Question 1

You have just purchased 10 shares of a stock selling at $50 per share. Since that time, the company was found to be in violation of several environmental laws and has several major lawsuits outstanding. Which of the following statements is most correct?

Accepted Answer

As a shareholder, your maximum loss is limited to the amount you invested, which is $500 in this case.

Question 2

Dividends are paid regardless if the company makes a profit.

Accepted Answer

Dividends are paid out of a company's profits. If a company does not make a profit, it may choose not to pay dividends to its shareholders.

Question 3

The ________ is the date on which the board of directors announces the amount of the dividend.

Accepted Answer

The declaration date is the date on which the board of directors publicly announces the amount and details of the dividend payment. This is the first step in the dividend process and sets the stage for the other important dates related to dividends.

Question 4

Nathan noticed that a company that has great potential just declared a ________ because its stock price was getting too high for the small investor to buy the stock. The company will substitute more shares for the existing shares of stock without increasing the market value of the firm.

Accepted Answer

The situation described in the sentence is a stock split, where the company increases the number of shares outstanding while reducing the price per share. This is done to make the stock more affordable and accessible to a wider range of investors. A stock repurchase (B) is when a company buys back its own shares from the market, and does not involve increasing the number of shares outstanding. Dividend yield (A) and claim on income (C) are not relevant to this scenario. "Stock splice" is not a term used in finance.

Question 5

The firm will pay an annual dividend this year of $2 per share. The current market price of the stock is $40.00 per share. The book value of this stock is $24.00 per share. The earnings per share for this firm is $5.75. What is the current dividend yield of this stock?

Accepted Answer

The current dividend yield is calculated by dividing the annual dividend per share by the current market price per share. Thus, $2 / $40.00 = 0.05 or 5%.

Question 6

A ________ increases the number of stock shares outstanding by replacing each existing share of stock with a stated number of new shares.

Accepted Answer

A stock split increases the number of outstanding shares by issuing additional shares to the existing shareholders based on a certain ratio (for example, 2-for-1 or 3-for-1). The purpose of a stock split is to make the price of each share more affordable for investors, as well as to increase liquidity and potential demand for the stock. The value of each individual share decreases proportionally with the increase in the number of shares outstanding. Dividend reinvestment, stock repurchase, and stock reissue do not involve increasing the number of shares outstanding.

Question 7

The net income of the firm is $4 million dollars. The firm will pay $500,000 in dividends to the preferred shareholders. There are currently 1 million shares of common stock outstanding. What are the earnings per share for this firm?

Accepted Answer

To find the earnings per share, we need to subtract the dividend paid to the preferred shareholders from the net income and then divide by the number of outstanding common shares.

Net income after dividends to preferred shareholders = $4,000,000 - $500,000 = $3,500,000

Earnings per share = Net income after dividends to preferred shareholders / Number of outstanding common shares 
= $3,500,000 / 1,000,000 
= $3.50

Therefore, the earnings per share for this firm is $3.50, and the best choice is B.

Question 8

While you can't be assured of what you will get when you sell your stock, you will most likely not have difficulty selling it.

Accepted Answer

This is because stocks are highly liquid investments, meaning they can be easily bought and sold on stock exchanges or through brokers. However, the price at which you sell your stock may be influenced by market conditions and demand for that particular stock.

Question 9

Which of the following statements is most correct regarding the general relationship between stocks and interest rates?

Accepted Answer

As interest rates increase, borrowing costs increase, which can result in lower profits for companies. This can lead to a decrease in stock prices. Conversely, as interest rates decrease, borrowing costs decrease, which can result in higher profits for companies, leading to an increase in stock prices. Therefore, there is generally an inverse relationship between interest rates and stock prices.

Question 10

You cannot benefit from capital appreciation until you actually sell your stock.

Accepted Answer

Capital appreciation refers to an increase in the value of an asset, such as a stock. However, this increase in value is only realized when the asset is sold. Until the stock is sold, any increase in its value is only on paper and does not provide any actual benefit to the owner.

Question 11

When a company buys back its own common stock it is engaging in a ________.

Accepted Answer

When a company buys back its own common stock, it is engaging in a stock repurchase. This can be done for a variety of reasons, such as to increase shareholder value by reducing the number of shares outstanding, to increase earnings per share, or to fend off unwanted takeover attempts.

Question 12

Your investment goal is to receive a stream of income from your investment. Which of the following would be important information to determine whether a particular stock purchase would suit your plan?

Accepted Answer

The most important information to determine whether a particular stock purchase would suit your plan of receiving a stream of income from your investment is the dividend yield. This is because the dividend yield indicates the amount of dividend income you can expect to receive relative to the stock price. A higher dividend yield implies higher income from the stock, thus making it a more suitable investment for an income-generating portfolio. Factors such as earnings per share, market-to-book ratio, and book value may be relevant for other investment strategies, but not specifically for an income-generating one.

Question 13

________ are a company's distribution of its profits in the form of cash or stock to its owners.

Accepted Answer

Dividends are the distribution of profits to shareholders in the form of cash or stock. Coupon interest payments are specific to bonds, equity payments are not a common term, and shareholder divestments refer to the sale of shares by shareholders, not the company's distribution of profits.

Question 14

The ________ date is the date the stock begins trading without dividend, meaning that if you buy it after this date you will not get the dividend for that year.

Accepted Answer

The ex-dividend date is the date when a stock begins trading without its dividend, which means that if an investor purchases the stock on or after this date, they will not be entitled to receive the dividend payment for that year. The payment date is the date when the dividend is actually paid out to shareholders who owned the stock before the ex-dividend date. The declaration date is the date when the company announces its intention to pay a dividend. The reinvestment date refers to the date in which a dividend reinvestment plan (DRIP) takes effect, allowing shareholders to automatically reinvest their dividends back into the company's stock. The maturity date is the date when a bond or other fixed income security reaches the end of its term and returns the principal amount to the investor.

Question 15

You are really keen on stocks. However, you do not like stocks with regard to ________. This means that if a company you have invested in goes bankrupt, the creditors are paid first and you will be out of luck.

Accepted Answer

The correct answer is C) claims on assets. This is because in the event of a company's bankruptcy, creditors have priority over shareholders when it comes to claims on the company's assets. Shareholders, especially those holding common stock, are last in line and may lose their investment if the company's assets are insufficient to pay its debts.

Question 16

Returns on stocks can come in the form of capital appreciation.

Accepted Answer

Capital appreciation is one of the ways in which investors can earn returns on their stock investments. It refers to the increase in the stock's market value over time, which results in a higher sale price and hence, a profit for the investor.

Question 17

You purchased 100 shares of Quantex at $150 per share for a total investment of $15,000. After your purchase the stock had a 3 for 1 split. How many shares do you now own and how much is your original investment now worth?

Accepted Answer

After a 3 for 1 stock split, you would own 3 times the number of shares you originally had, so 100 shares become 300 shares. However, the total value of your investment remains the same, $15,000, because the split does not change the total value of your investment, just the number of shares and the price per share.

Question 18

A(n) ________ is a legal agreement signed by a stockholder allowing someone else to vote on his or her behalf at the corporation's annual meeting.

Accepted Answer

A proxy is a legal agreement that allows someone else to vote on behalf of the stockholder during the corporation's annual meeting. This allows stockholders who cannot attend the meeting to still have a say in the company's decision-making process. Option A ("voting contract") and Option B ("agency contract") are not correct terms for this type of agreement, and Option C ("contingency contract") is not relevant to the situation.

Question 19

Both capital gains and dividends are guaranteed with common stock.

Accepted Answer

Common stock does not guarantee either capital gains or dividends. Both are subject to market performance and company decisions.

Question 20

Capital appreciation refers to an increase in the selling price of your shares of stock.

Accepted Answer

Capital appreciation refers to an increase in the value of an asset, in this case, the shares of stock, resulting in a higher selling price.

Quiz 13: Investing in Stocks