Multiple Choice (1 Point each) 1. One of the basic premises of security analysis and in particular fundamental analysis is that A) a stock’s price is based on its past cash flows rather than on anticipated future cash flows. B) market sectors do not move in concert with business cycles. C) all securities have an intrinsic value but some securities may be incorrectly priced in the market at any given time. D) a security’s risk has relatively little effect on the security’s return. 2. Increases in interest rates and increases in taxes both tend to A) have an expansionary impact on the economy. B) have a contractionary impact on the economy. C) signal the beginning of a bull market. D) signal the trough of a recessionary market. 3. The risk-free rate of return is 5.5 percent the expected market return is 11 percent and the beta for Lea Inc. is 0.85. What is Lea’s required rate of return? A) 4.7 percent B) 10.2 percent C) 14.9 percent D) 15.7 percent 4. Intrinsic value is based on which of the following factors? I the applied discount rate II. the amount of risk inherent in a particular stock. III. historical net profits of the company IV. estimated future cash flows of the company A) II and IV only B) I II and III only C) I II and IV only D) I II III and IV 5. Followers of the random walk hypothesis believe that A) security analysis is the best tool to utilize when investing in the stock market. B) the price movements of stocks are unpredictable and therefore security analysis will not help to predict future market behavior. C) the price movements of stocks follow a “flag” formation and charting this formation can help an investor time his or her purchases in the stock market. D) support levels and resistance lines when combined with basic chart formations yield buy and sell signals. 6. One widely followed measure of the business cycle represents the market value of all goods and services produced in a country over the period of a year. This measure is the A) industrial production index. B) money supply. C) gross domestic product. D) productivity average. 7. The Federal Reserve through monetary policy can help expand the economy by A) lowering income taxes on individuals. B) increasing foreign exports by reducing tariffs. C) supporting a moderate growth of the money supply. D) increasing regulation on banks 8. When investors say that the market is efficient they mean that A) the closing prices of all stocks can be found quickly and easily in The Wall Street Journal and in most daily newspapers. B) the business cycles that underlie stock fluctuations occur in a somewhat predictable fashion. C) industrial production and overall productivity in the economy is growing at a constant pace. D) securities consistently trade at prices very close to their intrinsic values. 9. At the end of year X the Petersen Company’s stock is expected to have an EPS of $2.50 a payout ratio of 0.55 and a P/E ratio of 18. Based on this information the estimated share price of Petersen at the end of year X is A) $9.90. B) $12.80. C) $24.75. D) $45.00. 10. The risk-free rate of return is 5.5 percent the expected market return is 11 percent and the beta for Lea Inc. is 0.85. What is Lea’s required rate of return? A) 4.7 percent B) 10.2 percent C) 14.9 percent D) 15.7 percent 11. The single most important issue in the stock valuation process is a company’s A) past earnings record. B) historic dividend growth rate. C) future cash flow. D) capital structure. 12. For the purpose of security analysis which one of the following statements concerning a firm’s successful past performance is correct? A) It means the firm’s future performance will also be successful. B) It provides a basis for having greater confidence in management’s future performance. C) It means the firm will experience problems in the future. D) It provides no useful information concerning the firm’s future prospects. 13. One stock valuation model holds that the value of a share of stock is a function of its future dividends and that the dividends will increase at an annual rate which will remain unchanged over time. This stock valuation model is known as the A) approximate yield model. B) holding period return model. C) dividend reinvestment model. D) constant growth dividend valuation model. 14. An internal rate of return (IRR) is the discount rate that A) represents the minimal rate that an individual investor will accept. B) is the minimal rate that a buy-and-hold investor will accept. C) produces a future value equal to or greater than an investor’s required rate of return. D) produces a present value of future benefits equal to the market price of a stock 15. In the price/earnings approach to stock valuation A) historical stock prices are utilized. B) forecasted EPS are typically used. C) the P/E ratio is computed by multiplying the stock price by the earnings per share. D) professional stock analysts recommend stocks based on their past performance. 16. The system of analysis which emphasizes studying the stock market itself and the forces at work in the marketplace is called A) fundamental analysis. B) security analysis. C) industry analysis. D) technical analysis. 17. As an investment vehicle bonds can provide income in the form of A) current income only. B) capital gains only. C) both current income and capital gains. D) neither current income nor capital gains. 18. The single most important force in the bond market is A) the rate of inflation. B) the movement of the stock market. C) the real rate of return. D) the behavior of interest rates. 19. In general the bond market is considered bearish when A) market interest rates are low or falling. B) market interest rates are high or rising. C) the risk-free rate of return exceeds the required rate of return. D) more bonds are called in a particular period than are issued. 20. Which one of the following correctly describes the effect of a decline in interest rates on bond prices? A) The prices of existing bonds are not affected. B) The prices of existing bonds fall. C) The prices of existing bonds rise. D) The prices of newly issued bonds are lowered.
