Q&A Hero

Q: A stock with a beta of 2.3 means that for every 1 percent change in the market overall, the stock tends to change by 2.3 percent in the same direction. a. True b. False

Q: The dividend discount model can be adapted to assess the value of any firm, even those that retain most or all of their earnings. a. True b. False

Q: The credit crisis caused major problems in the mortgage market but had no impact on the stock market. a. True b. False

Q: The main source of uncertainty in computing the return of a stock is the dividend to be received next year. a. True b. False

Q: A stock portfolio has more volatility when its individual stock returns are uncorrelated. a. True b. False

Q: The value-at-risk method is intended to warn investors about the potential maximum loss that could occur. a. True b. False

Q: A firm's stock price is affected not only by macroeconomic and market conditions but also by firm-specific conditions. a. True b. False

Q: While the previous year's earnings are often used as a base for forecasting future earnings, the recent year's earnings do not always provide an accurate forecast of the future. a. True b. False

Q: If investors agree on a firm's forecasted earnings, they will derive the same value for that firm using the PE method to value the firm's stock. a. True b. False

Q: If an investor has a $50,000 investment in a stock and has used beta to measure the maximum daily percentage loss as −5 percent, the maximum daily loss in dollars would be $10,000. a. True b. False

Q: A portfolio's beta is the sum of the individual forecasted betas, weighted by the market value of each stock. a. True b. False

Q: The market risk premium is stable over time and is not affected by stock market conditions. a. True b. False

Q: A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings for the year. a. True b. False

Q: The CBOE Volatility Index (VIX) indicates the volatility of the bond market in general. a. True b. False

Q: The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic risk. a. True b. False

Q: Indicate whether the statement is true or false.The U.S. governments budget deficit has a significant impact on the bond market but does not affect the stock market.a. Trueb. False

Q: The ____ is often used to estimate the required rate of return for any firm with public traded stock. a. capital asset pricing model b. Treynor index c. Sharpe index d. Treynor index AND Sharpe index

Q: ​Holding other factors constant, a stock portfolio has more volatility when its individual stock volatilities are ________ and its individual stock returns have _______ correlations. a. ​high; low b. ​low; high c. ​low; low d. ​high; high

Q: According to the capital asset pricing model, the required return by investors on a security is a. inversely related to the risk-free rate. b. inversely related to the firm's beta. c. inversely related to the market return. d. None of these are correct.

Q: ​The ____ is commonly used as a proxy for the risk-free rate in the capital asset pricing model. a. ​Treasury bond rate b. ​prime rate c. ​discount rate d. ​federal funds rate

Q: ​A stock has a standard deviation of daily returns of 1 percent. It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome. The stock's expected daily return is .2 percent. The lower boundary is a. ​-1.45 percent. b. ​-1.85 percent c. ​0 percent. d. ​-1.65 percent.

Q: The demand by foreign investors for the stock of a U.S. firm sold on a U.S. exchange may be higher when the dollar is expected to ____, other things being equal. (Assume the firm's operations are unaffected by the value of the dollar.) a. strengthen b. weaken c. stabilize d. weaken and then stabilize

Q: ​A stock's beta can be measured from the estimate of the ________ using regression analysis. a. ​intercept b. ​market return c. ​risk-free rate d. ​slope coefficient

Q: Which of the following is NOT correct regarding the capital asset pricing model (CAPM)? a. It is sometimes used to estimate the required rate of return for any firm with publicly traded stock. b. It is based on the premise that the only important risk of a firm is systematic risk. c. It is concerned with unsystematic risk. d. All of these are correct.

Q: LeBlanc Inc. currently has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as LeBlanc Inc. is 15. LeBlanc is expected to pay a dividend of $3 per share over the next four years, and an investor in LeBlanc requires a return of 12 percent. What is the forecasted stock price of LeBlanc in four years, using the adjusted dividend discount model? a. $150.00 b. $163.91 c. $45.00 d. $168.83 e. None of these are correct.

Q: A higher beta for an asset reflects a. lower risk. b. lower covariance between the asset's returns and market returns. c. higher covariance between the asset's returns and the market returns. d. None of these are correct.

Q: The Sharpe index measures the a. average return on a stock. b. variability of stock returns per unit of return. c. stock's beta adjusted for risk. d. excess return above the risk-free rate per unit of risk.

Q: The market risk premium is a. the yield on newly issued Treasury bonds. b. the return of the market in excess of the risk-free rate. c. the covariance between the risk-free rate and the return of the market. d. the return of the market in excess of expected cash flows.

Q: ​According to the text, other things being equal, stock prices of U.S. firms primarily involved in exporting could be ____ affected by a weak dollar. Stock prices of U.S. importing firms could be ____ affected by a weak dollar. a. ​adversely; favorably b. ​favorably; adversely c. ​favorably; favorably d. ​adversely; adversely

Q: ​When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns. a. ​beta; standard deviation b. ​standard deviation; beta c. ​intercept; beta d. ​beta; error term

Q: The expected acquisition of a firm typically results in ____ in the target's stock price. a. an increase b. a decrease c. no change d. None of these are correct.

Q: The "January effect" refers to a large a. rise in the price of small stocks in January. b. decline in the price of small stocks in January. c. decline in the price of large stocks in January. d. rise in the price of large stocks in January.

Q: ​The January effect refers to the ____ pressure on ____ stocks in January of every year. a. ​downward; large b. ​upward; large c. ​downward; small d. ​upward; small

Q: If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are a. weak-form efficient. b. semistrong-form efficient. c. strong-form efficient. d. semistrong-form efficient AND strong-form efficient. e. None of these are correct.

Q: ​A beta of 1.1 means that for a given 1 percent change in the value of the market, the _______ is expected to change by 1.1 percent in the same direction. a. ​risk-free rate b. ​stock's value c. ​stock's standard deviation d. ​correlation coefficient

Q: Investors can avoid unsystematic risk by a. using the capital asset pricing model. b. investing in stocks with low PE ratios. c. holding diversified portfolios. d. using the free cash flow model.

Q: Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____. a. 39.67 b. 41.67 c. 33.33 d. 31.73 e. None of these are correct.

Q: If security markets are semistrong-form efficient, investors cannot solely use ____ to earn excess returns. a. previous price movements b. insider information c. publicly available information d. previous price movements AND publicly available information

Q: ____ are not a firm-specific factor that affect stock prices. a. Exchange rates b. Dividend policy changes c. Acquisitions d. Earnings surprises e. All of these are firm-specific factors that affect stock prices.

Q: A stock's average return is 11 percent. The average risk-free rate is 9 percent. The stock's beta is 1, and the standard deviation of its returns is 10 percent. What is the Sharpe index? a. .05 b. .5 c. .1 d. .02 e. .2

Q: Tarzak Inc. has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year. Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15. Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent. The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model. a. $116.41 b. $104.91 c. $161.15 d. $128.64

Q: ​Stock prices of U.S. firms primarily involved in exporting are likely to be ____ affected by a weak dollar and ____ affected by a strong dollar. a. ​favorably; adversely b. ​adversely; adversely c. ​favorably; favorably d. ​adversely; favorably

Q: ​The beta of a stock portfolio is equal to a weighted average of the a. ​betas of stocks in the portfolio. b. ​betas of stocks in the portfolio, plus their correlation coefficients. c. ​standard deviations of stocks in the portfolio. d. ​correlation coefficients between stocks in the portfolio.

Q: ​The limitations of the dividend discount model are more pronounced when valuing stocks a. ​that pay most of their earnings as dividends. b. ​that retain most of their earnings. c. ​that have a long history of dividends. d. ​that have constant earnings growth

Q: ​Which of the following is not a type of factor that drives stock prices, according to your text? a. ​economic factors b. ​market-related factors c. ​firm-specific factors d. ​All of the above are factors that affect stock prices.

Q: ​Value at risk estimates the ____ a particular investment for a specified confidence level. a. ​beta of b. ​risk-free rate of c. ​largest expected loss to d. ​standard deviation of

Q: Fabrizio, Inc. is expected to generate earnings of $1.50 per share this year. If the mean price-earnings ratio of competitors in the same industry is 20, then the valuation of Fabrizios shares is $____. a. 13.33 b. 3.00 c. 20.00 d. 30.00 e. None of these are correct.

Q: ​Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share. a. ​33.33 b. ​166.67 c. ​41.67 d. ​60.00

Q: Morgan stock has an average return minus the average risk-free rate of 12.5 percent, a beta of 2.5, and a standard deviation of returns of 20 percent. The Treynor index of Morgan stock is a. 0.0625. b. 0.05. c. 0.35. d. 0.03. e. None of these are correct.

Q: Zilo stock has an average return minus the average risk-free rate of 5 percent, a beta of 1, and a standard deviation of returns of 20 percent. The Sharpe index of Zilo stock is a. 0.05. b. 0.35. c. 0.25. d. 0.45. e. None of these are correct.

Q: Which of the following is NOT used to measure a stock's risk? a. the stock's price volatility b. the stock's return c. the stock's beta d. the value-at-risk method e. All of these are used to measure risk.

Q: On average, firms that have had IPOs tend to perform ____ over a period of a year or longer. a. well b. poorly c. about the same as the S&P 500 index d. None of these are correct.

Q: For many IPOs, the lead underwriter has a(an) _______ option, which allows it to allocate an additional 15 percent of the firms shares for a period of up to 30 days after the IPO. a. credit default b. quantitative c. overallotment d. lockup

Q: A firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is​ a. ​.74 percent. b. ​1.34 percent. c. ​7.44 percent. d. ​1.14 percent.

Q: Private equity funds may exit their investment in a business by a. selling their stake to another company. b. engaging in a credit default swap with the business. c. investing in shares of the business when the business engages in an IPO. d. repurchasing shares of their own stock in the secondary market.

Q: Which of the following is NOT true with respect to venture capital (VC) funds? a. When a VC fund decides to invest in a business, it will set out clear requirements that the business must meet to receive the funding. b. A VC fund commonly sells its equity stake in a firm to the public before the firm engages in an IPO. c. VC funds receive money from wealthy investors and pension funds that are willing to maintain the investment for a long-term period. d. All of these are true with respect to VC funds.

Q: Firms are more willing to issue new stock in a secondary stock offering when the market price of their outstanding shares is relatively a. high. b. low. c. either high or low, depending on the overall market. d. None of these are correct.

Q: Which of the following is NOT true with respect to initial public offerings (IPOs)? a. IPOs are first-time offerings of shares by a specific firm to the public. b. Normally, a firm planning an IPO will hire a securities firm to recommend the amount of stock to issue and the asking price for the stock. c. Owners of firms that engage in IPOs are normally required to retain their shares for at least three years before selling them in the secondary market. d. IPOs are typically intended to raise funds so the corporation can expand.

Q: When a corporation makes a secondary offering, it may direct sales of the stock to its existing shareholders by giving them a. preemptive rights. b. limit orders. c. subscription rights. d. presumptive rights.

Q: ____ are not barriers to corporate control to eliminate agency problems.​ a. ​Leveraged buyouts b. ​Antitakeover amendments c. ​Poison pills d. ​Golden parachutes

Q: Which of the following is NOT true regarding the Sarbanes-Oxley Act? a. It requires firms to establish an internal control process for their financial reporting. b. It requires a firms CEO and CFO to certify that the audited financial statements are accurate. c. It allows a public accounting firm to audit a client firm whose CEO was employed by the accounting firm six months earlier. d. It prevents a firm from providing excessive compensation to members of its audit committee so that they will not closely oversee the audit.

Q: The first-time issuance of shares by a specific firm to the public is referred to as a(n)​ a. ​stock repurchase. b. ​secondary stock offering. c. ​initial rights issue. d. ​initial public offering (IPO).

Q: Whenever _____ the stock price will be driven up. a. supply exceeds demand b. demand exceeds supply c. demand is reduced d. None of these are correct.

Q: When a firm buys some of its shares that it had previously issued, this is referred to as a a. reverse IPO. b. leveraged buyout. c. ladder spin. d. stock repurchase.

Q: The practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called a. flipping. b. skiing. c. flopping. d. None of these are correct.

Q: ​Which of the following statements is incorrect? a. ​A stock represents partial ownership in a corporation. b. ​Like debt securities, common stock is issued by firms to obtain funds. c. ​Stocks are issued by corporations to raise short-term funds. d. ​The secondary stock market enables investors to sell stocks that they had previously purchased.

Q: ​Firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy. a. ​more; can b. ​less; can c. ​more; cannot d. ​less; cannot

Q: The ____ is a value-weighted index of stock prices of 500 large U.S. firms.​ a. ​Dow Jones Industrial Average b. ​Standard and Poor's 500 c. ​New York Stock Exchange Index d. ​Nasdaq

Q: A firm will typically attempt to sell shares from a secondary offering​ a. ​far below the prevailing market price. b. ​far above the prevailing market price. c. ​at the prevailing market price. d. ​at the offer price of the IPO.

Q: Which of the following is NOT a barrier to corporate control? a. antitakeover amendments b. proxy contests c. poison pills d. golden parachutes e. All of these are barriers to corporate control.

Q: ​A firm can avoid the time lag between registering new securities with the SEC and actually selling them by using a. ​a proxy. b. ​shelf registration. c. ​a margin call. d. ​preemptive rights.

Q: Which of the following is NOT a part of the over-the-counter market? a. the OTCQB b. the OTC Pink c. the OTC Bulletin Board d. the New York Stock Exchange

Q: ​A ____ prevents dividends from being paid on common stock until all current and previously omitted dividends are paid on preferred stock. a. ​residual claim b. ​preferred margin c. ​cumulative provision d. ​liquidation claim

Q: A firm whose stock price has risen a. will not have to pay a premium if it acquires another firm. b. has an incentive to use its stock as currency to acquire the shares of a target firm. c. is likely to be a candidate for a leveraged buyout. d. is likely to repurchase some of its shares.

Q: When brokers encourage investors to place first-day bids for IPO shares that are above the offer price, this is referred to as a. flipping. b. spinning. c. laddering. d. None of these are correct.

Q: The owners of common stock are permitted to vote on the a. election of the board of directors. b. authorization to issue new shares of common stock. c. approval of amendments to the corporate charter. d. adoption of bylaws. e. All of these are correct.

Q: To discourage flipping, some securities firms make ____ shares of future IPOs available to institutional investors that retain shares for a ____ period of time. a. fewer; long b. more; short c. more; long d. fewer; long AND more; short

Q: Sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price.​ a. ​overvalued b. ​fixed c. ​appropriate d. ​undervalued

Q: In preparing for an IPO, a prospectus must be filed with the​ a. ​stock market where the firm will be listed. b. ​Securities and Exchange Commission. c. ​Consumer Financial Protection Bureau. d. ​Federal Trade Commission.

Q: Firms listed on the OTC Pink market a. are typically very large. b. satisfy the Nasdaq's listing requirements. c. are typically owned by major institutional and individual investors. d. do not have to register with the Securities and Exchange Commission.