978-0134083308 Chapter 6 Part 2

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6) Stock held in treasury is a means of increasing the number of shares outstanding.

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 3

7) Firms tend to repurchase shares of their outstanding stock when they view the shares as

undervalued.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

8) Different classes of stock generally have either different voting rights or different dividends.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

9) Electronic trading systems have increased transaction costs of odd-lot trades.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 3

10) Since each share of common stock represents ownership in a company, shares of common

stock are often referred to as

A) illiquid investments.

B) equity securities.

C) fixed-income securities.

D) unit-cost securities.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

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

A) Each share of stock has a specified maturity date.

B) Common stock gives stockholders first title to a share of the company’s earnings, prior to

other corporate obligations.

C) Common stock typically provides higher levels of current income than do similar grade

corporate bonds.

D) Each share of common stock of a given class entitles the holder to an equal ownership

position and an equal vote in the corporation.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

12) Stocks that are readily available to the general public and that are bought and sold on the

open market are known as

A) initial public offerings.

B) publicly traded issues.

C) treasury stocks.

D) blue chip stocks.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

13) When a company offers the investing public a certain number of shares of its stock at a

certain price, the company is making what is known as a

A) public offering.

B) rights offering.

C) stock spin-off.

D) treasury offering.

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 3

14) In a rights offering, the

A) existing stockholders are given the first opportunity to purchase new shares in proportion to

their current ownership position.

B) underwriter offers the investing public a certain number of shares at a certain price.

C) total equity remains constant while the number of shares of common stock outstanding

increases.

D) amount of debt in the capital structure increases by the amount of the 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

15) Rob owns 300 shares of Blackwood common stock valued at $9 a share. Blackwood has

declared a 3-for-1 stock split effective tomorrow. After the split, Rob will own

A) 100 shares valued at about $27 a share.

B) 100 shares valued at about $3 a share.

C) 900 shares valued at about $27 a share.

D) 900 shares valued at about $3 a share.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

16) Engines, Inc. declares a 4-for-10 stock split. The stock currently sells for $3 a share. A

shareholder who owned 1000 shares of stock prior to the split will now own

A) 400 shares valued at about $7.50 a share.

B) 40 shares valued at about $1.20 a share.

C) 250 shares valued at about $7.50 a share.

D) 250 shares valued at about $1.20 a share.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

17) When a corporation declares a stock split, it usually does so because

A) the firm’s retained earnings are excessive.

B) there are too many shares of stock outstanding.

C) investors sometimes require nontaxable returns.

D) it wants to make its stock more affordable 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

18) Stock which has been issued and subsequently reacquired by the issuing corporation is

called

A) letter stock.

B) treasury stock.

C) classified stock.

D) book stock.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

19) Tiffany owned 1000 shares of GIA stock which was selling for $1.50 per share when the

company declared a 1 for 10 reverse split. After the split, Tiffany owned

A) 10,000 shares worth approximately $1.50 per share.

B) 10,000 shares worth approximately $0.15 per share.

C) 100 shares worth approximately $15 per share.

D) 100 shares worth approximately $1.50 per share.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

20) Which of the following is unlikely to be found in an internet stock quotation?

A) earning per share (EPS)

B) beta

C) previous day’s closing price

D) broker’s commission per 100 shares

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 3

21) What are the effects of a company repurchasing its own stock as Treasury shares?

A) usually negative in the short term but uncertain over the long term

B) usually positive in the short term but uncertain over the long term

C) usually positive in both the short term and the long term

D) no effect in either the short term or 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 3

22) One motive for issuing classified stock with different voting rights is to

A) increase the market value of the company.

B) avoid SEC reporting requirements.

C) allow the company’s founders to retain control of the company.

D) facilitate the issue of additional shares in the future.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

23) Stock quotes on most Internet service providers such as Yahoo Finance include

I. the highest and lowest price over the last 52 weeks.

II. the closing price for the previous trading day.

III. the opening price for the day.

IV. the bid price and ask price.

A) I and III only

B) II and IV only

C) I, II and III only

D) II, III and IV only

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 3

24) A round lot consists of

A) 1 share.

B) 10 shares.

C) 100 shares.

D) 1,000 shares.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

25) Assume the Plum Corporation has two different issues of common stock. One issue carries

voting rights, and the other issue does not. In this situation, Plum is said to have issued

A) buy-back stock.

B) treasury stock.

C) OTC stock.

D) classified stock.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

26) Why do some companies split their stock?

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 3

6.4 Learning Goal 4

1) A stock’s market value would normally be higher than it’s book value.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

2) A stock’s book value and par value are normally the same or nearly the same.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 4

3) A stock can have only one market value, but different investment values for different

investors.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

4) A stock’s investment value can be much higher than its book value.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

5) The investment value for a publicly traded stock can readily be found in the financial section

of the newspaper or on the Internet.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

6) If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the company

has a market capitalization of $50,000,000.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

7) Another term for the stated value or face value of a stock is its

A) book value.

B) liquidation value.

C) par value.

D) proxy value.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

8) The par or stated value of common stock is important for

A) accounting purposes only.

B) helping the investor determine the stock’s intrinsic value.

C) helping the board of directors determine the dividend payout.

D) helping the market determine the trading price of the stock.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

9) The balance sheet value of a firm’s assets minus the balance sheet amount of its liabilities is

known as

A) par value.

B) book value.

C) liquidation value.

D) market value.

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

into practice)

Question Status: New Question

Learning Goal: Learning Goal 4

10) If a firm has a 2 million shares outstanding and its stock trades at $25 per share, the

company also has $10,000,000 in debt. The company’s market capitalization is

A) $40,000,000.

B) $49,000,000.

C) $50,000,000.

D) $60,000,000.

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

11) Westlake Industries has total assets of $42.5 million, total debt of $29.3 million, and $2.4

million of 6% preferred stock outstanding. If the company has 250,000 shares of common stock

outstanding, its book value per share would be

A) $32.33.

B) $33.60.

C) $43.20.

D) $52.80.

AACSB: 3 Analytical thinking

Question Status: Previous Edition

Learning Goal: Learning Goal 4

12) As a general rule, which one of the following statements concerning the various values of

common stock is correct?

A) Market values are usually below book values.

B) Par values are usually above book values.

C) Market values are usually below par values.

D) Book values are usually below market values.

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

into practice)

Question Status: Previous Edition

Learning Goal: Learning Goal 4

13) Which of the following will tend to increase transaction costs?

A) using a full service broker

B) buying or selling shares through an on-line broker

C) buying or selling more than 1000 shares in a single trade

D) buying or selling at times when volume is high and the exchanges are busy

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

into practice)

Question Status: Revised

Learning Goal: Learning Goal 4

14) The Charbridge Inc. has 4 million shares of stock outstanding. The stock has a par value of

$1.00 per share and is currently trading at $36 per share. Nicole estimates the investment value

of this stock at $38.50. According to this information, the market capitalization of Charbridge

A) $144,000,000.

B) $154,000,000.

C) $4,000,000.

D) $72 million.

AACSB: 3 Analytical thinking

Question Status: New Question

Learning Goal: Learning Goal 4