Deck 6: Common Stocks

Question 1

$10,000 invested in the NASDAQ Composite at the beginning of 1995 would have increased in value to over $50,000 by the end of 1999.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Over the 50-year period of 1960-2010, the stock market as measured by the S&P 500 Index provided an average annual rate of return of approximately 11%.

Answer 3

True

Question 4

While many stocks increase in value over the long run, most of the return on stocks comes from dividends.

Question 5

Between 1956 and 2011 approximately 30% of years had positive returns.

Question 6

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 7

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 8

Since 1960, returns on the Dow Jones Industrial Average have never been negative for 3 consecutive years.

Question 9

Between 1956 and 2011 approximately 70% of years had positive returns.

Question 10

The period from late 2007 through the end of 2011 is best described as a prolonged bear market.

Question 11

For most stocks the returns from dividend income far exceed the return from capital gains.

Question 12

If stocks earn an average rate of return of 12 %, their value doubles every

A) 4 years.
B) 6 years.
C) 8 years.
D) 12 years.

Question 13

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

Question 14

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 15

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

Question 16

Although bear markets on average occur every 3 to 4 years, the timing of bear markets is very hard to predict.

Question 17

For the period 2000 through 2009, the average annual return on stocks was

A) 16%.
B) 8%.
C) -1%.
D) -50%.

Question 18

A bear market is described as a stock market decline of 20% or more.

Question 19

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

Question 20

Between 2009 and 2011 the stock regained much of the value lost in 2007 and 2008.

Question 21

Shareholders must either exercise their rights granted via a rights offering or let them expire unused.

Question 22

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 23

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

Question 24

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

Question 25

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 26

Treasury stock is a means of increasing the number of shares outstanding.

Question 27

The technology bubble of the 1990s lasted about 18 months.

Question 28

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

Question 29

Describe the bear market of 2008 through early 2009, the market recovery of 2009-2011 and put them in historical context.

Question 30

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

Question 31

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

Question 32

The total value of an investor's holdings in a company will increase as a direct result of a stock split.

Question 33

From March 2009 to January 2012, stock prices as measured by the S&P 500 Index

A) more than doubled in value.
B) lost more than half their value.
C) declined by nearly 10%.
D) rose by nearly 25%.

Question 34

Which of the following periods provided particularly high returns to stock investors?

A) February 1972-October 1974
B) March 2009-December 2011
C) September 2000-September 2002
D) October 2007-March 2009

Question 35

Over the period 1956-2011, stocks have provided investors with annual returns between

A) 6% to 8%.
B) 8% to 10%.
C) 10% to 12%.
D) 12% to 14%.

Question 36

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

Question 37

Transaction costs can significantly reduce the rate of return on stock investments.

Question 38

From October 2007 to March 2009, stock prices as measured by the S&P 500 Index

A) nearly doubled in value.
B) lost more than half their value.
C) declined by nearly 10%.
D) rose by nearly 25%.

Question 39

$10,000 invested in the NASDAQ Composite at the beginning of 2000 would have increased in value to about $20,000 by the end of 2005.

Question 40

Stock values declined sharply between

A) 1994 and 1997.
B) 1997 and 2000.
C) 2003 and 2007.
D) 2007 and 2008.

Question 41

Engines, Inc. declares a 4-for-10 stock split. The stock currently sells for $3 a share. A shareholder who owned 1000 shares of stock prior to the split will now own

A) 400 shares valued at about $7.50 a share.
B) 40 shares valued at about $1.20 a share.
C) 250 shares valued at about $7.50 a share.
D) 250 shares valued at about $1.20 a share.

Question 42

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 43

A round lot consists of

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

Question 44

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 45

Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has declared a 3-for-1 stock split effective tomorrow. After the split, Rob will own

A) 100 shares valued at about $27 a share.
B) 100 shares valued at about $3 a share.
C) 900 shares valued at about $27 a share.
D) 900 shares valued at about $3 a share.

Question 46

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 47

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

Question 48

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 49

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 50

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

Question 51

Why do some companies split their stock?

Question 52

Treasury stock can be used to do which of the following?
I) pay for an acquisition
II) pay the company employees
III) pay stock dividends
IV) cover employee stock option plan contributions

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

Question 53

What are the effects of a company repurchasing its own stock as Treasury shares?

A) Usually negative in the short term but uncertain over the long term.
B) Usually positive in the short term but uncertain over the long term.
C) Usually positive in both the short term and the long term.
D) No effect in either the short term or the long term.

Question 54

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 55

Investors should never pay more than book value for a stock.

Question 56

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 57

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 58

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 59

When a company, working with an underwriter, 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 60

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) the bid price and ask price.

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

Question 61

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

Question 62

The value that investors place on a stock is called its

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

Question 63

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 64

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 65

High dividend yields are typical of rapidly growing companies.

Question 66

Which of the following will tend to increase transaction costs?

A) buying or selling fewer than 100 shares at a time
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 67

If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company has a market capitalization of $50,000,000.

Question 68

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 69

A stock's investment value can be much higher than its book value.

Question 70

Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4 million of 6% preferred stock outstanding. If the company has 250,000 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 71

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

Question 72

Stock dividends and stock splits both increase the number of shares but add nothing to the value of the company.

Question 73

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

Question 74

You are given the following information on a company. Which one of the following statements is correct based on the information provided?

A) The market price is $21.34 per share.
B) The investment value is $2.67 per share.
C) The par value is $2.67 per share.
D) The book value is $21.34 per share.

Question 75

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

Question 76

With respect to dividend payments on stocks, the date of record is the date on which the payment is actually paid.

Question 77

The par or stated value of common stock is important for

A) accounting purposes only.
B) helping the investor determine the stock's intrinsic value.
C) helping the board of directors determine the dividend payout.
D) helping the market determine the trading price of the stock.

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

The value that represents the amount of stockholders' equity in a firm is called the

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

Question 80

The Jennings Company has 4 million shares of stock outstanding. The stock has a par value of $0.10 per share and is currently trading at $18 per share. According to this information, the market capitalization of Jennings is

A) $400,000.
B) $7.2 million.
C) $40 million.
D) $72 million.