Deck 6: Common Stocks

Question 1

Benefits of common stock ownership include

A) easy to buy and sell.
B) low trading costs.
C) potential for high returns.
D) all of these are benefits.

Answer 1

D

Question 2

Between 1930 and 2017, the average return on stocks exceeded 10%.

Answer 2

True

Question 3

Although bear markets on average occur about once a decade, the timing of bear markets is very hard to predict.

Answer 3

True

Question 4

Over the long term, the capital gain on most stocks will exceed the dividend income.

Question 5

Which type of investment return should result in the highest investment return over time?

A) dividends
B) preferred dividends
C) capital gains
D) bond interest

Question 6

Over the period beginning in January 2000 to the present, global stock markets have been relatively stable.

Question 7

For stocks in the S&P 500 index, returns from dividends exceeded capital gains over the period 2008-2017.

Question 8

Stock returns that are higher than 16%

A) are impossible to achieve.
B) can be achieved but require accepting higher risk.
C) are commonly achieved by most investors.
D) are only possible in the long-run.

Question 9

A market correction is defined as a stock market decline of 10% or more.

Question 10

Which of the following are benefits related to stock ownership?
I) ease of trading
II) attractive inflation-adjusted rates of return
III) guarantee of long-term positive returns
IV) affordability

A) I and II only
B) II and IV only
C) I and III only
D) I, II and IV only

Question 11

If stocks earn an average rate of return of 11 %, their value doubles approximately every

A) 5.8 years.
B) 6.6 years.
C) 7.2 years.
D) 9.1 years.

Question 12

Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets.

Question 13

Since the financial crisis of 2008. the major indexes have not yet recovered to their 2007 levels.

Question 14

There is a stronger tendency for the stock market to increase in value rather than decrease in value over time.

Question 15

Over the long term, most of the return on stocks has come from price increases.

Question 16

A decline of 5% in the S&P 500 would be considered a correction.

Question 17

Because common shareholders are entitled to the profits that remain after all of a corporation's other obligations have been met, common shareholders are known as

A) residual owners.
B) temporary owners.
C) debt owners.
D) owners of last resort.

Question 18

A weakness in the real estate market is very unlikely to affect the stock market.

Question 19

Which one of the following statements about common stock is true?

A) Common stock can provide attractive capital appreciation opportunities.
B) Dividends generally provide the greatest rate of return on common stocks.
C) Common stocks generally have a negative rate of return over a ten-year period.
D) The DJIA is the best indicator of the overall performance of common stocks.

Question 20

Between 1926 and 2017 ,approximately 26% of years had positive returns.

Question 21

Shares of publicly traded stock can be issued either through a public offering or a rights offering.

Question 22

Which of these asset classes is more likely to generate the highest returns over time?

A) government bonds
B) common stocks
C) corporate bonds
D) preferred stocks

Question 23

When residential real estate values fell sharply from 2006 to 2009, the stocks of financial institutions were hardly impacted at all.

Question 24

Stock held in treasury is a means of increasing the number of shares outstanding.

Question 25

The total value of an investor's holdings in a company will increase in proportion to the magnitude of a stock split.

Question 26

Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.

Question 27

Describe the bear market of 2008 through early 2009 and the trend of stock prices in subsequent years.

Question 28

Stocks generally have produced positive inflation-adjusted rates of return over the long- term.

Question 29

Corporations often split their stocks when they believe that the price makes them less attractive to average investors.

Question 30

One reason that common stock selection is difficult is because numerous factors can potentially impact future performance.

Question 31

Since each share of common stock represents ownership in a company, shares of common stock are often referred to as

A) illiquid investments.
B) equity securities.
C) fixed-income securities.
D) unit-cost securities.

Question 32

One advantage that bonds have over stocks is

A) a better chance for capital gains.
B) better diversification because they move opposite from stocks.
C) less risk.
D) higher rates of return.

Question 33

The extraordinary run up in stock prices during the late 1990s primarily affected

A) energy stocks.
B) retail stocks.
C) pharmaceutical stocks.
D) technology stocks.

Question 34

Shareholders can either exercise their rights granted via a rights offering or sell them to another investor.

Question 35

Different classes of stock generally have either different voting rights or different dividends.

Question 36

Some investors prefer bonds over commons stocks because

A) stocks are too risky for their level of risk tolerance.
B) they are concerned about preservation of wealth.
C) bond income is more predictable.
D) all of these

Question 37

Companies typically issue new shares through an initial public offering (IPO).

Question 38

An individual stock generally provides a

A) dividend payment that ensures total protection from purchasing power risk.
B) refuge from event risk.
C) current income that is less predictable than that available from other types of investments.
D) predictable annual rate of return.

Question 39

Many companies increased their dividends

A) whenever necessary to compensate shareholders for declining stock values.
B) in every year since 1950.
C) during the market decline of 2007-2008.
D) during the market recovery of 2009-2011.

Question 40

Electronic trading systems have reduced transaction costs of odd-lot trades.

Question 41

A round lot consists of

A) 1 share.
B) 10 shares.
C) 100 shares.
D) 1,000 shares.

Question 42

A stock can have only one market value, but different investment values for different investors.

Question 43

Which of the following is unlikely to be found in an internet stock quotation?

A) earning per share (EPS)
B) beta
C) previous day's closing price
D) broker's commission per 100 shares

Question 44

Why do some companies split their stock?

Question 45

In a rights offering, the

A) existing stockholders are given the first opportunity to purchase new shares in proportion to their current ownership position.
B) underwriter offers the investing public a certain number of shares at a certain price.
C) total equity remains constant while the number of shares of common stock outstanding increases.
D) amount of debt in the capital structure increases by the amount of the rights offering.

Question 46

The investment value for a publicly traded stock can readily be found in the financial section of the newspaper or on the Internet.

Question 47

One motive for issuing classified stock with different voting rights is to

A) increase the market value of the company.
B) avoid SEC reporting requirements.
C) allow the company's founders to retain control of the company.
D) facilitate the issue of additional shares in the future.

Question 48

When a corporation declares a stock split, it usually does so because

A) the firm's retained earnings are excessive.
B) there are too many shares of stock outstanding.
C) investors sometimes require nontaxable returns.
D) it wants to make its stock more affordable to average investors.

Question 49

Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the company declared a 1 for 10 reverse split. After the split, Tiffany owned

A) 10,000 shares worth approximately $1.50 per share.
B) 10,000 shares worth approximately $0.15 per share.
C) 100 shares worth approximately $15 per share.
D) 100 shares worth approximately $1.50 per share.

Question 50

When a company offers the investing public a certain number of shares of its stock at a certain price, the company is making what is known as a

A) public offering.
B) rights offering.
C) stock spin-off.
D) treasury offering.

Question 51

Assume the Plum Corporation has two different issues of common stock. One issue carries voting rights, and the other issue does not. In this situation, Plum is said to have issued

A) buy-back stock.
B) treasury stock.
C) OTC stock.
D) classified stock.

Question 52

VGG, Inc. declares a 2-for-5 stock split. The stock currently sells for $4 a share. A shareholder who owned 1000 shares of VGG stock prior to the split will now own

A) 400 shares valued at about $10.00 a share.
B) 440 shares valued at about $1.60 a share.
C) 2500 shares valued at about $1.60 a share.
D) 250 shares valued at about $11.60 a share.

Question 53

Stock quotes on most Internet service providers such as Yahoo Finance include
I) the highest and lowest price over the last 52 weeks.
II) the closing price for the previous trading day.
III) the opening price for the day.
IV) date of the most recent stock split.

A) I and III only
B) II and IV only
C) I, II and III only
D) II, III and IV only

Question 54

Stocks that are readily available to the general public and that are bought and sold on the open market are known as

A) initial public offerings.
B) publicly traded issues.
C) treasury stocks.
D) blue chip stocks.

Question 55

A stock's book value and par value are normally the same or nearly the same.

Question 56

Which one of the following statements about common stock is correct?

A) Each share of stock has a specified maturity date.
B) Common stock gives stockholders first title to a share of the company's earnings, prior to other corporate obligations.
C) Common stock typically provides higher levels of current income than do similar grade corporate bonds.
D) Each share of common stock of a given class entitles the holder to an equal ownership position and an equal vote in the corporation.

Question 57

A stock's market value would normally be higher than it's book value.

Question 58

A stock's investment value and market value are normally not far apart.

Question 59

Stock which has been issued and subsequently reacquired by the issuing corporation is called

A) letter stock.
B) treasury stock.
C) classified stock.
D) book stock.

Question 60

Kayla owns 200 shares of Blackwood common stock valued at $330 a share. Blackwood has declared a 3-for-2 stock split effective tomorrow. After the split, Kayla will own

A) 600 shares valued at about $220 a share.
B) 133 shares valued at about $495 a share.
C) 600 shares valued at about $$110 a share.
D) 300 shares valued at about $220 a share.

Question 61

Shareholders who sell their stock on or after the ex-dividend date, but before the date of record, will still receive the declared dividend.

Question 62

Which of the following would be typical for a successful company?

A) Market value greater than book value.
B) Par value greater than book value.
C) Book value greater than market value.
D) None of the above.

Question 63

Ostend Industries has total assets of $85 million, total debt of $58.6 million, and $4.8 million of 5% preferred stock outstanding. If the company has 500,000 shares of common stock outstanding, its book value per share would be

A) $32.33.
B) $33.60.
C) $43.20.
D) $52.80.

Question 64

Stock dividends and stock splits both increase the number of shares but only stock dividends increase the value of the company.

Question 65

The balance sheet value of a firm's assets minus the balance sheet amount of its liabilities is known as

A) par value.
B) book value.
C) liquidation value.
D) market value.

Question 66

A company's board of directors must declare a dividend if the firm is profitable.

Question 67

Under current laws, cash dividends are taxed at the same rate as capital gains.

Question 68

Dividend payments are usually more stable than capital gains.

Question 69

The value that investors place on a stock is called its

A) book value.
B) investment value.
C) liquidation value.
D) par value.

Question 70

You are given the following information on a company.
$$\begin{array} { l r } \hline\text { Total Book Value } & \$ 3,200,000 \\\text { Total Market Value } & \$ 25,608,000 \\\text { Common shares outstanding } & 600,000 \\\hline\end{array}$$ Which one of the following statements is correct based on the information provided?

A) The market price is $42.68 per share.
B) The investment value is $5.34 per share.
C) The par value is $5.34 per share.
D) The book value is $48.01 per share.

Question 71

The stock listing for a company shows a P/E of 22, a dividend yield of 3.4% and a closing price of $33.67. What is the amount of dividends per share?

A) $1.53
B) $1.14
C) $0.75
D) $0.05

Question 72

High dividend yields are typical of rapidly growing companies.

Question 73

What is the relationship between a stock's market value and its investment value?

Question 74

Which of the following will tend to increase transaction costs?

A) using a full service broker
B) buying or selling shares through an on-line broker
C) buying or selling more than 1000 shares in a single trade
D) buying or selling at times when volume is high and the exchanges are busy

Question 75

Another term for the stated value or face value of a stock is its

A) book value.
B) liquidation value.
C) par value.
D) proxy value.

Question 76

The Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of $1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value of this stock at $38.50. According to this information, the market capitalization of Charbridge is

A) $144,000,000.
B) $154,000,000.
C) $4,000,000.
D) $72 million.

Question 77

As a general rule, which one of the following statements concerning the various values of common stock is correct?

A) Market values are usually below book values.
B) Par values are usually above book values.
C) Market values are usually below par values.
D) Book values are usually below market values.

Question 78

If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is

A) $40,000,000.
B) $49,000,000.
C) $50,000,000.
D) $60,000,000.

Question 79

Stock dividends do not increase the value of a shareholder's position.

Question 80

If a firm has a 4 million shares outstanding and its stock trades at $50 per share, the company has a market capitalization of $200,000,000.