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WorksheetsQuiz 3 Investing SNHU17
Total questions: 110
Worksheet time: 55mins
Name
Class
Date
1.
Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of the firm's assets.
a)
true
b)
FALSE
2.
Companies typically issue new shares through an initial public offering (IPO).
a)
true
b)
FALSE
3.
There is a stronger tendency for the stock market to increase in value rather than decrease in value over time.
a)
true
b)
FALSE
4.
Which one of the following statements about common stock is true?
a)
A) Common stock can provide attractive capital appreciation opportunities.
b)
B) Dividends generally provide the greatest rate of return on common stocks.
c)
C) Common stocks generally have a negative rate of return over a ten-year period.
d)
D) The DJIA is the best indicator of the overall performance of common stocks.
5.
While many stocks increase in value over the long run, most of the return on stocks comes from dividends.
a)
true
b)
FALSE
6.
Firms tend to repurchase shares of their outstanding stock when they view the shares as undervalued.
a)
true
b)
FALSE
7.
If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company also has $10,000,000 in debt. The company's market capitalization is
a)
A) $40,000,000.
b)
B) $49,000,000.
c)
C) $50,000,000.
d)
D) $60,000,000.
8.
The Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of $1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value of this stock at $38.50. According to this information, the market capitalization of Charbridge is
a)
A) $144,000,000.
b)
B) $154,000,000.
c)
C) $4,000,000.
d)
D) $72 million.
9.
Dividend yield is calculated by dividing
a)
A) the market price of one share of stock by the annual dividend per share.
b)
B) the annual dividend per share by the market price of one share of stock.
c)
C) earnings per share by market price per share.
d)
D) annual dividend per share by earnings per share.
10.
Pilgrim Corp. stock currently sells for $25 per share? The annual dividend payment is $1.00 per share and earnings per share are $3.00. The dividend yield is ________ and the dividend payout ratio is ________.
a)
A) 12%; .4%
b)
B) 8.33%; 25%
c)
C) 4%; 33%
d)
D) 33%; 4%.
11.
Pilgrim Corp. stock currently sells for $25. The dividend yield is 4% and the dividend payout ratio is 25%. The dividend is ________ and the earnings per share are ________.
a)
A) $3.00; $1.00
b)
B) $1.00; $4.00
c)
C) $.12; $1.00
d)
D) $.25; $6.25
12.
Which one of the following is a characteristic of blue chip stocks?
a)
A) guaranteed minimum annual dividend of $2 a share
b)
B) annual dividends of more than $5 per share
c)
C) long and stable dividend and earnings records
d)
D) relatively high risk exposure
13.
The total-return approach concentrates solely on capital gains over the long term.
a)
true
b)
FALSE
14.
Which category of stocks represents the highest level of risk?
a)
A) large-cap
b)
B) mid-cap
c)
C) blue chip
d)
D) small-cap
15.
The intrinsic value of a security is based on the
I.amount of risk.
II. current market value of the security.
III.discount rate applicable to the security.
IV.estimated future cash flows from the security.
a)
A) I and III only
b)
B) III and IV only
c)
C) I, II and III only
d)
D) I, III and IV only
16.
Company analysis is only concerned with how a company has performed in the past.
a)
true
b)
FALSE
17.
Most firms tend to be more profitable and have higher stock values when the economy is strong.
a)
true
b)
FALSE
18.
The purpose of economic analysis is to gain an insight into the underlying health or vitality of the economy and to formulate expectations about future security prices.
a)
true
b)
FALSE
19.
The best time to buy stock is at the peak of an economic cycle.
a)
true
b)
FALSE
20.
The consumer electronics industry would be most significantly affected by
a)
A) developments in technology.
b)
B) interest rates and inflation.
c)
C) labor relations.
d)
D) government regulations.
21.
Companies with high P/E ratios tend to also have high dividend payout ratios.
a)
true
b)
FALSE
22.
A stock's value depends on future cash flows.
a)
true
b)
FALSE
23.
A company's estimated future earnings and its P/E ratio can be used to estimate the stock's future price.
a)
true
b)
FALSE
24.
The estimated price of a stock in the future is important because it includes the projected capital gain on the stock.
a)
true
b)
FALSE
25.
The value of a stock is a function of
a)
A) future returns.
b)
B) historic dividend growth rate.
c)
C) most recent earnings per share.
d)
D) past returns.
26.
Which of the following variables affect the P/E ratio?
I.capital structure of a firm
II.amount of dividends to be paid
III.inflation rate
IV.earnings rate of growth
a)
A) I, II and III only
b)
B) I, II and IV only
c)
C) I, III and IV only
d)
D) I, II, III and IV
27.
Which of the following contributes to high P/E ratios?
a)
A) high dividend payout ratios
b)
B) high rate of earnings growth
c)
C) periods of high inflation
d)
D) high debt ratios
28.
Which of the following contributes to high P/E ratios?
a)
A) high dividend payout ratios
b)
B) high rate of earnings growth
c)
C) periods of high inflation
d)
D) high debt ratios
29.
High P/E ratios can be expected when investors expect
a)
A) a high rate of growth in earnings.
b)
B) low earnings. relative to market prices.
c)
C) high interest rates.
d)
D) a bear market.
30.
P/E ratios could rise even as earnings fall if
a)
A) earnings fall at a faster rate than stock prices.
b)
B) earnings fall at a slower rate than stock prices.
c)
C) investors expect lower stock prices to be permanent.
d)
D) investors expect lower earnings to be permanent.
31.
Global Warning's EPS for the current year is $2.75 and its current P/E ratio is 50. You have forecasted that EPS will grow by 10% but the P/E ratio will fall to 40. What do you expect the price of a share of GW's stock to be at the end of next year?
a)
A) $110
b)
B) $121
c)
C) $137.50
d)
D) $151.25
32.
Over the last year, a firm's earnings per share increased from $1.20 to $1.40, its dividends per share increased from $0.50 to $0.60, and its share price increased from $21 to $24. The firm maintained a relative P/E of 1.10 over the entire time period. Given this information, it follows that the
a)
A) stock experienced an increase in its P/E ratio.
b)
B) company had a decrease in its dividend payout ratio.
c)
C) current P/E of the overall market is 26.4.
d)
D) overall market P/E is declining.
33.
Which of the following will lead to an increase in earnings per share?
a)
A) an increase in the P/E ratio.
b)
B) an increase in the dividend payout ratio.
c)
C) an increase in return on equity if book value per share stays the same.
d)
D) a decrease in the number of shares if return on equity stays the same.
34.
Markhem Enterprises is expected to earn $1.34 per share this year. The company has a dividend payout ratio of 40% and a P/E ratio of 18. What should one share of common stock in Markhem Enterprises be selling for in the market?
a)
A) $9.65
b)
B) $14.47
c)
C) $24.12
d)
D) $33.77
35.
A stock will be an attractive investment if the required rate of return exceeds the expected rate of return.
a)
true
b)
FALSE
36.
Both beta and the expected return on the market portfolio incorporate risk into the Capital Asset Pricing Model.
a)
true
b)
FALSE
37.
The required rate of return denotes the minimum rate of return an investor should expect.
a)
true
b)
FALSE
38.
The intrinsic value of an asset equals the present value of all future cash flows at a given discount rate.
a)
true
b)
FALSE
39.
The risk-free rate of return is 2.2 percent, the expected market return is 11 percent, and the beta for Solstice, Inc. is 1.12. What is Solstice's required rate of return?
a)
A) 8.80%
b)
B) 12.05%
c)
C) 13.20%
d)
D) 14.30%
40.
The risk free rate is 2%. The expected rate of return on the market is 12%. Beta and the expected rate of return for four stocks are as follows.: ABC .8 , 10%; DEF 1, 12%; GHI 1.2 , 13%, and JKL 2, 22%. Which of these stocks should not be purchased?
a)
A) ABC
b)
B) DEF
c)
C) GHI
d)
D) JKL
41.
Which of the following are key inputs to determining the intrinsic value of an asset?
I.the required rate of return
II.future cash flows
III.current stock price
IV.timing of future cash flows
a)
A) I and II only
b)
B) I and III only
c)
C) I, II and IV only
d)
D) II, III and IV only
42.
In the Capital Asset Pricing Model, which of the following factors are used to determine the required rate of return
I.the risk-free interest rate
II.future cash flows
III.expected return on the market portfolio
IV.beta
a)
A) I and II only
b)
B) I, II and III only
c)
C) II, III and IV only
d)
D) I, III and IV only
43.
An investor should purchase a stock when
a)
A) the market price exceeds the intrinsic value.
b)
B) the expected rate of return equals or exceeds the required return.
c)
C) the capital gains rate is less than the required return and no dividends are paid.
d)
D) the market price is greater than the justified price.
44.
The approach to stock valuation which holds that the value of a share of stock is a function of its future dividends is known as the dividend valuation model (DVM).
a)
true
b)
FALSE
45.
If the annual dividend on a stock never changes, its price will never change.
a)
true
b)
FALSE
46.
The dividend valuation model estimates the value of a share of stock as the future value of all dividends.
a)
true
b)
FALSE
47.
The intrinsic value of a zero-growth stock can be found simply by dividing the dividend by the required rate of return.
a)
true
b)
FALSE
48.
Lindor Inc.'s $100 par value preferred stock pays a dividend fixed at 8% of par. To earn 12% on an investment in this stock, you need to purchase the shares at a per share price of
a)
A) $9.60.
b)
B) $66.67.
c)
C) $96.00.
d)
D) $150.00.
49.
James is willing to settle for a 10% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?
a)
A) James will be have to pay more for the stock than he was willing to pay.
b)
B) Investors with different required rates of return will pay different prices for the stock.
c)
C) James will not be able to buy the stock unless the price changes.
d)
D) James will be happy to buy the stock for less than he was willing to pay.
50.
John requires a 12% rate of return on EG stock at a time when investors, on average, are requiring an 11% rate of return on the same stock. Which of the following will happen?
a)
A) John will have to pay more for the stock than he was willing to pay.
b)
B) Investors with different required rates of return will pay different prices for the stock.
c)
C) John will not be able to buy the stock unless the price changes.
d)
D) John will buy the stock at a lower price.
51.
Michelak's Maritime Industries has relatively stable earnings and pays an annual dividend of $3.00 per share. This dividend has remained constant over the past few years and is expected to remain constant for some time to come. If you want to earn 11% on an investment in the common stock of Michelak's, how much should you pay to purchase each share of stock?
a)
A) $12.50
b)
B) $18.88
c)
C) $20.83
d)
D) $27.27
52.
Walpurg, Inc. paid $1.30 as an annual dividend per share last year. The company is expected to increase their annual dividends by 6% each year. How much should you pay to purchase one share of this stock if you require a 9% rate of return on this investment?
a)
A) $45.93
b)
B) $11.44
c)
C) $23.39
d)
D) $22.96
53.
One stock valuation model holds that the value of a share of stock is a function of its future dividends, and that the dividends will increase at an annual rate which will remain unchanged over time. This stock valuation model is known as the
a)
A) approximate yield model.
b)
B) holding period return model.
c)
C) dividend reinvestment model.
d)
D) constant growth dividend valuation model.
54.
What is the required rate of return on a common stock that is expected to pay a $0.75 annual dividend next year if dividends are expected to grow at 2 percent annually and the current stock price is $8.59?
a)
A) 8.73%
b)
B) 8.91%
c)
C) 10.73%
d)
D) 11.38%
55.
The constant-growth dividend valuation model is best suited for use with
a)
A) stocks of new or emerging companies.
b)
B) small-cap stocks within growing industries.
c)
C) the stocks of mature, dividend-paying companies.
d)
D) the stocks of cyclical companies.
56.
When using the constant-growth dividend valuation model, which of the following will lower the value of the stock?
a)
A) an increase in the required rate of return
b)
B) a decrease in the required rate of return
c)
C) an increase in the dividend payout ratio
d)
D) an increase in the growth rate of the dividends
57.
Newton, Inc. just paid an annual dividend of $0.95. Their dividends are expected to increase by 4% annually. Newton Company stock is selling for $11.54 a share. What is the required rate of return on this stock implied by the dividend-growth model?
a)
A) 8.23%
b)
B) 12.2%
c)
C) 12.6%
d)
D) 13.9%
58.
The Hopkinton Company just paid $2.25 as its annual dividend. The dividends have been increasing at a rate of 5% annually and this trend is expected to continue. The stock is currently selling for $63.60 a share. What is the rate of return on this stock?
a)
A) 3.60%
b)
B) 3.70%
c)
C) 8.7%
d)
D) 11.8%
59.
Martin's Inc. is expected to pay annual dividends of $2.50 a share for the next three years. After that, dividends are expected to increase by 3% annually. What is the current value of this stock to you if you require a 9% rate of return on this investment?
a)
A) $39.47
b)
B) $40.11
c)
C) $41.81
d)
D) $42.92
60.
Zephyr Inc. sells wind based systems for generating electricity. The company pays no dividends, but you estimate the stock will be worth $50 per share 5 years from now and you require a 15% rate of return for stock investments of this type. What price should you be willing to pay for this stock?
a)
A) $12.50
b)
B) $24.86
c)
C) $43.48
d)
D) $57.50
61.
Ivonne has bought shares of RIO, Inc. stock for $25.00 per share. She expects a 1.00 dividend at the end of this year. After 2 years, she expects to receive a dividend of $1.25 and to sell the stock for $28.75. What is Ivonne's required rate of return?
a)
A) 4.0%
b)
B) 11.6%
c)
C) 15.2%
d)
D) 24.0%
62.
The Highlight Company has a book value of $56.50 per share, and is currently trading at a price of $59.00 per share. You are interested in investing in Highlight, and have just used a present-value based stock valuation model to calculate a present (intrinsic) value of $55.00 per share for Highlight's stock. Assuming that your calculations are correct you should
a)
A) buy the stock, because the current market price per share is higher than the present value.
b)
B) buy the stock, because the book value per share is greater than the present value.
c)
C) not buy the stock, because the present value is less than the market price per share.
d)
D) buy the stock, because the book value and the current trading price are very close to one another in value.
63.
The constant growth dividend valuation model works best for mature companies with a long record of paying dividends.
a)
true
b)
FALSE
64.
The constant growth dividend valuation model works best for mature companies with a long record of paying dividends.
a)
true
b)
FALSE
65.
Bondholders can earn income both from interest and from capital gains.
a)
true
b)
FALSE
66.
The bond market has occasionally outperformed the stock market for several years at a time.
a)
true
b)
FALSE
67.
As investors approach retirement age, they should hold more bonds and less stock.
a)
true
b)
FALSE
68.
Bondholders usually have capital gains when interest rates are rising.
a)
true
b)
FALSE
69.
Bondholders can earn income both from interest and from capital gains.
a)
true
b)
FALSE
70.
The bond market has occasionally outperformed the stock market for several years at a time.
a)
true
b)
FALSE
71.
As investors approach retirement age, they should hold more bonds and less stock.
a)
true
b)
FALSE
72.
Bondholders usually have capital gains when interest rates are rising.
a)
true
b)
FALSE
73.
When interest rates are falling, most of the return on bonds will come from
a)
A) inflation gains.
b)
B) interest income.
c)
C) capital gains.
d)
D) risk premiums.
74.
Bond investors will experience capital gains when
a)
A) market interest rates are high and falling.
b)
B) market interest rates are high and rising.
c)
C) the required rate of return exceeds the risk-free rate of return.
d)
D) more bonds are called than issued over a given period of time.
75.
A coupon rate of 6% means that the bond will pay $60 interest every 6 months if interest is paid semi-annually.
a)
true
b)
FALSE
76.
The interest payment on a 6% coupon, semi-annual bond is $30 every 6 months.
a)
true
b)
FALSE
77.
Most bonds pay interest quarterly.
a)
true
b)
FALSE
78.
The risk premium component of a bond's market interest rate is related to the characteristics of the particular bond and its issuer.
a)
true
b)
FALSE
79.
Most bonds pay interest
a)
A) annually.
b)
B) semi-annually.
c)
C) quarterly.
d)
D) monthly.
80.
When a bond's rating improves from A to AA
a)
A) the coupon rate will fall and the price will rise.
b)
B) both the coupon rate and the price will rise.
c)
C) both the coupon rate will stay the same and the price will fall.
d)
D) the coupon rate will stay the same, but the price will rise.
81.
Junk bond prices are more sensitive to ratings changes than investment grade bonds.
a)
true
b)
FALSE
82.
If you feel interest rates are going to drop significantly, you could potentially realize large capital gains by purchasing long-term zero coupon bonds prior to the rates decreasing.
a)
true
b)
FALSE
83.
Which one of the following variables has the greatest effect on bond prices?
a)
A) economic growth
b)
B) interest rates
c)
C) inflation
d)
D) stock market returns
84.
When the market rate of return exceeds the coupon rate, a bond will sell at
a)
A) par.
b)
B) face value.
c)
C) a premium.
d)
D) a discount.
85.
If you expect market interest rates to rise, you should purchase
a)
A) short term, low coupon bonds.
b)
B) short term, high coupon bonds.
c)
C) long term, low coupon bonds.
d)
D) long term, high coupon bonds.
86.
If the inflation rate is 2%, the principal of a Treasury inflation protection security will from $1,000 to $1,020.
a)
true
b)
FALSE
87.
If you hold a zero-coupon bond to maturity, the fully compounded rate of return is virtually guaranteed to be equal to the rate stated at the time the bond was purchased.
a)
true
b)
FALSE
88.
Junk bond appeal to some investors because of higher yields and potentially higher capital gains than those offered by investment grade bonds.
a)
true
b)
FALSE
89.
The risk-free rate of return considers the expected rate of inflation.
a)
true
b)
FALSE
90.
Municipal bonds usually have higher yields than bonds issued by the U. S. Government.
a)
true
b)
FALSE
91.
The required return on a bond is equal to
a)
A) the real rate of return plus a risk premium plus an expected inflation premium.
b)
B) the real rate of return plus the coupon rate plus an inflation rate.
c)
C) the risk-free rate plus a risk premium plus an expected inflation premium.
d)
D) the real rate plus a risk premium.
92.
The risk-free rate of return is equal to the
a)
A) real rate plus a risk premium.
b)
B) required return minus the inflation premium.
c)
C) real rate plus the inflation premium.
d)
D) required return minus the real rate.
93.
A bond has a coupon rate of 6%, matures in 6 years, and currently sells for $1,000 (par value). Therefore the yield to maturity is also 6%.
a)
true
b)
FALSE
94.
The yield to maturity on a zero coupon, $1,000 par value bond which will mature in 10 years is 5%. The price of the bond is $500.
a)
true
b)
FALSE
95.
The price of a bond with an 6% coupon rate paid semi-annually, a par value of $1,000, and fifteen years to maturity is the present value of
a)
A) 15 payments of $30 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
b)
B) 15 payments of $60 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
c)
C) 30 payments of $30 at 6 month intervals plus $1,000 received at the end of the fifteenth year.
d)
D) 30 payments of $60 at 1 year intervals plus $1,000 received at the end of the 30th year.
96.
To the nearest dollar, what is the current price of a 9%, $1,000 annual coupon bond that has eighteen years to maturity and a yield to maturity of 7.01%?
a)
A) $1,200
b)
B) $1,000
c)
C) $826
d)
D) $701
97.
What is the coupon rate of an annual bond that has a yield to maturity of 8.5%, a current price of $942.32, a par value of $1,000 and matures in thirteen years?
a)
A) 7.67%
b)
B) 7.75%
c)
C) 8.33%
d)
D) 8.50%
98.
What is the current price of a $1,000, 6% coupon bond that pays interest semi-annually if the bond matures in ten years and has a yield-to-maturity of 7.1325%?
a)
A) $567
b)
B) $920
c)
C) $1,030
d)
D) $1,080
99.
What is the yield-to-maturity of a $1,000, 7% semi-annual coupon bond that matures in 2 years and currently sells for $997.07?
a)
A) 6.87%
b)
B) 7.04%
c)
C) 7.16%
d)
D) 7.31%
100.
Which of the following are needed to determine the appropriate value of a bond?
I.required rate of return
II.time to maturity
III.frequency of interest payments
IV.coupon rate
a)
A) II and III only
b)
B) III and IV only
c)
C) II, III and IV only
d)
D) I, II, III and IV
101.
A $1,000 par value, 12-year annual bond carries a coupon rate of 7%. If the current yield of this bond is 7.995%, its market price to the nearest dollar is
a)
A) $876.
b)
B) $925.
c)
C) $1,075.
d)
D) $1,125.
102.
Jordan bought a 4% semi-annual coupon bond with 25 years to maturity at par value of $1,000. If the required rate of return (yield to maturity )of this bond increases to 4.25%, by how much does the value of the bond change?
a)
A) minus $38.04
b)
B) plus $39.28
c)
C) minus $38.27
d)
D) The value does not change if Jordan intends to hold the bond to maturity.
103.
The current yield for a bond with a par value of $1,000, an annual interest payment of $55 and a market price of $1,100 is 5%.
a)
true
b)
FALSE
104.
Generally speaking, short-term bonds have lower yields than long-term bonds.
a)
true
b)
FALSE
105.
A bond's current yield is equal to the interest payment divided by par value.
a)
true
b)
FALSE
106.
Yield-to-call assumes a bond is called on the last possible date.
a)
true
b)
FALSE
107.
Wayward.com $1,000 par value bonds have a 4.6% coupon paid semi-annually. They will mature in 6 years and 6 months and are currently selling at $1,015. The yield to maturity for these bonds is
a)
A) 2.17%.
b)
B) 4.33%.
c)
C) 4.45%.
d)
D) 4.00%.
108.
Which one of the following statements is true about a $1,000, 6% annual coupon bond that is selling for $1,012?
a)
A) The current yield is less than 6%.
b)
B) The current yield is 6%.
c)
C) The yield-to-maturity is greater than 6%.
d)
D) The yield-to-maturity is 6%.
109.
Yield to call on a bond with a coupon rate of 8% paid semi-annually, 10 years to maturity, a par value of $1,000 and a selling price of $1,071, callable after 5 years at $1,010 is
a)
A) 3.5%.
b)
B) 6.49%.
c)
C) 7.0%.
d)
D) 8.16%.
110.
Hunter bought a bond with an 8% coupon rate for $1,100 and sold it one year later for $1,150. His holding period return was
a)
A) 11.8%.
b)
B) 11.3%.
c)
C) 13.0%.
d)
D) 7.27%.
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