Question 1

There are two major markets for the sale of stock: the primary market and the secondary market.

Accepted Answer

The primary market is where new securities are issued by companies and sold to the public, while the secondary market is where previously issued securities are bought and sold by investors.

Question 2

You want to invest in a stock that pays $6.00 annual cash dividends for the next five years.At the end of the five years,you will sell the stock for $30.00.If you want to earn 10% on this investment,what is a fair price for this stock if you buy it today?

Accepted Answer

The correct answer is A because the fair price of the stock is $41.37. This is calculated by using the formula:Fair price = Present value of dividends + Present value of future sale pricePresent value of dividends = $6.00 x (1 - (1 + 0.10)^-5) / 0.10 = $24.87Present value of future sale price = $30.00 / (1 + 0.10)^5 = $16.50Fair price = $24.87 + $16.50 = $41.37

Question 3

Which of the statements below is FALSE?

Accepted Answer

Most companies do not have resident expertise to complete an IPO or first public equity issue. They usually hire investment banks to assist with the process.

Question 4

With best efforts compensation,the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at auction for a higher price.

Accepted Answer

With best efforts compensation, the investment banker does not guarantee to sell the entire stock issue and is not required to buy the unsold shares. Instead, they simply use their best efforts to sell the shares at the best possible price, and they receive a commission based on the number of shares sold.

Question 5

A bull market is a prolonged declining market.

Accepted Answer

A bull market is actually a prolonged period of rising stock prices and a bear market is a prolonged period of declining stock prices.

Question 6

Most companies do not have the resident expertise to complete an initial public offering (IPO),so they hire an investment banker to help accomplish the sale.Describe three significant tasks that an investment banker provides.

Accepted Answer

The answer of Most companies do not have the resident...

Question 7

Which of the statements below is FALSE?

Accepted Answer

The answer of Which of the statements below is FALSE?
...

Question 8

Part of the negotiation with the investment banker during the selection process has to do with how the investment banker will be compensated for taking the company public.One of these two standard compensation packages involves ________.

Accepted Answer

The best choice is the best efforts approach, in which the investment banker pledges to do their best to sell the shares and take a small percentage of the sale of each stock. This compensation package aligns the investment banker's incentives with the company's goals of selling the shares at the highest possible price. The firm-commitment approach (A) may require the company to sell the shares at a lower price than desired, and the investment banker may bear the risk of not being able to sell all the shares. Option C is not a standard compensation package, and option D is incorrect because it confuses the best efforts and firm-commitment approaches.

Question 9

If we know the dividend stream,the future price of the stock,the future selling date of the stock,and the required return,we can price stocks just as we priced ________.

Accepted Answer

Stock pricing using the mentioned parameters (dividend stream, future price, future selling date, and required return) is similar to bond pricing. Both involve discounting future cash flows (dividends or coupon payments, plus the final payment of principal or stock sale proceeds) back to their present value using a required rate of return.

Question 10

You want to invest in a stock that pays $3.50 annual cash dividends for the next six years.At the end of the six years,you will sell the stock for $22.50.If you want to earn 12.5% on this investment,what is a fair price for this stock if you buy it today?

Accepted Answer

To determine the fair price of the stock, we need to calculate the present value of all the future cash flows. The cash flows consist of six annual dividends of $3.50 each, plus the final proceeds from selling the stock, which is $22.50.

To calculate the present value, we can use the formula: PV = CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n

Where PV is the present value, CF is the cash flow for a given year, r is the desired rate of return, and n is the number of years.

Plugging in the values we get: 
PV = 3.50/(1+0.125)^1 + 3.50/(1+0.125)^2 + ... + 3.50/(1+0.125)^6 + 22.50/(1+0.125)^6

Solving for PV yields approximately $25.29, which is closest to answer choice B.

Question 11

The value of a financial asset is the ________.

Accepted Answer

The value of a financial asset is calculated as the present value of all the future cash flows that will be received over the lifetime of the asset. This includes both capital gains and any dividends or interest payments that will be received.

Question 12

In the United States,there are three well known secondary stock markets.Which of the below is NOT one of these?

Accepted Answer

The Chicago Stock Exchange (CSE) is not one of the three well-known secondary stock markets in the United States. The three well-known secondary stock markets are the New York Stock Exchange (NYSE), the National Association of Securities Dealers and their trading system NASDAQ (National Association of Securities Dealers Automated Quotation System), and the New York Stock Exchange MKT LLC (formerly the AMEX).

Question 13

Which of the following statements is TRUE?

Accepted Answer

The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy. This statement is true. A) is false as stock dealers are allowed to make money on the difference between what they buy and sell the stock for. B) is false as a bear market is a prolonged declining market, while D) is false as a bull market is a prolonged rising market with stock prices in general increasing.

Question 14

You want to invest in a stock that pays $5.00 annual cash dividends for the next four years.At the end of the four years,you will sell the stock for $20.00.If you want to earn 12% on this investment,what is a fair price for this stock if you buy it today?

Accepted Answer

The fair price of the stock today is the present value of the future cash flows, which include the dividends and the sale price. Using a discount rate of 12%, the present value of the dividends and sale price is calculated as follows: PV = $5/(1.12) + $5/(1.12)^2 + $5/(1.12)^3 + $5/(1.12)^4 + $20/(1.12)^4 = $27.90.

Question 15

Simpson Industries Inc.pays a $1.37 dividend every quarter and will maintain this policy forever.What price should you pay for one share of common stock if you want an annual return of 12.5% on your investment?

Accepted Answer

The correct answer is A because the annual dividend is $1.37 x 4 = $5.48. To find the price of the stock, we divide the annual dividend by the desired annual return: $5.48 / 0.125 = $43.84.

Question 16

Both the NYSE and the NYSE MKT LLC (formerly the AMEX)are physical trading locations with trading floors.

Accepted Answer

Both the NYSE and the NYSE MKT LLC have physical trading floors where traders can conduct transactions in person.

Question 17

Western Auto Inc.pays a $1.77 preferred dividend every quarter and will maintain this policy forever.What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?

Accepted Answer

The answer of Western Auto Inc.pays a $1.77 preferred dividend...

Question 18

The hiring process for an investment banker can happen in two ways.Which of the below is one of these ways?

Accepted Answer

The best way to hire an investment banker is to pick a desirable investment banking firm, usually basing the choice on the reputation and history of the banker in its particular industry. Randomly choosing a firm or relying solely on government agencies may not necessarily result in finding the best fit for your company's specific needs.

Question 19

In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds,which of the below statements is FALSE?

Accepted Answer

This statement is false because stocks do not have a maturity date and therefore do not have a fixed final sale on a specific date in the future.

Question 20

Which of the statements below is TRUE?

Accepted Answer

Private companies can choose to go public by selling stock to attract permanent financing through equity ownership of the company. Option A is incorrect as buying shares is the purchasing of ownership in the company. Option B is incorrect as a company goes public when it opens up its ownership structure to the general public through the sale of common stock. Option D is incorrect as most companies need to hire external expertise to help with an IPO as it is a complex and specialized process.

Quiz 7: Stocks and Stock Valuation

There are two major markets for the sale of stock: the primary market and the secondary market.

You want to invest in a stock that pays $6.00 annual cash dividends for the next five years.At the end of the five years,you will sell the stock for $30.00.If you want to earn 10% on this investment,what is a fair price for this stock if you buy it today?

Which of the statements below is FALSE?

With best efforts compensation,the investment banker essentially buys the entire stock issue from the company at one price and then sells the issue at auction for a higher price.

A bull market is a prolonged declining market.

Most companies do not have the resident expertise to complete an initial public offering (IPO),so they hire an investment banker to help accomplish the sale.Describe three significant tasks that an investment banker provides.

Which of the statements below is FALSE?

Part of the negotiation with the investment banker during the selection process has to do with how the investment banker will be compensated for taking the company public.One of these two standard compensation packages involves ________.

If we know the dividend stream,the future price of the stock,the future selling date of the stock,and the required return,we can price stocks just as we priced ________.

You want to invest in a stock that pays $3.50 annual cash dividends for the next six years.At the end of the six years,you will sell the stock for $22.50.If you want to earn 12.5% on this investment,what is a fair price for this stock if you buy it today?

The value of a financial asset is the ________.

In the United States,there are three well known secondary stock markets.Which of the below is NOT one of these?

Which of the following statements is TRUE?

You want to invest in a stock that pays $5.00 annual cash dividends for the next four years.At the end of the four years,you will sell the stock for $20.00.If you want to earn 12% on this investment,what is a fair price for this stock if you buy it today?

Simpson Industries Inc.pays a $1.37 dividend every quarter and will maintain this policy forever.What price should you pay for one share of common stock if you want an annual return of 12.5% on your investment?

Both the NYSE and the NYSE MKT LLC (formerly the AMEX)are physical trading locations with trading floors.

Western Auto Inc.pays a $1.77 preferred dividend every quarter and will maintain this policy forever.What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?

The hiring process for an investment banker can happen in two ways.Which of the below is one of these ways?

In regards to the fact that the pricing of stocks is more difficult than the pricing of bonds,which of the below statements is FALSE?

Which of the statements below is TRUE?