P1 Finance Test 1, MP2 Stock Investments

What should you consider if the market value of your stock increases?

• Whether to sell at a lower price.

• Whether to sell at the higher price or hold on to it.

• Whether to buy more stock.

• Whether to sell at the original purchase price.

Answer explanation

If the market value of your stock increases, you should consider whether to sell at the higher price or hold on to it, as this decision impacts your potential profit and investment strategy.

After a two-for-one stock split, if you owned 200 shares before the split, you would own (a)   shares after.

• 100

• 200

• 400

• 800

Answer explanation

After a two-for-one stock split, each share is divided into two. If you owned 200 shares before the split, you would now have 200 x 2 = 400 shares after the split. Therefore, the correct answer is 400.

What is the main advantage of preferred stock over common stock?

• Higher voting rights

• Guaranteed stock price increase

• Receiving cash dividends before common stockholders

• More control over company decisions

Answer explanation

The main advantage of preferred stock is that it provides holders with cash dividends before common stockholders receive any. This priority in dividend payments makes preferred stock more attractive for income-focused investors.

What is the main advantage of cumulative preferred stock?

• It offers tax benefits.

• It accumulates unpaid dividends.

• It provides voting rights.

• It can be converted to common stock.

Answer explanation

The main advantage of cumulative preferred stock is that it accumulates unpaid dividends. This means if dividends are not paid in a given year, they are carried over and must be paid before any dividends can be distributed to common stockholders.

What does the participation feature allow preferred stockholders to do?

• Convert their stock to bonds.

• Share in the corporation's earnings.

• Receive tax benefits.

• Vote on company decisions.

Answer explanation

The participation feature allows preferred stockholders to share in the corporation's earnings, typically by receiving additional dividends beyond their fixed rate, unlike the other options listed.

Match the following countries with their currencies.

• United States

• US dollar

• United Kingdom

• Euro

• European Union

• British pound

• Japan

• Yen

Why is it difficult to keep track of a penny stock's performance?

• Information about them is easy to find

• They are issued by large companies

• Information about them is hard to find

• They have a stable performance

Answer explanation

Penny stocks are often issued by smaller companies, making reliable information scarce. This lack of transparency and limited data sources complicate tracking their performance, unlike larger, more established companies.

What is one example of a web source for financial information?

• A personal blog

• A social media site

• A search engine

• A cooking website

Answer explanation

A search engine is a web source that aggregates financial information from various websites, making it a reliable tool for finding up-to-date financial data. In contrast, personal blogs and social media sites may lack credibility.

What is a common feature of small-cap stocks?

• High market stability

• Low investment risk

• Issued by smaller companies

• High dividend yield

Answer explanation

Small-cap stocks are typically issued by smaller companies, which is a defining characteristic. They often have higher volatility and risk compared to larger companies, but the correct choice highlights their association with smaller firms.

What is the capitalization limit for a small-cap stock?

• $1 billion

• $500 million

• $100 million

• $50 million

Answer explanation

The capitalization limit for a small-cap stock is defined as companies with a market capitalization of up to $500 million. Therefore, the correct answer is $500 million.