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Investments & Securities
Q:
movements in individual stock prices tend to be a. positively correlated b. positively correlated with inflation c. negatively correlated d. positively correlated with changes in interest rates
Q:
a strategy of averaging down will be profitable if a. the price of the stock continues to fall b. the firm pays more dividends c. the firm retains earnings d. the price of the stock subsequently rises
Q:
dollar cost averaging is a. periodically buying a round lot of stock b. periodically investing a specified dollar amount in a stock c. a means to increase the average cost basis d. a means to insure a positive return
Q:
historical studies of rates of return on large stocks suggest a. the average return is about 6.4 percent annually b. over a period of years, the rate is approximately 10 percent c. equity investors rarely sustain losses d. dividends account for over half the return
Q:
the russell 1000 index a. combines 1000 stocks and bonds b. uses the 1000 largest nasdaq stocks c. is a broad measure of listed and nasdaq stocks d. is a broad-based measure of bonds
Q:
the s&p 500 uses a. a simple average b. a compound average c. a geometric average d. a value-weighted average
Q:
an investment's internal rate of return equates a. dividend payments and capital gains b. cash outflows and subsequent cash inflows c. initial cash outflow and the sale price d. dividend payments and the investment's cost
Q:
to determine the realized return on an investment, the investor needs to know 1> income received 2> the cost of an investment 3> the sale price of the investment a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
if a stock rose from $10 to $30 over ten years, the annual rate of return a. was 20 percent b. was greater than 20 percent c. was less than 20 percent d. cannot be determined
Q:
which of the following is the least broad-based measure of stock prices? a. nasdaq market index b. dow jones industrial average c. s&p 500 stock index d. russell 3000
Q:
the standard & poor's 500 stock index illustrates a. a value-weighted index b. a simple average c. a geometric index d. an exponential index
Q:
studies of realized rates of return assume that dividend income is not reinvested.
Q:
the calculation of a rate of return assumes dividend income is reinvested at the current dividend yield.
Q:
the wilshire stock index is more broad based than the s&p 500 stock index.
Q:
over time, holding period returns tend to overstate the true annualized rate of return.
Q:
holding period returns for greater than a year do not give an accurate measure of the true rate of return.
Q:
the s&p 500 stock index is more sensitive to changes in the prices of small stocks than the stocks of large companies.
Q:
averaging down will prove to be profitable only if the price of the stock subsequently rises.
Q:
averaging down may result in the investor sending good money after bad.
Q:
with dollarcost averaging, the investor purchases more securities when their prices rise.
Q:
dollarcost averaging is achieved by periodic, equal dollar investments.
Q:
according to the ibbotson associates studies of investment returns, larger stocks in the s&p earned higher returns than the smaller companies.
Q:
studies of investment returns suggest that investors can expect to earn at least 15 percent annually.
Q:
historical studies of investment returns suggest that the stocks of small companies generate higher returns than the stocks of larger companies.
Q:
bond averages that are expressed in percentages are not comparable to the s&p 500.
Q:
stock indices do not consider taxes on capital gains.
Q:
the russell 3000 is a broad-based measure of bond prices.
Q:
indices of nasdaq stocks tend to be less volatile than the s&p 500 index.
Q:
the s&p 500 stock index is value-weighted.
Q:
comparisons of stock performance should use percentage changes instead of absolute price changes.
Q:
movements in stock prices are often illustrated using relative (percentage) price changes instead of absolute price changes.
Q:
realized returns include both dividends and price changes.
Q:
the rate of return on a stock considers the price change but not dividend income.
Q:
if a stock increased from $25 to $50 in five years, the annual rate of return was 20 percent.
Q:
the dow jones industrial and utility averages include a relatively small number of stocks.
Q:
aggregate measures of stock prices include dividend income.
Q:
aggregate securities prices may be measured by using valueweighted or geometric averages.
Q:
presently, stock a pays a dividend of $2.00 a share, and you expect the dividend to grow rapidly for the next four years at 20 percent. thus the dividend payments will be year dividend 1 $1.20 2 1.44 3 1.73 4 2.07 after this initial period of super growth, the rate of increase in the dividend should decline to 8 percent. if you want to earn 12 percent on investments in common stock, what is the maximum you should pay for this stock?
Q:
two stocks each pay a $1 dividend that is growing annually at 8 percent. stock a has a beta of 1.3; stock b's beta is 0.8. a. which stock is more volatile? b. if treasury bills yield 6 percent and you expect the market to rise by 12 percent, what is your riskadjusted required rate of return? c. using the dividendgrowth model, what is the maximum amount you would be willing to pay for each stock? d. why are your valuations different?
Q:
the riskfree rate of return is 8 percent; the expected rate of return on the market is 12 percent. stock x has a beta coefficient of 1.3, an earnings and dividendgrowth rate of 7 percent, and a current dividend of $2.40. if the stock is selling for $35, what should you do?
Q:
you know the following concerning a common stock: eps $3.00 payout ratio 25% p/e 10 annual rate of growth of 6% earnings and dividends if you want to earn 10 percent, should you buy this stock? what is the maximum price you should be willing to pay for the stock?
Q:
as an investor you have a required rate of return of 14 percent for investments in risky stocks. you have analyzed three risky firms and must decide which (if any) to purchase. your information is firm a b c current dividends $1.00 $3.00 $7.50 expected annual growth 7% 2% (1%) rate in dividends current market price $23 $47 $60 a. what is the maximum price? which (if any) should you buy? b. if you bought stock a, what is your implied rate of return? c. if your required rate of return were 10 percent, what should be the price necessary to induce you to buy stock a?
Q:
if you purchase triscorp stock at $71 a share and the firm pays a $5.20 dividend which is expected to grow at 7.5 percent, what is the implied annual rate of return on the investment?
Q:
your broker recommends that you purchase xyz inc. at $60. the stock pays a $2.40 dividend which (like its per share earnings) is expected to grow annually at 8 percent. if you want to earn 12 percent on your funds, is this a good buy?
Q:
if the ratio of price to book exceeds 1.0, a. the stock is overvalued b. the firm's assets are understated c. the price of the stock is greater than the accounting value of the firm d. the accounting value of the firm is greater than the market value of the firm
Q:
investors may use p/e ratios and price/sales ratios to value stocks. if this analysis is used, which of the following is desirable? a. a high p/e and a low price/sales ratio b. a high p/e and a high price/sales ratio c. a low p/e and a low price/sales ratio d. a low p/e and a high price/sales ratio
Q:
the price to sales ratio may be a preferred analytical tool if a. the firm is not generating cash b. the firm is not generating earnings c. the p/e ratio is too high d. the dividend-growth model suggests the stock is undervalued
Q:
a low price to sales ratio suggests a. the firm is generating cash b. the firm has no earnings c. the stock valuation is too high d. the stock may be undervalued
Q:
higher required returns a. decrease stock prices b. are required by the efficient market hypothesis c. increase dividends d. are associated with higher dividends
Q:
the use of price to book ratios to select stocks suggests that a. high price to book stocks should be purchased b. low price to book stocks are overvalued c. a stock should be purchased if it is selling near its historic high price to book ratio d. a stock should be purchased if it is selling near its historic low price to book ratio
Q:
the use of p/e ratios to select stocks suggests that a. high p/e stocks should be purchased b. low p/e ratio stocks are overvalued c. a stock should be purchased if it is selling near its historic low p/e d. a stock should be purchased if it is selling near its historic high p/e
Q:
a p/e ratio depends on 1> the firm's dividends 2> the price of the stock 3> the firm's per share earnings a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
a stock's price will tend to fall if 1> the firm's beta declines 2> the firm's beta increases 3> the riskfree rate declines 4> the riskfree rate increases a. 1 and 3 b. 1 and 4 c. 2 and 3 d. 2 and 4
Q:
the riskadjusted required rate of return includes 1> the firm's earnings 2> the firm's beta coefficient 3> the treasury bill rate (i.e., the riskfree rate) a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
if the required rate of return is 10 percent and the stock pays a fixed $5 dividend, its value is a. $100 b. $75 c. $50 d. $25
Q:
according to the dividendgrowth model, the valuation of common stock depends on 1> the firm's dividends 2> investors' required rate of return 3> the prior year's dividends a. 1 and 2 b. 1 and 3 c. 2 and 3 d. all of the above
Q:
according to the efficient market hypothesis, purchasing companies with high cash flow should produce superior investment results.
Q:
according to the efficient market hypothesis, purchasing low p/s stocks should produce superior investment results.
Q:
according to the efficient market hypothesis, purchasing high p/e stock should not produce superior investment results.
Q:
the peg ratio combines a stocks earnings, price, and growth rate.
Q:
value investors tend to prefer stocks with low price to sales and price to book ratios.
Q:
high p/e stocks should be preferred because they pay larger dividends.
Q:
an increase in the riskfree rate will tend to decrease stock prices.
Q:
the required rate of return includes the riskfree rate and a risk premium.
Q:
a higher beta decreases the required rate of return.
Q:
the dividendgrowth model requires that dividends grow annually at the same rate.
Q:
if the anticipated return exceeds the required rate of return, the investor should buy the stock.
Q:
the dividendgrowth model includes both the current and past years' dividends.
Q:
the dividend-growth valuation model depends on dividends and the required rate of return.
Q:
the expected return depends on future dividends and future price appreciation.
Q:
if the industry average days sales outstanding is 65 days and a firm with sales of $1,034,550 has receivables of $268,700, how much in interest expense could the firm save if the receivables turn over as quickly as the industry average and the cost of carrying the receivables is 9%?
Q:
what is the debt/net worth ratio and the debt to total assets ratio for a firm with total debt of $600,000 and equity of $400,000?
Q:
the inventory turnover for an industry is 6 (every two months) but slow corp. turns over its inventory 4 times a year (every three months). if annual sales are $1,000,000 and the interest cost to carry inventory is 12 percent, what is the potential savings in interest expense if the firm achieves the industry for the turnover of its inventory?
Q:
an analysis of last year's financial statements produced the following results. current ratio 3.6 quick ratio 2.2 days sales outstanding 78.0 days inventory turnover 4.4 fixed asset turnover 6.4 operating profit margin 11.9% net profit margin 6.1% return on assets 8.8% return on equity 13.7% debt ratio 35.5% times-interest-earned 9.3x payout ratio 41.4% use the following data to compute the comparable financial ratios for next fiscal year. has the firm's financial position changed? current assets cash and shortterm investments $ 14,657,000 accounts receivable 71,873,000 inventory 56,372,0001 plant and equipment 26,881,000 long-term investments and other assets 20,606,000 total assets $190,389,000 current liabilities $ 37,481,000 long-term debt 17,895,000 equity 135,013,000 total liabilities and equity $190,389,000 sales $254,553,000 cost of goods sold 149,903,000 selling, administrative, and other expenses 69,609,000 earnings before interest and taxes 35,041,000 interest 2,529,000 taxes 13,972,540 net income $ 18,540,000 earnings per share $4.13 dividends per share $1.80 1 average inventory = $56,530,000
Q:
using the income statement and balance sheet constructed in (1) and (2), compute the following ratios. compare the results with the industry averages. what strengths and weaknesses are apparent? ratio industry average current ratio 2:1 acid test (quick ratio) 1:1 inventory turnover a. annual sales 2.5 b. cost of goods sold 1.2 receivables turnover a. annual credit sales 5.0x b. annual sales 6.0x days sales outstanding 75 days operating profit margin 26% net profit margin 19% return on assets 10% return on equity 15% debt/equity 33% debt ratio (debt/total assets) 25% timesinterestearned 7.1x additional information: last year's inventory $40,000 credit sales $90,000
Q:
given the following information, construct the statement of changes in financial position. what happened to the firm's liquidity position during the year? net income $16.7 decrease in accounts receivable 6.1 increase in accounts payable 13.6 sale of bonds 55.1 dividends 14.8 retirement of bonds 10.8 increase in inventory 15.2 depreciation expense 56.0 cost of goods sold 72.1 reduction in income taxes payable 5.0 sale of stock 0.4 purchase of plant and equipment 91.0 beginning cash 1.1 repurchase of stock 5.6
Q:
determine a firm's earnings per share from the following information. corporate income tax rate 25% number of shares outstanding 10,000 cost of goods sold $60,000 interest earned 2,400 selling and administrative expense 15,000 interest expense 5,000 sales 100,000 annual credit sales 90,000
Q:
construct a balance sheet from the following information. accrued interest payable $4,000 accumulated depreciation 30,000 trade accounts payable 10,000 retained earnings 86,000 accrued wages 11,000 work in process 5,000 finished goods 30,000 plant and equipment 100,000 cash and marketable securities 10,000 land 10,000 accounts receivable 32,000 allowance for doubtful accounts 2,000 bank note (due in six months) 15,000 longterm debt 15,000 raw materials 7,000 investments 10,000 taxes due 1,000 additional paidin capital 20,000 $1 par value common stock 20,000 shares authorized 10,000 shares outstanding
Q:
a firm's balance sheet has the following entries: cash $30,000,000 total assets 100,000,000 common stock (10,000,000 20,000,000 shares outstanding, $2 par) additional paidin capital 5,000,000 retained earnings 35,000,000 what will be each of these balance sheet entries after a a. $2 a share cash dividend b. fourforone split c. 5 percent stock dividend (current price of the stock is $20)?
Q:
a firm's stock sells for $100 a share. what will be the price after a a. twoforone split b. fourforone split c. onefortwo reverse split?