978-0133427073 Test Bank Chapter 13 Part 2

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31) (I) The market price of a security at a given time is the highest value any investor puts on the

security. (II) Superior information about a security increases its value by reducing its risk.

A) (I) is true, (II) is false.

B) (I) is false, (II) is true.

C) Both are true.

D) Both are false.

32) The main cause of fluctuations in stock prices is changes in

A) tax laws.

B) errors in technical stock analysis.

C) daily trading volume in stock markets.

D) information available to investors.

E) total household wealth in the economy.

33) Stock values computed by valuation models may differ from actual market prices because it

is difficult to

A) estimate future dividend growth rates.

B) estimate the risk of a stock.

C) forecast a stock’s future dividends.

D) all of the above are true.

34) The 2001 terrorist attacks and the Enron financial scandal caused anticipated dividend

growth to ________, investors’ required return on equity to ________, and stock prices to

________.

A) decrease; increase; decrease

B) decrease; increase; increase

C) increase; decrease; decrease

D) increase; decrease; increase

35) Which of the following is not an objective of the Securities and Exchange Commission?

A) Maintain integrity of the securities markets

B) Advise investors about which particular stocks are good buys

C) Require firms to provide specific information to investors

D) Regulate major participants in securities markets

36) A share of common stock in a firm represents an ownership interest in that firm and allows

stockholders to

A) vote.

B) receive dividends.

C) receive interest payments.

D) only A and B of the above.

37) In 2013, the NYSE traded ________ shares on an average trading day.

A) 4 billion

B) 7 billion

C) 10 billion

D) 12 billion

38) Exchange traded funds (ETFs) have which of the following features?

A) They are listed and traded as individual stocks on a stock exchange.

B) They are indexed rather than actively managed.

C) Their value is based on the underlying net asset value of the stocks held in the index basket.

D) All of the above.

39) What is the primary disadvantage of an ETF?

A) ETFs tend to have lower management fees than comparable index mutual bonds.

B) ETFs usually have no minimum investment amount.

C) Investors have to pay a broker commission each time they buy or sell shares.

D) None of the above are disadvantages of an ETF.

40) A high price earnings ratio (PE) gives what interpretation?

A) The market expects earnings to fall in the future.

B) The market feels the firm’s earnings are very high risk and are willing to pay a premium for

them.

C) The market expects the earnings to rise in the future.

D) The firm is not paying a dividend.

41) A ________ PE may indicate that the market feels the firm’s earnings are very ________ risk

and is therefore willing to pay a ________ for them.

A) high; low; premium

B) high; high; discount

C) low; low; discount

D) high; high; premium

42) The subprime financial crisis led to one of the worst bear markets in the last 50 years. Stock

prices likely fell due to

A) an increase in required returns on equity investments.

B) a decline in growth prospects for U.S. companies.

C) Both A and B are likely reasons.

D) None of the above are correct.

43) The Securities Acts of 1933 and 1934 established the S.E.C. to enforce which of the follow

laws?

A) Require firms to tell the public the truth about their businesses.

B) Require brokers, dealers, and exchanges to treat investors fairly.

C) To ensure that no investment ever loses money.

D) All of the above are laws the S.E.C. enforces.

E) A and B above are laws the S.E.C. enforces.

44) Which of the following is not a division of the S.E.C.?

A) The Division of Fraud Investigation

B) The Division of Corporate Finance

C) The Division of Market Regulation

D) The Division of Investment Management

E) The Division of Enforcement

1) More stock trading in the U.S. occurs in over-the-counter markets rather than on organized

exchanges.

2) In over-the-counter markets, dealers increase the liquidity of thinly traded securities.

3) Electronic Communications Networks apply technology to make organized exchanges more

efficient and speedy.

4) All stocks pay dividends, as that is the only way an investor can profit from holding stock.

5) Common stock is the riskiest corporate security, followed by preferred stock and then bonds.

6) The Enron financial scandal increased uncertainty about the quality of accounting information

and as a result, increased required return on investment in stocks.

7) The Dow Jones Industrial Average is the broadest and best indicator of the stock market’s day–

to-day performance.

8) The Securities and Exchange Commission requires firms to submit various documents to

increase the flow of information to investors but does not verify the accuracy of that information.

9) About half of new equity issues are preferred stock.

10) A stock’s market value will be higher the higher its expected dividend stream is, all else

being equal.

11) The Gordon growth model assumes that a stock’s dividend grows at a constant rate forever.

12) A stock’s market value will be higher the higher the investor’s required rate of return is, all

else being equal.

13) A lower than average PE may mean that the market expects earnings to rise in the future.

14) About 75% of orders to buy or sell on the NYSE are executed using SuperDOT.