chp 14 - investing in stocks

Which best describes cash dividends paid by corporations?

A. Dividends generally come from after-tax earnings of the corporation, thus are tax free to individuals.

B. Dividends generally come from after-tax earnings of the corporation, and are taxed again when received by an individual at their marginal tax rate.

C. Dividends generally come from after-tax earnings of the corporation, and qualifying dividends are taxed again when received by an individual at lower rates (generally 15% for most taxpayers).

D. Dividends come from the corporation’s pre-tax earnings, thus are deductible by the corporation since they are taxable to the individual shareholder as ordinary income.

C. Dividends generally come from after-tax earnings of the corporation, and qualifying dividends are taxed again when received by an individual at lower rates (generally 15% for most taxpayers).

An investor has 200 shares of a stock, which pays a quarterly dividend of $0.40 per share. What is his/her quarterly dividend payment?

 

A. $320.00

 

B. $80,00

 

C. $88.00

 

D. $888.00

B. $80.00

An investor has 350 shares of a stock, which just declared a 2 for 1 stock split. On the day before the stock split, the shares were trading at $80 per share. The day after the split,

A. The investor will have 700 shares trading at
around $40 per share.

 

B. The investor will have 720 shares trading at
around $40 per share.

 

C. The investor will have 175 shares trading at
around $40 per share.

 

D. The investor will have 175 shares trading at
around $160 per share.

A. The investor will have 700 shares trading at
around $40 per share.

An investor bought 100 shares of a stock for $28.00 per share. He/she sold the stock after two years for $38.00 per share . No commissions were paid on either the buy or sell side.

The investor received dividends while holding the stock of $0.50 per share per quarter (a total of eight quarters).

What is the total gain and annual return on this stock?

A. $1,000 gain, 34.9% annual return.

B. $1,300 gain, 20% annual return.

C. $1,400 gain, 21.86% annual return.

D. $1,014 gain, 34% annual return.

C. $1,400 gain, 21.86% annual return.

With respect to the investor’s stock transaction assuming all dividends received were "qualifying":

 

A. The separate gain on the stock is treated as a
short-term capital gain and the dividend income
is treated as ordinary income.

 

B. The separate gain on the stock is treated as a
long-term capital gain, and both the capital gain
and qualifying dividend income are now taxed
at lower favorable rates.

 

C. The entire gain (stock and dividend income) is treated as ordinary income.

 

D. The entire gain (stock and dividend income) is treated as a long-term capital gain.

B. The separate gain on the stock is treated as a
long-term capital gain, and both the capital gain
and qualifying dividend income are now taxed
at lower favorable rates.

What is the equity risk premium for small company stocks given the following assumptions:

Return on small company stocks = 11%

Return on Treasury bonds = 5%

Inflation rate = 3%

 

A. 12%

B. 7%

C. 6%

D. 4%

E. 3%

 

Return on stocks – Return on risk-free asset (like Treasury bonds)

Equity Risk Premium = 11% − 5% = 6%​

An investor bought a stock for $40 per share. It now trades for $60 per share and pays an annual dividend of $1 per share ($0.25 per quarter).

What is the current dividend yield on this stock?

 

A. 1.67%

B. 2.50%

 

C. 1.11%

 

D. 0.42%

A. 1.67%

ABC Corp. has earnings of $300,000,000 with 150,000,000 shares outstanding.

ABC’s earnings per share would be_______?

 

A. $300,000,000/share

 

B. $0.50/share

 

C. $2.00/share

 

D. $3.00/share

C. $2.00/share

Knight Corp.’s stock trades at $120. It has a book value of $15 per share and earnings per share of $3.00.

What is the PE ratio for Knight Corp.?

 

A. $40.00

B. 4

C. 5

D. 40

D. 40

Which statement is TRUE?

a. Dividends are required for large corporations, and usually paid quarterly

b. Dividends are not required for corporations, but if paid, they are normally paid quarterly

c. Dividends are required for large corporations, and usually paid semi-annually

d. Dividends are not required for corporations, but if paid, they are normally paid semi-annually

b. Dividends are not required for corporations, but if paid, they are

normally paid quarterly

Investors earn returns on stocks from the dividend yield and capital gain yield. Since 1926,

about how much of the return is attributable to the dividend yield?

a. 20%

b. 30%

c. 40%

d. 50%

c. 40%

In measuring investment returns, it is best to use average returns as compared to geometric returns.

True or False

False

Which evaluation method would reflect an investor’s actual cash flows as opposed to returns as of the beginning of the year?

a. Time weighted returns

b. Money weighted returns

c. Beta weighted returns

b. Money weighted returns

Which type of stock would MOST likely have a lower beta?

a. A growth stock

b. A small cap stock

c. A technology stock

d. A defensive stock

d. A defensive stock

stock has 100 million shares outstanding and a stock price of $200 per share. If it splits its stock 2 for 1, then the market cap would be:

a. $30 billion

b. $20 billion

c. $10 billion

b. $20 billion

after split, 200 million shares outstanding x $100/share

A large cap stock would normally have a market cap of over:

a. $1 billion

b. $5 billion

c. $10 billion

c. $10 billion

Assume the following: You invest $5,000 in a stock today that pays a $10 quarterly dividend. After 10 years you sell the stock for $15,000.

What is the annual return?

a. 9,2%

b. 10.8%

c. 11.6%

d. 14.7%

c. 11.6%

how to solve:

End mode; Pmt/yr = 4

PV = (5,000)

PMT = 10

FV = 15,000

N = 10x4

Solve I/yr = 11.63

Assume you bought 300 shares of a stock over a period of three years. You

paid the following for each purchase: Year 1 – 100 shares at $70/share;

Year 2 - 100 shares at $80/share; Year 3 - 100 shares at $ $50 per share. If

you sold 100 shares in Year 5 for $100/share, then which lot of shares

should you identify as sold IF you wish to minimize your long term capital

gain?

a. $50 shares bought in year 3

b. $70 shares bought in year 1

c. $80 shares bought in year 2

c. $80 shares bought in year 2

how to solve:

100 sales price - cost of $80 = $20 gain per share

(as compared to $50 or $30 gains for other lots)

Which type of stock order would be used after you buy a stock to limit your

losses?

a. Market order

b. Limit order

c. Stop order

c. Stop order

Beta

IPO

systematic risk

nonsystematic risk

market order

limit order

stop order

dividend payments

short term capital gains

long term capital gains

capital loss limit

primary/secondary markets

market cap

large > 10 billion

mid > $2 billion - $10 billion

small < $2 billion

what market cap is the US mostly? and what % of the total world?

various types of stocks

equity risk premium

historical returns

Buy 100 shares @$50,

Pays dividend of $.25/share each quarter

Hold for 2 years, sell @$60

What is dividend yield?

What is total return?

$0.25 × 4 = $1.00/year / $50 = 2%

End mode

P/yr = 4

PV = -5000

PMT = 25

N = 2×4

FV = 6000

Int = 11.07

stock returns 40% dividend/ 60% capital gains