt outstanding. McKenzie's equity beta is 1.4, the risk- free rate is currently 5% and the market risk premium is estimated to be 7.5%. McKenzie has 10 million shares of common stock outstanding. What is the current value of a share of McKenzie stock?
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|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.5 Topic: Free Cash Flow Model |
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93. |
Stuart, Inc. reported net income of $20 million for last year. Depreciation expense totaled $15 million and capital expenditures came to $5 million. Free cash flow is expected to grow at a rate of 6% for the foreseeable future. Stuart faces a 40% tax rate and has a 0.30 debt to equity ratio with $75 million (market value) in debt outstanding. Stuart's equity beta is 1.1, the risk-free rate is currently 6% and the market risk premium is estimated to be 8.0%. What is the current value (in millions) of Stuart's equity?
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|
Blooms: Apply Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.5 Topic: Free Cash Flow Model |
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94. |
A firm has net income of $198,500 and total equity of 1.15 million. There are 220,000 shares of stock outstanding at a price per share of $14.80. What is the firm's price-earnings ratio?
P/E = $14.80/($198,500/220,000) = 16.40 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Earnings Ratio |
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95. |
L.B. Jay has net income of $38,000, total assets of $437,000, total liabilities of $208,000, and a price-book ratio of 3.8. There are 60,000 shares of stock outstanding. What is the firm's price-earnings ratio?
P/E = {[($437,000 - $208,000)/60,000] × 3.8}/($38,000/60,000) = 22.90 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 2 Medium Section: 6.6 Topic: Price-Earnings Ratio |
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96. |
Miller's Farm has 120,000 shares of stock outstanding, sales of $850,000, and net income of $55,000. Financial analysts believe the price-earnings ratio for this firm should be 15.8. Given this information, what should be the current stock price?
P0 = ($55,000/120,000) × 15.8 = $7.24 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Price-Earnings Ratio |
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97. |
Electronics Galore has historically had a P/E ratio of 23.4. This ratio is considered a good estimate of the future ratio. The firm currently has EPS of $1.68. These earnings are expected to increase by 4.2 percent next year. What is the expected price of this stock one year from now?
Expected price = $1.68 × (1 + .042) × 23.4 = $40.96 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Expected Price |
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98. |
Historically, Jones Trucking has had a P/E ratio of 14.6. The firm has current net income of $92,000 with 85,000 shares of stock outstanding. The EPS growth rate is 4.5 percent. What is the expected price of this stock one year from now?
Expected price = ($92,000/85,000) × (1 + .045) × 14.6 = $16.51 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Expected Price |
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99. |
The Retail Box has an historical P/CF ratio of 21.5. The current CFPS is $1.42 and the projected CFPS growth rate is 5.6 percent. The current EPS is $1.02. What is the expected price of this stock one year from now?
Expected price = $1.42 × (1 + .056) × 21.5 = $32.24 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Expected Price |
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100. |
The Satellite Shoppe has current sales per share of $8.40. The sales per share are expected to increase at an annual rate of 12 percent. The historical P/E ratio is 16.2 and the historical P/S ratio is 7.6. What is the expected price of this stock one year from now?
Expected price = $8.40 × (1 + .12) × 7.6 = $71.50 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Expected Price |
|
101. |
Currently, Southern Foods has sales of $1.32 million, net profit of $521,400, and 125,000 shares of stock outstanding. The sales and net profit are each expected to grow by 6 percent annually. The historical P/S ratio is 7.8. What is the expected price of this stock one year from now?
Expected price = ($1,320,000/125,000) × (1 + .06) × 7.8 = $87.31 |
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Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 1 Easy Section: 6.6 Topic: Expected Price |
Essay Questions
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102. |
Future stock prices that are estimated using any one of the various price ratios will be based on an assumption related to the ratio. What is that assumption? Answer will vary Feedback: The assumption is that the future price ratio will be relatively similar to the historical price ratio used in the estimation process. |
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Blooms: Understand Learning Objective: 06-04 Price ratio analysis. Level of Difficulty: 2 Medium Section: 6.6 Topic: Price Ratio Analysis |
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103. |
Identify three causes for a decrease in a firm's sustainable rate of growth. Answer will vary Feedback: Any one of the following will decrease a firm's sustainable rate of growth: 1) a decrease in the retention ratio, 2) an increase in the dividend payout ratio, 3) a decrease in net income, and 4) an increase in the book value of equity, all else constant. |
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Blooms: Understand Learning Objective: 06-01 The basic dividend discount model. Level of Difficulty: 2 Medium Section: 6.2 Topic: Sustainable Growth Rate |
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104. |
The residual income model for valuing a stock suffers from some of the same estimating errors as the dividend growth model. Identify and explain these estimating errors. Answer will vary Feedback: Both the residual income model and the dividend growth model use a growth rate and a discount rate in the computation of an estimated stock value. The discount rate is commonly based on CAPM, which uses a risk-free rate, beta, and the market risk premium. The variables are only known with certainty in hindsight. The dividend growth rate is even more susceptible to estimating errors as it is affected by changes in a firm's earnings as well as changes in the dividend payout ratio. The growth rate is particularly difficult to estimate when a firm adheres to a residual dividend policy. |
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Blooms: Understand Learning Objective: 06-03 The residual income and free cash flow models. Level of Difficulty: 2 Medium Section: 6.4 Topic: Residual Income Model |
Chapter 07
Stock Price Behavior and Market Efficiency
Multiple Choice Questions
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1. |
Which one of the following states that investors cannot consistently earn positive excess returns?
|
|
2. |
Security A and Security B have similar risks. However, Security A has a higher rate of return than Security B. The return on Security A minus the return on Security B is referred to as which one of the following?
|
|
3. |
Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?
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|
4. |
Which one of the following is a research method used to study the effects news has on stock prices?
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|
5. |
Which one of the following returns is computed as the observed return minus the expected return?
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|
6. |
Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?
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7. |
Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?
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8. |
The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?
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9. |
Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?
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10. |
Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?
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11. |
Which one of the following terms is used to describe a sudden and significant collapse in market prices?
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|
12. |
Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session?
|
|
13. |
Which one of the following is required for a trader to earn excess profits?
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|
14. |
Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that:
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|
15. |
In an efficient market, stocks with similar risks will:
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|
16. |
Which one of the following will automatically occur if all investors are rational?
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|
17. |
Efficient markets tend to exist:
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|
18. |
Independent deviations from rationality:
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|
19. |
The term "independent deviations from rationality" implies that:
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|
20. |
Arbitrage traders:
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|
21. |
You are the chief financial officer of Donnelly Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?
|
|
22. |
Which one of the following best describes the type(s) of information included in a strong-form efficient market?
|
|
23. |
If the financial markets were regulated such that the markets maintained strong-form efficiency, then:
|
|
24. |
Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements
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25. |
You analyze a firm's financial statements and invest based upon the results of this analysis. Which form of market efficiency must exist if you are able to earn excess profits on these investments?
|
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26. |
Amy uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices. Secondly, she analyzes the financial statements of The Atwater Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Amy earns excess profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least _____ efficient but less than _____ efficient.
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27. |
If the market is semistrong-form efficient, then which one of the following statements is true?
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28. |
Which form of market efficiency exists if the market is efficient only in regard to historical information?
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29. |
Which of the following will lead to excess profits in a semistrong-form efficient market? I. private financial information II. historical price trends III. financial analysts reports IV. unreleased merger plans
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30. |
Research on semistrong-form efficient markets indicates which one of the following is correct?
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31. |
If you believe that stock market prices follow a random walk, then:
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32. |
Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Ace common stock closed at $20. On the day following the announcement, Ace closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Ace stock traded at $26, a level it has maintained since then. This is an example of a(n):
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33. |
Dennison Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level. This is an example of a(n):
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|
34. |
Last week, New Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n):
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35. |
Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?
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36. |
Which one of the following would best reveal how stock prices react when competitive firms merge?
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|
37. |
In an efficient market, daily abnormal returns:
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|
38. |
How should cumulative abnormal returns react in an efficient market?
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|
39. |
Which of the following sources of information are used by informed traders? I. financial statements II. inside information III. internet reports IV. analysts reports
|
|
40. |
Which one of the following statements is correct?
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|
41. |
Ted is an engineer for True Tech and has just discovered a revolutionary method for strengthening metals. He knows this knowledge will add value to True Tech's stock. Ted happens to mention this discovery and its value to his neighbor, Fred. Fred can be charged with insider trading if he:
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|
42. |
Which one of the following is most apt to be considered insider trading?
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43. |
Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly.
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44. |
Helena is the chief executive officer of Beltway Holdings (BEH). She owns 1.2 million shares of BEH stock and wishes to sell 10 percent of those shares to diversify her holdings. She follows the SEC requirements, along with those of her firm, and proceeds with the sale on Monday, June 9. On Tuesday, June 10, BEH stock declines by 25 percent. Helena's stock trade is:
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45. |
Which one of the following statements related to insider trading is correct?
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46. |
Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency?
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47. |
Which one of the following best describes the current understanding of market efficiency?
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48. |
If the financial markets are highly efficient, then:
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49. |
If the markets are efficient, then why is asset allocation still considered important?
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50. |
Moving money in and out of the market based on your market expectations is called _____ and tends to lead to returns that are _____ than the overall market return, assuming that the market is relatively efficient.
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51. |
Market timing tends to lead to:
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52. |
Studies indicate that the Vanguard 500 Index fund tends to:
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53. |
Which one of the following statements is correct?
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54. |
The day-of-the-week effect refers to which trading day?
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55. |
Over the past 50 years, which day of the week, on average, has the lowest average rate of return?
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56. |
The January effect:
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57. |
Which of the following are offered as possible causes of the January effect? I. new professional money managers who assume the role at the beginning of the year II. tax loss selling in December III. bonus lock-in effect IV. window dressing
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58. |
Market prices tend to _____ earnings "surprises".
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59. |
Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?
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60. |
Which one of the following statements concerning the stock market is correct?
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61. |
Over the time period of 1929 to 1932, the stock market lost approximately _____ percent of its value.
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62. |
Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?
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63. |
Which of the following are offered as factors contributing to the Crash of October 1987? I. bubble bursting II. market volatility III. negative economic signals IV. activities in Congress
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64. |
Which of the following occurred during the Crash of 1987? I. market prices were kept up-to-date which increased investors' anxiety II. the market declined another 5 percent within the 2 days following the crash III. trading volume exceeded the exchange's capacities IV. NASDAQ went off-line
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65. |
Which one of the following occurred following the Crash of 1987?
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66. |
Which of the following factors contributed to the Crash of 1987? I. irrational investors II. program trading III. panic selling IV. price uncertainty
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67. |
Immediately following the Crash of 1987, the stock market:
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68. |
If the S&P 500 falls by 20 percent, the NYSE will:
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69. |
If the S&P 500 falls by 7 percent, the NYSE will:
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70. |
The NYSE circuit breakers are recalculated:
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71. |
The primary purpose of the NYSE circuit breakers is to:
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72. |
From the end of 1989 to the spring of 2003, the Nikkei Index declined in value approximately _____ percent.
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73. |
The Asian stock market crash of 1990 was followed by a:
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74. |
The value of the Amex Internet Index increased by about _____ percent from October 1998 to March 2000 and subsequently declined by about _____ percent by October 2002.
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75. |
By the end of 2002, the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.
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76. |
The following are the daily returns for both the overall market and for Dexter Inc. What is the cumulative abnormal return on Dexter, Inc., stock for these 5 days?
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77. |
Over the past 5 days, the common stock of Tyler Mfg. had daily returns of 0.2, -0.1, -0.2, 0.3, and 0.1 percent, respectively. For the same 5 days, the market had daily returns of 0.0, 0.1, -0.3, 0.4, and 0.2 percent, respectively. What is the cumulative abnormal return on Tyler Mfg. stock for this time period?
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78. |
Swenson Co. announced its merger plans on August 25 and had a daily return of 0.8 percent. Tyler Co. announced its merger plans on August 26 and had a daily return of 0.6 percent. The Underwood Co. announced its merger plans on August 27 and had a daily return of -0.5 percent. The daily market returns for August 25 through August 27 were 0.2, 0.3, and -0.4, respectively. What is the combined cumulative abnormal return for the announcement date?
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79. |
A.B. Pharmaceutical announced FDA approval for a new drug on October 12. Uptown Drug Co. announced FDA approval for its new drug on October 14. No other information was released that would affect returns over this time period. What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the FDA approval announcement date? Use the following data to answer this question. No trading occurred on October 15 or 16.
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Essay Questions
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80. |
What are some of the key lessons to be learned from historical stock market crashes?
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81. |
What should the primary role of portfolio managers be given the research to date on their market performance and based on the assumption that markets are efficient?
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82. |
A trader was found guilty of violating insider trading laws. As part of his sentencing, he had to forfeit the excessive profits earned on the illegal trades. What does this conviction indicate about the current form of market efficiency?
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Chapter 07 Stock Price Behavior and Market Efficiency Answer Key
Multiple Choice Questions
|
1. |
Which one of the following states that investors cannot consistently earn positive excess returns?
See Section 7.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.1 Topic: Efficient Market Hypothesis |
|
2. |
Security A and Security B have similar risks. However, Security A has a higher rate of return than Security B. The return on Security A minus the return on Security B is referred to as which one of the following?
See Section 7.12 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.2 Topic: Excess Return |
|
3. |
Which one of the following terms is used to describe a stock price that moves over time creating no discernible pattern?
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Random Walk |
|
4. |
Which one of the following is a research method used to study the effects news has on stock prices?
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Event Study |
|
5. |
Which one of the following returns is computed as the observed return minus the expected return?
See Section 7.6 |
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Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Abnormal Return |
|
6. |
Which type of trader is defined as one who decides to trade securities based on publicly available information and analysis?
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Informed Trader |
|
7. |
Which one of the following terms best describes the information you know about a company that will have a significant effect on the price of the company's stock once that information is released?
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Material Non-Public Information |
|
8. |
The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: Day-of-The-Week Effect |
|
9. |
Which one of the following correctly identifies the phenomenon that states that one month has the greatest tendency for small stocks to earn large returns?
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: January Effect |
|
10. |
Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Bubble |
|
11. |
Which one of the following terms is used to describe a sudden and significant collapse in market prices?
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Crash |
|
12. |
Which one of the following terms is used to identify the NYSE rules which slow or stop trading when the DJIA declines by more than a specified amount during a trading session?
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Nyse Circuit Breakers |
|
13. |
Which one of the following is required for a trader to earn excess profits?
See Section 7.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.2 Topic: Efficient Market Hypothesis |
|
14. |
Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that:
See Section 7.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.2 Topic: Positive Excess Return |
|
15. |
In an efficient market, stocks with similar risks will:
See Section 7.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.2 Topic: Market Efficiency |
|
16. |
Which one of the following will automatically occur if all investors are rational?
See Section 7.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.3 Topic: Rational Investor |
|
17. |
Efficient markets tend to exist:
See Section 7.3 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.3 Topic: Market Efficiency |
|
18. |
Independent deviations from rationality:
See Section 7.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.3 Topic: Independent Deviations from Rationality |
|
19. |
The term "independent deviations from rationality" implies that:
See Section 7.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.3 Topic: Independent Deviations from Rationality |
|
20. |
Arbitrage traders:
See Section 7.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.3 Topic: Arbitrage |
|
21. |
You are the chief financial officer of Donnelly Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Strong-form Market Efficiency |
|
22. |
Which one of the following best describes the type(s) of information included in a strong-form efficient market?
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Strong-form Market Efficiency |
|
23. |
If the financial markets were regulated such that the markets maintained strong-form efficiency, then:
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Strong-form Market Efficiency |
|
24. |
Which of the following are ineffective strategies for producing excess returns if the market is semistrong-form efficient? I. graphing past prices searching for patterns II. watching the daily market movements III. studying the latest analyst's reports IV. analyzing a firm's financial statements
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Semistrong-form Efficiency |
|
25. |
You analyze a firm's financial statements and invest based upon the results of this analysis. Which form of market efficiency must exist if you are able to earn excess profits on these investments?
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Weak-form Market Efficiency |
|
26. |
Amy uses two approaches to trading stocks. First, she trades on what she believes is a repetitive pattern as seen in Delta Co's historical prices. Secondly, she analyzes the financial statements of The Atwater Co. to compute changes in the return on equity as a predictor of future stock prices for that firm. She trades based on both strategies. Amy earns excess profits on her return on equity strategy but not on her historical prices strategy. This suggests that the market is at least _____ efficient but less than _____ efficient.
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Semistrong-form Efficiency |
|
27. |
If the market is semistrong-form efficient, then which one of the following statements is true?
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Semistrong-form Efficiency |
|
28. |
Which form of market efficiency exists if the market is efficient only in regard to historical information?
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Weak-form Market Efficiency |
|
29. |
Which of the following will lead to excess profits in a semistrong-form efficient market? I. private financial information II. historical price trends III. financial analysts reports IV. unreleased merger plans
See Section 7.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.4 Topic: Semistrong-form Market Efficiency |
|
30. |
Research on semistrong-form efficient markets indicates which one of the following is correct?
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Market Efficiency |
|
31. |
If you believe that stock market prices follow a random walk, then:
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Random Walk |
|
32. |
Two weeks ago Ace Electronics announced that it had developed a new chip design which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Ace common stock closed at $20. On the day following the announcement, Ace closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement the stock traded at $23. Last week, Ace stock traded at $26, a level it has maintained since then. This is an example of a(n):
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Market Price Reactions |
|
33. |
Dennison Lumber announced last week that its unpopular CEO had resigned. In response to this announcement, the firm's stock price increased from $17 a share to $23 a share. The following day the price declined to $21 a share and has remained constant at that level. This is an example of a(n):
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Market Price Reactions |
|
34. |
Last week, New Plastics announced that it had developed a new plastic container that is stronger and more durable, yet easier to recycle. In response to this announcement, the firm's stock price rose from $21 a share to a high of $27 a share and has remained at that level. This is an example of a(n):
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Market Price Reactions |
|
35. |
Which one of the following involves the study of a firm's stock price for the few days surrounding a news announcement?
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Event Study |
|
36. |
Which one of the following would best reveal how stock prices react when competitive firms merge?
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Event Study |
|
37. |
In an efficient market, daily abnormal returns:
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Abnormal Return |
|
38. |
How should cumulative abnormal returns react in an efficient market?
See Section 7.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Abnormal Cumulative Returns |
|
39. |
Which of the following sources of information are used by informed traders? I. financial statements II. inside information III. internet reports IV. analysts reports
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Informed Trader |
|
40. |
Which one of the following statements is correct?
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Insider Trader |
|
41. |
Ted is an engineer for True Tech and has just discovered a revolutionary method for strengthening metals. He knows this knowledge will add value to True Tech's stock. Ted happens to mention this discovery and its value to his neighbor, Fred. Fred can be charged with insider trading if he:
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Insider Trading |
|
42. |
Which one of the following is most apt to be considered insider trading?
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Insider Trading |
|
43. |
Which one of the following items is most apt to be considered material non-public information? Assume that none of this information is known publicly.
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Material Non-Public Information |
|
44. |
Helena is the chief executive officer of Beltway Holdings (BEH). She owns 1.2 million shares of BEH stock and wishes to sell 10 percent of those shares to diversify her holdings. She follows the SEC requirements, along with those of her firm, and proceeds with the sale on Monday, June 9. On Tuesday, June 10, BEH stock declines by 25 percent. Helena's stock trade is:
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Legal Insider Trading |
|
45. |
Which one of the following statements related to insider trading is correct?
See Section 7.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.7 Topic: Insider Trading |
|
46. |
Which one of the following relates to the risk-adjustment problem encountered when testing market efficiency?
See Section 7.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.8 Topic: Testing Market Efficiency |
|
47. |
Which one of the following best describes the current understanding of market efficiency?
See Section 7.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.8 Topic: Market Efficiency |
|
48. |
If the financial markets are highly efficient, then:
See Section 7.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.8 Topic: Market Efficiency |
|
49. |
If the markets are efficient, then why is asset allocation still considered important?
See Section 7.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.8 Topic: Market Efficiency |
|
50. |
Moving money in and out of the market based on your market expectations is called _____ and tends to lead to returns that are _____ than the overall market return, assuming that the market is relatively efficient.
See Section 7.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.8 Topic: Market Timing |
|
51. |
Market timing tends to lead to:
See Section 7.8 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.8 Topic: Market Timing |
|
52. |
Studies indicate that the Vanguard 500 Index fund tends to:
See Section 7.9 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-03 Market efficiency and the performance of professional money managers. Level of Difficulty: 1 Easy Section: 7.9 Topic: Professional Money Managers |
|
53. |
Which one of the following statements is correct?
See Section 7.9 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-03 Market efficiency and the performance of professional money managers. Level of Difficulty: 1 Easy Section: 7.9 Topic: Professional Money Managers |
|
54. |
The day-of-the-week effect refers to which trading day?
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: Day-of-The-Week Effect |
|
55. |
Over the past 50 years, which day of the week, on average, has the lowest average rate of return?
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: Day-of-The-Week Effect |
|
56. |
The January effect:
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: January Effect |
|
57. |
Which of the following are offered as possible causes of the January effect? I. new professional money managers who assume the role at the beginning of the year II. tax loss selling in December III. bonus lock-in effect IV. window dressing
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: January Effect |
|
58. |
Market prices tend to _____ earnings "surprises".
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: Earnings Announcement |
|
59. |
Which one of the following statements describes an investment strategy that may lead to profitable results based on current research findings?
See Section 7.10 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.10 Topic: Market Anomalies |
|
60. |
Which one of the following statements concerning the stock market is correct?
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Bubbles and Crashes |
|
61. |
Over the time period of 1929 to 1932, the stock market lost approximately _____ percent of its value.
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1929-32 Bear Market |
|
62. |
Approximately how many years did it take for the stock market to recover from the bear market of 1929 to 1932?
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1929-32 Bear Market |
|
63. |
Which of the following are offered as factors contributing to the Crash of October 1987? I. bubble bursting II. market volatility III. negative economic signals IV. activities in Congress
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1987 Market Crash |
|
64. |
Which of the following occurred during the Crash of 1987? I. market prices were kept up-to-date which increased investors' anxiety II. the market declined another 5 percent within the 2 days following the crash III. trading volume exceeded the exchange's capacities IV. NASDAQ went off-line
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1987 Market Crash |
|
65. |
Which one of the following occurred following the Crash of 1987?
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1987 Market Crash |
|
66. |
Which of the following factors contributed to the Crash of 1987? I. irrational investors II. program trading III. panic selling IV. price uncertainty
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1987 Market Crash |
|
67. |
Immediately following the Crash of 1987, the stock market:
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: 1987 Market Crash |
|
68. |
If the S&P 500 falls by 20 percent, the NYSE will:
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Nyse Circuit Breakers |
|
69. |
If the S&P 500 falls by 7 percent, the NYSE will:
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Nyse Circuit Breakers |
|
70. |
The NYSE circuit breakers are recalculated:
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Nyse Circuit Breakers |
|
71. |
The primary purpose of the NYSE circuit breakers is to:
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Nyse Circuit Breakers |
|
72. |
From the end of 1989 to the spring of 2003, the Nikkei Index declined in value approximately _____ percent.
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Asian Crash |
|
73. |
The Asian stock market crash of 1990 was followed by a:
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Asian Crash |
|
74. |
The value of the Amex Internet Index increased by about _____ percent from October 1998 to March 2000 and subsequently declined by about _____ percent by October 2002.
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Dot.Com Bubble |
|
75. |
By the end of 2002, the AMEX Internet Index was at a level approximately equal to _____ percent of the index high.
See Section 7.11 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 1 Easy Section: 7.11 Topic: Dot.Com Bubble |
|
76. |
The following are the daily returns for both the overall market and for Dexter Inc. What is the cumulative abnormal return on Dexter, Inc., stock for these 5 days?
|
|
Blooms: Apply Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Cumulative Abnormal Returns |
|
77. |
Over the past 5 days, the common stock of Tyler Mfg. had daily returns of 0.2, -0.1, -0.2, 0.3, and 0.1 percent, respectively. For the same 5 days, the market had daily returns of 0.0, 0.1, -0.3, 0.4, and 0.2 percent, respectively. What is the cumulative abnormal return on Tyler Mfg. stock for this time period?
|
|
Blooms: Apply Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 1 Easy Section: 7.6 Topic: Cumulative Abnormal Returns |
|
78. |
Swenson Co. announced its merger plans on August 25 and had a daily return of 0.8 percent. Tyler Co. announced its merger plans on August 26 and had a daily return of 0.6 percent. The Underwood Co. announced its merger plans on August 27 and had a daily return of -0.5 percent. The daily market returns for August 25 through August 27 were 0.2, 0.3, and -0.4, respectively. What is the combined cumulative abnormal return for the announcement date?
Combined cumulative daily abnormal return = [0.8% - 0.2%] + [0.6% - 0.3%] + [-0.5% - (-0.4%)] = 0.8% |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 2 Medium Section: 7.6 Topic: Cumulative Abnormal Returns |
|
79. |
A.B. Pharmaceutical announced FDA approval for a new drug on October 12. Uptown Drug Co. announced FDA approval for its new drug on October 14. No other information was released that would affect returns over this time period. What is the combined cumulative abnormal return for the 5 day period commencing 2 days prior to the FDA approval announcement date? Use the following data to answer this question. No trading occurred on October 15 or 16.
|
|
Blooms: Apply Learning Objective: 07-02 The implications of the forms of market efficiency. Level of Difficulty: 2 Medium Section: 7.6 Topic: Cumulative Abnormal Returns |
Essay Questions
|
80. |
What are some of the key lessons to be learned from historical stock market crashes? Answer will vary Feedback: Student answers will vary but should display a basic understanding of market crashes. Students can address causes of crashes, the suddenness of crashes, and the variances in post-crash market behavior. |
|
Blooms: Understand Learning Objective: 07-04 What stock market anomalies; bubbles; and crashes mean for market efficiency. Level of Difficulty: 2 Medium Section: 7.11 Topic: Market Crashes |
|
81. |
What should the primary role of portfolio managers be given the research to date on their market performance and based on the assumption that markets are efficient? Answer will vary Feedback: The role of portfolio managers is the construction and maintenance of a diversified portfolio designed to meet the needs and risk tolerances of their investors. |
|
Blooms: Understand Learning Objective: 07-03 Market efficiency and the performance of professional money managers. Level of Difficulty: 1 Easy Section: 7.9 Topic: Professional Money Managers |
|
82. |
A trader was found guilty of violating insider trading laws. As part of his sentencing, he had to forfeit the excessive profits earned on the illegal trades. What does this conviction indicate about the current form of market efficiency? Answer will vary Feedback: To earn excess profits on inside information, the market cannot be strong-form efficient. Given the fact that some inside information has entered the marketplace through illegal trading, the market is somewhere between semi-strong and strong-form efficient. |
|
Blooms: Understand Learning Objective: 07-01 The foundations of market efficiency. Level of Difficulty: 2 Medium Section: 7.4 Topic: Forms of Market Efficiency |
Chapter 08
Behavioral Finance and the Psychology of Investing
Multiple Choice Questions
|
1. |
What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions?
|
|
2. |
Which one of the following is the basis for prospect theory?
|
|
3. |
Which one of the following defines frame dependence?
|
|
4. |
Mental accounting is the process of associating a stock with its:
|
|
5. |
Loss aversion is defined as:
|
|
6. |
Representativeness heuristic is best explained as:
|
|
7. |
The belief that information you hold is superior to information held by other investors best describes:
|
|
8. |
An unwillingness to take a risk after a loss describes:
|
|
9. |
Which one of the following is the tendency to believe that random events that occur in clusters are not really random?
|
|
10. |
Which one of the following best describes heuristics?
|
|
11. |
The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms?
|
|
12. |
Which one of the following is a trader whose trades are not based on meaningful financial analysis or information?
|
|
13. |
Which one of the following risks is related to irrational beliefs?
|
|
14. |
Technical analysis is the study of which one of the following as the basis for trading?
|
|
15. |
Dow theory is a method of predicting future market movements based on which of the following Dow Jones averages? I. industrial II. transportation III. utilities IV. commodities
|
|
16. |
According to Elliott wave theory, market predictions should be based on which one of the following?
|
|
17. |
The minimum price at which a security is expected to trade is called the:
|
|
18. |
The maximum price at which a security is expected to trade is called the:
|
|
19. |
The measure of performance of one investment compared to another investment is called the:
|
|
20. |
Prospect theory is based on the concept that investors are:
|
|
21. |
Which one of the following statements is correct regarding prospect theory?
|
|
22. |
Phil is a contestant on a game show. At this point in the game, he can either accept $500 or spin a wheel for a chance of winning $100,000. Which type of behavior is he displaying if he spins the wheel?
|
|
23. |
Investors tend to make better decisions when looking at a decision:
|
|
24. |
Which one of the following is an example of mental accounting?
|
|
25. |
According to the concept of loss aversion, individual investors are most apt to do which one of the following?
|
|
26. |
According to the concept of house money, individual investors are most apt to do which one of the following?
|
|
27. |
Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from:
|
|
28. |
The tendency to overvalue an item because you own it is referred to as which one of the following?
|
|
29. |
Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following?
|
|
30. |
Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following?
|
|
31. |
Investors who tend to invest too heavily in the securities issued by their employer suffer from the condition known as:
|
|
32. |
Which one of the following statements appears to be correct based on current research?
|
|
33. |
The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics?
|
|
34. |
Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the:
|
|
35. |
Four of the last five stocks your investment adviser recommended have outperformed the market. Thus, you believe that if you continue to follow her advice, that 80 percent of your investments will outperform the market over the long term. This belief is based on the:
|
|
36. |
According to the theory of recency bias, investors tend to believe the financial markets will:
|
|
37. |
Which one of the following is a characteristic of the self-attribution bias?
|
|
38. |
Which of the following are impediments to the correction of a security's mispricing? I. sentiment-based risk II. implementation costs III. firm-specific risk IV. noise trader risk
|
|
39. |
Which one of the following market sentiment index (MSI) values represents the best buying opportunity?
|
|
40. |
Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish?
|
|
41. |
Which one of the following indicates the long-run direction of the market according to Dow Theory?
|
|
42. |
What is the primary purpose of Dow theory?
|
|
43. |
According to Dow theory, which one of the following is the primary means of eliminating secondary market trends?
|
|
44. |
If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following?
|
|
45. |
According to technical analysis, which one of the following is best seen as a buying opportunity?
|
|
46. |
You recently heard a news announcer state that the market is approaching its support level. Which one of the following is the best interpretation of that statement?
|
|
47. |
Which one of the following advance/decline lines is the most bullish signal?
|
|
48. |
Which of the following are bullish indicators? I. flat advance/decline line II. breakout of a support level III. Arms ratio of .38 IV. heavy advancing volume
|
|
49. |
If the closing tick of the day is +32, this means that the:
|
|
50. |
Which one of the following Arms values is the most bearish?
|
|
51. |
For the past year, a particular stock has a relative strength value of 1.03 as compared to the market. This means that the stock:
|
|
52. |
A "block trade" is a trade in excess of how many shares?
|
|
53. |
Which one of the following statements is correct concerning an open-high-low-close bar chart?
|
|
54. |
According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential:
|
|
55. |
Which one of the following is correct concerning a head and shoulders top pattern?
|
|
56. |
Which one of the following statements is correct regarding moving averages?
|
|
57. |
Assume the 50-day moving average is currently intersecting the 200-day moving average. Also assume the 50-day average is downward sloping and the 200-day average is upward sloping. Which one of the following statements is accurate based on this information?
|
|
58. |
Bollinger bands:
|
|
59. |
A stock's price has been relatively constant for an extended period of time. In this instance, the Bollinger bands are:
|
|
60. |
Investors who use the MACD indicator as a signal for trading are most apt to buy a security when the MACD:
|
|
61. |
Which of the following are considered in the computation of money flows? I. last trade price II. current trade price III. volume of each trade IV. time of each trade
|
|
62. |
Assume a stock's price remains relatively stable while the money flow becomes highly positive. Which one of the following is most expected given this scenario?
|
|
63. |
Fibonacci numbers:
|
|
64. |
Some technical analysts use Fibonacci numbers to predict:
|
|
65. |
Which one of the following is seen as a bearish indicator?
|
|
66. |
A survey of 64 of your fellow classmates determines that 19 of them are bullish on the market while the remainder is bearish. What is the market sentiment index for this group of individuals?
|
|
67. |
A recent survey indicates that 1,731 people are bearish on the market for every 1,000 that are bullish. What is the value of the market sentiment index based on this information?
|
|
68. |
Given the following information, what is the value of the advance/decline line on the third day of this 3-day period?
|
|
69. |
Given the following information, what is the value of the advance/decline line on the second day of this 3-day period?
|
|
70. |
Given the following information, what is the value of the closing Arms?
|
|
71. |
Given the following information, what is the value of the closing Arms?
|
|
72. |
Last year, Kathy purchased 3 shares of stock A at $50 a share. At the same time, she purchased 5 shares of stock B at $35 a share. Today, stock A is valued at $65 a share and stock B is worth $42 a share. What is the relative strength of stock A as compared to stock B?
|
|
73. |
What is the 3-day simple moving average as of day 5, given the following information?
|
|
74. |
What is the 4-day simple moving average as of day 7, given the following information?
|
|
75. |
What is the 3-day exponential moving average as of day 4 assuming that a weight of 70 percent is placed on the most recent price?
|
|
76. |
What is the 3-day exponential moving average as of day 5 assuming that a weight of 60 percent is placed on the most recent price?
|
|
77. |
Given the following information, what is the net money flow at the end of the trading day?
|
|
78. |
Given the following information, what is the net money flow at the end of the trading day?
|
|
79. |
The series of Fibonacci numbers contains the sequential values of 610 and 987. What is the next number in this series?
|
|
80. |
The price of a stock increased from $32 to $38. Using phi, what are the primary and secondary support areas for the stock?
|
|
81. |
Altoona Train stock increased from $18 a share to $25 a share. Based on phi, what are the primary and secondary support areas for this stock?
|
Essay Questions
|
82. |
Draw a basic Elliott Wave Pattern. Identify each wave and indicate the waves that are "corrective" and those that are "impulsive".
|
|
83. |
Explain the basics of prospect theory and provide an example that illustrates this theory.
|
|
84. |
Give some examples of how overconfidence affects investor behavior along with the results that might be expected based on that behavior.
|
Chapter 08 Behavioral Finance and the Psychology of Investing Answer Key
Multiple Choice Questions
|
1. |
What is the area of finance called that addresses issues such as how reasoning errors affect investment decisions?
See Section 8.1 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.1 Topic: Behavioral finance |
|
2. |
Which one of the following is the basis for prospect theory?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Prospect theory |
|
3. |
Which one of the following defines frame dependence?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Frame Dependence |
|
4. |
Mental accounting is the process of associating a stock with its:
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Mental Accounting |
|
5. |
Loss aversion is defined as:
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Loss Aversion |
|
6. |
Representativeness heuristic is best explained as:
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Representativeness Heuristic |
|
7. |
The belief that information you hold is superior to information held by other investors best describes:
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Illusion of Knowledge |
|
8. |
An unwillingness to take a risk after a loss describes:
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Snakebite Effect |
|
9. |
Which one of the following is the tendency to believe that random events that occur in clusters are not really random?
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Clustering Illusion |
|
10. |
Which one of the following best describes heuristics?
See Section 8.5 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.5 Topic: Heuristics |
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11. |
The concept that well-capitalized, rational traders may be unable to correct a mispricing defines which one of the following terms?
See Section 8.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-03 Sentiment-based risk and limits to arbitrage. Level of Difficulty: 1 Easy Section: 8.6 Topic: Limits to Arbitrage |
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12. |
Which one of the following is a trader whose trades are not based on meaningful financial analysis or information?
See Section 8.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-03 Sentiment-based risk and limits to arbitrage. Level of Difficulty: 1 Easy Section: 8.6 Topic: Noise Trader |
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13. |
Which one of the following risks is related to irrational beliefs?
See Section 8.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-03 Sentiment-based risk and limits to arbitrage. Level of Difficulty: 1 Easy Section: 8.6 Topic: Sentiment-Based Risk |
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14. |
Technical analysis is the study of which one of the following as the basis for trading?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Technical Analysis |
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15. |
Dow theory is a method of predicting future market movements based on which of the following Dow Jones averages? I. industrial II. transportation III. utilities IV. commodities
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Dow Theory |
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16. |
According to Elliott wave theory, market predictions should be based on which one of the following?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Elliott Wave Theory |
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17. |
The minimum price at which a security is expected to trade is called the:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Support Level |
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18. |
The maximum price at which a security is expected to trade is called the:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Resistance Level |
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19. |
The measure of performance of one investment compared to another investment is called the:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Relative Strength |
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20. |
Prospect theory is based on the concept that investors are:
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Prospect theory |
|
21. |
Which one of the following statements is correct regarding prospect theory?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Prospect theory |
|
22. |
Phil is a contestant on a game show. At this point in the game, he can either accept $500 or spin a wheel for a chance of winning $100,000. Which type of behavior is he displaying if he spins the wheel?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Risk-Adverse Behavior |
|
23. |
Investors tend to make better decisions when looking at a decision:
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Frame Dependence |
|
24. |
Which one of the following is an example of mental accounting?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Mental Accounting |
|
25. |
According to the concept of loss aversion, individual investors are most apt to do which one of the following?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Loss Aversion |
|
26. |
According to the concept of house money, individual investors are most apt to do which one of the following?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: House Money |
|
27. |
Peter hesitates when it comes to picking an individual stock to purchase as he feels that he will later realize that a different stock would have been a better investment. Peter is suffering from:
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Regret Aversion |
|
28. |
The tendency to overvalue an item because you own it is referred to as which one of the following?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Endowment Effect |
|
29. |
Yesterday, Krista stated that Overland stock was only worth $12 a share and since it was selling for $15 a share, she declared it overpriced and refused to buy any shares. This morning, she learned that she is inheriting 3,500 shares of Overland stock from her grandmother. Suddenly, she is saying that Overland stock is a great buy at $15 and is probably worth at least $17 a share. This is an example of which one of the following?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Endowment Effect |
|
30. |
Ted constantly ignores the effects of inflation on money. Ted is suffering from which one of the following?
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Money Illusion |
|
31. |
Investors who tend to invest too heavily in the securities issued by their employer suffer from the condition known as:
See Section 8.2 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.3 Topic: Overconfidence |
|
32. |
Which one of the following statements appears to be correct based on current research?
See Section 8.3 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.3 Topic: Overconfidence |
|
33. |
The increased cash flows into mutual funds that have recently had superior returns is most associated with which one of the following characteristics?
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Clustering Illusion |
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34. |
Tricia has lost money on a particular stock for the past three years. Thus, she believes the stock will have a high positive rate of return this year because earning a good return is long overdue. This assumption is best described as the:
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Gambler's Fallacy |
|
35. |
Four of the last five stocks your investment adviser recommended have outperformed the market. Thus, you believe that if you continue to follow her advice, that 80 percent of your investments will outperform the market over the long term. This belief is based on the:
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Law of Small Numbers |
|
36. |
According to the theory of recency bias, investors tend to believe the financial markets will:
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Recency Bias |
|
37. |
Which one of the following is a characteristic of the self-attribution bias?
See Section 8.4 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.4 Topic: Self-Attribution Bias |
|
38. |
Which of the following are impediments to the correction of a security's mispricing? I. sentiment-based risk II. implementation costs III. firm-specific risk IV. noise trader risk
See Section 8.6 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-03 Sentiment-based risk and limits to arbitrage. Level of Difficulty: 1 Easy Section: 8.6 Topic: Limits to Arbitrage |
|
39. |
Which one of the following market sentiment index (MSI) values represents the best buying opportunity?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Market Sentiment Index |
|
40. |
Which one of the following market sentiment index (MSI) values indicates that all polled investors were bearish?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Market Sentiment Index |
|
41. |
Which one of the following indicates the long-run direction of the market according to Dow Theory?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Dow Theory |
|
42. |
What is the primary purpose of Dow theory?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Dow Theory |
|
43. |
According to Dow theory, which one of the following is the primary means of eliminating secondary market trends?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Dow Theory |
|
44. |
If you are a proponent of the Elliott wave theory, you are most apt to do which one of the following?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Elliott Wave Theory |
|
45. |
According to technical analysis, which one of the following is best seen as a buying opportunity?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Resistance Level |
|
46. |
You recently heard a news announcer state that the market is approaching its support level. Which one of the following is the best interpretation of that statement?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Support Level |
|
47. |
Which one of the following advance/decline lines is the most bullish signal?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Advance/Decline Line |
|
48. |
Which of the following are bullish indicators? I. flat advance/decline line II. breakout of a support level III. Arms ratio of .38 IV. heavy advancing volume
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Technical Indicators |
|
49. |
If the closing tick of the day is +32, this means that the:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Closing Tick |
|
50. |
Which one of the following Arms values is the most bearish?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Arms |
|
51. |
For the past year, a particular stock has a relative strength value of 1.03 as compared to the market. This means that the stock:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Relative Strength |
|
52. |
A "block trade" is a trade in excess of how many shares?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Block Trade |
|
53. |
Which one of the following statements is correct concerning an open-high-low-close bar chart?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Price Channel |
|
54. |
According to technical analysts, pricing patterns such as the head and shoulders are indicators of potential:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Head and Shoulders Pattern |
|
55. |
Which one of the following is correct concerning a head and shoulders top pattern?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Head and Shoulders Pattern |
|
56. |
Which one of the following statements is correct regarding moving averages?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Exponential Moving Average |
|
57. |
Assume the 50-day moving average is currently intersecting the 200-day moving average. Also assume the 50-day average is downward sloping and the 200-day average is upward sloping. Which one of the following statements is accurate based on this information?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Understand Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Moving Averages |
|
58. |
Bollinger bands:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Bollinger Bands |
|
59. |
A stock's price has been relatively constant for an extended period of time. In this instance, the Bollinger bands are:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Bollinger Bands |
|
60. |
Investors who use the MACD indicator as a signal for trading are most apt to buy a security when the MACD:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: MACD |
|
61. |
Which of the following are considered in the computation of money flows? I. last trade price II. current trade price III. volume of each trade IV. time of each trade
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Money Flow |
|
62. |
Assume a stock's price remains relatively stable while the money flow becomes highly positive. Which one of the following is most expected given this scenario?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Money Flow |
|
63. |
Fibonacci numbers:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Fibonacci Numbers |
|
64. |
Some technical analysts use Fibonacci numbers to predict:
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Fibonacci Numbers |
|
65. |
Which one of the following is seen as a bearish indicator?
See Section 8.7 |
|
Accessibility: Keyboard Navigation Blooms: Remember Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Technical Indicators |
|
66. |
A survey of 64 of your fellow classmates determines that 19 of them are bullish on the market while the remainder is bearish. What is the market sentiment index for this group of individuals?
MSI = (64 - 19)/45 = .70 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Market Sentiment Index |
|
67. |
A recent survey indicates that 1,731 people are bearish on the market for every 1,000 that are bullish. What is the value of the market sentiment index based on this information?
MSI = 1,731/(1,731 + 1,000) = .6338 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Market Sentiment Index |
|
68. |
Given the following information, what is the value of the advance/decline line on the third day of this 3-day period?
Value of A/D line = 1,315 + 1,650 + 1,300 - 1,416 - 1,128 - 1,312 = +409 |
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Advance/Decline Line |
|
69. |
Given the following information, what is the value of the advance/decline line on the second day of this 3-day period?
Value of A/D line = 1,211 + 1,360 - 1,806 - 1,654 = -889 |
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Advance/Decline Line |
|
70. |
Given the following information, what is the value of the closing Arms?
Arms = (621,433,125/1,310)/(851,325,120/1,512) = .8425 |
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Arms |
|
71. |
Given the following information, what is the value of the closing Arms?
Arms = (2,408,493,040/2,463)/(318,106,250/914) = 2.81 |
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Arms |
|
72. |
Last year, Kathy purchased 3 shares of stock A at $50 a share. At the same time, she purchased 5 shares of stock B at $35 a share. Today, stock A is valued at $65 a share and stock B is worth $42 a share. What is the relative strength of stock A as compared to stock B?
Relative strength = (3 × $65)/(5 × $42) = .9286 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Relative Strength |
|
73. |
What is the 3-day simple moving average as of day 5, given the following information?
3-day moving average as of day 5 = ($35.01 + $35.16 + $35.89)/3 = $35.35 |
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Simple Moving Average |
|
74. |
What is the 4-day simple moving average as of day 7, given the following information?
4-day moving average as of day 7 = ($44.61 + $42.83 + $42.65 + $43.13)/4 = $43.305 |
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Simple Moving Average |
|
75. |
What is the 3-day exponential moving average as of day 4 assuming that a weight of 70 percent is placed on the most recent price?
|
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 2 Medium Section: 8.7 Topic: Exponential Moving Average |
|
76. |
What is the 3-day exponential moving average as of day 5 assuming that a weight of 60 percent is placed on the most recent price?
|
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 2 Medium Section: 8.7 Topic: Exponential Moving Average |
|
77. |
Given the following information, what is the net money flow at the end of the trading day?
|
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Money Flow |
|
78. |
Given the following information, what is the net money flow at the end of the trading day?
|
|
Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Money Flow |
|
79. |
The series of Fibonacci numbers contains the sequential values of 610 and 987. What is the next number in this series?
Next number = 610 + 987 = 1,597 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Fibonacci Numbers |
|
80. |
The price of a stock increased from $32 to $38. Using phi, what are the primary and secondary support areas for the stock?
Primary support = $38 - [($38 - $32) × .382] = $35.71 Secondary support = $38 - [($38 - $32) × .618] = $34.29 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 2 Medium Section: 8.7 Topic: Fibonacci Numbers |
|
81. |
Altoona Train stock increased from $18 a share to $25 a share. Based on phi, what are the primary and secondary support areas for this stock?
Primary support = $25 - [($25 - $18) × .382] = $22.33 Secondary support = $25 - [($25 - $18) × .618] = $20.67 |
|
Accessibility: Keyboard Navigation Blooms: Apply Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 2 Medium Section: 8.7 Topic: Fibonacci Numbers |
Essay Questions
|
82. |
Draw a basic Elliott Wave Pattern. Identify each wave and indicate the waves that are "corrective" and those that are "impulsive". Answer will vary Feedback: Students should draw a pattern similar to Figure 8.4 in the textbook. Waves 1-5 are "impulsive" and waves A-C are "corrective". |
|
Blooms: Understand Learning Objective: 08-04 The wide array of technical analysis methods used by investors. Level of Difficulty: 1 Easy Section: 8.7 Topic: Elliott Wave Pattern |
|
83. |
Explain the basics of prospect theory and provide an example that illustrates this theory. Answer will vary Feedback: Prospect theory is the basic idea that investors respond more strongly to a loss than to a gain. For example, an investor may feel that it takes a gain of $3 to offset the pain of losing $1. |
|
Blooms: Understand Learning Objective: 08-01 Prospect theory. Level of Difficulty: 1 Easy Section: 8.2 Topic: Prospect theory |
|
84. |
Give some examples of how overconfidence affects investor behavior along with the results that might be expected based on that behavior. Answer will vary Feedback: Overconfidence tends to cause investors to trade too frequently, which increases trading costs. Overconfidence also causes investors to invest too heavily in their employer's securities as well as securities of firms with which they are familiar. These actions cause investor's portfolios to be too concentrated in certain securities and lack sufficient diversification. Regardless of how overconfidence is displayed, it tends to lower investor returns. |
|
Blooms: Understand Learning Objective: 08-02 The implications of investor overconfidence and misperceptions of randomness. Level of Difficulty: 1 Easy Section: 8.3 Topic: Overconfidence |
5-1
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