True of False (1-18)
1. An increase in the yields on T-Bill and other securities should depress the price of common stock.
2. Capital gains taxes are paid only after the profits have been realized.
3. An increase in required return will tend to increase the value of a stock.
4. The use of margin increases the potential return on investment in stock.
5. A stock dividend increases the wealth of stockholders who receive additional
shares.
6. Security markets are often inefficient, so investors can anticipate beating the
market over a period of years.
7. When a stock goes ex-dividend, its price tends to decline by the amount of the
cash dividend.
8. If an investor establishes a short position and security prices rise, the investor
sustains a loss.
9. Stockholders who seek to defer taxes prefer capital gains to dividends. 10. The PVA is worth more if I = 5% instead of 10%.
11. Preferred stock dividends are usually fixed.
12. The larger an investment's standard deviation, the smaller is the risk.
13. A strong sinking fund implies the debt issue is riskier.
14. Systematic risk is reduced through diversification.
15. All debentures are bonds, but not all bonds are debentures.
16. A portfolio consisting of securities that are highly correlated (i.e. very similar
firms) is not diversified.
17. The current yield = YTM if the bond sells for par (face value).
18. If interest rates rise, the prices of existing bonds increase.
19. A P/E ratio considers
a. profits relative to earnings
b. price of the stock relative to equity
c. profits relative to equity
d. price of the stock relative to earnings
20. Entering an order to sell stock @$18.50 when the bid is 18-19
a. is a market order.
b. illustrates a short sale.
c. requires a margin payment.
d. is a limit order.
21. If a perpetual preferred stock pays a dividend of $5 a year and yields rise from 10% to 12%,
a. the price of the stock rises from $50 to $60
b. the price of the stock falls from $50 to $41.67
c. the price of the stock rises from $14.67 to $50
d. the price of the stock falls from $60 to $50
22. OTC stock quotes are obtained through
a. Nasdaq
b. SEC
c. SIPC
d. The specialist
23. If a firm pays cash dividend,
a. retained earnings are reduced
b. additional paid-in capital is reduced
c. the price of the stock rises on the ex-dividend date
d. income taxes are deferred
24. Which of the following is the largest if I=12% annually?
a. $100 compounded for 3 years
b. $100 annuity compounded for 3 years
c. PV of $100 received after 3 years
d. answer cannot be determined
25. A 10% stock dividend reduces the firm's
a. stock price and retained earnings
b. stock price and number of shares outstanding
c. retained earnings and assets
d. total assets and total equity
26. If interest rates rise,
a. FV of a $ declines
b. PVofa$rises
c. PV of an annuity falls
d. FV of an annuity falls
27. If investors anticipate that interest rates will fall, they
a. should buy bonds
b. should sell bonds
c. should buy shares in money market mutual funds
d. should take no action
28. Sources of risk include
a. fluctuations in stock prices
b. inflation
c. possibility of bankruptcy
d. all of the above
29. Which of the following bonds is supported by collateral?
a. zero coupon bond
b. mortgage bond
c. debenture
d. income bond
30. A diversified portfolio reduces
a. unsystematic risk
b. systematic risk
c. purchasing power risk
d. interest rate risk
31. Which of the following is not a source of systematic risk?
a. inflation
b. reduction in the value of the British pound
c. how a firm finances its assets
d. a decline in the DJIA
32. The standard deviation (σ) measures
a. the dispersion around an average value
b. systematic risk
c. unsystematic risk
d. the security's high-low prices
33. A beta coefficient for a volatile stock is
a. =1
b. <1
c. >1
d. cannot be determined
