292 Miller Economics Today, 16th Edition
83) Present value is
A) unrelated to the rate of interest. B) lower the longer the time horizon.
C) not expressed in today s dollars. D) opposite the time value of money.
84) The real interest rate is the
A) nominal interest rate plus the anticipated interest rate.
B) nominal interest rate minus the anticipated interest rate.
C) nominal interest rate plus the anticipated inflation rate.
D) nominal interest rate minus the anticipated inflation rate.
85) If the interest rate is 10 percent per year, and you have $100,000 now, which of the following is
closest to what your $100,000 will be worth in one year?
A) $105,000 B) $110,000 C) $100,000 D) $102,000
86) The ABC Corporation earned a real rate return of 4.5 percent on an investment. In the economy,
the nominal rate of interest was 6 percent and the rate of inflation was 3 percent. We can
conclude that
A) the investment was unprofitable. B) the investment was profitable.
C) the real rate of interest was 9 percent. D) the real rate of interest was 1.5 percent.
87) Last year, the nominal interest rate was less than the anticipated rate of inflation.
A) This means that not enough loans were made by banks.
B) This means that the real interest rate was negative.
C) This means that the real interest rate was very high.
D) This scenario is not possible.
88) If the interest rate is 10 percent per year, and you have $100,000 now, which of the following is
closest to what your $100,000 will be worth in three years?
A) $155,000 B) $115,000 C) $120,000 D) $133,000
89) If the interest rate is 10 percent per year, and you have $100,000 now, which of the following is
closest to what your $100,000 will be worth in four years?
A) $175,000 B) $125,000 C) $146,000 D) $190,000
90) Suppose someone offered to give you $1,000,000 five years in the future and the anticipated
interest rate is 5 percent. The present value of this offer would be worth approximately
A) $784,000. B) $500,000. C) $1,050,000. D) $286,000
91) What are the two meanings of interest in economics?
92) Do people make decisions on the basis of the nominal interest rate or the real interest rate? What
is the relationship between the two interest rates?
93) How is inflation related to interest rates?
94) What is the main purpose of an interest payment? What major factors affect interest rates?
95) You have won the lottery. There are two payment options for you. The first option is a lump
sum payment of $10 million that you will receive immediately. The second option is an annual
payment of $1 million for each of the next 12 years. Assume there is no inflation. How would
you make a decision between the two options?
21.4 Corporate Financing Methods
1) A shareholder in a corporation
A) may not sell his or her share of ownership in the business without the business dissolving.
B) can earn interest, but not dividends, from the profits of the business.
C) is a part owner of the business.
D) is personally liable for the debts of the corporation.
2) The part of corporate profits that is paid to the shareholders of a corporation is
A) retained earnings. B) shareholders.
C) dividends. D)
b
usiness revenue.
3) Each of the following is a source of financial capital for a corporation EXCEPT
A) issuing new stock.
B) reinvestment of profit or retained earnings.
C) issuing bonds or borrowing funds from a bank.
D) dividends.
4) Corporations are able to raise large amounts of financial capital because
A) of the tax breaks corporations are given relative to partnerships or proprietorships.
B) of the elimination of the problem of separation of ownership and control.
C) of limited liability and the treatment of a corporation as an individual entity.
D) of their greater ability to monitor the performance of decision makers.
5) In which of the following ways can a corporation raise new funds for investment?
I. Issuing new shares of stock
II. Having existing stock resold between two owners
A) I only B) II only C) Both I and II D) Neither I nor II
6) A difference between a share of stock in a corporation and a corporate bond is that
A) the share of stock is a legal claim while the bond is not.
B) the bond owner has voting rights within the corporation whereas the stockholder does
not.
C) the bond owner is entitled to receive a fixed annual coupon payment plus a lump sum
payment at the bond s maturity date, whereas the stockholder is entitled to a share of
future profits.
D) stocks are issued in return for funds that are lent to the corporation.
7) The owners of preferred stock
A) receive preferential treatment in the payment of dividends.
B) have the same voting rights as owners of common stock.
C) are the original owners of the corporation.
D) have the same rights as bondholders.
8) When a firm uses profits to purchase new capital equipment, it is engaging in
A) tax evasion.
B)
b
alance sheet accounting.
C) reinvestment.
D) the most risky way the firm can obtain investment funds.
9) A share of stock in a corporation is
A) a guarantee to a fixed amount of income from the corporation.
B) a legal claim to a lump sum payment at a specified point of time in the future.
C) a legal claim to a dividend, regardless of the corporation s ability to pay its interest
payments.
D) a legal claim to a share of the company s future profits.
10) The person least likely to receive a payment from a corporation in a year of losses is the
A)
b
ank that loaned money to the corporation.
B)
b
ondholder.
C) preferred stockholder.
D) common stockholder.
11) If profits are reinvested in the corporation, then
A) payments made to bondholders will be less.
B) there are fewer funds available to distribute to stockholders.
C) the company will sell more bonds in order to pay dividends to stockholders.
D) the high profits indicate that common stockholders will get larger dividends than normal.
12) If you want a say in the management of a corporation, you should buy
A) common stock. B) preferred stock.
C)
b
onds. D) either bonds or preferred stock.
13) A legal claim against a firm that usually entitles the owner of the claim to receive a fixed annual
coupon payment, plus a lump sum payment at some future date, is known as
A) a bond. B) a share of common stock.
C) a share of preferred stock. D) a reinvestment coupon.
14) An investor who owns preferred stock has
A) regular voting rights.
B) preferential treatment in the payment of dividends.
C) the same rights as a bond holder.
D) unlimited liability for the debts of the firm.
15) Bond coupon payments represent
A) dividends paid to owners. B) interest on the amount borrowed.
C) capital gains for tax purposes. D) payments to preferred shareholders.
16) Which of the following modern methods of financing a corporation was not available to
corporations four hundred years ago?
A) Selling stock.
B) Selling bonds.
C) Reinvestment.
D) All of these methods were used then as well as now.
17) A legal claim to a part of a corporation s future profits is called
A) a bond. B) a share of stock.
C) a dividend. D) a financial debt.
18) Which legal claim comes with voting rights?
A) Common stock B) Preferred stock C) Bond D) Reinvestment
19) Which legal claim has a fixed annual coupon payment?
A) Common stock B) Preferred stock C) Bond D) Reinvestment
20) Which legal claim comes with the most preferential treatment in the payment of dividends?
A) Common stock B) Preferred stock C) Bond D) Reinvestment
21) Which of the following is not a principal method of financing today?
A) Common stock B) Bond
C) Reinvestment D) The entrepreneur s wealth
22) A bond is
A) a legal claim to a part of a corporation s future profits that includes voting rights.
B) a legal claim to a part of a corporation s future profits that does not include voting rights.
C) a legal claim against a firm, providing a fixed annual coupon payment and a lump sum
payment at maturity.
D) a nonlegal promise to provide an annual payment to the holder when the corporation
makes profits.
23) The most important source of financial capital for firms today is
A) sale of bonds. B) sale of new issues of stock.
C) trade of previously issued stock. D) reinvestment of profits.
24) The person most likely to receive a payment from a corporation in a year of losses is the
A)
b
ondholder. B) common stockholder.
C) preferred stockholder. D) investment banker.
25) The more profits are reinvested into the firm, the
A) less there is available to distribute to bondholders.
B) less there is available to distribute to stockholders.
C) more the firm will be able to raise in sales of new issues to stock.
D) more bonds the firm will sell in order to pay their required dividends to preferred
stockholders.
26) A person who is willing to bear more risk will buy
A) common stock. B) preferred stock.
C)
b
onds. D) government bonds.
27) The three primary sources of corporate funds are
A)
b
anks, friends, and family.
B) government, other corporations, and the central bank.
C) investment banks, brokerages, and insurance companies.
D) stocks, bonds, and reinvestment of profits.
28) If you own 500 shares of preferred stock, how many regular votes would you get to cast at the
next stockholders meeting?
A) 500 B) 250 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)
b
onds. C) funds. D) notes.
30) When Patricia sells her General Motors common stock at the same time that Brian purchases the
same amount of General Motors stock from another party, General Motors 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)
b
ond. 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)
b
ond. C) dividend. D) random walk.
36) When a corporation uses profits to pay for the purchase of new capital equipment, this is know
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)
b
ond 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)
b
ond 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)
b
ond. 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)
b
onds. 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) Describe and explain the three principle methods of financing used by corporations.
45) What would happen if a corporation goes out of business?
46) Which method of corporate finance is used the most? Why?
47) 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?
21.5 The Markets for Stocks and Bonds
1) 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.
2) 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.
3) 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.
4) 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.
5) 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.
6) 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.
7) 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.
8) 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.
9) 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.
10) 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.
11) 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.
12) 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.
13) 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.
14) 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.
15) 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.
16) Stocks and bonds are collectively known as
A) securities. B) equities. C) real property. D) shares.
17) 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.
18) 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.
19) 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.
20) 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.
21) Inside information is the use of information
A)
b
y those who read the companies annual reports.
B)
b
y those who write the companies annual reports.
C)
b
y stockbrokers at the largest brokerage firms.
D) that is not available to the public.
22) 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
23) 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.
24) The stock market showed a PE for BluarCo equal to 17. What does PE mean?
A) price earnings ratio B) profit earnings ratio
C) perfect earnings ratio D) price equity ratio
25) What is the random walk theory?
26) If the random walk theory is correct, then is there any way to beat the market ?
27) How can one beat the market?