978-0134083308 Chapter 6 Part 1

Unlock access to all the studying documents.

View Full Document

Fundamentals of Investing, 13e (Smart)

Chapter 6 Common Stocks

6.1 Learning Goal 1

1) Every shareholder is a part owner of the firm and, as such, has a direct claim on a portion of

the firm’s assets.

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) There is a stronger tendency for the stock market to increase in value rather than decrease in

value over time.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

3) Since 1960, returns on the Dow Jones Industrial Average have never been negative for 3

consecutive years.

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) For most stocks, the returns from dividend income far exceeds the return from capital gains.

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) Between 1930 and 2014, the average return on stocks exceeded 10%.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

6) Between 1956 and 2011, approximately 30% of years had positive returns.

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) In spite of major losses in 2008, by the end of 2014 stock prices, as measured by the S&P

500 index, were higher than their peak levels of 2007.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

8) Because common shareholders are entitled to the profits that remain after all of a

corporation’s other obligations have been met, common shareholders are known as

A) residual owners.

B) temporary owners.

C) debt owners.

D) owners of last resort.

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) If stocks earn an average rate of return of 12 %, their value doubles every

A) 4 years.

B) 6 years.

C) 8 years.

D) 12 years.

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) Which one of the following statements about common stock is true?

A) Common stock can provide attractive capital appreciation opportunities.

B) Dividends generally provide the greatest rate of return on common stocks.

C) Common stocks generally have a negative rate of return over a ten–year period.

D) The DJIA is the best indicator of the overall performance of common stocks.

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) Which of the following are benefits related to stock ownership?

I. ease of trading

II. attractive inflation-adjusted rates of return

III. guarantee of long-term positive returns

IV. affordability

A) I and II only

B) II and IV only

C) I and III only

D) I, II and IV only

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

6.2 Learning Goal 2

1) A market correction is defined as a stock market decline of 10% or more.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

2) While many stocks increase in value over the long run, most of the return on stocks comes

from dividends.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

3) It is not unusual for bear markets to occur two or more times in any given 10 year period.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

4) Over the long term, the capital gain on most stocks will exceed the dividend income.

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) Although bear markets on average occur every 3 to 4 years, the timing of bear markets is

very hard to predict.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

6) For stocks in the S&P 500 index, returns from dividends exceeded capital gains over the

period 2000-2009.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

7) The period from late 2007 through the end of 2014 is best described as a prolonged bear

market.

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

8) For the period 2000 through 2009, the average annual price change for stocks in the S&P

500 index was

A) 16%.

B) 8%.

C) -1%.

D) -50%.

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

9) The rate of return from dividends has been much higher in recent decades than it was in the

1930s and 40s.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

10) $10,000 invested in the S&P 500 in March 2009 would have grown to more than $20,000

by the end of 2014.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

11) When residential real estate values fell sharply from 2006 to 2009, the stocks of financial

institutions were hardly impacted at all.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

12) Stocks generally have produced positive inflation-adjusted rates of return over the long-

term.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

13) An individual stock generally provides a

A) dividend payment that ensures total protection from purchasing power risk.

B) refuge from event risk.

C) current income that is less predictable than that available from other types of investments.

D) predictable annual rate of return.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

14) From October 2007 to March 2009, stock prices as measured by the S&P 500 Index

A) nearly doubled in value.

B) lost more than half their value.

C) declined by nearly 10%.

D) rose by nearly 25%.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

15) From March 2009 to January 2012, stock prices as measured by the S&P 500 Index

A) more than doubled in value.

B) lost more than half their value.

C) declined by nearly 10%.

D) rose by nearly 25%.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 1

16) Which of the following periods provided particularly high returns to stock investors?

A) February 1972-October 1974

B) March 2009-December 2014

C) September 2000-September 2002

D) October 2007-March 2009

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

17) From 1976 through 2014, the dividend yield on stocks has been ________ the coupon yield

on corporate bonds.

A) sometimes higher and sometimes lower than

B) on average, about the same as

C) consistently lower than

D) consistently higher than

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

18) The extraordinary run up in stock prices during the late 1990s primarily affected

A) energy stocks.

B) retail stocks.

C) pharmaceutical stocks.

D) technology stocks.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 2

19) Many companies increased their dividends

A) whenever necessary to compensate shareholders for declining stock values.

B) in every year since 1950.

C) during the market decline of 2007-2008.

D) during the market recovery of 2009-2011.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 2

20) Which of the following are true about stock market returns as measured by the S&P 500

index?

I. In 2008 alone stocks in the index lost approximately 36% of their value.

II. $10,000 invested in the index in March 2009 would have been worth more than $20,000 by

the end of 2014.

III. From the beginning of 2000 to the end of 2010, the index more than doubled in value.

IV. Both stock and real estate prices recovered recovered strongly in the period between early

2009 and late 2014.

A) I II and III only

B) II, III and IV only

C) I ,II and IV only

D) I, and IV only

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 1

21) Describe the bear market of 2008 through early 2009 and the trend of stock prices in

subsequent years.

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 2

6.3 Learning Goal 3

1) Shares of publicly traded stock can be issued either through a public offering or a rights

offering.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

2) Companies typically issue new shares through an initial public offering (IPO).

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) Shareholders must either exercise their rights granted via a rights offering or let them expire

unused.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

4) Corporations often split their stocks when they believe that the price makes them less

attractive to average investors.

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) The total value of an investor’s holdings in a company will increase as a direct result of a

stock split.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3