Exam 2

Bright Detergent is issuing new shares of stock which will trade on NASDAQ. If Sally purchases 300 of these shares, the trade will occur in which one of the following markets?

a. primary
b. secondary
c. third
d. fourth
e. over-the-counter

a.

Main Supplies is a publicly traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n):

a. supplemental offering
b. seasoned equity offering
c. initial public offer
d. market expansion offer
e. after-market underwriting

b.

The difference between the price an underwriter pays an issuer and the underwriter's offering price is called the:

a. spread
b. margin
c. offer differential
d. firm commitment
e. underwriting capital

a.

When an underwriting syndicate purchases an entire issue of new securities and accepts the risk of unsold shares, the underwriting is known as a _____ underwriting.

a. Dutch auction
b full-fledge
c. firm commitment
d. best efforts
e. guaranteed sale

c.

An order to buy shares of stock at a stated price or less is called a _____ order.

a. limit
b. stop
c. market
d. short
e. bid

a.

The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.

a. diminishing valuation growth model
b. increasing valuation growth model
c. constant perpetual growth model
d. irregular growth perpetual model
e. two-stage growth model

c.

The portion of net income that is held by a firm for future growth comprises which one of the following balance sheet accounts.

a. capital surplus
b. common stock
c. internal earnings
d. retained earnigns
e. net earnigns

d.

What is the percentage of a firm's earnings that is distributed to shareholders called?

a. payout ratio
b. distribution percentage
c. retention ratio
d. dividend portion
e. outflow ratio

a.

The model used to value the stock of a firm which has a short-term growth rate that varies from its long-term growth rate is called the _____ dividend growth model.

a. flexible
b. increasing
c. two-stage
d. stepped up
e. geometric

c.

Growth stocks are typically described as having which one of the following characteristics?

a. high dividends
b. a value orientation
c. high P/E ratios
d. low cash flows per share
e. low retention ratios

c.

Which one of the following holds that investors cannot consistently earn positive abnormal returns?

a. market return hypothesis
b. current market hypothesis
c. efficient market hypothesis
d. risk-return theory
e. excess theory

c.

Which one of the following is a research method used to study the effects new has on stock prices?

a. polarization
b. market analysis
c. event study
d. news theory
e. reaction hypothesis

c.

The day-of-the-week effect is defined as the tendency for which day of the week to have a negative average rate of return?

a. Monday
b. Tuesday
c. Wednesday
d. Thursday
e. Friday

a.

Which one of the following terms is used to describe a market situation where prices are much higher than either fundamental or rational analysis would tend to support?

a. bear market
b. cloud
c. inversion
d. bubble
e. crash aversion

d.

Stocks A, B, and C have identical risks. Stock A earns an annual return of 9.9 percent as compared to 9.6 percent returns on stocks B and C. Given this, you can correctly assume that:

a. stock A is overpriced
b. the market return is 9.75%
c. stock A represents the smallest sized firm
d. stock A has a positive abnormal
e. stocks B and C represent firms that are in the process of merging

d.

In an efficient market, stocks with similar risks will:

a. have the same market price
b. pay similar dividends
c. yield the market rate of return
d. produce abnormal returns
e. have similar rates of return

e.

You are the chief financial officer of Davidson Industries. On multiple occasions, you have engaged in insider trading but have never been able to earn any abnormal returns. Which form of market efficiency most likely exists given your situation?

a. mild form
b. weak form
c. historical form
d. semistrong form
e. strong form

e.

Which one of the following best describes the current understanding of market efficiency?

a. The market tends to overreact to new information in a manner that can be used to earn abnormal returns.
b. Markets underreact to unanticipated events in a manner that can be used to earn abnormal returns.
c. The market appears to be highly inefficient.
d. Short-term market movements are difficult, if not impossible, to predict accurately.
e. Markets tend to react slowly to unanticipated announcements.

d.

If the financial markets are highly efficient, then:

a. investing based on technical analysis is highly recommend.
b. holding a diversified, low-cost, passively managed portfolio is probably your best investment strategy.
c. you should adopt an investment strategy based on market timing.
d. having a professional manager who actively trades your portfolio is most likely your best investment strategy.
e. it does not matter which securities you invest in as all securities will provide relatively equal returns.

b.

Two weeks ago Acme Electronics announced that it had developed a new chip design, which was being considered by major companies for use in future smart phone development. At the close of trading the day before the announcement, Acme common stock closed at $20. On the day following the announcement, Acme closed at $21. Two days after the announcement the stock closed at $22.50. Four days after the announcement, the stock traded at $23. Last week, Acme stock traded at $26, a level it has maintained since then. This is an example of a(n):

a. overreaction and correction
b. underpricing
c. delayed reaction
d. pre-activity action
e. efficient market reaction

c.