Question 1

The first sale to the general public of stock in a corporation is referred to as

Accepted Answer

The first sale of stock to the general public is known as an initial public offering (IPO). This occurs when a private company decides to go public and offers shares of stock to the public for the first time. The process involves underwriters who help determine the price of the shares and promote the offering to potential investors.

Question 2

Suppose the Martin Microchip Corporation earns a profit of $20 per share of stock.If the prevailing interest rate is 10 percent and the stock is currently selling for $100 per share, what is the current price/earnings ratio?

Accepted Answer

The price/earnings (P/E) ratio is calculated by dividing the current stock price by the earnings per share. In this case, the stock is selling for $100 per share and the earnings are $20 per share, so the P/E ratio is $100/$20 = 5.

Question 3

Large swings in stock prices are usually caused by

Accepted Answer

Large swings in stock prices are generally caused by widespread changes in expectations, such as changes in the economic outlook or shifts in investor sentiment. Interest rate changes, changes in the supply of stocks, or dividend payments can all affect stock prices, but these factors usually result in more modest movements rather than large swings.

Question 4

The price of a stock will decrease, ceteris paribus, when

Accepted Answer

The situation described in option C, where people are fearful due to an external event like terrorism, can cause a decrease in the value of the stock market as investors may shy away from investing until the situation stabilizes. The other options (A, B, and D) would typically lead to an increase or stability in the stock market.

Question 5

Ceteris paribus, the price of a stock will definitely increase when the

Accepted Answer

When demand for a stock increases, investors are willing to pay more for it, driving up the price. Conversely, if demand decreases, the price will likely decrease as well. Factors that can increase demand include positive news about the company, an increase in earnings or revenue, or a growing industry trend. None of the other options presented (increased supply, increased interest rates, or decreased demand and supply) would result in a price increase for the stock.

Question 6

The purpose of an initial public offering is to

Accepted Answer

The purpose of an initial public offering (IPO) is to raise funds for investment and growth by selling shares of the company to the public. By going through the IPO process, a private company can become a public company with publicly traded shares, which allows them to attract new investors and raise capital for future expansion and operations. Choices A, B, and C are not accurate explanations of the purpose of an IPO.

Question 7

The Dow Jones Industrial Average is an arithmetic average of _____ blue-chip industrial stocks.

Accepted Answer

The Dow Jones Industrial Average is made up of 30 large, blue-chip industrial stocks, chosen by the editors of the Wall Street Journal.

Question 8

An initial public offering

Accepted Answer

An initial public offering (IPO) allows a company to raise money without increasing debt. The company issues shares to the public in exchange for capital, which it can use for investment and growth. This allows the company to raise a large amount of funds quickly and also provides an exit opportunity for early investors or founders who want to sell their stake. It does not necessarily indicate demand for the company's new product, and it may or may not increase the percentage of the company owned by management and original entrepreneurs.

Question 9

The most important determinant of how much an individual will pay for a share of stock is

Accepted Answer

The expectation of future profit is the most important determinant of a stock's price because investors purchase stocks in anticipation of earning a return on their investment. This means that they are looking for stocks that they believe will increase in value over time, and this is largely determined by the company's expected future profitability. The other options may have some impact on a stock's price, but they are not as significant as the company's financial prospects.

Question 10

If Shoffner Inc., a publicly traded corporation, has a share price of $125, revenues of $15.35 per share, and profits of $5.25 per share, what is the P/E ratio for Shoffner Inc.shares?

Accepted Answer

The P/E (Price-to-Earnings) ratio is calculated by dividing the market value per share by the earnings per share (EPS). For Shoffner Inc., the EPS is $5.25. Therefore, the P/E ratio is $125 / $5.25 = 23.81.

Question 11

The P/E ratio, or price to earnings ratio of a stock, can be computed using which of the following formulas?

Accepted Answer

The P/E ratio is calculated by dividing the price of a stock by its earnings per share. This formula gives investors an idea of how much they are paying for each dollar of earnings. A higher P/E ratio generally indicates that investors are willing to pay more for each dollar of earnings, which can be a sign of optimism or potentially overvalued stock.

Question 12

The primary economic role of financial markets is to

Accepted Answer

The primary economic role of financial markets is to allocate resources to profitable businesses and away from businesses with losses. Financial markets facilitate the efficient allocation of resources in the economy by directing funds from savers to borrowers. This is done through various financial instruments, such as stocks, bonds, and mutual funds. The goal is to match the supply and demand for funds in order to ensure that the most efficient and productive use is made of available resources. While investors can gain profits and earn dividends, these are secondary effects of the primary role of financial markets. Providing loanable funds to the government is also a secondary role.

Question 13

Which of the following is not a reason to hold stock?

Accepted Answer

Holding stock does not provide payments on the firm's debt, but rather ownership in the company with potential for capital gains, participation in board of director selection, and potential dividends.

Question 14

A bond is

Accepted Answer

A bond is a type of debt security that represents a promise to repay a loan. When an investor buys a bond, they are essentially lending money to the issuer (often a corporation or government) in exchange for regular interest payments and the eventual return of their initial investment at maturity. Unlike stocks, owning a bond does not give the investor ownership in the company.

Question 15

The price of a stock will decrease, ceteris paribus, for all of the following reasons except

Accepted Answer

Consumer confidence increasing would have a positive effect on the stock market, and would likely cause the price of a stock to increase. A, B, and C would all have a negative impact on the demand for a stock, leading to a decrease in price.

Question 16

All of the following are allowed to issue bonds except

Accepted Answer

The Federal Reserve is not allowed to issue bonds. While it can buy and sell bonds, it does not issue bonds itself. Therefore, options A, B, and C are incorrect as they are all entities that issue bonds.

Question 17

Bonds may be issued by the U.S.

Accepted Answer

Bonds are issued by the U.S. Treasury as a way for the government to borrow money from investors. Congress has the power to regulate the issuance of bonds, but they are not the ones who physically issue them. The Federal Reserve Bank and Immigration and Naturalization Agency do not have the authority to issue bonds.

Question 18

The price of a stock will increase, ceteris paribus, when

Accepted Answer

An increase in consumer confidence is usually seen as a positive indicator of a company's future earnings potential which can lead to an increase in demand for the stock and therefore an increase in price. The other options, such as a decrease in future earnings expectations, an increase in interest rates, or fearful events such as terrorist attacks, can all have a negative impact on a company's stock price.

Question 19

The price of a stock will increase, ceteris paribus, when

Accepted Answer

When future earnings expectations increase, investors are more likely to buy the stock, driving up demand and therefore the price. B and D are incorrect because an increase in interest rates typically decreases stock prices, and a surplus of the stock at the current price indicates a lack of demand which would also decrease the price. C is incorrect because an increase in the supply of the stock would also imply a decrease in price.

Question 20

The price of a stock will decrease, ceteris paribus, when

Accepted Answer

An increase in interest rates leads to a decrease in demand for stocks, as investors find other investment options, resulting in a decrease in the price of the stock. The other options listed would lead to an increase in demand for the stock, resulting in an increase in the price.

Quiz 18: Financial Markets

The first sale to the general public of stock in a corporation is referred to as

Suppose the Martin Microchip Corporation earns a profit of $20 per share of stock.If the prevailing interest rate is 10 percent and the stock is currently selling for $100 per share, what is the current price/earnings ratio?

Large swings in stock prices are usually caused by

The price of a stock will decrease, ceteris paribus, when

Ceteris paribus, the price of a stock will definitely increase when the

The purpose of an initial public offering is to

The Dow Jones Industrial Average is an arithmetic average of _____ blue-chip industrial stocks.

An initial public offering

The most important determinant of how much an individual will pay for a share of stock is

If Shoffner Inc., a publicly traded corporation, has a share price of $125, revenues of $15.35 per share, and profits of $5.25 per share, what is the P/E ratio for Shoffner Inc.shares?

The P/E ratio, or price to earnings ratio of a stock, can be computed using which of the following formulas?

The primary economic role of financial markets is to

Which of the following is not a reason to hold stock?

A bond is

The price of a stock will decrease, ceteris paribus, for all of the following reasons except

All of the following are allowed to issue bonds except

Bonds may be issued by the U.S.

The price of a stock will increase, ceteris paribus, when

The price of a stock will increase, ceteris paribus, when

The price of a stock will decrease, ceteris paribus, when