Question 1

As compared to growth stocks, income stocks pay ________ dividends with ________ growth in earnings.

Accepted Answer

Income stocks typically pay relatively high dividends but have limited growth in earnings. This is because they focus on generating a steady stream of income for investors rather than reinvesting profits to fuel growth. Growth stocks, on the other hand, reinvest earnings to fuel growth and typically pay little to no dividends.

Question 2

Earnings per share is a ratio that describes the amount of net income less preferred stock dividends available to the common shareholders.

Accepted Answer

Earnings per share (EPS) is calculated by dividing the net income available to common shareholders by the number of outstanding common shares. EPS shows how much profit a company generates for each share of common stock outstanding.

Question 3

Discuss the relationship between growth stocks and income stocks and their P/E ratios.

Accepted Answer

The answer of Discuss the relationship between growth stocks and...

Question 4

Differentiate between the general classifications of common stock.

Accepted Answer

The answer of Differentiate between the general classifications of common...

Question 5

Technical analysis focuses on supply and demand, using charts and computer programs to project stock trends.

Accepted Answer

Technical analysis indeed focuses on analyzing supply and demand through the use of charts and computer programs to forecast future stock trends.

Question 6

Technical analysis is a stock valuation technique that incorporates expected future earnings of the company, the riskiness of the companies cash flows, and interest rates in the markets in determining the current value of the stock.

Accepted Answer

Technical analysis is a stock valuation technique that focuses on analyzing past market data, such as price and volume, to predict future price movements. It does not incorporate future earnings, riskiness of cash flows, or interest rates. These factors are part of fundamental analysis.

Question 7

A stock currently selling for $105 with estimated earnings per share of $5.25 would have a P/E ratio of

Accepted Answer

P/E ratio is calculated by dividing the market price per share by the earnings per share. In this case, P/E ratio = 105/5.25 = 20.

Question 8

Large-caps, mid-caps, and small-caps refer to the size of the firm issuing the stock, more specifically, to its ________.

Accepted Answer

Large-caps refer to well-established, financially sound companies with typically higher market values. Mid-caps are medium-sized companies with moderate market values, and small-caps are smaller, younger companies with lower market values. Therefore, the size of the firm issuing the stock is determined by its market value, making option B the correct answer. A refers to the accounting value of the firm's assets, while C refers to the amount of money that a company pays out to its shareholders. D refers to the ability of a company to expand its operations, which may or may not correspond to its size.

Question 9

The P/E ratio of a stock is 20, and its earnings per share is $5.25. What is the current selling price of the stock?

Accepted Answer

The formula for calculating the current selling price of a stock using P/E ratio and earnings per share is: 
Current selling price = P/E ratio x Earnings per share

Substituting the given values, we get: 
Current selling price = 20 x $5.25 = $105

Therefore, the correct answer is option D, $105.

Question 10

You are considering the purchase of a stock with a current market price of $50.25 per share. It is expected to pay a dividend of $5.25 next year. Historically the stock has grown at 5%, and based on its risk, you desire to earn a 15% return. Which of the following is true?

Accepted Answer

To determine if the stock is undervalued or overvalued, we need to calculate the estimated price using the dividend discount model:

Estimated price = Dividend / (Discount rate - Dividend growth rate)

In this case, the dividend is $5.25, the discount rate is 15%, and the dividend growth rate is 5%. Plugging in these values, we get:

Estimated price = $5.25 / (0.15 - 0.05) = $52.50

Since the estimated price is higher than the market price of $50.25, the stock is undervalued and should be purchased. Therefore, the correct answer is A) Buy the stock, since your estimated price is higher than the market price.

Question 11

Which stock index will have the largest representation of small-, mid‑and large -cap stocks?

Accepted Answer

The Wilshire 5000 is a broad market index that includes all publicly traded companies in the United States, and therefore has the largest representation of small-, mid- and large-cap stocks. The DJIA only includes 30 large-cap stocks, while the S&P 500 includes 500 mostly large-cap stocks.

Question 12

For an investor who is retired, which category of stocks would be more appropriate for a portion of their portfolio?

Accepted Answer

Blue-chip stocks (highly established and stable companies) and income stocks (companies that pay consistent dividends) are more appropriate for a retired investor as they provide steady income and are less volatile compared to growth stocks (companies that reinvest their profits to expand quickly). This helps to ensure a more stable retirement income stream with less risk.

Question 13

You are considering purchasing one of two stocks. Stock A is expected to pay a $2.50 dividend, and has historically grown at 6%. Stock B is expected to pay a $3.00 dividend and has historically grown at 4%. Both are the same risk, and you desire to earn a 16% return. Which of the following is true?

Accepted Answer

The answer of You are considering purchasing one of two...

Question 14

Brenda is a 25 year old investor who recently graduated from college and has a successful career, which type of stock should represent a good portion of her portfolio?

Accepted Answer

Brenda is young and likely has a longer investment horizon, meaning she can afford to take on additional risk to potentially earn higher returns. Investing in growth stocks, which typically have higher potential for earnings growth but also higher risk, may be a good option for her. Defensive stocks (B) are typically for investors looking for stability and income stocks (C) for those who prioritize current income over growth. Risk-free stocks (D) do not exist as all investments carry some level of risk.

Question 15

The price/earnings ratio is an indication of how much investors are willing to pay for a dollar of the company's earnings.

Accepted Answer

The price/earnings ratio is a valuation metric that measures how much investors are willing to pay for each dollar of earnings that a company generates. It is calculated by dividing the current market price of a company's stock by its earnings per share. A higher P/E ratio indicates that investors expect the company to grow and generate higher earnings in the future.

Question 16

The discounted dividends valuation model states that the value of a share of stock is the present value of its future dividends.

Accepted Answer

The discounted dividends valuation model is based on the idea that the value of a share of stock is equal to the present value of all its future dividends. This model is based on the assumption that the main reason for investing in a stock is to receive dividends, and that the value of a stock is directly proportional to the amount of dividends that it pays. Therefore, under this model, the value of a stock is calculated by discounting its future dividends back to the present using a discount rate that reflects the risk and opportunity cost of investing in the stock.

Question 17

According to your text, there is very little validation in using technical analysis as an investing tool.

Accepted Answer

The text states that technical analysis is often criticized for its lack of empirical validation and that academic research has found very little evidence to support its effectiveness as an investing tool.

Question 18

When the market becomes too bullish, the average P/E ratio will fall.

Accepted Answer

When the market becomes too bullish, investors become more optimistic about the future earnings of companies, which can lead to an increase in the average P/E ratio. This is because investors are willing to pay more for a company's earnings when they believe that the earnings will grow in the future. Therefore, when the market becomes too bullish, the average P/E ratio is likely to rise, not fall.

Question 19

Your friend has recommended that you purchase stock in company XYZ. It is expected to pay a $4 dividend, and has historically grown at 5%. If the required rate of return is 12%, what is the estimated value of a share of XYZ stock?

Accepted Answer

To calculate the estimated value of a share of XYZ stock, we can use the Gordon Growth Model:

Estimated Value = D / (r - g)

Where: 
D = Expected dividend per share = $4 
r = Required rate of return = 12% 
g = Historical growth rate = 5%

Plugging in the values:

Estimated Value = 4 / (0.12 - 0.05) = 57.14

Therefore, the estimated value of a share of XYZ stock is $57.14. The best choice is C.

Question 20

The P/E ratio approach is a type of fundamental analysis.

Accepted Answer

The P/E ratio approach is a common type of fundamental analysis used by investors to evaluate the potential worth of a stock. It involves comparing a company's current stock price to its earnings per share (EPS) over the past 12 months.

Quiz 13: Investing in Stocks

As compared to growth stocks, income stocks pay dividends with growth in earnings.