Chapter 14 – Investing in Stocks
1. (p. 462) Since 1926, stocks as measured by the Standard & Poor’s 500 Index have returned on
average about 10 percent a year.
2. (p. 462) A proxy is a legal form that lists the issues to be decided at a stockholders’ meeting
and requests that stockholders transfer their voting rights to some individual or individuals.
3. (p. 463) The record date is the date that the actual dividend payment is made to stockholders.
4. (p. 465) A stock split is a procedure in which a stockholder’s common stock is exchanged for
preferred stock.
Chapter 14 – Investing in Stocks
5. (p. 466) Preferred stock is often referred to as a middle investment as it has features similar to
both common stock and corporate bonds.
6. (p. 467) If an investor owns cumulative preferred stock, missed or omitted dividends
accumulate and must be paid before any cash dividend is paid to common stockholders.
7. (p. 467) Convertible preferred stock may be exchanged, at the corporation’s option, for a
specified number of shares of common stock.
8. (p. 468) A blue-chip stock is too speculative for most investors.
Chapter 14 – Investing in Stocks
9. (p. 468) A stock that pays higher than average dividends is called an income stock.
10. (p. 468) A cyclical stock is a stock that follows the business cycle of advances and declines
in the economy.
11. (p. 468) A defensive stock is a stock that typically sells for less than $1.
12. (p. 468) A large cap stock is a stock issued by a company that has capitalization of $10
billion or more.
Chapter 14 – Investing in Stocks
13. (p. 468) Because of the need for secrecy, most corporations do not supply financial
information about the company on their Web sites.
14. (p. 469) By using the Internet, it is possible to find market price quotations, but more detailed
financial information about a corporation is unavailable to the average investor.
15. (p. 470) It is common for professional advisory services like Morningstar, Standard & Poor’s,
and Value Line to charge for more detailed financial information than provided on other
Internet Web sites.
16. (p. 473) Many investors and analysts believe that a corporation’s ability or inability to
generate earnings in the future may be one of the most significant factors that account for an
increase or decrease in the value of a stock.
Chapter 14 – Investing in Stocks
17. (p. 473) If a corporation’s earnings decline, the stock’s value usually increases.
18. (p. 473) Earnings per share is a corporation’s after-tax earnings divided by the number of
stockholders.
19. (p. 473) An increase in a corporation’s earnings per share is a healthy sign.
20. (p. 473) The P/E ratio is the price of a share of stock divided by the corporation’s earnings
per share.
Chapter 14 – Investing in Stocks
21. (p. 474) Stocks issued by large corporations in mature industries often have high PE ratios.
22. (p. 474) From an investor’s standpoint, an increase in estimates of earnings per share is a
good sign.
23. (p. 475) The dividend yield for a stock investment is calculated by dividing the annual
dividend by the stock’s current market value.
24. (p. 476) The total return on a stock is equal to the current market value of the stock minus the
investor’s purchase price.
Chapter 14 – Investing in Stocks
25. (p. 476) The annualized holding period yield calculation takes into account the time the
investment is held.
26. (p. 473) The book value for a share of stock is determined by deducting all liabilities from
the corporation’s assets and dividing the remainder by the number of outstanding shares of
common stock.
27. (p. 477) The Beta is a measure that compares the volatility associated with a specific stock
issue with the volatility of the Standard & Poor’s 500 Index.
28. (p. 479) The fundamental theory is based on the assumption that a stock’s intrinsic or real
value is determined by the future earnings of the company.
Chapter 14 – Investing in Stocks
29. (p. 480) An investment bank is a financial institution that assists corporations with issuing
new shares of stock.
30. (p. 481) A securities exchange is a marketplace where member brokers who are representing
investors meet to buy and sell securities.
31. (p. 483) A market order is a request that a stock be purchased or sold at the current market
price.
32. (p. 483) The minimum commission charged by most brokerage firms for buying or selling
stock is between $7 and $35.
Chapter 14 – Investing in Stocks
33. (p. 484) A limit order allows investors to specify the price at which a security will be bought
or sold.
34. (p. 485) Most speculators use a buy and hold technique.
35. (p. 485) Dollar cost averaging helps investors avoid the problem of buying high and selling
low.
36. (p. 487) When investors purchase stock on margin, they borrow stock from a stockbroker or
brokerage firm.
Chapter 14 – Investing in Stocks
37. (p. 488) A call option gives the purchaser the right to sell 100 shares of a stock at a
guaranteed price before a definite expiration date.
38. (p. 462) Amy Farmer just received a legal form in the mail from a firm in which she owns
stock. This form lists the issues to be decided at the annual stockholders’ meeting and asks her
to give written permission for someone else to vote for her if she cannot attend. What form
has she received in the mail?
Chapter 14 – Investing in Stocks
39. (p. 461) Jeff Goldblum has just purchased a security which has no maturity date and no
promised payments. He can recoup his investment by either selling the security to another
individual or to the issuer, if the issuer ever makes an offer to buy it. What type of security did
Jeff purchase?
40. (p. 462) Christopher Pratt just bought shares of common stock. Which one of the following is
he entitled to based on his ownership of these shares?
Chapter 14 – Investing in Stocks
41. (p. 461) James Green just bought a security which he expects will provide him with a
quarterly cash payment, although that payment is not guaranteed. In fact, he expects the
amount of the payment to vary over time. What type of payment is he expecting to receive?
42. (p. 465) Valerie Kilmer owns stock in the Williams Widget Company. She was just advised
that in the near future she will be receiving two shares for every one share she owns today.
What has the company declared that will cause this change to her shares?
43. (p. 463) Sean Rouse owns shares of common stock in Stowaway Transportation Company.
The company is getting ready to pay a dividend. Sean knows he must be registered on the
corporation’s books on the date in order to receive the dividend.
Chapter 14 – Investing in Stocks
44. (p. 463) Orlando Blodgett is buying stock in the Getaway Caribbean Cruise Company today.
He had thought about buying the stock yesterday and if he had, he would have received this
quarter’s dividend. However, since he waited until today, he will not receive that dividend
payment. Given this information, which one of the following dates applies to this stock
today?
45. (p. 465) Beverly Frickel purchased 100 shares of Gleason Systems stock for $42.50 per
share. Her commission for this purchase was $35. She sold the stock two years later for $55
per share and a commission of $50. While she held the stock it paid a dividend of $1.50 per
share. What was Beverly’s total dollar return on this stock?
Chapter 14 – Investing in Stocks
46. (p. 465) Arnell Johnson bought 200 shares of Black Petroleum Company for $95 per share
and paid a commission of $60. He sold the stock five years later for $120 per share and paid
$75 commission. While he held the stock, it paid a dividend of $5.50 per share. What was
Arnell’s total dollar return on this stock?
47. (p. 466) Lindsey Holt owns stock in the Galloway Gems Company. She knows she will
receive a $1.50 dividend each quarter. Given this, you know for sure that she purchased which
type of stock?
Chapter 14 – Investing in Stocks
48. (p. 467) Gaby Williams is thinking about buying some stock but wants some protection
should the issuer miss paying a dividend payment. Which one of the following features would
help provide this protection?
49. (p. 472) The federal government requires corporations selling new issues of securities to
disclose information about itself in a prospectus. Which of the following must be disclosed?
50. (p. 461) To raise capital, many corporate financial managers prefer selling common stock
because:
Chapter 14 – Investing in Stocks
51. (p. 462) Common stock dividends are paid out of profits and:
52. (p. 461) Equity financing is a popular choice to provide long-term financing for a corporation
because:
53. (p. 462) ABC Corporation holds its annual meeting in April. Maxine Star, who owns stock in
the company, cannot attend the meeting. She can vote by:
Chapter 14 – Investing in Stocks
54. (p. 462) Which one of the following statements is true?
55. (p. 462) Which one of the following statements is true?
56. (p. 463) Dividends remain with the stock until:
Chapter 14 – Investing in Stocks
57. (p. 463) Patsy Banz owns 220 shares of a stock. For the last calendar quarter, the company
paid a dividend of $0.47 a share. What is the total amount she received in her dividend check
for this quarter?
58. (p. 465) Jo Bower purchased 150 shares of stock for $24 a share and sold it for $30 a share.
The commissions required to buy and sell her stock totaled $120. Assuming she received no
dividends during the time she owned the stock, what is her total return on this investment?
Chapter 14 – Investing in Stocks
59. (p. 465) James Brewer purchased 100 shares of stock for $72 a share. James also paid $55
commission. What was the total purchase price for this transaction?
60. (p. 466) If the board of directors approves a two-for-one stock split, an investor who owns
150 shares before the split will own ____________ shares after the split.
61. (p. 465) When a stock splits two-for-one, you should expect the price per share to:
Chapter 14 – Investing in Stocks
62. (p. 467) The type of stock in which stockholders are assured that omitted dividends will be
paid to them before other dividends are paid is ____________ stock.
63. (p. 467) Which type of preferred stock can be exchanged for common stock at the
stockholder’s option?
64. (p. 468) A very safe investment that generally attracts conservative investors is called a(n)
____________ stock.