d.
neither high credit risk nor a long term
64. Which of the following bonds has the highest interest rate?
a.
a high credit risk and a short term.
b.
a low credit risk and a short term.
c.
a long term and a high credit risk.
d.
a long term and a low credit risk.
65. People who buy newly issued stock in a corporation such as Crate and Barrel provide
a.
b.
c.
d.
66. People who buy stock in a corporation such as General Electric become
a.
creditors of General Electric, so the benefits of holding the stock depend on General Electric’s profits.
b.
creditors of General Electric, but the benefits of holding the stock do not depend on General Electric’s profits.
c.
part owners of General Electric, so the benefits of holding the stock depend on General Electric’s profits.
d.
part owners of General Electric, but the benefits of holding the stock do not depend on General Electric’s
profits.
67. If Huedepool Beer runs into financial difficulty, the stockholders as
a.
part owners of Huedepool are paid before bondholders get paid anything at all.
b.
part owners of Huedepool are paid after bondholders get paid.
c.
creditors of Huedepool are paid before bondholders get paid anything at all.
d.
creditors of Huedepool are paid after bondholders get paid.
68. As chief financial officer you sell newly issued bonds on behalf of your firm. Your firm is
a.
borrowing directly.
b.
borrowing indirectly.
c.
lending directly.
d.
lending indirectly.
69. Which of the following people purchased the correct asset to meet his or her objective?
a.
Michelle wanted to be a part owner of Mamma Rosa’s Pizza, so she purchased a bond issued by Mamma
Rosa’s Pizza.
b.
Tim wanted a high return, even if it meant taking some risk, so he purchased stock issued by Specific Electric
instead of bonds issued by Specific Electric.
c.
Jennifer wanted to buy equity in Honda, so she purchased bonds sold by Honda.
d.
All of the above are correct.
70. If a firm sells a total of 100 shares of stock, then
a.
each share represents 1 percent of the firm’s indebtedness.
b.
each share represents ownership of 1 percent of the firm.
c.
the firm is engaging in term finance.
d.
All of the above are correct.
71. If a firm sells a total of 100 shares of stock, then
a.
the supply of, and demand for, those shares determine the price per share.
b.
each share represents ownership of 1 percent of the firm.
c.
the firm is engaging in equity finance.
d.
All of the above are correct.
72. The prices of stock traded on exchanges are determined by
a.
the Corporate Stock Administration.
b.
the administrators of NASDAQ.
c.
the supply of, and demand for, the stock.
d.
All of the above are correct.
73. Which of the following is not an important stock exchange in the United States?
a.
New York Stock Exchange
b.
American Stock Exchange
c.
Chicago Mercantile Exchange
d.
NASDAQ
74. All else equal, when people become more optimistic about a company’s future, the
a.
supply of the stock and the price will both rise.
b.
supply of the stock and the price will both fall.
c.
demand for the stock and the price will both rise.
d.
demand for the stock and the price will both fall.
75. Suppose the government finds a major defect in one of a company’s products and demands that the product be taken
off the market. We would expect that the
a.
supply of existing shares of the stock and the price will both rise.
b.
supply of existing shares of the stock and the price will both fall.
c.
demand for existing shares of the stock and the price will both rise.
d.
demand for existing shares of the stock and the price will both fall.
76. World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its costs. We would
expect that this would
a.
raise the demand for existing shares of the stock, causing the price to rise.
b.
decrease the demand for existing shares of the stock, causing the price to fall.
c.
raise the supply of the existing shares of stock, causing the price to rise.
d.
raise the supply of the existing shares of stock, causing the price to fall.
77. In the late summer of 2005 some regions of the country were suffering from drought. What effect would we expect
this to have on the stock of companies such as John Deere that manufacture farm equipment?
a.
raise the demand for existing shares of the stock, causing the price to rise
b.
decrease the demand for existing shares of the stock, causing the price to fall
c.
raise the supply of the existing shares of stock, causing the price to rise
d.
raise the supply of the existing shares of stock, causing the price to fall
78. In the Coen Brothers’ movie The Hudsucker Proxy the board of directors picks someone to run the company who they
believe will make poor decisions. If things turn out as they plan,
a.
the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.
b.
the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises.
c.
the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares falls.
d.
the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares rises.
79. Suppose that the tires of a certain tire manufacturer are discovered to be defective. Other things the same, this news
would cause
a.
the demand for this company’s stock to decrease, so the price would rise.
b.
the demand for this company’s stock to decrease, so the price would fall.
c.
the supply of this company’s stock to decrease, so the price would fall.
d.
the supply of this company’s stock to decrease, so the price would rise.
80. Nastech Pharmaceuticals announced it has developed a nasal spray that would reduce hunger cravings. Other things
the same we would expect
a.
the demand for existing shares of stock in this company to decrease, so the price would fall.
b.
the demand for existing shares of stock in this company to increase, so the price would rise.
c.
the supply of existing shares of stock in this company to decrease, so the price would fall.
d.
the supply of existing shares of stock in this company to increase, so the price would rise.
81. Other things being constant, when a firm sells new shares of stock, the
a.
supply of the stock increases and the price decreases.
b.
supply of the stock decreases and the price increases.
c.
demand for the stock increases and the price increases.
d.
demand for the stock decreases and the price decreases.
82. Which of the following is a certificate of indebtedness?
a.
stocks and bonds
b.
stocks but not bonds
c.
bonds but not stocks
d.
neither stocks nor bonds
83. Compared to stocks, bonds offer the holder
a.
lower risk and lower potential return.
b.
lower risk and higher potential return.
c.
higher risk and lower potential return.
d.
higher risk and higher potential return.
84. Which of the following statements is correct?
a.
A general, persistent decline in stock prices may signal that the economy is about to enter a boom period
because people will be able to buy stock for less money.
b.
A general, persistent decline in stock prices may signal that the economy is about to enter a recession because
low stock prices may mean that people are expecting low corporate profits.
c.
A general, persistent decline in stock prices may signal that the economy is about to enter a recession because
low stock prices mean that corporations have had low profits in the past.
d.
Expectations about the business cycle have no impact on stock prices.
85. A stock index is
a.
an average of a group of stock prices.
b.
an average of a group of stock yields.
c.
a measure of the risk relative to the profitability of corporations.
d.
a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that
issued the stock.
86. The Dow Jones Industrial Average has been computed regularly since
a.
1976.
b.
1948.
c.
1913.
d.
1896.
87. The Dow Jones Industrial Average is now based on the prices of the stocks of
a.
30 major U.S. corporations.
b.
100 major U.S. corporations.
c.
500 representative U.S. corporations.
d.
1,000 representative U.S. corporations.
88. The single most important piece of information about a stock is its
a.
term.
b.
dividend.
c.
daily volume.
d.
price.
89. Potential buyers of ABC Corporation bonds are concerned about ABC Corporation declaring bankruptcy. Potential
buyers of XYZ Corporation bonds are not concerned that XYZ Corporation may declare bankruptcy. Which of the
following statements is correct?
a.
Other things equal, the interest rate on XYZ Corporation bonds will be high relative to the interest rate on
ABC Corporation bonds.
b.
An ABC Corporation bond must have a longer term than an XYZ Corporation.
c.
XYZ Corporation bonds carry less default risk than do ABC Corporation bonds.
d.
All of the above are correct.
90. Compared to bondholders, stockholders
a.
face higher risk and have the potential for higher returns.
b.
face higher risk but receive a fixed payment.
c.
face lower risk and have the potential for higher returns.
d.
face lower risk but receive a fixed payment.
91. After a corporation issues stock, the stock
a.
cannot be resold.
b.
can be resold only if the corporation wants to buy it back.
c.
can be resold on exchanges; the resale will raise additional funds for the corporation.
d.
None of the above are correct.
92. A high demand for a company’s stock is an indication that
a.
the company is in need of funds.
b.
the company has recently sold a large quantity of bonds.
c.
people are optimistic about the company’s future.
d.
people are pessimistic about the company’s future.
93. The price of a stock will rise if
a.
the managers of a stock exchange decide the price should be higher.
b.
the demand for the stock rises.
c.
the supply of the stock rises.
d.
None of the above are correct.
94. Volume, as reported in stock tables, refers to the
a.
number of shares traded.
b.
percentage of shares outstanding traded.
c.
number of shares traded times the price they sold at.
d.
number of shares of a company traded divided by the shares of all companies traded.
95. A corporation’s earnings are the amount of revenue it receives for the sale of its products
a.
minus its cost of production as measured by its accountants. Earnings must be paid out as dividends.
b.
minus its cost of production as measured by its accountants. Earnings may be paid out as dividends or retained
by the corporation.
c.
minus its direct and indirect costs as measured by its economists. Earnings must be paid out as dividends.
d.
minus its direct and indirect cost as measure by its economists. Earnings may be paid out as dividends or
retained by the corporation.
96. All or part of a firm’s profits may be paid out to the firm’s stockholders in the form of
a.
retained earnings.
b.
dividends.
c.
interest payments.
d.
capital accounts.
97. Profits not paid out to stockholders are
a.
retained earnings.
b.
known as dividends.
c.
the denominator in the price-earnings ratio.
d.
All of the above are correct.
98. A stock’s dividend yield is the
a.
dividend as a percentage of the price per share.
b.
stock price as a percentage of the dividend.
c.
dividend as a percentage of the retained earnings per share.
d.
retained earnings per share as the percentage of the dividend.
99. A particular stock pays an annual dividend of $2 per share and the annual dividend yield is 2.5 percent. The price of a
share of this stock is
a.
$2.05.
b.
$5.00.
c.
$80.00
d.
$50.00.
100. In 2013, ABC Corporation had total earnings of $200 million and 40 million shares of the corporation’s stock were
outstanding. If the price-earnings ratio for ABC is 20, then what is the price of a share of its stock?
a.
$5
b.
$10
c.
$80
d.
$100
101. In 2013, XYZ Corporation had total earnings of $500 million and XYZ retained 20 percent of its earnings for future
investments. If the price of a share of XYZ stock is $70 and if 100 million shares of its stock is outstanding, then what is
the price-earnings ratio?
a.
6.25
b.
11.2
c.
14.0
d.
17.5
102. The number of shares of Biggie Corporation stock outstanding in 2013 was 100 million. In 2013, Biggie stock paid a
dividend of $2.50 per share and its dividend yield was 2 percent. If the price-earnings ratio is 20, then Biggie’s total
earnings in 2013 amounted to
a.
$15.6 million.
b.
$250 million.
c.
$160 million.
d.
$625 million.
103. Camp Company had total earnings of $600 million in 2013, out of which it retained 20 percent for future
investments. In 2013, its stock featured a dividend yield of 4 percent and 100 million shares were outstanding. The price-
earnings ratio for Camp Company stock was
a.
5.
b.
150.
c.
20.
d.
25.
104. Fortunade Corporation stock has a price of $100 per share, a dividend of $1.60 per share, and retained earnings of
$2.00 per share. The dividend yield on this stock is
a.
2.8 percent.
b.
2.0 percent.
c.
1.6 percent.
d.
0.4 percent.
105. Queen City Sausage stock is selling at $40 per share, it has retained earnings of $1.00 per share, and dividends of
$1.00 per share. What is the price-earnings ratio and what is the dividend yield?
a.
20, 2.5 percent.
b.
20, 5 percent.
c.
40, 2.5 percent.
d.
40, 5 percent.
106. Stock in Creole Cuisine Restaurants is selling at $25 per share. Creole Cuisine had earnings of $5 a share and a
dividend yield of 5 percent. The dividend is
a.
$0.25 and the price-earnings ratio is 5.
b.
$.25 and the price-earnings ratio is 6.7.
c.
$1.25 and the price-earnings ratio is 5.
d.
$1.25 and the price-earnings ratio is 6.7.
107. Stock in Tasty Greens Restaurants is selling at $80 per share with 1 million shares outstanding. Last year, Tasty
Greens earned $4 million, of which it retained $2.4 million for future investments. The dividend yield on the stock is
a.
8 percent.
b.
2 percent.
c.
3 percent.
d.
5 percent.
108. Buskin’s Corporation has issued 2 million shares of stock. Its earnings were $10 million, of which it retained 40
percent. What was the dividend per share?
a.
$2.
b.
$3.
c.
$5.
d.
$8.
109. Over-the-Rhine Cheese Corporation had a P/E ratio of 20, retained earnings of $0.80 per share and a dividend of
$1.70. What was its dividend yield?
a.
1.25%.
b.
5.0%.
c.
3.4%.
d.
10.6%.
110. XDF Corporation had a P/E ratio of 25, earnings per share of $4, and retained earnings per share of $3. What was its
dividend yield?
a.
4%
b.
3%
c.
1%
d.
None of the above is correct.
111. Mallard Corporation had a price-earnings ratio of 15, paid a dividend of $3, and retained earnings of $1 a share.
What was the price of a share of Mallard stock?
a.
$15
b.
$30
c.
$45
d.
$60.
112. Bountiful Tractors has a share price of $60, retained earnings of $2 per share, and a dividend yield of 2 percent. What
is Bountiful Tractor’s price-earnings ratio?
a.
23.1
b.
18.75
c.
15
d.
30
113. A corporation’s earnings are
a.
the amount of revenue it receives for the sale of its products minus its costs of production as measured by its
accountants minus the dividends paid out.
b.
the amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as
measured by its economists minus the dividends paid out.
c.
the amount of revenue it receives for the sale of its products minus its costs of production as measured by its
accountants.
d.
the amount of revenue it receives for the sale of its products minus its direct and indirect costs of production as
measured by its economists.
114. Retained earnings are
a.
earnings of a company that are not paid out to stockholders.
b.
the amount of revenue a corporation receives for the sale of its products minus its costs of production as
measured by its accountants.
c.
the single most important piece of information about a stock.
d.
computed by multiplying the dividend yield by the price of the stock.
115. The amount of revenue a firm receives for the sale of its products minus its costs of production as measured by its
accountants is the firm’s
a.
earnings.
b.
retained earnings.
c.
economic, or real, profit.
d.
dividend.
116. Historically, the typical price-earnings ratio for stocks is about
a.
3
b.
8
c.
15
d.
26
117. A high price-earnings ratio for a stock indicates that either the stock is
a.
undervalued or people are relatively optimistic about the corporation’s prospects.
b.
overvalued or people are relatively optimistic about the corporation’s prospects.
c.
overvalued or people are relatively pessimistic about the corporation’s prospects.
d.
undervalued or people are relatively pessimistic about the corporation’s prospects.
118. A low price-earnings ratio indicates that either the stock is
a.
undervalued or people are relatively optimistic about the corporation’s prospects.
b.
overvalued or people are relatively optimistic about the corporation’s prospects.
c.
overvalued or people are relatively pessimistic about the corporation’s prospects.
d.
undervalued or people are relatively pessimistic about the corporation’s prospects.
119. If people expect future earnings of Galt Corporation to be high relative to current earnings, then
a.
the P/E ratio of its stock will be high. A P/E ratio of 8 is relatively high.
b.
the P/E ratio of its stock will be high. A P/E ratio of 8 is relatively low.
c.
the P/E ratio of its stock will be low. A P/E ratio of 8 is relatively high.
d.
the P/E ratio of its stock will be low. A P/E ratio of 8 is relatively low.
120. Longview Corporation has a stock price of $60, has issued 1,000,000 shares of stock, has retained earnings of $3
million dollars, and a dividend yield of 5 percent. The price-earnings ratio for Longview stock is
a.
20, which is high compared to historical standards of the market.
b.
20, which is low compared to historical standards of the market.
c.
10, which is low compared to historical standards of the market.
d.
10, which is high compared to historical standards of the market.
121. Bay City Mining, Inc. has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1 million
dollars, and a dividend yield of 2 percent. It has a price-earnings ratio of
a.
50, which is high by historical standards.
b.
50, which is low by historical standards.
c.
25, which is high by historical standards.
d.
25, which is low by historical standards.
122. Alpha Corporation has a price of $5 a share, outstanding shares of 2.5 million, retained earnings of $1 million
dollars, and a dividend yield of 2 percent. It has a price-earnings ratio which is
a.
high, perhaps indicating that people expect future earnings to rise.
b.
high, perhaps indicating that people expect future earnings to fall.
c.
low, perhaps indicating that people expect future earnings to rise.
d.
low, perhaps indicating that people expect future earnings to fall.
123. A low P/E for a stock indicates that
a.
people may expect earnings to fall in the future, perhaps because the firm will be faced with increased
competition.
b.
its dividends have been low so that no one is willing to pay very much for it.
c.
the corporation is possibly overvalued.
d.
All of the above are correct.
124. Suppose Sarah Lee Corporation stock has a P/E ratio of 8. This P/E ratio is relatively
a.
low, indicating that buyers may expect earnings to rise.
b.
low, indicating that buyers may expect earnings to fall.
c.
high, indicating that buyers may expect earnings to rise.
d.
high, indicating that buyers may expect earnings to fall.
125. Which of the following is correct?
a.
Joan takes some of her income and buys mutual fund shares. Joan’s purchase will be included in the
investment category of GDP.
b.
If a share of stock in Virtual Pizza Corporation sells for $77, the earnings per share are $5, and the dividend
per share is $2, then the P/E ratio is 11.
c.
In order to use equity finance, a firm must sell about equal values of stocks and bonds.
d.
None of the above is correct.
Use the following table to answer the following questions.
Table 26-1
Stock
Sym
Yld %
P/E
Vol 1000s
Hi
Lo
Close
Net Chg.
GenMills
GIS
3.0
18.4
1659
51.57
51.10
51.09
–0.06
Microsoft
MSFT
2.6
18.6
20,315
36.15
35.59
35.67
0.02
Graco
GGG
1.5
25.3
101
68.39
67.63
68.09
0.00
Hershey
HSY
1.8
29.9
956
83.62
82.87
83.38
0.13
126. Refer to Table 26-1. In dollar terms, which company paid the highest dividend per share?
a.
GenMills
b.
Microsoft
c.
Graco
d.
Hershey