Financial Markets and Institutions, 8e (Mishkin)
1) (I) A share of common stock in a firm represents an ownership interest in that firm.
(II) A share of preferred stock is as much like a bond as it is like common stock.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
2) Preferred stockholders hold a claim on assets that has priority over the claims of
A) both common stockholders and bondholders.
B) neither common stockholders nor bondholders.
C) common stockholders, but after that of bondholders.
D) bondholders, but after that of common stockholders.
3) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common
stockholders, but after that of bondholders.
(II) Firms issue preferred stock in far greater amounts than common stock.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
4) (I) Preferred stockholders hold a claim on assets that has priority over the claims of common
stockholders. (II) Bondholders hold a claim on assets that has priority over the claims of
preferred stockholders.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
5) (I) Firms issue common stock in far greater amounts than preferred stock.
(II) In a given year, the total volume of stock issued is much less than the volume of bonds
issued.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
6) The riskiest capital market security is
A) preferred stock.
B) common stock.
C) corporate bonds.
D) Treasury bonds.
7) (I) The largest of the organized stock exchanges in the United States is the New York Stock
Exchange.
(II) To be listed on the NYSE, a firm must have a minimum of $100 million in market value or
$10 million in revenues.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
8) To list on the NYSE, a firm must
A) have earnings of at least $10 million per year.
B) have at least $500 million in outstanding debt.
C) have a total of $100 million in market value.
D) meet all of the above requirements.
E) meet A and C of the above requirements.
9) Securities not listed on one of the exchanges trade in the over-the-counter market. In this
exchange, dealers “make a market” by
A) buying stocks for inventory when investors want to sell.
B) selling stocks from inventory when investors want to buy.
C) doing both of the above.
D) doing neither of the above.
10) The most active stock exchange in the world is the
A) Nikkei Stock Exchange.
B) London Stock Exchange.
C) Shanghai Stock Exchange.
D) New York Stock Exchange.
11) Which of the following statements about trading operations in an organized exchange is
correct?
A) Floor traders all deal in a wide variety of stocks.
B) In most trades, specialists match buy and sell orders.
C) In most trades, specialists buy for or sell from their own inventories.
D) The SuperDOT system is used to expedite large trades of over 100,000 shares.
12) Which of the following is not an advantage of Electronic Communications Networks
(ECNs)?
A) All unfilled orders are available for review by ECN traders.
B) Transactions costs are lower for ECN trades.
C) Trades are made and confirmed faster.
D) ECNs work well for thinly traded stocks.
13) Which of the following statements is false regarding Electronic Communications Networks
(ECNs)?
A) Archipelago and Instinet are two examples of ECNs.
B) Competition from ECNs has forced NASDAQ to cut its fees.
C) Traders benefit from lower trading costs and faster service.
D) ECNs allow institutional investors, but not individuals, to trade after hours.
14) A basic principle of finance is that the value of any investment is
A) the present value of all future net cash flows generated by the investment.
B) the undiscounted sum of all future net cash flows generated by the investment.
C) unrelated to the future net cash flows generated by the investment.
D) unrelated to the degree of risk associated with the future net cash flows generated by the
investment.
15) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an
investor’s valuation of this stock if she expects it to be selling for $30 in one year and requires a
15 percent return on equity investments?
A) $30.24
B) $26.30
C) $26.09
D) $27.74
16) A stock currently sells for $30 per share and pays $1.00 per year in dividends. What is an
investor’s valuation of this stock if he expects it to be selling for $37 in one year and requires a
12 percent return on equity investments?
A) $38
B) $33.50
C) $34.50
D) $33.93
17) In the one-period valuation model, a stock’s value will be higher
A) the higher its expected future price is.
B) the lower its dividend is.
C) the higher the required return on investments in equity is.
D) all of the above.
18) In the one-period valuation model, a stock’s value falls if the ________ rises.
A) dividend
B) expected future price
C) required return on equity
D) current price
19) In the generalized dividend valuation model, a stock’s value depends only on
A) its future dividend payments and its future price.
B) its future dividend payments and the required return on equity.
C) its future price and the required return on investments on equity.
D) its future dividend payments.
20) Which of the following is not an element of the Gordon growth model of stock valuation?
A) The stock’s most recent dividend paid
B) The expected constant growth rate of dividends
C) The required return on investments in equity
D) The stock’s expected future price
21) According to the Gordon growth model, what is an investor’s valuation of a stock whose
current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10
percent over a long period of time and the investor’s required return is 11 percent?
A) $110
B) $100
C) $11
D) $10
E) $5.24
22) According to the Gordon growth model, what is an investor’s valuation of a stock whose
current dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10
percent over a long period of time and the investor’s required return is 15 percent?
A) $20
B) $11
C) $22
D) $7.33
E) $4.40
23) Holding other things constant, a stock’s value will be highest if its dividend growth rate is
A) 15%.
B) 10%.
C) 5%.
D) 2%.
24) Holding other things constant, a stock’s value will be highest if its most recent dividend is
A) $2.00.
B) $5.00.
C) $0.50.
D) $1.00.
25) Holding other things constant, a stock’s value will be highest if the investor’s required return
on investments in equity is
A) 20%.
B) 15%.
C) 10%.
D) 5%.
26) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price
of Auto Zone stock if the retailer’s earnings per share is projected to be $1.85?
A) $21.85
B) $37
C) $10.81
D) $9.25
27) Which of the following is true regarding the Gordon growth model?
A) Dividends are assumed to grow at a constant rate forever.
B) The dividend growth rate is assumed to be greater than the required return on equity.
C) Both A and B of the above.
D) Neither A nor B of the above.
28) The PE ratio approach to valuing stock is especially useful for valuing
A) privately held firms.
B) firms that don’t pay dividends.
C) both A and B of the above.
D) neither A nor B of the above.
29) The PE ratio approach to valuing stock is especially useful for valuing
A) publicly held corporations.
B) firms that regularly pay dividends.
C) both A and B of the above.
D) neither A nor B of the above.
30) A weakness of the PE approach to valuing stock is that it is
A) difficult to estimate the constant growth rate of a firm’s dividends.
B) difficult to estimate the required return on equity.
C) difficult to predict how much a firm will pay in dividends.
D) based on industry averages rather than firm-specific factors.