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CHAPTER 10
TRUE/FALSE QUESTIONS
alter the riskiness of their portfolios.
operational market efficiency.
securities.
is priced to yield a required return of 18% must be selling for $33.33.
$8.00 annual dividend, is 8 per cent.
IPO.
ratio.
them at once.
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securities.
stockholder.
current public information about a firm but prices do not reflect inside
information.
MULTIPLE-CHOICE QUESTIONS
a. common stocks
b. convertible bonds
c. commercial paper
d. mortgages
a. residual claim on income and assets
b. proxy
c. cumulative dividends
d. dual-class stock
board of directors, had better have __________ voting privileges.
a. straight
b. cumulative
c. proxy
d. limited
shareholders will elect
a. four directors.
b. five directors.
c. four or five depending on how the cumulative voters vote.
d. the same proportional share of directors as their ownership share.
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a. funds are channeled to their most productive use.
b. market makers such as dealers and brokers are making reasonable, not excessive
rates of return.
c. only if informational and operational market efficiencies are high.
d. both a and c.
a. a right to dividends.
b. a contractual relationship with a corporation.
c. an ownership claim.
d. a prior claim on income and assets.
a. contractual
b. residual
c. ownership
d. limited liability
a. create interest in stocks.
b. increase the marketability of securities.
c. provide a legal way to gamble.
d. supply money to deficit spending units.
e. both a and d
a. try to keep the market participants honest.
b. try to prevent excessive speculation from destabilizing the market.
c. make sure all pertinent information about publicly traded securities is disclosed.
d. all of the above
a. money invested in the stock.
b. house.
c. dividends declared.
d. par value.
a. ADRs are claims issued by U.S. financial intermediaries (FIs) against shares in
foreign companies, with the shares held in custody by the FIs for investors.
b. ADRs are issued in the U.S. and are denominated in U.S. dollars. All cash flows
to the investor are in dollars.
c. An ADR enhances a company’s visibility, status and profile in the U.S. and
internationally among investors.
d. An ADR decreases the foreign firm’s U.S. liquidity (and potentially total global
issuer liquidity).
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a. Electronically linking equity dealers and exchange markets is slowly leading
toward a national market system.
b. Electronically linking international markets has created 24-hour trading
opportunities for some stocks.
c. U. S. stock exchanges have extended (after hours) their normal trading hours in
which shares are traded electronically, linking U. S. with the hours of
international markets.
d. All of the above statements are true.
a. directly by purchasing stocks and bonds.
b. directly by issuing assets payable in the capital market.
c. indirectly through mutual funds and pension funds
d. both a and c
for a net price of $42 at the end of the year. The total annual return is
a. 25%
b. 100%
c. 30%
d. 40%
e. 12%
funds is called
a. a seasoned offering.
b. a secondary offering.
c. an initial public offering.
d. a best efforts offering.
a. seasoned equity offering
b. initial public offering
c. underwriter’s spread
d. bid-ask spread
e. shelf registration
a. broker
b. specialist
c. underwriter
d. dealer
e. none of the above
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200,000 shares of common stock to the public, grossing $7.4 million. Issuing expenses
paid by Sampson totaled $200,000, and the underwriter’s spread was $3 per share. How
much net financing did Sampson Corporation raise in the deal?
a. $6.6 million
b. $7.2 million
c. $6.4 million
d. $7.0 million
e. $6.8 million
a. directly related to the size of the primary offering.
b. directly related to the riskiness of the issue.
c. greater when the shelf registration process is used.
d. smaller for stocks than for bonds.
a. auction
b. exchange
c. secondary
d. all of the above
and no third party?
a. direct search
b. brokered
c. dealer
d. auction
search costs but does not guarantee that orders will be executed promptly?
a. direct search
b. brokered
c. dealer
d. auction
search costs are often high?
a. direct search
b. brokered
c. dealer
d. auction
risk, and the expense of a bid/ask spread?
a. direct search
b. brokered
c. dealer
d. auction
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a. is higher with higher priced stocks.
b. is large for very small and very large transactions.
c. is less for less than round lot trades.
d. all of the above.
stocks and _______ for stocks which have more traders with inside information.
a. less; more
b. less; less
c. more; more
d. more; less
to list ________ companies.
a. less; smaller
b. less; larger
c. more; larger
d. more; smaller
a. limited trading in the stock
b. small issue size
c. having excellent support by NASD dealers
d. having a large number of public shareholders
a. NASDAQ
b. unlisted
c. auction market
d. dealer market
a. brokers.
b. dealers.
c. stock-trading customers of dealers.
d. the Securities and Exchange Commission.
a. by the emerging dealer market.
b. by the brokers relaying information to their customers.
c. by the NASDAQ system.
d. when the NASD required that dealers be registered.
stock issue at a stock trading post on an exchange?
a. floor brokers handling customer orders.
b. limit price orders held by floor brokers.
c. the specialists making trades for his/her own account.
d. the specialist executing limit price orders.
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called
a. a limit order.
b. a stop order.
c. a market order.
d. none of the above.
equity markets?
a. higher transaction costs
b. the development of a national market system
c. 24-hour trading of some stocks
d. globalization of equity markets
a. A buyer may incur search costs and find a seller on their own through a direct
search.
b. A broker may bring buyers and sellers together, charging a commission.
c. A dealer may sell and buy securities using his inventory, therefore reducing
search costs. The dealer’s return is the bid/ask spread.
d. An auction market allocates the selling shares to the highest bidder.
e. All of the above statements are true.
a. shortened their trading hours to decrease the volatility of stock prices.
b. implemented after-hours discussion session between floor brokers and customers.
c. expanded electronic after-hour trading for stocks.
d. listed more stocks to compete with foreign stock exchanges.
a. the Federal Reserve.
b. the Federal National Securities Corporation.
c. the National Association of Securities Dealers (NASD).
d. the Securities Investor Protection Corporation.
e. the Securities and Exchange Commission.
for the broad oversight of securities markets was
a. The Securities Act of 1933.
b. The Securities Exchange Act of 1934.
c. The Investment Company Act of 1940.
d. The National Securities Company Act of 1932.
e. none of the above.
the market required rate of return is 18%?
a. $90
b. $28
c. $36
d. $23
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per year over each of the next three years and 5% per year thereafter. What is the value of
the stock if the required rate of return is 12%?
a. $34.29
b. $36.49
c. $39.84
d. $43.80
e. $58.74
currently selling at $47.50. What is required rate of return on the stock?
a. 7.5%
b. 8%
c. 8.4%
d. 12.5%
e. 16%
dividends to grow at 6 per cent, and requires a 20 per cent return?
a. $35.71
b. $37.86
c. $25.00
d. $20.38
e. $26.50
market portfolio is 15%, and the beta is 1.5?
a. 12 %
b. 19%
c. 22.5%
d. 29.5%
e. 33%
what is the value of the stock if the current dividend (D0) is $1.20 and it is expected to
grow at a constant rate of 6% per year?
a. $6.30
b. $6.70
c. $9.20
d. $9.80
e. $20.00
and stock price has been growing at 8% per year for 10 years. What is the expected total
return on the stock this year?
a. 17%
b. 18%
c. 20%
d. 9%
e. 15%
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a. specific stock
b. unsystematic
c. systematic
d. diversifiable
a. will have very predictable rates of return.
b. will have little risk compared to the market portfolio.
c. has had return variability similar to the market.
d. has had a constant rate of return.
e. both a and b
a. the amount of risk demanded for each unit of return.
b. the return for each level of risk.
c. the sum of the systematic and unsystematic risks.
d. the risk/return tradeoff over time.
a. the market risk premium.
b. beta
c. the risk-free rate
d. the return on the market portfolio.
e. none of the above
a. the starting date and an estimate of future prices.
b. the starting date and the base index value.
c. the starting and ending dates of the index.
d. 1,000 is the base value, combined with the starting date.
later the value was 298. What was the average annual rate of return on the index
portfolio?
a. 28.6%
b. 30.0%
c. 36.3%
d. 15.0%
e. 14.3%
price-weighted index with a base value of 100. One year later the stocks above were
valued at $40, $69, and $87, respectively. What was the value of the index at the end of
year one?
a. 88
b. 100
c. 114
d. 124
e. 196
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a. The stock market does a poor job of predicting economic recessions.
b. The stock market does a good job of predicting economic recessions.
c. Economic recessions always precede poor stock market performance.
d. Positive stock market returns are not possible during economic recessions.
stock price, on common stock of Formosan Freedom Co. is 4.8 %. The company
just paid a $2.10 dividend. The dividend will be $2.205 in next year. The dividend
growth rate is expected to remain constant at the current level. What is the
required rate of return on stock of Formosan Freedom Co.?
a. 10.04 percent
b. 16.07 percent
c. 21.88 percent
d. 43.75 percent
that its dividends will grow by 20 percent next year, 12 percent annually for the
two years after that, and then at 6 percent annually. Based on this information,
how much should the company’s common stock sell for today if the required
return is 10.5%?
a. $50.90
b. $59.22
c. $66.60
d. $77.50
next year should be $2.5 per share and it should pay a $ 1 dividend. The P/E
multiple is 15 times on average in this industry. What price would you expect for
the firm’s stock in the future if you believe the P/E multiple approach is correct?
a. $13.5
b. $22.50
c. $26.50
d. $37.50
1.3. The risk-free rate, which is 90-day Treasury Bill yield, is an annual rate of
6%, and the market return, which is S&P 500 index change, is an annual rate of
12%. This stock is expected to generate a constant dividend of $5.20. However,
a toxic spill of Cino Oil Co. results in an international lawsuit and potential finds,
and the beta of the stock jumps to 1.6. What will the new equilibrium price of the
stock be?
a. $33.33
b. $37.68
c. $43.33
d. $53.68
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it is worthy to invest in your education. She is wondering if you can tell her the
key differences between common stock and bonds. Which of the following is
NOT accurate?
a. interest paid to bondholder is tax-deductible but dividends paid to
stockholders are not.
b. bonds have a stated maturity but stock does not.
c. bonds are long-term debt instruments, while stock is long-term equity
capital.
d. common stockholders have a senior claim on assets and income relative to
bondholders.
a. convertible
b. callable
c. tax-deductible dividends
d. no maturity date
growth rate of dividends of 10 percent, and a required return of 20%. The value of
a share of common stock is.
a. $22.40
b. $28.00
c. $18.67
d. $56.00
ESSAY QUESTIONS
1. Explain what shelf registration is and how it can help companies to reduce their costs.
2. List and briefly describe the four types of secondary equity markets.
Answer: Direct search involves buyers and sellers seeking each other directly. Brokered markets
3. Describe how limit orders whose prices are not close to current market prices are handled at
NYSE.
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4. What are the advantages of investing in American Depository Receipts (ADRs)
compared to direct investment into foreign equities?
5. Explain why unsystematic risk is ignored when appropriate levels of return are computed.
6. Why have international stock prices fallen as a result of Standard and Poor’s
announcement regarding the down grade in the U.S. long-term credit rating in August
2011?