28) If you own 100 shares of preferred stock, how many regular votes would you get to cast at
the next stockholders meeting?
A) 500
B) 100
C) 1
D) 0
29) When the Dutch East India Company was founded in 1602, it raised financial capital by
issuing notes of indebtedness called
A) stocks.
B) bonds.
C) funds.
D) notes.
30) When Peter sells his Google common stock at the same time that Brian purchases the same
amount of Google stock from another party, Google receives
A) the dollar value of the transaction.
B) only the par value of the common stock.
C) nothing.
D) the dollar amount of the transaction, less brokerage fees.
31) Stocks are
A) promises to repay loans.
B) a liability of a proprietorship.
C) a liability of a corporation.
D) shares of ownership in a corporation.
32) Bonds are
A) promises to repay loans.
B) promissory notes issued by partnerships.
C) promissory notes issued by proprietorships.
D) shares of ownership in a corporation.
33) When a person buys stock in a company, that person is buying ________, but when a person
buys a bond in a company, that person is ________ the company.
A) ownership; borrowing funds from
B) ownership; lending funds to
C) debt; lending funds to
D) debt; borrowing funds from
34) A legal claim to a percentage of a company’s future profits and assets is known as a
A) share of stock.
B) bond.
C) dividend.
D) random walk.
35) A long-term loan that is given to a firm is known as a
A) share of stock.
B) bond.
C) dividend.
D) random walk.
36) When a corporation uses profits to pay for the purchase of new capital equipment, this is
known as
A) reinvestment.
B) a coupon payment.
C) dividend.
D) collusion.
37) If a corporation fails, the first recipients of funds that may remain are
A) preferred stockholders.
B) common stockholders.
C) bond holders.
D) no one.
38) If a corporation fails, the last recipients of funds that may remain are
A) preferred stockholders.
B) common stockholders.
C) bond holders.
D) government tax collectors.
39) Suppose you own $15,000 of personal property, $5,000 of stock in ABC Corporation, a
$1,000 certificate of deposit, and $10,000 of government bonds. If ABC goes bankrupt, the most
you could lose is
A) $31,000.
B) $26,000.
C) $15,000.
D) $5,000.
40) A company raises funds by selling 5 million shares of common stock to 5,000 shareholders
and $1 million bonds to 1,000 bondholders. The number of individuals who vote for the
company’s board of directors is
A) 6,000.
B) 5,000.
C) 1,000.
D) 5,000,000.
41) A legal claim entitling the owner of the claim to fixed annual payments and a lump-sum
payment is called a(n)
A) equity share.
B) bond.
C) stock.
D) debit.
42) If you want to vote for the management of the corporation, you should buy
A) common stock.
B) preferred stock.
C) bonds.
D) either common stock or preferred stock.
43) Suppose a firm wanted to go out of business. The firm sells all its assets and pays off
everything it owes to creditors. The stockholders would receive
A) nothing.
B) their annual dividend payment.
C) one half of the funds; the other half of the funds goes to bondholders.
D) the rest of the funds, after everyone who has a claim against the firm is paid.
44) According to the random walk theory
A) today’s stock price will be related to yesterday’s stock price.
B) successive prices of a stock are independent of each other.
C) stock prices can easily be predicted for as much as 52 weeks into the future.
D) stock prices rise and fall in predictable cycles that correspond with the overall business cycle.
45) The random walk theory says that
A) stock prices follow a trend for varying periods of time.
B) successive stock prices increase more than they decrease.
C) successive stock prices are dependent on the weighted average of the previous week’s prices.
D) successive stock prices are independent of each other.
46) Which of the following statements about “inside information” is FALSE?
A) It is information that is not available to the general public.
B) It is illegal to knowingly use inside information when trading stocks.
C) Profits can be made using inside information.
D) The government never imposes fines or other penalties for abuse of inside information.
47) The idea that any public information you will be able to find will prove of little value to you
when buying and selling stocks, because that information is so quickly incorporated into the
trading prices of stocks, is known as the
A) theory of efficient markets.
B) theory of fundamental analysis.
C) principle of context.
D) over-the-counter hypothesis.
48) The yield percentage of a stock is calculated as
A) the corporation’s net worth divided by the number of shareholders.
B) the book value of the stock divided by the number of shareholders.
C) the stock dividend divided by the price of the stock.
D) the expected appreciation of the stock.
49) The PE ratio for a stock is
A) the predicted earnings per share of the stock divided by its current yield.
B) the current yield of the stock.
C) the price of the stock divided by its earnings per share.
D) the predicted volatility of the stock.
50) A stock that has a price of $20 per share, earnings per share of $2.00, and a dividend of $1.50
will have
A) a PE ratio of 20/1.50.
B) a yield of 7.5 percent.
C) a yield of 12 percent.
D) a PE ratio of 1.333.
51) The most prestigious stock market in the world is the
A) New York Stock Exchange.
B) Chicago Mercantile Exchange.
C) London Stock Exchange.
D) Tokyo Stock Exchange.
52) Stock markets for securities are important because
A) they are where corporations raise financial capital.
B) they are where proprietorships and partnerships raise financial capital.
C) they permit individuals to transfer their savings directly into investment spending.
D) they make the stocks and bonds more valuable.
53) Exchanges of stocks take place
A) in New York City only.
B) in the principle financial city of each country, such as New York City for the United States
and London for England.
C) in a decentralized fashion around the world.
D) in centralized physical locations known as stock exchanges and online through Internet
brokers.
54) According to the random walk theory
A) the probability that a stock’s price will increase tomorrow is greater if it increased today.
B) the probability that a stock’s price will increase tomorrow is greater if it decreased today.
C) the best forecast of tomorrow’s price is today’s price.
D) the best forecast of tomorrow’s price is found by determining the trend for the last five trading
days.
55) The theory that there is no predictable trends in securities prices is the
A) opportunity cost of capital.
B) random walk theory.
C) capital reinvestment.
D) present value.
56) Which of the following is a TRUE statement about stock markets?
A) Economists can make above-average profits in the stock market because of their specialized
knowledge of economics.
B) It is always better to buy growth stocks than the older and more stable blue-chip stocks.
C) The stock market on average over time is random and totally unrelated to the performance of
the economy.
D) It is illegal for a friend of a corporate executive to make large profits in the stock market by
using his inside information.
57) Information that is NOT available to the general public about what is happening in a
corporation is
A) opportunity benefit.
B) limited liability.
C) economic rent.
D) inside information.
58) Inside information
A) applies to proprietorships only.
B) applies to proprietorships and partnerships only.
C) applies to corporations only.
D) applies to all forms of business.
59) “Stocks and bonds” are collectively known as
A) securities.
B) equities.
C) real property.
D) shares.
60) The theory that there is no way to “get rich quick” in securities due to a lack of predictable
trends is
A) no-win theory.
B) market trend analysis.
C) random walk theory.
D) trading.
61) Which of the following statements about stock market brokers and dealers is TRUE?
A) Brokers earn commissions from trading stocks but dealers try to profit from trading stocks.
B) Brokers try to profit from trading stocks but dealers earn commissions from trading stocks.
C) Both brokers and dealers earn commissions from trading stocks.
D) Both brokers and dealers try to profit from trading stocks.
62) Efficient markets theory suggests that purchasing the published reports of financial analysts
A) is likely to increase one’s returns by an average of 5 percent.
B) is likely to increase one’s returns by an average of about 3 to 5 percent.
C) is not likely to increase financial returns.
D) will increase financial returns in the first year but not in following years.
63) The theory that there are no predictable trends in securities prices that can be used to “get
rich quick” is the
A) dartboard theory.
B) random walk theory.
C) Wall Street theory.
D) inefficient market hypothesis.
64) “Inside information” is the use of information
A) by those who read the companies’ annual reports.
B) by those who write the companies’ annual reports.
C) by stockbrokers at the largest brokerage firms.
D) that is not available to the public.
65) According to efficient market theory, which of the following can best predict the stock price
of a particular company tomorrow?
A) a finance professor who knows a lot of investment theory
B) a stock trader who has traded stocks for more than 10 years
C) that company’s employee who has inside information about the company
D) none of the above: Everyone has an equal chance of predicting future stock prices.
66) The price of the stock divided by the profits per share of stock is known as the
A) price-earnings ratio.
B) dividend.
C) yield in percent per year.
D) number of shares traded during the day.
67) The stock market showed a PE for Alibaba equal to 32. What does PE mean?
A) price-earnings ratio
B) profit-earnings ratio
C) perfect-earnings ratio
D) price-equity ratio
68) Describe and explain the three principle methods of financing used by corporations.
69) What would happen if a corporation goes out of business?
70) Which method of corporate finance is used the most? Why?
71) Suppose that you decide to purchase either stocks or bonds of a particular corporation and
you also prefer to receive some returns from the securities every year. Which should you buy –
stocks or bonds? Why?
72) What is the random walk theory?
73) If the random walk theory is correct, then is there any way to “beat the market”?
74) How can one “beat the market”?