Question 1

The fact that common stockholders are residual claimants means the stockholders:

Accepted Answer

A) have a claim against the revenue that remains after everyone else is paid. 
B) receive their dividends before any other residuals are paid. 
C) are paid any past due dividends before other claims are paid. 
D) are paid before the bondholders but after any taxes are paid. 
A) have a claim against the revenue that remains after everyone else is paid. 
B) receive their dividends before any other residuals are paid. 
C) are paid any past due dividends before other claims are paid. 
D) are paid before the bondholders but after any taxes are paid.

Question 2

The investment you made in a mutual fund one year ago lost 50% of its value over the past year.What percentage increase is needed in the fund to restore your portfolio to the level it was one year ago?

Accepted Answer

We can employ the formula from

Question 3

After one year, a company will pay $20 in dividends.It commits to paying $21 two years from the current date.This growth rate in dividends is expected to continue indefinitely.The interest rate is 8%.Compute the current price of this stock, using the dividend-discount model.

Accepted Answer

First, we need to compute the growth rat

Question 4

You have a portfolio valued at $10,000.Over the next twelve months it loses 50% of its value.What return does the portfolio need to earn over the following twelve months to be restored to its original value?

Accepted Answer

A) 100% 
B) 50% 
C) 200% 
D) 25% 
A) 100% 
B) 50% 
C) 200% 
D) 25%

Question 5

Suppose there is a reduction of the return provided on U.S.Treasury bonds.We should expect the current price of stocks to:

Accepted Answer

A) increase since the risk-free return is now lower. 
B) decrease since U.S.Treasury bonds are safer. 
C) increase since the risk premium on the stocks will increase. 
D) stay the same; there is no effect on stock prices from this reduction. 
A) increase since the risk-free return is now lower. 
B) decrease since U.S.Treasury bonds are safer. 
C) increase since the risk premium on the stocks will increase. 
D) stay the same; there is no effect on stock prices from this reduction.

Question 6

The impact from rapid dividend growth on a stock's current price will be:

Accepted Answer

A) negative, since the company is paying out profits to stockholders. 
B) positive, since rapid dividend growth causes stockholders to expect higher future dividends. 
C) zero; only current dividends are used to determine the current price of a stock. 
D) positive, but only if the corporation does not have any debt. 
A) negative, since the company is paying out profits to stockholders. 
B) positive, since rapid dividend growth causes stockholders to expect higher future dividends. 
C) zero; only current dividends are used to determine the current price of a stock. 
D) positive, but only if the corporation does not have any debt.

Question 7

As a company issues more debt:

Accepted Answer

A) its leverage decreases. 
B) the share of financing from equity increases. 
C) the expected return to equity holders falls. 
D) risk increases. 
A) its leverage decreases. 
B) the share of financing from equity increases. 
C) the expected return to equity holders falls. 
D) risk increases.

Question 8

The Dow Jones Industrial Average is a:

Accepted Answer

A) simple average. 
B) price-weighted index. 
C) value-weighted index. 
D) total-value index. 
A) simple average. 
B) price-weighted index. 
C) value-weighted index. 
D) total-value index.

Question 9

Which of the following is not a feature of common stock?

Accepted Answer

A) Stockholders receive regular fixed payments on their shares. 
B) Stockholders have limited liability. 
C) Stock holders are residual claimants. 
D) Stockholders have voting rights. 
A) Stockholders receive regular fixed payments on their shares. 
B) Stockholders have limited liability. 
C) Stock holders are residual claimants. 
D) Stockholders have voting rights.

Question 10

The notion that stock prices reflect all current available information:

Accepted Answer

A) makes the risk of holding stocks greater. 
B) indicates that mutual fund managers will not, on average, outperform market averages. 
C) says stock prices should be more rigid than they are. 
D) makes it easier to predict the movements in the price of a stock. 
A) makes the risk of holding stocks greater. 
B) indicates that mutual fund managers will not, on average, outperform market averages. 
C) says stock prices should be more rigid than they are. 
D) makes it easier to predict the movements in the price of a stock.

Question 11

Stock market bubbles typically lead to all of the following except:

Accepted Answer

A) an efficient allocation of resources. 
B) stock market crashes. 
C) patterns of volatile returns from the stock market. 
D) gaps between actual stock prices and those warranted by the fundamentals. 
A) an efficient allocation of resources. 
B) stock market crashes. 
C) patterns of volatile returns from the stock market. 
D) gaps between actual stock prices and those warranted by the fundamentals.

Question 12

What price would an individual be willing to pay today for a stock that is expected to sell for $100 two years from now and which pays an annual dividend that is $6.00? Assume the individual has a discount rate of 8% (0.08).

Accepted Answer

We can use the formula from the chapter

Question 13

Why isn't the actual level of an index, for example the Dow Jones Industrial Average, very useful on its own?

Accepted Answer

For many indexes, the real value is to b

Question 14

Without the stockholders' limited liability, the risk from the use of leverage would:

Accepted Answer

A) be significantly less. 
B) be significantly greater. 
C) still be the same. 
D) be irrelevant. 
A) be significantly less. 
B) be significantly greater. 
C) still be the same. 
D) be irrelevant.

Question 15

The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because:

Accepted Answer

A) it takes into account the stock prices of 500 of the largest firms, which is less than the DJIA. 
B) it is a price-weighted index, where the DJIA is a value-weighted index. 
C) larger firms are less important in the S&P 500 than in the DJIA. 
D) it takes into account the prices of more stocks and it uses a different weighting scheme. 
A) it takes into account the stock prices of 500 of the largest firms, which is less than the DJIA. 
B) it is a price-weighted index, where the DJIA is a value-weighted index. 
C) larger firms are less important in the S&P 500 than in the DJIA. 
D) it takes into account the prices of more stocks and it uses a different weighting scheme.

Question 16

When studying world stock indexes, we observe that:

Accepted Answer

A) the S&P 500 is largest in terms of index value. 
B) most of the world's indexes are price-weighted. 
C) the indexes are very comparable. 
D) the indexes are comparable but only in percentage terms. 
A) the S&P 500 is largest in terms of index value. 
B) most of the world's indexes are price-weighted. 
C) the indexes are very comparable. 
D) the indexes are comparable but only in percentage terms.

Question 17

If the Dow Jones Industrial Average is at 10,205 and it is up 4% from the previous day, what was the index at the close of the market the previous day?

Accepted Answer

A) 10,201.0 
B) 9,805.0 
C) 9,812.5 
D) 9800.0 
A) 10,201.0 
B) 9,805.0 
C) 9,812.5 
D) 9800.0

Question 18

A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year.It is expected that two years from now the stock will sell for $90.00 a share.If the interest rate is 5% (0.05), then equation 7 in the chapter predicts the stock's current price should be:

Accepted Answer

A) $94.90 
B) $93.12 
C) $101.30 
D) $94.30 
A) $94.90 
B) $93.12 
C) $101.30 
D) $94.30

Question 19

A share of common stock represents a(n):

Accepted Answer

A) claim from a lender against a borrower. 
B) share in the company's debts. 
C) share of ownership of the company. 
D) unlimited liability to the owner of the stock. 
A) claim from a lender against a borrower. 
B) share in the company's debts. 
C) share of ownership of the company. 
D) unlimited liability to the owner of the stock.

Question 20

Management fees for mutual funds are:

Accepted Answer

A) different across funds and can significantly impact the return to an investor. 
B) fixed by regulation. 
C) fixed by regulation but can vary by the size of the fund. 
D) usually a percentage of the return achieved by fund managers. 
A) different across funds and can significantly impact the return to an investor. 
B) fixed by regulation. 
C) fixed by regulation but can vary by the size of the fund. 
D) usually a percentage of the return achieved by fund managers.

Exam 8: Stocks, Stock Markets, and Market Efficiency

The fact that common stockholders are residual claimants means the stockholders:

The investment you made in a mutual fund one year ago lost 50% of its value over the past year.What percentage increase is needed in the fund to restore your portfolio to the level it was one year ago?

After one year, a company will pay $20 in dividends.It commits to paying $21 two years from the current date.This growth rate in dividends is expected to continue indefinitely.The interest rate is 8%.Compute the current price of this stock, using the dividend-discount model.

You have a portfolio valued at $10,000.Over the next twelve months it loses 50% of its value.What return does the portfolio need to earn over the following twelve months to be restored to its original value?

Suppose there is a reduction of the return provided on U.S.Treasury bonds.We should expect the current price of stocks to:

The impact from rapid dividend growth on a stock's current price will be:

As a company issues more debt:

The Dow Jones Industrial Average is a:

Which of the following is not a feature of common stock?

The notion that stock prices reflect all current available information:

Stock market bubbles typically lead to all of the following except:

What price would an individual be willing to pay today for a stock that is expected to sell for $100 two years from now and which pays an annual dividend that is $6.00? Assume the individual has a discount rate of 8% (0.08).

Why isn't the actual level of an index, for example the Dow Jones Industrial Average, very useful on its own?

Without the stockholders' limited liability, the risk from the use of leverage would:

The Standard & Poor's 500 Index differs from the Dow Jones Industrial Index because:

When studying world stock indexes, we observe that:

If the Dow Jones Industrial Average is at 10,205 and it is up 4% from the previous day, what was the index at the close of the market the previous day?

A stock has a current annual dividend of $6.00 per year and it is expected to grow by 3% (0.03) a year.It is expected that two years from now the stock will sell for $90.00 a share.If the interest rate is 5% (0.05), then equation 7 in the chapter predicts the stock's current price should be:

A share of common stock represents a(n):

Management fees for mutual funds are:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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