Question 1

An investment theory based on the assumption that stock price movements are purely random is called the ____________ theory.

Accepted Answer

The efficient market theory posits that all available information about a stock is already reflected in its current price, and that stock price movements are therefore random and unpredictable. This theory underlies the practice of passive investing, where investors simply buy and hold a diversified portfolio of stocks rather than trying to actively pick winners and losers. The other answer choices (fundamental, technical, primary, and market) refer to other investment theories and strategies that are not predicated on the assumption of random price movements.

Question 2

Book value per share is determined by:

Accepted Answer

Book value per share is the net assets of a company divided by the number of shares outstanding. This is essentially the same as deducting liabilities from assets and dividing the remainder (owner's equity) by the number of shares outstanding, as shown in option B.

Question 3

An investment theory based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole is called the ____________ theory.

Accepted Answer

Technical analysis theory is based on the assumption that a stock's market value is determined by the forces of supply and demand in the stock market as a whole, focusing on patterns within market data to predict future price movements.

Question 4

Masterworks Manufacturing has after-tax profits that total $625,000. If the firm has 250,000 shares, what is the amount of earnings per share?

Accepted Answer

Earnings per share can be calculated by dividing the total after-tax profits by the number of shares.
Earnings per share = $625,000 ÷ 250,000 = $2.50. 
Therefore, the correct option is D.

Question 5

An investment theory based on the assumption that a stock's intrinsic or real value is determined by the future earnings of the company is called the ____________ theory.

Accepted Answer

The fundamental theory holds that a stock's value is based on its underlying or intrinsic characteristics, such as the company's projected earnings, financial health, and industry outlook. This theory assumes that the stock's price will ultimately reflect its true worth over time.

Question 6

Assume the beta for the stock market in general is 1.0 and the beta for World-Wide Television Productions is 2.4. If the stock market increases in value by 10 percent, what is the expected increase in value for the World-Wide Productions stock?

Accepted Answer

The expected increase in value for World-Wide Television Productions stock can be calculated using the formula: 
Expected increase = Beta of World-Wide Television Productions * Market increase 
Expected increase = 2.4 * 10% = 24% 
Therefore, the expected increase in value for World-Wide Productions stock is 24%.

Question 7

The Arnold Fertilizer Company's stock is selling for $55 in the market and its earnings per share is $5. The company is projected to grow at a rate of 22% over the next year. What is this company's price/earnings to growth (PEG) ratio?

Accepted Answer

The PEG ratio is calculated by dividing the P/E ratio by the growth rate. The P/E ratio is $55/$5 = 11. The growth rate is 22%. Thus, the PEG ratio is 11/22 = 0.50.

Question 8

Acme Widget, Inc. has 1,000 shareholders who own a total of one million shares of its common stock. The company earned $10 million after taxes and paid out $4 million in dividends. The firm has assets of $125 million and liabilities of $25 million. What is the book value per share?

Accepted Answer

Book value per share is calculated by taking the total shareholder's equity (assets - liabilities) and dividing by the number of shares outstanding.

Total shareholder's equity = assets - liabilities = $125 million - $25 million = $100 million

Book value per share = total shareholder's equity / number of shares outstanding
= $100 million / 1 million shares
= $100

Therefore, the book value per share is $100, which is option D.

Question 9

The stock of ABC Company has a current market price of $75. The corporation has paid a dividend of $3.75 over the last 12 months and has earnings per share of $5. What is the dividend yield?

Accepted Answer

The answer of The stock of ABC Company has a...

Question 10

Quincy Martin Manufacturing stock has a market value of $48 a share. If the book value is $40 a share, the firm's market-to-book ratio is:

Accepted Answer

The market-to-book ratio is calculated by dividing the market value per share by book value per share, so Market-to-Book Ratio = Market Value per Share / Book Value per Share. Given that the market value per share is $48 and the book value per share is $40, the market-to-book ratio is 48/40 = 1.2. Therefore, the correct answer is C) 1.2.

Question 11

Becky Martinez paid $65 a share for stock in GBX Corporation. The stock has a current market value of $48 a share and pays $1.60 a year in dividends. What is the dividend yield?

Accepted Answer

The answer of Becky Martinez paid $65 a share for...

Question 12

A yield calculation that takes into account the total return, the original investment, and the time that the investment is held is called ____________ yield.

Accepted Answer

The description given matches the definition of annualized holding period yield, which incorporates both capital gains and income received from the investment over the period it is held. Option A, current yield, only accounts for the income earned from the investment as a percentage of the current market price. Option B, dividend yield, is similar to current yield but applies only to dividend-paying stocks. Option D, capital gain yield, only considers the increase in market value of the investment over the holding period. Option E, original investment yield, is not a commonly used or recognized term.

Question 13

Assume that you purchased 100 shares of a stock for $70 a share, that you received an annual dividend of $0.60 a share, and that you sold your stock for $80 a share at the end of one year. What is the total return for your investment? (Ignore commission amounts for this question.)

Accepted Answer

The total return includes both the capital gain and the dividend income. Capital gain is ($80 - $70) * 100 = $1,000. Dividend income is $0.60 * 100 = $60. Total return is $1,000 + $60 = $1,060.

Question 14

Last year, High-Tech Electronics earned $1.50 per share. If the current market value for a share of stock is $45, what is the firm's P-E ratio?

Accepted Answer

P-E ratio = Market value per share / Earnings per share
P-E ratio = $45 / $1.50
P-E ratio = 30.00

Question 15

To calculate dividend yield, the annual dividend amount per share is divided by the _______ per share.

Accepted Answer

Dividend yield is calculated by dividing the annual dividend amount per share by the current stock price per share. This formula measures the return on investment for shareholders who hold the stock.

Question 16

Acme Widget, Inc. has one million shares of common stock outstanding at a price per share of $85. The company earned $5 million after taxes. The annual dividend is $3.50 per share. The firm has assets of $125,000,000 and liabilities of $25,000,000. What is the dividend yield?

Accepted Answer

The answer of Acme Widget, Inc. has one million shares...

Question 17

Assume that you purchased 100 shares of a stock for $55 a share, that you received an annual dividend of $2.00 a share, and that you sold your stock for $65 a share at the end of one year. What is the total return on your investment? (Ignore commission amounts for this question.)

Accepted Answer

The total dividends received would be $2.00 x 100 = $200.

The profit from selling the stock would be $65 - $55 = $10 per share, so for 100 shares that would be a profit of $10 x 100 = $1000.

Therefore, the total return on the investment would be $200 (dividends) + $1000 (profit from selling) = $1200. So, the best choice is (C).

Question 18

Barker Creek Clothing has after-tax income of $12.8 million. It also has 32 million shares of stock outstanding. What is the firm's earnings per share?

Accepted Answer

Earnings per share (EPS) is calculated by dividing the after-tax income by the number of shares outstanding. EPS = $12.8 million / 32 million shares = $0.40.

Question 19

ABC Corporation has assets that total $12 million and liabilities that total $4 million. It also has 500,000 shares of stock outstanding. What is the ABC's book value per share?

Accepted Answer

($12,000,000 - $4,000,000) / 500,000 shares = $16 per share.

Question 20

Acme Widget, Inc. has 1,000 shareholders who own a total of one million shares of its common stock. The stock currently sells for $85 per share. The company earned $5 million after taxes. The annual dividend is $0.50 per share. The firm has assets of $125 million and liabilities of $25 million. What is the P-E ratio?

Accepted Answer

P-E ratio = (stock price) / (earnings per share)
Earnings per share = (earnings after taxes) / (number of shares outstanding)
Earnings per share = $5,000,000 / 1,000,000 shares = $5 per share
Stock price = $85 per share

Therefore, P-E ratio = $85 / $5 = 17

Quiz 14: Investing in Stocks