Question 1

In the one-period valuation model, a stock's value will be higher

Accepted Answer

In the one-period valuation model, the stock's value is equal to the expected future price divided by (1+ required return). Therefore, the higher the expected future price, the higher the stock's value. The dividend amount does not directly affect the one-period valuation model. The required return on investments in equity has an inverse relationship with the stock's value - the higher the required return, the lower the stock's value.

Question 2

In the one-period valuation model, a stock's value falls if the ________ rises.

Accepted Answer

According to the one-period valuation model, the stock's value is calculated as the present value of expected future cash flows. The required return on equity is used as the discount rate in this calculation. If the required return on equity rises, the present value of future cash flows decreases, leading to a fall in the stock's value. Changes in dividends, expected future price, and current price can certainly impact the stock's value, but they are not directly related to the discount rate used in the one-period valuation model.

Question 3

(I)Firms issue common stock in far greater amounts than preferred stock. (II)In a given year, the total volume of stock issued is much less than the volume of bonds issued.

Accepted Answer

C

Question 4

Preferred stockholders hold a claim on assets that has priority over the claims of

Accepted Answer

Preferred stockholders typically have a higher priority on claim to company assets than common stockholders, but lower priority than bondholders. Therefore, their claim has priority over common stockholders but not bondholders.

Question 5

In the generalized dividend valuation model, a stock's value depends only on

Accepted Answer

The generalized dividend valuation model, also known as the Gordon growth model, calculates a stock's value based on its future dividend payments and a required return on equity. The formula is V = D/(r-g), where V is the stock's current value, D is the next period's expected dividend payment, r is the required return on equity, and g is the expected constant rate of dividend growth. This means that future price is not the only factor that determines a stock's value in this model.

Question 6

Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by

Accepted Answer

Dealers in the over-the-counter market make a market by both buying stocks for inventory when investors want to sell and selling stocks from inventory when investors want to buy. This allows for trading to occur without the need for a centralized exchange.

Question 7

A basic principle of finance is that the value of any investment is

Accepted Answer

The value of any investment is determined by the present value of all future net cash flows generated by the investment. This takes into account the time value of money, which means that a dollar received in the future is worth less than a dollar received today due to inflation and the potential to earn interest or returns on that money if invested. Therefore, the present value of future cash flows is discounted by an appropriate rate to reflect the time value of money, and the sum of these discounted cash flows represents the value of the investment.

Question 8

Which of the following is not an element of the Gordon growth model of stock valuation?

Accepted Answer

The Gordon growth model is used to value a stock based on its expected future cash flows, i.e., future dividends. The model takes into account the stock's most recent dividend paid, the expected constant growth rate of dividends, and the required return on investments in equity. However, the model does not explicitly include the stock's expected future price.

Question 9

Which of the following statements is false regarding Electronic Communications Networks (ECNs)?

Accepted Answer

This statement is false. ECNs do allow both institutional investors and individuals to trade after hours.

Question 10

To list on the NYSE, a firm must

Accepted Answer

To list on the NYSE, a firm needs to meet certain financial standards, including having at least $100 million in total market value and earning a minimum amount of pre-tax income, currently set at $10 million per year. There is no specific requirement for outstanding debt, so option B is incorrect. Therefore, the best choice is E, which includes options A and C, but not B.

Question 11

A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?

Accepted Answer

The answer of A stock currently sells for $25 per...

Question 12

(I)A share of common stock in a firm represents an ownership interest in that firm. (II)A share of preferred stock is as much like a bond as it is like common stock.

Accepted Answer

(I) is true, as common stock represents a fractional ownership in the company, entitling the holder to voting rights and a share in profits.
(II) is also true, because preferred stock has a fixed dividend rate like a bond, but unlike bonds, preferred stockholders do not have any voting rights.

Question 13

(I)Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II)Bondholders hold a claim on assets that has priority over the claims of preferred stockholders.

Accepted Answer

Both statements are true. Preferred stockholders do have a higher priority claim on assets than common stockholders, and bondholders have the highest priority claim on assets in case of bankruptcy or liquidation.

Question 14

A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?

Accepted Answer

The answer of A stock currently sells for $30 per...

Question 15

The most active stock exchange in the world is the

Accepted Answer

The answer of The most active stock exchange in the...

Question 16

The riskiest capital market security is

Accepted Answer

Common stock is considered the riskiest capital market security because it represents ownership in a company and its value can fluctuate greatly depending on market conditions and the performance of the company. Unlike bonds (both corporate and Treasury), there is no guarantee of a fixed return, and unlike preferred stock, common stockholders have the lowest priority in receiving payments if the company faces financial difficulties.

Question 17

Which of the following statements about trading operations in an organized exchange is correct?

Accepted Answer

In most trades, specialists match buy and sell orders. Floor traders may deal in a wide variety of stocks, but they do not necessarily handle all trades. Specialists act as intermediaries between buyers and sellers, matching their orders to execute trades. They do not buy or sell from their own inventories. The SuperDOT system is used to expedite small trades of up to 10,000 shares, not large trades of over 100,000 shares.

Question 18

(I)Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II)Firms issue preferred stock in far greater amounts than common stock.

Accepted Answer

Preferred stockholders do indeed have priority over common stockholders, but they still rank lower than bondholders. However, firms typically issue far more common stock than preferred stock.

Question 19

(I)The largest of the organized stock exchanges in the United States is the New York Stock Exchange. (II)To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10 million in revenues.

Accepted Answer

The New York Stock Exchange (NYSE) is indeed the largest organized stock exchange in the United States. However, the listing requirements for the NYSE involve more than just having a specific market value or revenue; they include a combination of factors such as earnings, market capitalization, and share distribution.

Question 20

Which of the following is not an advantage of Electronic Communications Networks (ECNs)?

Accepted Answer

ECNs are most effective for heavily traded stocks. For thinly traded stocks, liquidity may be insufficient, and prices may be more volatile.

Quiz 13: The Stock Market

In the one-period valuation model, a stock's value will be higher

In the one-period valuation model, a stock's value falls if the ________ rises.

(I) Firms issue common stock in far greater amounts than preferred stock. (II) In a given year, the total volume of stock issued is much less than the volume of bonds issued.

Preferred stockholders hold a claim on assets that has priority over the claims of

In the generalized dividend valuation model, a stock's value depends only on

Securities not listed on one of the exchanges trade in the over-the-counter market. In this exchange, dealers "make a market" by

A basic principle of finance is that the value of any investment is

Which of the following is not an element of the Gordon growth model of stock valuation?

Which of the following statements is false regarding Electronic Communications Networks (ECNs) ?

To list on the NYSE, a firm must

A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor's valuation of this stock if she expects it to be selling for $30 in one year and requires a 15 percent return on equity investments?

(I) A share of common stock in a firm represents an ownership interest in that firm. (II) A share of preferred stock is as much like a bond as it is like common stock.

(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders. (II) Bondholders hold a claim on assets that has priority over the claims of preferred stockholders.

A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?

The most active stock exchange in the world is the

The riskiest capital market security is

Which of the following statements about trading operations in an organized exchange is correct?

(I) Preferred stockholders hold a claim on assets that has priority over the claims of common stockholders, but after that of bondholders. (II) Firms issue preferred stock in far greater amounts than common stock.

(I) The largest of the organized stock exchanges in the United States is the New York Stock Exchange. (II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or $10 million in revenues.

Which of the following is not an advantage of Electronic Communications Networks (ECNs) ?