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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

 

Fundamentals Of Investing 13th Edition by Scott B. Smart – Test Bank

 

 

Sample  Questions

 

Fundamentals of Investing, 13e (Smart)

Chapter 3   Investment Information and Securities Transactions

 

3.1   Learning Goal 1

 

1) Most brokers charge higher commissions for on-line trades than for telephone transactions.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

2) On-line trading has greatly lowered the cost of buying and selling stock as well as greatly increasing the speed of transactions.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 1

 

3) For most stocks, charts and tables of historical prices are only available through subscription services.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

4) You can utilize the Internet to develop financial plans and goals, analyze and select individual investments and organize your portfolio.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

5) An investor who mistakenly buys the wrong stock because the symbols are similar has 24 hours to undo the trade.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

6) The tools and calculators available on the FINRA website are useful, but quite expensive to use.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

7) Investing online is usually less expensive than traditional methods.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

8) The Internet provides

 

  1. educational sites for financial investing.
  2. the ability to trade securities on-line.

III. current information on stocks and bonds.

  1. analysts reports on individual stocks.

 

  1. A) II and III only
  2. B) III and IV only
  3. C) I, II and III only
  4. D) I, II, III and IV

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

9) Individuals can use the Internet to

 

  1. analyze individual securities.
  2. search for stocks that meet specific investment criteria.

III. organize their financial information.

  1. track the performance of their portfolio.

 

  1. A) I and IV only
  2. B) II and III only
  3. C) I, III and IV only
  4. D) I, II, III and IV

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

10) Individuals can now use the Internet to buy and sell

 

  1. stocks.
  2. bonds.

III. mutual funds.

  1. stock options.

 

  1. A) I and IV only
  2. B) II and III only
  3. C) I, II and III only
  4. D) I, II, III and IV

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

11) Information that can be found on the Internet at no cost includes

 

  1. P/E ratios.
  2. recent news about a company.

III. financial statements.

  1. future earnings and stock prices.

 

  1. A) I and IV only
  2. B) II and III only
  3. C) I, II and III only
  4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

12) Which one of the following can be considered a pitfall for investors new to on-line trading?

  1. A) On-line trading is fast and efficient.
  2. B) On-line investors tend to trade too frequently.
  3. C) On-line trading is available to the average investor.
  4. D) On-line investors pay lower costs per trade than investors using a broker.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 1

13) What are some of the tools available to investors on the internet (name at least 4)?

Answer:  Price histories, charts, screening for various attributes such as dividends, calculators and portfolio trackers all are available on the internet, often at no cost.

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

 

3.2   Learning Goal 2

 

1) Analytical information would include such information as estimates of growth in sales and future earnings.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

2) Reviewing industry and company information may provide guidance on the future outlook of a particular firm.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

3) A listing of a firm’s major product lines and projections of future sales would both be considered descriptive information.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

4) Descriptive information might include the company’s lines of business, a list of major competitors, and recent changes in management.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

5) Current price information on shares of a company’s stock is often accompanied by statistics on the recent price behavior of that stock.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

6) Investors who are aware of current economic, political, and market events tend to make better investment decisions.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

7) Chemical Week and the Oil and Gas Journal are considered to be general business periodicals.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

8) Investors can usually find the financial statements of a firm on the firm’s website.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

9) A “pump and dump” scheme involves buying shares of stock, hyping that stock via the Internet and then quickly selling the shares at a profit.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

10) Charting is the technique of

  1. A) plotting the performance of a security over time.
  2. B) sorting through databases of securities to select one based on certain parameters.
  3. C) monitoring a stock based on the underlying economic conditions.
  4. D) determining the amount of money that must be saved based on a given financial goal.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

11) Which of the following types of information will NOT be found in major urban newspapers?

  1. A) price quotations for stocks of local interest
  2. B) stories concerning local business leaders
  3. C) interest rates offered by local and national banks
  4. D) real time price quotes for widely held stocks and exchange traded funds

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

12) Which of the following is a general rather a financial newspaper?

  1. A) The New York Times
  2. B) Investor’s Business Daily
  3. C) The Wall Street Journal
  4. D) Barron’s

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

13) Which one of the following is NOT published by the U.S. Government?

  1. A) Federal Reserve Bulletin
  2. B) Survey of Current Business
  3. C) Kiplinger Washington Letter
  4. D) Economic Report of the President

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

14) Regulation FD requires simultaneous disclosure of critical information simultaneously to investment professionals and the general public with the exception of

  1. A) brokerage firms.
  2. B) hedge funds.
  3. C) securities rating service such as Moody’s Investor Services and Standard & Poor’s.
  4. D) mutual fund managers.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

15) Which one of the following web sites should you utilize to review the financial information in a company’s 10-K report?

  1. A) freeedgar.com
  2. B) valueline.com
  3. C) wsj.com
  4. D) finance.yahoo.com

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

16) Which of the following is usually available on a companies website?

  1. A) brokerage reports
  2. B) annual reports
  3. C) back-office reports
  4. D) red herrings

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Revised

Learning Goal:  Learning Goal 2

 

 

17) The published analysis and recommendations of an individual brokerage firm is called a

  1. A) prospectus.
  2. B) comparative data source.
  3. C) back-office research report.
  4. D) broker’s subscription report.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

18) Assume you wanted to find the most current price for Home Depot’s stock. Your most likely source would be

  1. A) Yahoo Finance.
  2. B) Investor’s Business Daily.
  3. C) The Granville Market Letter.
  4. D) The Wall Street Journal.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

19) Which one of the following statements about back-office research reports is FALSE?

  1. A) They frequently include buy or sell recommendations.
  2. B) They include analyses of current and future prospects for the securities markets.
  3. C) They look at specific companies as well as industries.
  4. D) They are only available to high-profile clients who maintain large accounts with the brokerage firm.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

20) The Value Line Investment Survey includes which of the following reports?

 

  1. Selection and Opinion
  2. The Outlook

III. Ratings and Reports

  1. Summary and Index

 

  1. A) I and II only
  2. B) I, II and IV only
  3. C) I, III and IV only
  4. D) II, III and IV only

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

21) Subscription letters are

  1. A) sometimes geared to specific industries and companies.
  2. B) available free on the Internet.
  3. C) published on an annual basis.
  4. D) descriptive in nature but do not offer investment advice.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

22) Which of the following sites is especially valuable for information concerning mutual funds?

  1. A) www.investopedia.com
  2. B) www.morningstar.com
  3. C) www.moody’s.com
  4. D) www.bondsonline.com

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

23) Current price information is found in which of the following?

 

  1. Dow Theory Letters
  2. Yahoo!Finance

III. CNBC TV website

  1. Hulbert Financial Digest

 

  1. A) II and III only
  2. B) I, II and III only
  3. C) II, III and IV only
  4. D) I, II, III and IV

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

24) MSN Money, Yahoo! Finance, and the Motley Fool are all classified as

  1. A) subscription services.
  2. B) comparative data sources.
  3. C) financial portals.
  4. D) institutional news sites.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  Revised

Learning Goal:  Learning Goal 2

 

25) Which one of the following services provides bond ratings?

  1. A) Standard & Poor’s
  2. B) Yahoo Finance
  3. C) Value Line
  4. D) Bureau of the Public Debt Online

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  6 Diverse and multicultural work environments.

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

 

3.3   Learning Goal 3

 

1) An index measures the current value of a group of stocks in relation to a base value established previously.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

2) All the Standard & Poor’s indexes are based on the total market values of the companies rather than on the price of a single share.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

3) Both the Dow Jones Industrial Average and the Standard & Poor’s 500 Index are constructed to reflect the value of shares in large, mid-size and smaller companies.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

4) Standard & Poor’s and Mergent both publish extensive data on bonds.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

5) In addition to the Dow Jones Industrial Average, the Standard & Poors 500 and NASDAQ indexes are widely quoted measures of market performance.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

6) The Value Line Index is a value weighted index based on a small sample of the 1700 stocks covered by the Value Line investment reports.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

7) Stock market averages and indexes are commonly used to measure the

  1. A) specific behavior of companies.
  2. B) general behavior of stock prices.
  3. C) specific behavior of alternative investments.
  4. D) specific behavior of the economy.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

8) Stock market averages reflect the arithmetic average price behavior of a group of stocks

  1. A) at a given point in time.
  2. B) relative to a base value set at an earlier point in time.
  3. C) relative to other indexes.
  4. D) relative to a base price of 100.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

9) Averages and indexes differ from one another in that an index

  1. A) is the arithmetic average price behavior of a group of stocks at a given point in time.
  2. B) measures the current price behavior of a group of stocks in relation to a base value set at an earlier point in time.
  3. C) is of value in-and-of itself, whereas an average must be compared to a historical figure to have any meaning.
  4. D) always moves up before a corresponding average moves up, and always moves down before a corresponding average moves down.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

10) The Dow Jones Industrial Average (DJIA) consists of 30 stocks whose price behavior

  1. A) typically has little correlation with the rest of the stock market.
  2. B) broadly reflects the overall price behavior of the stock market.
  3. C) reflects the changes in value of manufacturing stocks only.
  4. D) leads the movements in the general economy by one to two weeks.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

11) Both General Electric and Goldman Sachs are part of the Dow-Jones Industrial Average.  If on a given day Goldman Sachs closes at $175 and General Electric at $25

  1. A) the difference in price will not affect the Average.
  2. B) the Average will include 7 shares of General Electric for each share of Goldman Sachs.
  3. C) the effect of each stock on the Average cannot be determined without knowing the number of shares outstanding for each company.
  4. D) the effect of changes in the price of Goldman Sachs shares will have 7 times the effect on the Average as changes in the price of General Electric.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 3

 

12) The Dow Jones Industrial Average (DJIA) is based on the prices of

  1. A) 30 stocks.
  2. B) 100 stocks.
  3. C) 500 stocks.
  4. D) 200 stocks.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

13) Which of the following statements about the Dow Jones Industrial Average are correct?

 

  1. Higher-priced stocks tend to affect the average more than lower-priced stocks.
  2. A one-point change in the DJIA correlates to a $1 change in average share value.

III.       Changes in the DJIA are made to reflect company mergers and acquisitions.

  1. The DJIA divisor was determined when the average was created and remains constant.

 

  1. A) I and III only
  2. B) II and IV only
  3. C) I, III and IV only
  4. D) I, II, III and IV

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

14) Which one of the following statements is correct?

  1. A) The S&P 500 Index is based on 500 large companies that trade on U.S. exchanges.
  2. B) Because of mergers and bankruptcies, the S&P 500 Index no longer contains 500 stocks.
  3. C) The S&P 500 Index is carefully constructed to reflect the values of large, medium and small capitalization companies.
  4. D) The S&P 500 is based on the 500 largest U.S. companies as measured by market value.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

15) Assume that the S&P 500 composite stock index closes at 2,000. This means that

  1. A) the average stock in the index is selling for $20.00.
  2. B) an investor would have to pay $2,000 to purchase one share of each of the stocks represented in the index.
  3. C) The average value of a company reflected in the Index has doubled from when the Index was at 1000.
  4. D) the share prices of the stocks in the index have risen 20 times since the 1941-1943 base period.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Revised

Learning Goal:  Learning Goal 3

 

16) Over-the-counter market activity is reflected in the

  1. A) Standard & Poor’s composite index.
  2. B) NASDAQ index.
  3. C) AMEX composite index.
  4. D) financials index.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

17) The value of a Standard & Poor’s Index is computed by

  1. A) dividing the sum of the closing share prices by an adjusted divisor.
  2. B) dividing the sum of the closing share prices by a divisor and then multiplying the quotient by 100.
  3. C) dividing the sum of the current market value of all the stocks in the index by a divisor adjusted for changes in the companies composing the Index.
  4. D) dividing the sum of the current market value of all the stocks in the index by a divisor that adjusts for stock splits and scales the Index figure to a manageable size.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Revised

Learning Goal:  Learning Goal 3

 

 

18) EAFE stands for

  1. A) Europe, Asia, Far East.
  2. B) Europe, Australia, Far East.
  3. C) England, America, Far East.
  4. D) England, America, France, European Community.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

19) Which one of the following statements is true concerning bonds?

  1. A) A bond yield represents only the interest earned on a bond.
  2. B) Bond yield data is more useful to an investor when compared over time.
  3. C) A bond’s yield remains constant even when a bond is sold prior to maturity.
  4. D) Bonds with similar characteristics generally have widely disparate bond yields.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

20) Which of the following indexes would best reflect the performance of a large, diversified portfolio with equal amounts of money invested in each company.

  1. A) the S&P 500 Index
  2. B) the Russell 3000
  3. C) the NASDAQ 100
  4. D) the Value Line Composite Index

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

21) Which one of the following indexes reflects a large sample of small, medium sized and large companies?

  1. A) NYSE composite
  2. B) DJIA
  3. C) Russell 3000
  4. D) Value Line composite

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Revised

Learning Goal:  Learning Goal 3

 

22) Which one of the following is a measure of the performance of small companies?

  1. A) Russell 2000
  2. B) Russell 1000
  3. C) Russell 3000
  4. D) Value Line 1700

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

23) The Dow Jones Corporate Bond Indexes is based

  1. A) the yield to maturity of bonds in the index.
  2. B) annual rates of return and assume the bonds were purchased one year ago and sold today.
  3. C) the interest rates offered on a sample of newly issued bonds.
  4. D) the closing prices of bonds in the index.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 3

 

 

24) The Dow Jones Industrial Average and the Standard & Poor’s Industrial Index have a number of similarities and differences. Discuss at least two major similarities and major differences between these two market indicators.

Answer:  Similarity: Both the DJIA and the S&P Industrial Index are meaningful only when compared to values in other time periods or to a base value. Over the long-run and on a relative basis, they seem to move together remarkably well. Both track only established companies with large market capitalizations.  Difference: The DJIA and the S&P Industrial Index are constructed very differently. The DJIA is a price average of only 30 stocks, while the S&P is a market-weighted index of 500 stocks.

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

25) Why are market averages and indexes useful to investors?

Answer:  By comparing the values of various averages and indexes over time, investors can capture the “mood” of the market and assess the market’s relative strength or weakness.  Averages and indexes are also convenient benchmarks to assess the performance of individual portfolios and mutual funds against the broader markets.

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

3.4   Learning Goal 4

 

1) The basic function of stockbrokers is to execute client orders at the best possible price.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

2) Shares of stock owned by an individual but held in a brokerage firm’s name for ease of trading are said to be held in street name.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

3) Trading stocks is much faster and less complicated if an individual investor has possession of the actual stock certificates.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

4) Regulation FD requires that brokerage firms disclose material information such as earnings forecasts with all clients simultaneously.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

 

5) Stocks held in street name can be quickly sold online or by telephone.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

6) Brokerage firms are not allowed to make specific buy or sell recommendations to their clients.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

7) Dividends earned on securities held in street name by the brokerage are not reported to the Internal Revenue Service.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

8) Which one of the following statements about stockbrokers is correct?

  1. A) Stockbrokers act as dealers in the securities they trade.
  2. B) Stockbrokers must be licensed by the Securities and Exchange Commission.
  3. C) Stockbrokers are regulated by financial consultants.
  4. D) Stockbrokers execute trades on the floor of the New York Stock Exchange on behalf of account executives.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

9) Which one of the following statements concerning stock trades is correct?

  1. A) Brokerage firms send customer orders to a market maker on the floor of the NYSE.
  2. B) Confirmation of a trade is transmitted directly from the NYSE to the customer who placed the order.
  3. C) A broker transmits OTC orders from a customer directly to a floor broker in the OTC market.
  4. D) Brokerage firms generally hold securities in street name so they can be transferred without the customer’s signature.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

10) Unless the investor has requested another arrangement, cash from dividends and the sale of stock is normally

  1. A) deposited in a Money Market Account offered by the brokerage.
  2. B) automatically reinvested in more stock.
  3. C) direct deposited to the investor’s bank account.
  4. D) held in escrow by the brokerage until it is be reinvested.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

11) Which of the following services would not be available through premium discount brokerages?

  1. A) fast execution of trades
  2. B) lower commissions on most trades
  3. C) phone conversations and advice from a broker
  4. D) the ability to place limit and stop-loss orders

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 4

 

12) Which is the correct order of events when an individual buys a stock through a brokerage firm?

 

  1. The order is transmitted to the main office of the brokerage firm.
  2. The customer places the order with their local stockbroker.

III. The confirmation of the order is sent to the broker placing the order.

  1. The order is sent to the floor of the exchange.

 

  1. A) I, II, III, IV
  2. B) II, I, III, IV
  3. C) II, IV, I, III
  4. D) II, I, IV, III

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

13) Holding securities in street name

  1. A) makes the trading of securities easier and more efficient for individual investors.
  2. B) allows the brokerage firm to sell securities without the customers approval.
  3. C) enables the brokerage firm to collect the stock dividends as compensation for their services.
  4. D) means that the brokerage firm actually owns the securities.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

14) A report describing the transactions in an account, listing the dividend and interest payments received, and detailing the current holdings is called a

  1. A) prospectus.
  2. B) red herring.
  3. C) statement.
  4. D) street certificate.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

15) A brokerage firm which provides analyst reports, investment advice and information as well as online brokerage services is called a(n)

  1. A) premium discount broker.
  2. B) full-service broker.
  3. C) basic discount broker.
  4. D) electronic broker.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

16) When deciding between a discount or full service brokerage, the investor should consider

  1. A) trading costs.
  2. B) her comfort level making unassisted investment decisions.
  3. C) her awareness of potential investment opportunities.
  4. D) all of the above.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

17) Which one of the following is the LEAST important when selecting a stockbroker?

  1. A) knowing the stockbroker personally
  2. B) selecting a stockbroker who best understands your investment goals
  3. C) considering the services offered and the related costs
  4. D) getting referrals from personal acquaintances with similar investment objectives

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

3.5   Learning Goal 5

 

1) A limit order is an order to buy at the limit price or less.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 5

 

2) A limit order is an order to sell at the limit price or less.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

3) A stop-loss order is activated once the stock reaches the specified price.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

4) When placing an order on-line, an individual investor should always double check the ticker symbol prior to submitting the order.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

5) Many day traders are also margin traders.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

6) Stop orders are used only when selling a stock.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

7) Most day traders avoid holding stocks overnight because they fear large price changes while the markets are closed.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

8) It is generally a good idea to use limit orders when trading after hours.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

9) Traders who hold stocks for less than a full day can reduce the tax burden on their profits.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

10) Commission structures vary with the type of security being traded, the type of broker involved and the size of the order.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

11) Small investors normally have a negotiated commission schedule while large investors benefit from a fixed-commission schedule.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

12) Commissions for on-line trades are considerable lower than for orders placed with a full-service broker.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

13) SIPC insurance is offered by some full-service brokers to protect investors from large losses.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

14) Many brokerage firms require that disputes between individual investors and brokers be settled through arbitration.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

15) The Securities Investors Protection Corporation protects investors from brokers who offer incompetent advice.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

16) Excessively trading a customers account to increase a stockbrokers commission income is

  1. A) an acceptable method of timing the market to increase rates of return.
  2. B) called churning which is an illegal practice.
  3. C) probably unethical but yet is acceptable by the securities industry.
  4. D) permitted provided that the customer does not object.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

17) Which of the following practices is not recommended for on-line traders?

  1. A) Double check stock symbols to be sure you are ordering the right stock.
  2. B) Use limit orders rather than market orders, especially when trading after hours.
  3. C) Trade as often as possible to maintain a strong relationship with the brokerage.
  4. D) Double check your order to be sure the quantity of shares and the price is what you intended.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

 

18) When an investor places a ________ order, he agrees to buy or sell at the best available price when the trade is executed.

  1. A) market
  2. B) limit
  3. C) stop
  4. D) stop-limit

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

19) An individual investor who wishes to borrow money to buy stocks must open a

  1. A) signature account.
  2. B) margin account.
  3. C) joint account.
  4. D) custodial account.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

20) The current price of XUM stock is $35.  Jason places a limit order for 100 shares at $30, GTC.  The price fall so $30.05 and the rises over the course of a month to $42.

  1. A) Jason has a gain of $1,200.
  2. B) Jason has a gain of $1,195.
  3. C) Jason does not own the stock, but will if his trade can ever be executed at $30.00 or better.
  4. D) Jason has a loss of $1,195.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

21) A margin account

  1. A) can be opened by any investor who wants to purchase securities by charging them to his/her credit card.
  2. B) allows an investor to borrow one hundred percent of the cost of the securities purchased.
  3. C) allows an investor to borrow a portion of the purchase price at a reasonable rate of interest.
  4. D) is permitted only in wrap accounts.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

22) Which of the following are characteristics of a wrap account?

 

  1. a flat amount of commission per transaction
  2. an increased probability of account churning

III. a money manager

  1. detailed performance reports

 

  1. A) I and II only
  2. B) III and IV only
  3. C) II, III and IV only
  4. D) I, III and IV only

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

23) An odd-lot trade involves a trade

  1. A) of only 100 shares.
  2. B) that is generally priced at a discount to the market price.
  3. C) of 100,000 shares or more.
  4. D) consisting of any number of shares that is not a multiple of 100.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

24) Heather places an order to buy 525 shares of stock. This is an order for

  1. A) five round lots and one odd lot.
  2. B) 21 round lots of 25.
  3. C) one odd lot.
  4. D) five hundred round lots and twenty-five odd lots.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

25) An order to sell 300 shares of ABC stock at the best available price is called a

  1. A) limit order.
  2. B) market order.
  3. C) stop loss order.
  4. D) fill-or-kill order.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

26) Market orders are usually executed

  1. A) only after all limit orders have been executed.
  2. B) at the average price during the previous trading session.
  3. C) at the closing price for the day’s trading.
  4. D) before the price can change significantly if the order is placed while the markets are in session.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

 

27) McDonald’s stock is now selling for $92 per share.  Kim wants to buy 100 shares but only if she can do so at $90 or less.  She should place a(n)

  1. A) stop order.
  2. B) market order.
  3. C) limit order.
  4. D) odd-lot order.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 5

 

28) Which one of the following statements about limit orders is correct?

  1. A) The execution of the trade will occur prior to the close of trading on the day the trade is placed.
  2. B) The execution will occur at the regular open on the day following the day the trade is placed.
  3. C) The trade may be executed only at the limit price or better at any time prior to expiration or cancellation of the order.
  4. D) The trade will be executed at the market price at the end of the third business day, if not executed previously at the limit price.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

29) A fill-or-kill order will be

  1. A) executed immediately upon order arrival on the floor of the exchange.
  2. B) will be cancelled if not immediately executed at the stated price or better.
  3. C) will be cancelled at the end of the trading day if not executed by that time.
  4. D) in effect until cancelled by the customer who placed the order.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

30) Ryan places a good-’til-canceled limit order to sell 300 shares of KM at $18 a share. When his order reaches the trading floor, KM is trading at $18.20. Which of the following statements is true concerning Roy’s order?

  1. A) The trade will not be executed and will be immediately cancelled.
  2. B) The specialist will record the order in the order book and execute the trade as soon as the price hits $18.00.
  3. C) The brokerage firm will sell the 300 shares at $18.20 and keep the additional $0.20 as a commission.
  4. D) The order will be executed at $18.20 with the proceeds credited to Roy’s account.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

31) Which of the following statements concerning market, stop loss and limit orders are correct?

 

  1. Market orders guarantee both a price and an execution.
  2. Market orders guarantee an execution but not a price.

III. Limit orders guarantee a price but not an execution.

  1. Stop-loss orders may never be executed.

 

  1. A) I and III only
  2. B) II, III and IV only
  3. C) I and IV only
  4. D) II and IV only

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 5

 

 

32) On March 15, Marcos placed a good-’til-canceled order to buy 200 shares of ABC at $10 a share. ABC sold between $10.50 and $11.00 on that day. Over the following two months the stock price continued to rise and Marcos forgot about the order. After the markets closed on June 6, some bad news concerning ABC was released. The stock opened on June 7 at a price of $8.00 a share. Which one of the following statements is correct concerning Marcos’ order?

  1. A) The order was cancelled on May 15 because it had not been executed within the allowable two-month time period.
  2. B) The order was executed on March 15 at $10.50 a share since that was the best available price of the day.
  3. C) The order was executed on June 7 at a price of $10.00 a share.
  4. D) The order was executed on June 7 at a price of $8.00 a share.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

33) Which one of the following statements is correct about a good-’til-cancelled order?

  1. A) The order generally expires after six weeks.
  2. B) The order will automatically renew unless cancelled by the customer.
  3. C) The order helps customers obtain a specific price without watching the market continuously.
  4. D) The order will be cancelled at the end of the trading day if not executed.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

34) On October 12, Kevin placed a day order to purchase 100 shares of ABC stock at $21 a share. During the day, the stock sold at prices ranging from $21.01 to $22.49. Over the following month the stock sold in a range of $21.60 to $23.05. On December 2, the market declined radically and the price of ABC stock dropped to $19.94. Which one of the following statements is correct concerning Allen’s order?

  1. A) The order was never executed.
  2. B) The order was executed at $21.01 per share.
  3. C) The order was executed at $22.49.
  4. D) The order was executed at $19.94.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

35) Ryan bought a stock three years ago for $6 a share. Today, June 22, the stock is selling for $72 a share. Ryan is afraid that the price will fall and does not want to lose his profits so he places a stop-loss order to sell at $70. The stock sells between $71 and $75 throughout the remainder of the day on June 22. On the morning of June 23, the stock opens at $9 a share based on rumors of a possible bankruptcy due to inappropriate accounting procedures. Which one of the following statements is true concerning this situation?

  1. A) Ryan was able to sell his stock for $70 a share thereby protecting his profits.
  2. B) Ryan’s stock was sold for $9 a share causing him to lose most of his profits.
  3. C) Ryan still owns his shares of stock since his order was never executed at the $70 price.
  4. D) Ryan received a call from the specialist asking him what he wanted to do about his order.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

36) Three years ago, Emily bought 200 shares of HQ at $27.00 per share.  HQ shares have risen to $57.50 per share.  If the stock continues to rise, she wants to hold it, but she fears that the price could fall quickly and she will lose most of her profit.  Which of the following decisions would be best?

  1. A) Place a limit order to sell at $60.00.
  2. B) Place a stop-limit order at $55.00.
  3. C) Place a stop-loss order at $27.00.
  4. D) Place a stop-loss order at $55.00.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Revised

Learning Goal:  Learning Goal 5

 

37) Mike bought 200 shares of EG stock two years ago at $16 per share. The stock has traded in a range of $21 to $44 a share over the past year. EG is now selling for $43.60 a share. EG announces its earnings today and Mike feels the stock could go to $60 on good news or fall to $30 on bad.  To protect his profits, the most appropriate order for him to place is

  1. A) market order to sell immediately.
  2. B) a limit sell order at $60.00.
  3. C) a stop loss order at $42.
  4. D) a stop-limit order to sell at $45.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

38) Angela placed a stop-limit order to sell 100 shares of RST stock at $28 when the market price of RST was $31. Shortly after Angela placed her order, trading on RST was halted due to a pending news announcement. When trading re-opens RST is priced at $24 a share. Within minutes the price of RST began to drop further until it reached $19 a share. Which one of the following statements is correct concerning Angela’s stop-limit order to sell?

  1. A) Angela’s stock was sold for $28 a share.
  2. B) Angela’s stock was sold for $24 a share.
  3. C) Angela’s stock was sold at a price between $19 and $24 a share.
  4. D) Angela still owns her 100 shares of stock.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

39) At 10:45 a.m., Ashley placed a stop-loss order to sell 200 shares of Alpha stock at $43 a share. At 2:15 p.m., the price of Alpha fell to $42.90 and then rose to $43.40 a share by the end of the trading day. Ashley order was executed that day. Ashley would have received a price

  1. A) of $42.90 a share for her stock since her order was already recorded in the specialist’s book.
  2. B) of $43.40 a share for her stock since that was the closing price on the day of execution.
  3. C) between $42.90 and $43.40 a share depending upon when her trade executed.
  4. D) equal to the average prices paid by the specialist during that trading day.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

40) Which of the following statements concerning day traders are correct?

 

  1. Day traders generally do not hold securities over night.
  2. Day trading is a relatively low risk approach to investing.

III. Some day traders sell stocks short.

  1. Day trading was declared illegal by the Market Stabilization Act of 2002.

 

  1. A) I and II only
  2. B) I and III only
  3. C) I, II and IV only
  4. D) II, III and IV only

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

41) The Securities Investor Protection Corporation insures individual investors against

  1. A) the loss of up to $500,000 in securities or $100,000 in cash held by a broker.
  2. B) market losses of $500,000 total or $100,000 per transaction.
  3. C) losses of up to $100,000 incurred due to innocent online trading errors.
  4. D) losses incurred up to $500,000 due to churning by a broker.

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

42) In which of the following cases might an investor receive help from The Securities Investor Protection Corporation?

  1. A) The investor purchased a stock at $40 per share because his broker recommended it. Over the next six months, it fell to $20 per share.
  2. B) The investor purchases stock in a company that shortly later was forced into bankruptcy because of accounting fraud.
  3. C) The investor holds $100,000 worth of stock in certificate form. The certificates are destroyed in a fire.
  4. D) A broker took money sent by investors to cover stock purchases, but never invested it and sent falsified statements to cover the fraud.

Answer:  D

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

43) An informal, voluntary agreement to solve disputes between an investor and his/her broker by utilizing a person to facilitate negotiations between the two parties is called

  1. A) voluntary arbitration.
  2. B) binding arbitration.
  3. C) mediation.
  4. D) litigation.

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

44) Describe several appropriate uses of stop-loss orders.

Answer:  Stop loss orders are appropriate when an investor who cannot continuously monitor her investments wants to limit potential losses on a newly purchased stock.  They are also used to protect profits or limit additional losses on stocks that the investor has held for a period of time.

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

45) When is it appropriate to use limit orders?

Answer:  It is especially appropriate to use limit orders when buying or selling outside of normal trading hours.  The limit order protects the investor from large, unanticipated price changes when the markets open.  Limit orders are also useful when an investor has decided to sell but wants to profit a little longer from rising prices or wants to catch what he hopes is a temporary dip in the price before he buys.

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

3.6   Learning Goal 6

 

1) Chartered Financial Analysts and Certified Financial Planners must pass a rigorous series of exams, as well as meet educational and experience requirements.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

2) A person can become a Certified Financial Planner merely by filling out an application and paying an annual fee.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

3) Investment clubs are legal partnerships.

Answer:  TRUE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

4) Investment clubs may only operate under the guidance of a registered investment advisor.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  New Question

Learning Goal:  Learning Goal 6

 

5) Investment advisors are legally responsible for losses incurred by their clients.

Answer:  FALSE

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

6) Which of the following designations does NOT have formal education and testing requirements?

  1. A) Chartered Financial Analyst
  2. B) Certified Financial Planner
  3. C) Registered Investment Adviser
  4. D) Certified Public Accountant

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

7) Recent studies suggest that, on average, investments clubs

  1. A) outperform broad market indexes by several percentage points.
  2. B) underperform broad market indexes by a several percentage points.
  3. C) earn average rates of return.
  4. D) no data is available on investment club performance.

Answer:  B

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

8) Which of the following is required by the Investment Advisers Act to disclose their background and any conflicts of interest?

  1. A) professional investment advisers
  2. B) accountants and lawyers
  3. C) stockbrokers
  4. D) all of the above

Answer:  A

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

9) Which of the following are advantages of investment clubs?

 

  1. Small investors can pool their money to build a portfolio.
  2. Members can share research responsibilities.

III. Individual members may have different goals and tolerance levels for risk.

  1. Investment clubs typically buy stocks for the long term rather than short term profits.

 

  1. A) I and III only.
  2. B) III and IV only.
  3. C) I, II and IV only
  4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-01 Describe the different financial markets and the role of the financial managers

AACSB:  8 Application of knowledge (Able to translate knowledge of business and management into practice)

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

Fundamentals of Investing, 13e (Smart)

Chapter 7   Analyzing Common Stocks

 

7.1   Learning Goal 1

 

1) The top down approach to security analysis starts with top management and then examines production and marketing strategies.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

2) Company analysis is only concerned with how a company has performed in the past.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

3) Advocates of the efficient market hypothesis would argue that it is virtually impossible for any investor to consistently outperform the market.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

4) Economic analysis is concerned with how the general state of the economy will impact the performance of a particular company within a particular industry.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

5) Investors who believe that most securities are efficiently priced should not not be concerned with fundamental analysis.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

6) Fundamental analysis can only be profitable if some securities are at least temporarily mispriced.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

7) Markets can only be efficient if many competent analysts are performing fundamental analysis.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

8) One of the basic premises of security analysis, and in particular fundamental analysis, is that

  1. A) a stock’s price is based on its past cash flows rather than on anticipated future cash flows.
  2. B) market sectors do not move in concert with business cycles.
  3. C) all securities have an intrinsic value that their market value will approach over time.
  4. D) a security’s risk has relatively little effect on the security’s return.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

9) The intrinsic value of a security is based on the

 

  1. amount of risk.
  2. current market value of the security.

III. discount rate applicable to the security.

  1. estimated future cash flows from the security.

 

  1. A) I and III only
  2. B) III and IV only
  3. C) I, II and III only
  4. D) I, III and IV only

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

10) The three steps in determining a stock’s intrinsic value are

 

  1. estimating the stock’s future cash flows.
  2. estimating the risk associated with future cash flows.

III. careful analysis of patterns in the stock’s recent price history.

  1. estimating an appropriate discount rate to apply to future cash flows.

 

  1. A) II, III and IV only
  2. B) I, II and IV only
  3. C) I, III and IV only

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

11) The basic motivation of security analysis is to help investors

  1. A) identify the best times to buy and sell securities.
  2. B) contribute to the efficiency of securities markets.
  3. C) identify securities whose intrinsic values are at or near their market values.
  4. D) identify mispriced stocks.

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

12) Top-down security analysis

  1. A) starts with the fundamental analysis of a firm.
  2. B) includes economic, industry, and fundamental analysis.
  3. C) concentrates on the competency of the senior management of a firm.
  4. D) centers on the past performance of a firm.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

13) The normal sequence in performing top down analysis is

  1. A) competition, consumer demand, threat of substitute products.
  2. B) market conditions, risk, company fundamentals.
  3. C) economy, industry, company.
  4. D) profitability, efficiency, liquidity.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 1

 

14) Fundamental analysis involves the in-depth study of the

  1. A) role of nondiversifiable risk in an investor’s portfolio.
  2. B) financial condition and operating results of a given firm.
  3. C) pattern of security prices as revealed in chart formations.
  4. D) role of diversifiable risk in an investor’s portfolio.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

15) Investment analysts who believe that a thorough investigation of a company’s financial condition, product development, management and other intrinsic factors can discover stocks that are priced above or below their intrinsic value are advocates of

  1. A) fundamental analysis.
  2. B) behavioral analysis.
  3. C) the efficient market hypothesis.
  4. D) technical analysis.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 1

 

 

7.2   Learning Goal 2

 

1) Most firms tend to be more profitable and have higher stock values when the economy is strong.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

2) 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.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

3) The business cycle reflects economic changes only in the industrial sectors of the economy.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

4) The best time to buy stock is at the peak of an economic cycle.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

5) Developing a general economic outlook assists in the identification of industries and firms that might be good investment opportunities.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

6) Federal budget deficits tend to further depress an already depressed economy.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

7) Changes in stock prices tend to lag changes in level of economic activity by several months.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

8) Interest rates and stock prices tend to rise and fall together.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

9) Which measure of the business cycle represents the market value of all goods and services produced in a country over a twelve-month period?

  1. A) industrial production index
  2. B) money supply
  3. C) gross domestic product
  4. D) productivity average

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

10) Which one of the following is likely to have a negative effect on stock prices?

  1. A) falling interest rates
  2. B) a decrease in the money supply (M2)
  3. C) low inflation
  4. D) a decrease in the unemployment rate

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

11) The Federal Reserve through monetary policy can help expand the economy by

  1. A) lowering income taxes on individuals.
  2. B) reducing tariffs such that foreign exports can increase.
  3. C) supporting a moderate growth of the money supply.
  4. D) increasing government spending on the national infrastructure.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

12) Rising interest rates tend to

  1. A) contract the level of economic activity.
  2. B) increase the level of business investment.
  3. C) indicate governmental expansion of the economy.
  4. D) signal the trough of a recessionary market.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

13) The government has an expansionary economic policy when it

  1. A) increases taxes.
  2. B) increases government spending.
  3. C) promotes rising interest rates.
  4. D) limits exports of goods and services.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

14) Rising corporate profits are likely to have the greatest effect on which of the following industrial sectors?

  1. A) business equipment
  2. B) defense
  3. C) food and agriculture
  4. D) consumer durables

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

15) Which of the following businesses will be positively impacted by a weak dollar?

  1. A) retailing
  2. B) imports
  3. C) exports
  4. D) personal services

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

16) Which of the following businesses will be negatively impacted by a strong dollar?

  1. A) retailing
  2. B) imports
  3. C) exports
  4. D) automotive

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

17) Which of the following tend to signal that stock prices are likely to rise in the future?

 

  1. Employment increases after several months of recession.
  2. Interest rates are low compared to the recent past.

III. Major market indexes have just reached record highs.

  1. Housing starts increase after several months of decline.

 

  1. A) I and II only
  2. B) II and III only
  3. C) I, II and IV only
  4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

18) Which of the following are characteristics of an expansionary fiscal policy?

 

  1. Increased government spending on infrastructure projects.
  2. Reduction in defense and education budgets.

III. Reduction in employment taxes.

  1. Reduction in government borrowing.

 

  1. A) I and III only
  2. B) II and III only
  3. C) I, II and IV only
  4. D) I, II, III and IV

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 2

 

 

19) Which of the following is most likely to increase in value as the result of a weakening dollar?

  1. A) an ADR for a foreign telecommunications company
  2. B) stock in a firm that depends heavily on imported raw materials
  3. C) stock in a firm with many accounts payable in foreign currencies
  4. D) stock in a foreign company that depends heavily on exports to the U.S.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

20) Which one of the following statements is correct?

  1. A) Stock prices are independent of the economic cycle.
  2. B) Stock prices change simultaneously with the economy.
  3. C) Stock prices are often start to rise before the end of a recession.
  4. D) Changes in stock prices generally lag changes in the economy.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

21) Name at least three economic variables that the affect the stock market and describe their effects.

Answer:  Inflation: high inflation increases the rate at which cash flows from investments are discounted and therefore tends to lower their value.  Inflation is also a major component of interest rates. Interest rates: in general rising interest have a negative effect on security prices and falling interest rates a positive effect.

Money supply:  moderate growth in the money supply has a positive effect, but rapid growth can lead to inflation and higher interest rates, which would be negative.  A contracting money supply is typical of recessions and depresses stock prices.

Exchange rates:  a relatively weak dollar favors industries that are major exporters such as agriculture and construction equipment.  A strong dollar favors importers and also reduces the possibility of inflation because imported goods are cheaper in dollar terms.

(Student answers will vary.)

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 2

 

 

7.3   Learning Goal 3

 

1) To predict the demand for an industrial sector, it is essential to understand the economic forces that affect the industry.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

2) Economic factors such as a weak dollar will have a negative impact on all industrial sectors.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

3) Industries in the rapid expansion stage will be especially sensitive to a slowing economy.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

4) In addition to company reports, Value Line also publishes industry analyses.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

5) The economy will expand more slowly if consumers decided to save more and reduce their debt levels.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

6) Industry analysis focuses on the amount spent on research and development by individual companies within the industry.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 3

 

7) Investors who conduct industry analyses typically favor companies with strong market positions over companies with less secure market positions because firms with strong market positions tend to

 

  1. be price leaders.
  2. benefit more from economies of scale.

III. have better R&D programs.

  1. have lower production costs.

 

  1. A) II and IV only
  2. B) I, II and IV only
  3. C) I, II and III only
  4. D) I, II, III and IV

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

8) The consumer electronics industry would be most significantly affected by

  1. A) developments in technology.
  2. B) interest rates and inflation.
  3. C) labor relations.
  4. D) government regulations.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

9) Which of the following factors are considered when analyzing an industry?

 

  1. the nature and conditions of governmental regulations
  2. the involvement and relations, if any, with labor unions

III. the development of new technologies relevant to the industry

  1. the extent of competition within the industry

 

  1. A) I, II and IV only
  2. B) II, III and IV only
  3. C) I, II and III only
  4. D) I, II, III and IV

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

10) Which stage of an industry’s growth cycle is most influenced by economic events?

  1. A) initial development
  2. B) stability or decline
  3. C) mature growth
  4. D) rapid expansion

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

11) Which stage of an industry’s growth cycle is interesting only for potentially high dividend payouts?

  1. A) initial development
  2. B) stability or decline
  3. C) mature growth
  4. D) rapid expansion

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

12) The rapid expansion phase of an industry is characterized by

  1. A) extreme sensitivity to interest rates and other economic factors.
  2. B) high returns and relatively low risks.
  3. C) willingness of investors to buy almost any stock associated with the industry.
  4. D) many decades of sustained above average growth.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

13) Well managed companies rarely reach the decline stage because

  1. A) the world’s population is growing.
  2. B) they continuously develop new products to meet the needs of changing markets.
  3. C) consumers remain loyal to established brands.
  4. D) all of the above.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

 

14) Which stage of an industry’s growth cycle offers the greatest opportunity for an investor who is seeking capital gains?

  1. A) initial development
  2. B) mature growth
  3. C) stability or decline
  4. D) rapid expansion

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

15) List and explain the various stages of the growth cycle of an industry. Also discuss the merit of investing in the industry during each of the various stages.

Answer:  The 4 stages of the growth cycle are

  1. initial development stage—the industry is new and untried; investment opportunities are not available to most investors; risks are high;
  2. rapid expansion stage—product acceptance is spreading and investors can foresee the industry’s future; economic variables don’t have a large effect on the industry’s performance; good time to invest in company;
  3. mature growth—heavily influenced by economic development; expansion comes from the economy’s growth; may provide defensive, cyclical or current income types of investment opportunities;
  4. stability or decline—demand for the industry’s products is diminishing; investment opportunities are few.

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

16) Briefly describe and discuss industry analysis and the motivation behind it.

Answer:  Industry analysis

  1. focuses on the activities of one of more industries.
  2. looks at the competitive position of an industry in relation to other industries.
  3. seeks answers to questions such as: How is the industry regulated? What role does labor play in the industry? What economic forces are especially important to the industry?
  4. facilitates research by using published reports such as the S&P Industry Surveys.

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 3

 

7.4   Learning Goal 4

 

1) Fundamental analysis is based on the presumption that the value of a stock is influenced by the financial performance of the issuing company.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

2) Fundamental analysis encompasses return, but not risk, in the valuation process.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

3) The statement of cash flows is less influenced than the income statement by choices of accounting methods.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

4) The income statement indicates how successfully a company has utilized its assets.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

5) Positive cash flow from investing activities is typical of firms experiencing healthy growth.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

6) A company may appear to be profitable on its income statement, but fail to generate strong cash flows.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

7) The balance sheet summarizes the company’s operations over the last fiscal year.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

8) EBITDA stands for earnings before inflation, taxes, depreciation, and adjustments.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

9) Calculating the times interest earned ratio using EBITDA is more conservative than using EBIT because it takes the cost of replacing fixed assets into consideration.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

10) Which of the following are considered in the ratio analysis of a firm?

 

  1. profitability
  2. market share

III. liquidity

  1. leverage

 

  1. A) I and II only
  2. B) I, III and IV only
  3. C) II and IV only
  4. D) I, II, III and IV

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

11) Which of the following accounting practices are potentially misleading or even fraudulent?

 

  1. writing off goodwill as an extraordinary loss
  2. using accrual rather than cash basis reporting

III. off-balance sheet liabilities

  1. recognizing revenues prematurely

 

  1. A) I and II only
  2. B) I, II and IV only
  3. C) III and IV only
  4. D) I, III and IV only

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

12) Which one of the following statements concerning accounting reports is correct?

  1. A) The income statement reflects the position of a firm as of a single point in time.
  2. B) The total equity of a firm is equal to the total assets plus the total liabilities.
  3. C) The statement of cash flows identifies both the sources and the uses of cash.
  4. D) The income statement reflects the amount of cash available for investment and financing activities.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

13) Cash flow from operations includes all of the following adjustments to net income EXCEPT

  1. A) purchases of new equipment.
  2. B) depreciation.
  3. C) increase or decrease in current liabilities.
  4. D) increase or decrease in current inventory.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

 

14) Which of the following would be typical of a Statement of Cash Flows for a healthy firm in a sustainable business?

  1. A) Cash flow from operations is negative, cash flows from investment activities and financing activities are positive.
  2. B) Cash flow from operations , investment activities and financing activities must all be positive.
  3. C) Cash flow from operations is positive, cash flows from investment activities and financing activities are negative.
  4. D) If the Statement shows a net increase in cash, the source is unimportant.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

15) Which of the following measures excludes non-cash charges against income?

  1. A) operating expenses
  2. B) EBIT
  3. C) net income before taxes
  4. D) EBITDA

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

16) Which of the following would be found on a company’s income statement?

 

  1. cost of goods sold
  2. interest expense

III. cash flow from operations

  1. earnings before taxes

 

  1. A) I an IV only
  2. B) I, II and III only
  3. C) I, II and IV only
  4. D) I, II, III and IV

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

17) Which of the following would be found on a company’s balance sheet?

 

  1. Accounts receivable
  2. Interest expense

III. Property plant and equipment

  1. Total stockholders’ equity

 

  1. A) I an IV only
  2. B) I, II and III only
  3. C) I, II and IV only
  4. D) I, III and IV only

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

18) On September 30, the Simpson Company reported the following information on its financial statements.

 

 

What is the amount of the stockholder’s equity in the Simpson Company?

  1. A) $243,000
  2. B) $277,000
  3. C) $927,000
  4. D) $3,217,000

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

19) Briefly describe fundamental analysis and the basic assumption behind it.

Answer:

  1. rests on the belief that the value of a stock is influenced by the performance of the company that issued the stock.
  2. studies the financial condition and operating results of a firm.
  3. uses financial ratios to understand relationships.
  4. compares current ratios to historical and industry standards.

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

 

7.5   Learning Goal 5

 

1) Ratio analysis is the study of the relationships between various financial statement accounts.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

2) Financial ratios can reveal a lot about a company’s liquidity, activity, and profitability.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

3) The quick ratio differs from the current current ratio in that accounts receivable are excluded from current assets.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

4) Return on assets is a very important analytical tool because it measures how effectively management is using a firm’s assets to generate profits.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

5) A firm with a very low debt-equity ratio has a low risk of defaulting on its loans.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

6) A firm with a very low debt-equity ratio might be able to increase return on equity by taking on additional debt.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

7) The Allied Computer Co. has sales of $300 million, a net profit margin of 9%, and 10 million shares of common stock outstanding. It has no preferred stock outstanding. If Allied stock trades at $50 per share, it has a price/earnings ratio of 20.9.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

8) Return on equity (ROE) is computed by dividing net income by the market value of equity.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

9) The PEG ratio divides the stock’s current price by the growth rate of earnings over the preceding 12 months.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

10) In seeking potential stock investments, most analysts look for companies that have PEG ratios that are equal to or less than one.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

11) Banks can use the times interest earned ratio as a measure of a borrower’s ability to repay their loan.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

12) If a firm has an equity multiplier of 3, this means that the firm has $3 in equity for every $1 in long-term debt.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

13) Return on equity can be expressed mathematically as “(net profit margin)(total asset turnover)(equity multiplier).”

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

14) A high P/E ratio may be an indication that a stock is overpriced.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

15) A high PEG ratio implies a high growth rate in earnings relative to the stock’s price.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

16) When comparing companies in the same industry but of different sizes, net profit margin is more meaningful than net profit as a dollar amount.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

17) Which of the following are measures of liquidity?

 

  1. net working capital
  2. accounts receivable turnover

III. current ratio

  1. times interest earned

 

  1. A) I and III only
  2. B) I, II and III only
  3. C) I, II and IV only
  4. D) I, III and IV only

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

18) Financial ratios

 

  1. allow comparisons across firms without concern over firm size.
  2. can compare a firm’s operating and financial status to industry norms.

III. provide insights into a companies future.

  1. look at the liquidity, activity, leverage, profitability and market measures of a firm.

 

  1. A) II and IV only
  2. B) I and II only
  3. C) I, II and IV only
  4. D) I, II, III and IV

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Revised

Learning Goal:  Learning Goal 4

 

19) On December 31, the Gold Standard Company reported the following information on its financial statements.

 

 

According to this information, the company’s current ratio is approximately

  1. A) 1.39.
  2. B) 1.68.
  3. C) 1.73.
  4. D) 1.90.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

20) To determine whether a company is using leverage effectively, an analyst should consider

  1. A) the current ratio and net working capital.
  2. B) inventory, accounts receivable and total asset turnover ratios.
  3. C) the debt to equity and times interest earned ratios.
  4. D) ROA and the net profit margin.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 4

 

21) A company has sales of $640,000, net profit after taxes of $23,000, and a total asset turnover of 2.5. What is the return on assets?

  1. A) 3.6%
  2. B) 4.5%
  3. C) 8.1%
  4. D) 9.0%

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

22) A company has sales of $640,000, net profit after taxes of $23,000, a total asset turnover of 4.17 and an equity multiplier of 1.67. What is the return on equity?

  1. A) 24%
  2. B) 9.0%
  3. C) 8.1%
  4. D) 4.5%

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

23) Substituting EBITDA for EBIT when computing the times interest earned ratio will make the company appear

  1. A) more leveraged.
  2. B) less leveraged.
  3. C) more profitable.
  4. D) less efficient.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

24) For their last fiscal year, the Short Company reported the following information.

 

 

What is the accounts receivables turnover rate?

  1. A) 0.8
  2. B) 2.8
  3. C) 4.5
  4. D) 7.3

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

25) The inventory turnover rate for a firm is 14.5 as compared to the relevant industry rate of 13.2. In this case, the firm is

  1. A) selling its inventory slower than the industry.
  2. B) underperforming the industry.
  3. C) averaging fewer days of sales in inventory than the industry.
  4. D) generating fewer sales per dollar of inventory.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

26) A total asset turnover of 3 means that every

  1. A) $1 in sales is supported by $3 of assets.
  2. B) $3 in assets produces $1 in net earnings.
  3. C) $1 in total assets is replaced on average every 3 years.
  4. D) $1 in assets produces $3 in sales.

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

27) On March 31, Adolpha, Inc. reported the following information on its financial statements.

 

 

What is the available net working capital for Adolpha, Inc.?

  1. A) -$253,844
  2. B) -$132,366
  3. C) $121,578
  4. D) $1,873,020

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 4

 

28) A company has a net loss for the year of $(10,000,000) and a deficit (negative equity) of $(1,000,000).  ROE will be

  1. A) 1000% indicating an exceptional opportunity.
  2. B) 1000% and meaningless.
  3. C) -1000% indicating that the company is in dire straits.
  4. D) 10.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

29) The measure that indicates how efficiently assets are being used to support sales is called the

  1. A) total asset turnover.
  2. B) current ratio.
  3. C) book value.
  4. D) net profit margin.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

30) A lending institution would prefer that a firm have a ________ debt-equity ratio and a ________ times interest earned ratio.

  1. A) higher; higher
  2. B) higher; lower
  3. C) lower; higher
  4. D) lower; lower

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

31) Marco’s just reported an EPS of $1.80 on revenues of $440 million. The company has 13 million shares outstanding. Total assets are $380 million, current liabilities equal $78 million, and long-term debt is $122 million. Net fixed assets are worth $230 million. Given this information, which one of the following statements is correct?

  1. A) Marco’s net working capital is $72 million.
  2. B) Marco’s current ratio is 1.75.
  3. C) Marco’s total asset turnover is 3.67.
  4. D) .Marco’s debt-equity ratio is 0.75.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

32) Worcester Corporation has a P/E ratio of 15.  Natick Corporation is in the same industry as Worcester, but has a P/E ratio of 20.  Possible interpretations of this discrepancy include

  1. A) Worcester Corporation is overpriced.
  2. B) Natick Corporation has higher earnings per share.
  3. C) Investors expect Natick to grow faster than Worcester.
  4. D) Natick’s stock price is higher than Worcester’s.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

33) Nadine Enterprises has total assets of $240,000, a debt-equity ratio of 0.60, and a return on assets of 9%. What is the return on equity?

  1. A) 5.4%
  2. B) 5.6%
  3. C) 14.4%
  4. D) 15.0%

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

34) Quick Cement has a return on assets of 8%. If it has $1.5 million in total assets and a total asset turnover of 2, it follows that the firm must have a net profit margin of

  1. A) 4%.
  2. B) 6%.
  3. C) 8%.
  4. D) 12%.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

35) Investors are most interested in which one of the following ratios?

  1. A) return on assets
  2. B) current ratio
  3. C) net profit margin
  4. D) return on equity

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

36) Which one of the following is a leverage measure?

  1. A) times interest earned
  2. B) net working capital
  3. C) return on equity
  4. D) net profit margin

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

37) If a company’s ROA is high, then an investor can assume that the company

  1. A) is in danger of defaulting on its loans.
  2. B) pays a high dividend.
  3. C) is profitable.
  4. D) has more equity than debt in its capital structure.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

38) If a firm has an ROA of 10% and an ROE of 10%, then the

  1. A) operating results of the firm are improving.
  2. B) firm has no financial leverage.
  3. C) firm must have enough cash on hand to pay some extra dividends.
  4. D) firm is losing money.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

39) Kim has gathered the following information on a company.

 

 

What is the amount of the earnings per share?

  1. A) $0.14
  2. B) $0.25
  3. C) $0.28
  4. D) $0.30

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

40) Over the last 5 years, Spencer Inc.’s earnings have grown at an annual average rate of 9%.  Current EPS are $1.80 and the company’s stock recently sold for $36 per share.  Spencer’s PEG ratio is

  1. A) .05
  2. B) 20
  3. C) 2.22
  4. D) 222.22

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

41) JJ Industries has a P/E ratio of 18 and an EPS of $0.93. This means that JJ’s stock is currently selling for

  1. A) $16.74 per share.
  2. B) $17.07 per share.
  3. C) $18.00 per share.
  4. D) $19.35 per share.

Answer:  A

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

42) When dividend payout ratios are higher than ________, investors should investigate whether or not they are sustainable.

  1. A) 15%
  2. B) 25%.
  3. C) 40%.
  4. D) 75%.

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 5

 

 

43) Which of the following may be signs of future problems for a company?

 

  1. Inventories growing faster than sales.
  2. Rapidly increasing debt to equity ratio.

III. Cash flow from operations is higher than net income.

  1. Current liabilities increasing faster than current assets.

 

  1. A) I and III only
  2. B) II and IV only
  3. C) I, II and IV only
  4. D) I, II and III only

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

44) The PEG ratio

  1. A) preferred by investors is equal to 2.0 or higher.
  2. B) compares the price/earnings ratio to the rate of growth of the company’s earnings.
  3. C) is a measure of a firm’s liquidity.
  4. D) measures the ability of a firm’s assets to generate growth for the firm.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

45) Which of the following directly impact return on equity?

 

  1. net profit margin
  2. leverage

III. return on assets

  1. cash flow from investment activities

 

  1. A) I and III only
  2. B) II and IV only
  3. C) I, II and IV only
  4. D) I, II and III only

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

46) ROE = (net profit margin)(total asset turnover)(equity multiplier). What is the advantage of using this expanded version of the ROE formula versus using the simplified version which is net income divided by total equity?

Answer:  The expanded version provides more insight into a firm’s operations. The net profit margin reflects the efficiency of operations. The total asset turnover measures the ability of assets to generate sales. The equity multiplier reflects the use of leverage.

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

47) The following information is available for the Oil Creek Corporation.

 

 

(a)  What is the current ratio?

(b)  What is the net working capital?

(c)  What is the net income?

(d) What is the return on equity?

(e)  What is the total asset turnover?

(f)  What is the debt-equity ratio?

(g)  What is the accounts receivable turnover?

(h)  What is the earnings per share (EPS)?

(i)   What is the price to earnings (P/E) ratio?

Answer:

(a)  0.88

(b) -$5,000

(c)  $11,700

(d) 20.17%

(e)  1.33

(f)  0.83

(g) 10.26

(h) $0.78

(i)  18.50

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 5

 

 

7.6   Learning Goal 6

 

1) A company’s ratios are more meaningful when compared to other companies in the same industry.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

2) The debt to equity ratio should be approximately the same across all industrial sectors.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

3) Financial ratios give little indication whether a company is well managed or not.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

4) Investors who want to analyze a company’s ratios usually need to compute them from the financial statements.

Answer:  FALSE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

5) Historical comparisons will reveal whether a company’s performance is improving or deteriorating.

Answer:  TRUE

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

6) Generally, the market price of a stock is

  1. A) below its book value.
  2. B) above its book value.
  3. C) equal to its par value.
  4. D) equal to its book value.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

7) To determine whether a pharmaceutical company’s profitability ratios indicate strength or weakness, we should

 

  1. compare them to others in the same industry.
  2. compare them to companies in unrelated industries such as energy or banking.

III. compare them to previous years.

  1. compare them to absolute standards established by the CFA Institute.

 

  1. A) I and II only
  2. B) I and III only
  3. C) III and IV only
  4. D) IV only

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

8) Which of the following is a readily available source of industry comparisons?

 

  1. Standard & Poor’s
  2. MSN Money, Yahoo Finance and other financial portals

III. Mergent (Moody’s)

  1. The Wall Street Journal

 

  1. A) I and II only
  2. B) I, II and III only
  3. C) III and IV only
  4. D) II, III and IV only

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

 

9) A comparison of a firm’s current financial ratios to those of prior years allows one to

  1. A) accurately predict the future performance of a firm.
  2. B) see how a firm’s performance compares to that of a competitor.
  3. C) see trends that are developing.
  4. D) determine if the firm is performing better than the overall industry.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

 

10) Amgen’s debt to equity ratio is .54 while Walmart’s is .68.  By comparing these ratios we can conclude

  1. A) that Walmart is in danger of bankruptcy.
  2. B) that Amgen uses too little debt financing.
  3. C) that Walmart uses too little equity financing.
  4. D) very little because the firm’s are in different industries.

Answer:  D

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6

Use the following information for the question(s) that follow.

 

Company X and Company Y are in the same industry and have the following ratios.

 

 

11) Based on the information above, we can conclude that

  1. A) company X is using leverage more aggressively than company Y.
  2. B) company X is more liquid than company Y.
  3. C) company X is using assets more efficiently than company Y.
  4. D) company X is reinvesting a higher percentage of its earnings in the business than company Y.

Answer:  B

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 6

 

 

12) Based on the information above, we can conclude that

  1. A) company Y is more financially conservative than company X.
  2. B) company Y is more liquid than company X.
  3. C) company Y is reinvesting a higher percentage of its earnings in the business than company X.
  4. D) company Y is using assets less efficiently than company X.

Answer:  C

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  New Question

Learning Goal:  Learning Goal 6

13) Company X and Company Y are in the same industry and have the following ratios.

 

 

Discuss the relative natures of the two companies in terms of risk and return. Identify the more growth-oriented firm and justify your selection. Support your discussion and conclusions by referring to the ratios.

Answer:  Company Y has more financial risk because its debt/equity ratio is higher than both X and the industry average. Y’s current ratio is lower than both A’s and the industry average, indicating less liquidity and possibly a willingness to sacrifice some safety in pursuit of efficiency.  Company Y has a lower net profit margin which may be caused by higher interest expenses due to the higher debt load. Company Y offers a higher return to shareholders based on the return on equity ratio.  Y’s higher rate of return on equity is entirely due to its use of debt financing because return on assets is the same for both companies (1.9 × 4.2 = 2.1 × 3.8).  Company X’s net profit margin is slightly above the industry average, while both companies’ return on equity ratios are below the industry averages.  Company Y is probably growing faster than Company X because the dividend payout ratio is lower and the total asset turnover rate is higher.

Learning Outcome:  F-09 Discuss the fundamentals of stocks and how to value them

AACSB:  3 Analytical thinking

Question Status:  Previous Edition

Learning Goal:  Learning Goal 6