Question 1

A key reason for uncertainty surrounding the return on investment is the uncertainty surrounding the current economic conditions.

Accepted Answer

Uncertainty in current economic conditions can lead to fluctuations in market demand, interest rates, and inflation, among other factors, which can in turn affect the profitability and thus the return on investment of projects or investments.

Question 2

Stocks that provide investors with steady income in the form of large dividends are classified as ________.

Accepted Answer

The answer of Stocks that provide investors with steady income...

Question 3

The time value of money concepts do not include

Accepted Answer

The time value of money concepts primarily focus on the idea that a dollar today is worth more than a dollar in the future due to its potential earning capacity. This concept includes interest or the cost of money, payments of principal and interest, and present and future values. However, it does not directly include the risks associated with various investments, as this is more related to investment analysis and risk management rather than the core concept of the time value of money.

Question 4

One advantage of investing in commercial real estate compared to stock, bonds, and mutual funds is that real estate

Accepted Answer

Real estate investments can provide unique income and tax benefits, such as rental income and deductions for property depreciation and mortgage interest, which are not typically available with stocks, bonds, and mutual funds.

Question 5

The return you will earn on certain stocks and bonds is uncertain because specific prices are not guaranteed.

Accepted Answer

The return on stocks and bonds is uncertain because their prices fluctuate due to market conditions, economic factors, and company performance, making specific future returns unpredictable.

Question 6

It is December 30th and you have stock in Zero Corporation that you bought on March 1st that has increased $2,000 in value. You are thinking of selling the stock. From a tax standpoint, what should you do with the Zero stock?

Accepted Answer

If you wait until after March 1st of next year to sell the stock, you will qualify for long-term capital gains tax rates, which are typically lower than short-term rates.

Question 7

Which of the following is not true regarding mutual funds?

Accepted Answer

Mutual funds distribute dividends and capital gains to the shareholders, not use dividends to pay operational expenses. Operational expenses are covered by the fund's expense ratio.

Question 8

What return on investment would you earn if you bought a stock on 1/1/16 for $100, received a 1% per quarter dividend and sold the stock on 1/2/2017 for $107?

Accepted Answer

The answer of What return on investment would you earn...

Question 9

What would be the annual compound return on a stock purchased at $20 per share, held for 5 years, and sold for $32.22? Ignore brokerage commissions and tax implications and assume the stock paid no dividends during the holding period. Round to the nearest whole percent if necessary.

Accepted Answer

The annual compound return can be calculated using the formula for compound annual growth rate (CAGR): $$CAGR = \left(\frac{FV}{PV}\right)^{\frac{1}{n}} - 1$$ where $FV$ is the final value ($32.22), $PV$ is the initial value ($20), and $n$ is the number of years (5). Plugging in the values: $$CAGR = \left(\frac{32.22}{20}\right)^{\frac{1}{5}} - 1 \approx 0.10$$ or 10% when rounded to the nearest whole percent.

Question 10

The main difference(s) between a preferred stock in Company A that pays a $2.50 per share annual dividend and a common stock in Company A that also pays a $2.50 per share current annual dividend is (are)

Accepted Answer

Preferred stocks typically have fixed dividends and less potential for price appreciation compared to common stocks, which may see dividends increase with the company's earnings and can gain or lose value based on company performance. Thus, all the options listed are true differences between preferred and common stocks.

Question 11

It is December 10th and you have a stock that you purchased last January 5th, which has increased in value by more than $3,000. You think the stock will not significantly increase or decrease in value over the next month or so, and you would like to take your gain. What should you do?

Accepted Answer

Selling the stock on January 6th of next year or later allows the gains to be taxed as long-term capital gains, which are typically taxed at a lower rate than short-term capital gains. Since the stock was purchased last January 5th, holding it for at least a year and a day qualifies the gains for long-term capital gains tax treatment.

Question 12

Corporate bonds

Accepted Answer

Corporate bonds offer a predictable return to investors through interest or coupon payments, which are fixed amounts paid at regular intervals until the bond matures. Choices B, C, and D are incorrect because the value of corporate bonds can fluctuate with changes in interest rates and other market conditions; they do not necessarily appreciate or depreciate uniformly as the maturity date approaches.

Question 13

What would you pay for a stock whose price you estimate will be $50 in 10 years and you wish to earn a return on the investment of 9% per year? Ignore brokerage commissions and tax implications and assume the stock pays no dividends during the holding period.

Accepted Answer

To find out what you would pay for a stock to achieve a 9% annual return over 10 years, you would use the formula for the present value of a future sum of money, which is $PV = \frac{FV}{(1 + r)^n}$, where PV is the present value, FV is the future value ($50), r is the annual interest rate (9% or 0.09), and n is the number of years (10). Plugging in these values gives $PV = \frac{50}{(1 + 0.09)^{10}} \approx 21.10$.

Question 14

If a stock is purchased for $30 a share and pays $5 per share in dividends a year, what selling price at the end of the year would result in a return of 50%?

Accepted Answer

To achieve a 50% return on a $30 investment, the total return needs to be $15 (50% of $30). Since the stock pays $5 in dividends, the remaining $10 needed to reach a 50% return must come from the sale price. Therefore, the selling price must be $30 (original price) + $10 (capital gain) + $5 (dividend) = $45. However, since the options provided do not include $45 and the closest correct approach to calculate the total return would be $30 * 1.5 = $45 (to achieve a 50% return), it seems there was a mistake in my explanation regarding the options provided. The correct calculation for a 50% return including dividends correctly is: the initial investment is $30, and to achieve a 50% return, the total amount after selling should be $30 * 150% = $45. Subtracting the $5 dividend from this target gives a selling price of $40 to achieve the total desired return.

Question 15

You can estimate the amount by which your wealth will increase from an investment using

Accepted Answer

The time value of money concept is used to estimate the future value of an investment, considering the interest it will earn over time. This helps in understanding how much your wealth will increase from an investment.

Question 16

What would be the market price of a stock that paid a constant $2.00 per year in dividends in perpetuity, if the expected market return for a risk of this type was 7.5%?

Accepted Answer

The market price of a stock paying a constant dividend in perpetuity can be calculated using the formula P = D / r, where P is the price, D is the dividend, and r is the required rate of return. Plugging in the values gives P = $2.00 / 0.075 = $26.67.

Question 17

Most investors are fully aware of the risk involved when pursuing investments that have the potential for very large returns.

Accepted Answer

Many investors, especially those who are inexperienced, may not fully understand the risks associated with high-return investments, often underestimating the potential for significant losses.

Question 18

Name three applications of present and future value concepts to stocks.

Accepted Answer

The answer of Name three applications of present and future...

Question 19

Assuming a tax rate on ordinary income of 25% and a long-term capital gain rate of 10%, how much would you pay in taxes if you sold stock "A" for a $200 capital gain after holding it for 5 months, stock "B" for a $300 capital gain after holding it for 8 months, and stock "C" for a $500 capital gain after holding it for 14 months?

Accepted Answer

The answer of Assuming a tax rate on ordinary income...

Question 20

What would be the return on 200 shares of stock purchased on January 1, 2016 for $60 per share and sold on December 31, 2016 at $80 per share? Also assume that the company paid dividends of $2 per share over the year. The prices include all brokerage fees. Round to the nearest whole percent.

Accepted Answer

The return on investment (ROI) can be calculated by adding the capital gain and dividends received, then dividing by the initial investment and multiplying by 100 to get a percentage. Capital gain per share = $80 - $60 = $20. Total capital gain = 200 shares * $20 = $4000. Total dividends = 200 shares * $2 = $400. Total return = $4000 + $400 = $4400. Initial investment = 200 shares * $60 = $12000. ROI = ($4400 / $12000) * 100 = 36.67%, which rounds to 37%.

Quiz 14: Investing Fundamentals