Saving, Investment, and the Financial System 6319
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.
6320 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6321
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.
6322 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6323
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.
6324 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6325
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.
6326 Saving, Investment, and the Financial System
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.
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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.
6328 Saving, Investment, and the Financial System
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. b. $10
c. c. $80
d. $100
Saving, Investment, and the Financial System 6329
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.
6330 Saving, Investment, and the Financial System
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.
Saving, Investment, and the Financial System 6331
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.
6332 Saving, Investment, and the Financial System
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.
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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.
6334 Saving, Investment, and the Financial System
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
Saving, Investment, and the Financial System 6335
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.
6336 Saving, Investment, and the Financial System
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
Saving, Investment, and the Financial System 6337
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.
6338 Saving, Investment, and the Financial System
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.