Question 1

Which of the following statements is most correct?

Accepted Answer

A) Stockholders have limited liability and have no control over corporate leadership 
B) Stockholders can dislodge the managers of the corporation but not the board of directors 
C) Stockholders have unlimited liability and can dislodge members of the board of directors 
D) Stockholders can dislodge members of the board and have limited liability 
A) Stockholders have limited liability and have no control over corporate leadership 
B) Stockholders can dislodge the managers of the corporation but not the board of directors 
C) Stockholders have unlimited liability and can dislodge members of the board of directors 
D) Stockholders can dislodge members of the board and have limited liability

Question 2

If you understood the discussion of the characteristics of common stocks, you should be able to explain the following statement: One of the benefits from stock ownership is the unlimited upside potential and the limited downside.What does this statement mean?

Accepted Answer

The common stockholders are residual cla

Question 3

Under what circumstances are stocks less risky than bonds?

Accepted Answer

A) When stockholders have limited liability. 
B) When investors buy stocks and hold them for long periods of time. 
C) When investors actively buy and sell stocks in response to new information. 
D) When the economy goes into a period of economic recession. 
A) When stockholders have limited liability. 
B) When investors buy stocks and hold them for long periods of time. 
C) When investors actively buy and sell stocks in response to new information. 
D) When the economy goes into a period of economic recession.

Question 4

The Dow Jones Industrial Average:

Accepted Answer

A) Gives equal weight to a change in the price of the stock of any company in the index 
B) Reflects that a 10% increase in a share of stock selling for $30 will have the same affect on the index as a 10% increase in the price of a stock selling for $60 
C) Is a value-weighted index 
D) Gives greater weight to shares with higher prices 
A) Gives equal weight to a change in the price of the stock of any company in the index 
B) Reflects that a 10% increase in a share of stock selling for $30 will have the same affect on the index as a 10% increase in the price of a stock selling for $60 
C) Is a value-weighted index 
D) Gives greater weight to shares with higher prices

Question 5

If the Dow Jones Industrial Average is currently at 10,000 and the price of one stock included in the index increases by $10, the Dow Jones Industrial Average will:

Accepted Answer

A) Not change; it is a value-weighted index 
B) Increase by 10.0% 
C) Increase by 1.0% 
D) Increase by 0.1% 
A) Not change; it is a value-weighted index 
B) Increase by 10.0% 
C) Increase by 1.0% 
D) Increase by 0.1%

Question 6

Why must caution be employed in comparing stock indexes across countries?

Accepted Answer

Since stock indexes are made up of diffe

Question 7

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

Accepted Answer

A) The opportunity for a greater expected return for the stockholders 
B) Greater risk for the stockholders 
C) Leverage for the stockholders 
D) Consistently lower debt-to-equity ratios 
A) The opportunity for a greater expected return for the stockholders 
B) Greater risk for the stockholders 
C) Leverage for the stockholders 
D) Consistently lower debt-to-equity ratios

Question 8

Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them.This behavior could be explained by:

Accepted Answer

A) People are irrational in their investment behavior, only focusing on positive outcomes. 
B) People are not very risk-averse and do not require a risk premium for stocks. 
C) Investing in stocks over the long run is not as risky as short-term holdings. 
D) People are not efficient users of information. 
A) People are irrational in their investment behavior, only focusing on positive outcomes. 
B) People are not very risk-averse and do not require a risk premium for stocks. 
C) Investing in stocks over the long run is not as risky as short-term holdings. 
D) People are not efficient users of information.

Question 9

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 10

Considering the return an investor requires from a stock, what are the two components that make up that return? Briefly explain each of these components.

Accepted Answer

We saw in the chapter; that the required

Question 11

A company currently pays an annual dividend of $6.50 per share.It expects the growth rate of the dividend will be 2.5% (0.025) annually.If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

Accepted Answer

A) It doesn't, you need an expected future price to use the model 
B) $257.50 
C) $130.00 
D) $266.50 
A) It doesn't, you need an expected future price to use the model 
B) $257.50 
C) $130.00 
D) $266.50

Question 12

Stock market bubbles impact consumers by:

Accepted Answer

A) Encouraging greater consumption of luxury goods and greater saving. 
B) Encouraging greater consumption of luxury goods and less saving. 
C) Encouraging more work and delaying retirement. 
D) Resulting in less investment in home ownership and more into stocks. 
A) Encouraging greater consumption of luxury goods and greater saving. 
B) Encouraging greater consumption of luxury goods and less saving. 
C) Encouraging more work and delaying retirement. 
D) Resulting in less investment in home ownership and more into stocks.

Question 13

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 14

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

Accepted Answer

A) Would be significantly less 
B) Would be significantly greater 
C) Would still be the same 
D) Would be irrelevant; limited liability eliminates the risk from leverage 
A) Would be significantly less 
B) Would be significantly greater 
C) Would still be the same 
D) Would be irrelevant; limited liability eliminates the risk from leverage

Question 15

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 16

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 17

The concept of limited liability says a stockholder of a corporation:

Accepted Answer

A) Is liable for the corporation's liabilities, but nothing more 
B) Cannot receive dividends that exceed his/her investment 
C) Cannot lose more than his/her investment 
D) Is only responsible for any taxes that the corporation may owe but not its other debts 
A) Is liable for the corporation's liabilities, but nothing more 
B) Cannot receive dividends that exceed his/her investment 
C) Cannot lose more than his/her investment 
D) Is only responsible for any taxes that the corporation may owe but not its other debts

Question 18

Stock market bubbles are:

Accepted Answer

A) The increase in a stock's price resulting from reported higher profits by a firm. 
B) Persistent and expanding gaps between stocks' actual prices and the prices warranted by the fundamentals. 
C) Synonymous to stock market crashes. 
D) Those periods of time when the overall level of the stock market is rising at a slow rate reflecting market fundamentals. 
A) The increase in a stock's price resulting from reported higher profits by a firm. 
B) Persistent and expanding gaps between stocks' actual prices and the prices warranted by the fundamentals. 
C) Synonymous to stock market crashes. 
D) Those periods of time when the overall level of the stock market is rising at a slow rate reflecting market fundamentals.

Question 19

The fact that returns from the stock market are less volatile over long-periods of time suggests that:

Accepted Answer

A) Investors are more risk averse over the long run. 
B) Stock markets are efficient. 
C) People get comfortable with the stocks they own. 
D) Stock market bubbles have become more common. 
A) Investors are more risk averse over the long run. 
B) Stock markets are efficient. 
C) People get comfortable with the stocks they own. 
D) Stock market bubbles have become more common.

Question 20

After one year, a company will pay $5 in dividends.It commits to paying $5.30 two years from the current date.This growth rate for dividends is expected to continue indefinitely.The U.S.Treasury bond yield is 8% and the equity-risk premium is equal to 2.5%.Compute the required stock return and current price of this stock, using the dividend-discount model.

Accepted Answer

The required stock return is 10.5%.To fi

Exam 8: Stocks, Stock Markets, and Market Efficiency

Which of the following statements is most correct?

If you understood the discussion of the characteristics of common stocks, you should be able to explain the following statement: One of the benefits from stock ownership is the unlimited upside potential and the limited downside.What does this statement mean?

Under what circumstances are stocks less risky than bonds?

The Dow Jones Industrial Average:

If the Dow Jones Industrial Average is currently at 10,000 and the price of one stock included in the index increases by $10, the Dow Jones Industrial Average will:

Why must caution be employed in comparing stock indexes across countries?

The fact that many corporations use debt financing as well as equity financing creates all of the following except:

Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them.This behavior could be explained by:

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?

Considering the return an investor requires from a stock, what are the two components that make up that return? Briefly explain each of these components.

A company currently pays an annual dividend of $6.50 per share.It expects the growth rate of the dividend will be 2.5% (0.025) annually.If the interest (discount) rate is 5% (0.05) what does the dividend-discount model predict the current price of the stock should be?

Stock market bubbles impact consumers by:

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?

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

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

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.

The concept of limited liability says a stockholder of a corporation:

Stock market bubbles are:

The fact that returns from the stock market are less volatile over long-periods of time suggests that:

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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