Question 1

A proprietorship or partnership can raise funds for expansion in all of the following ways except

Accepted Answer

Issuing stock through financial markets is not possible for a proprietorship or partnership. Only corporations can issue stock through financial markets. The other options (A, B, and C) are all ways that a proprietorship or partnership can raise funds for expansion.

Question 2

You have a bond that pays $60 per year in coupon payments.Which of the following would result in an increase in the price of your bond?

Accepted Answer

The price of a bond is inversely related to current market interest rates. If newly-issued bonds have a lower coupon rate than your bond, then the demand for your bond will increase, as it offers a higher return compared to new bonds. This will result in an increase in the price of your bond.

Question 3

When you buy newly-issued shares of Facebook stock,this transaction takes place in the

Accepted Answer

The primary market is where newly issued securities, such as stocks, are bought and sold for the first time. In this scenario, when someone buys newly-issued shares of Facebook stock, they are participating in the primary market. The other choices are not applicable to this situation.

Question 4

A financial security that represents a promise to repay a fixed amount of funds is a

Accepted Answer

A bond is a debt instrument that represents a promise to repay a fixed amount of funds to the bondholder at a specified maturity date with a fixed interest rate. This is in contrast to stocks, which represent ownership in a company and do not have a fixed repayment obligation. Coupons and dividends are payments made to investors in stocks or bonds, but they do not represent the underlying security itself.

Question 5

In October 2013,General Motors (GM)posted a price-earnings ratio of 10.13.If the price of the stock at that time was $36 per share,which of the following must have been true?

Accepted Answer

The price-earnings ratio (P/E ratio) is calculated by dividing the market price per share by the earnings per share (EPS).

P/E ratio = Market price per share / EPS

Given, P/E ratio = 10.13 and market price per share = $36

So, EPS = Market price per share / P/E ratio

= $36 / 10.13

= $3.55 (rounded to two decimal places)

Therefore, option B is the correct choice. The other options are not related to the given information about P/E ratio and stock price.

Question 6

Which of the following does not take place in the direct finance market?

Accepted Answer

Deposits from savers being accumulated and loans being made to borrowers is a characteristic of the indirect finance market, not the direct finance market. In the direct finance market, individuals and institutions directly buy securities issued by corporations or other entities, such as stocks or bonds.

Question 7

What is the central role of financial intermediaries in a market economy?

Accepted Answer

Financial intermediaries play a central role in bringing together savers and borrowers, by accepting deposits from savers and then lending them out to borrowers. This significantly increases the efficiency of the financial system, as it allows savers to earn interest on their savings while providing borrowers with access to funding they may not be able to get otherwise. This intermediation process helps to allocate capital more efficiently, promoting economic growth and development.

Question 8

When the coupon rate on newly issued bonds decreases relative to older,outstanding bonds,what happens?

Accepted Answer

The answer of When the coupon rate on newly issued...

Question 9

One of the most widely followed stock indexes in the United States is the Dow Jones Industrial Average.This index represents

Accepted Answer

The Dow Jones Industrial Average represents the stock prices of 30 large U.S. corporations.

Question 10

Raising funds through financial intermediaries is called

Accepted Answer

Raising funds through financial intermediaries is called indirect finance, as it involves using an intermediary such as a bank or mutual fund to access the funds of others. Direct finance involves raising funds directly from investors without the use of intermediaries. Corporate finance involves managing the financial activities of a company, while dividend reinvestment involves using dividends to purchase additional shares of stock.

Question 11

What do the highest stock price and the lowest stock price over the previous year indicate?

Accepted Answer

The highest and lowest stock prices over the previous year indicate the volatility of the stock's market price. This means how much the stock's price has fluctuated over the past year. It does not provide any information about the current market price, price-earnings ratio, or dividend yield.

Question 12

Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store,and the company wishes to raise the funds through direct finance.Which of the following methods could it use?

Accepted Answer

Abercrombie & Fitch can use either option A or option C to raise $8 million through direct finance. Option A involves selling bonds, which are debt securities that offer fixed interest payments and a repayment of the principal. Option C involves issuing stocks, which are equity securities that represent ownership in the company and offer potential capital gains through stock price appreciation. Both options allow the company to raise funds without incurring additional debt or paying interest on loans. However, the choice between bonds and stocks will depend on various factors such as market conditions, investor preferences, and the company's financial goals.

Question 13

In 2013,the dividend yield on Abercrombie & Fitch (ANF)stock rose from a low of 1.33% in May to 2.24% in October.Which of the following would have generated that result?

Accepted Answer

The dividend yield is calculated as the annual dividend per share divided by the current stock price, expressed as a percentage. Therefore, for the dividend yield to increase, either the dividend per share would need to increase or the stock price would need to decrease. The price-earnings ratio and bond issuance are not directly related to dividend yield. Since the question does not mention any change in stock price, the most likely reason for the increase in dividend yield is that ANF announced an increase in the dividend it would pay per share. Hence, option B is the best choice.

Question 14

Dividing the current market price of a stock by the firm's earnings per share gives the firm's

Accepted Answer

Dividing the current market price of a stock by the firm's earnings per share gives the price-earnings ratio (P/E ratio). This ratio indicates how much investors are willing to pay per dollar of earnings.

Question 15

Total dividend payments plus retained earnings divided by outstanding stock shares equals

Accepted Answer

Dividing the total dividend payments plus retained earnings by outstanding stock shares gives the earnings per share, which represents the amount of earnings attributable to each outstanding share of common stock.

Question 16

Generally with bond ratings,the higher the rating,the ________ the interest rate an investor will receive and the ________ the risk that the issuer of the bond will default.

Accepted Answer

The answer of Generally with bond ratings,the higher the rating,the...

Question 17

Which of the following is part of the secondary market?

Accepted Answer

All of these options are part of the secondary market. The New York Stock Exchange, the over-the-counter market, and NASDAQ are all examples of exchanges where investors can trade securities that were previously issued in initial public offerings (IPOs).

Question 18

If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store,this is an example of

Accepted Answer

This is an example of indirect finance because Abercrombie & Fitch is borrowing from a bank, which is acting as an intermediary between the company and the ultimate lender (depositors or investors in the bank).

Question 19

Dividing the dividend payment by the stock's closing market price determines the

Accepted Answer

Dividing the dividend payment by the stock's closing market price determines the dividend yield.

Question 20

In August 2011,Standard & Poor's (S&P)changed its rating on U.S.Treasury bonds from ________ based on the state of the federal government's budget deficit.

Accepted Answer

Standard & Poor's changed its rating on U.S. Treasury bonds from "AAA" to "AA+" in August 2011, based on the state of the federal government's budget deficit.

Quiz 6: Firms,the Stock Market,and Corporate Governance