Q&A Hero

Q: One purpose of regulation of financial markets is to A) limit the profits of financial institutions. B) increase competition among financial institutions. C) promote the provision of information to shareholders, depositors and the public. D) guarantee that the maximum rates of interest are paid on deposits.

Q: Regulation of the financial system A) occurs only in the United States. B) protects the jobs of employees of financial institutions. C) protects the wealth of owners of financial institutions. D) ensures the stability of the financial system.

Q: Direct finance involves the sale to ________ of marketable securities such as stocks and bonds. A) households B) insurance companies C) pension funds D) financial intermediaries

Q: As a source of funds for nonfinancial businesses, stocks are relatively more important in A) the United States. B) Germany. C) Japan. D) Canada.

Q: Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds A) by issuing stock. B) by issuing bonds. C) from nonbank loans. D) from bank loans.

Q: With regard to external sources of financing for nonfinancial businesses in the United States, which of the following are accurate statements? A) Marketable securities account for a larger share of external business financing in the United States than in Germany and Japan. B) Since 1970, most of the newly issued corporate bonds and commercial paper have been sold directly to American households. C) Direct finance accounts for more than 50 percent of the external financing of American businesses. D) Smaller businesses almost always raise funds by issuing marketable securities.

Q: Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? A) Issuing marketable securities is the primary way that they finance their activities. B) Bonds are the least important source of external funds to finance their activities. C) Stocks are a relatively unimportant source of finance for their activities. D) Selling bonds directly to the American household is a major source of funding for American businesses.

Q: Which of the following statements concerning external sources of financing for nonfinancial businesses in the United States are true? A) Stocks are a far more important source of finance than are bonds. B) Stocks and bonds, combined, supply less than one-half of the external funds. C) Financial intermediaries are the least important source of external funds for businesses. D) Since 1970, more than half of the new issues of stock have been sold to American households.

Q: Of the four sources of external funding for nonfinancial businesses, the least often used in the U.S. is A) bank loans. B) nonbank loans. C) bonds. D) stock.

Q: Of the sources of external funds for nonfinancial businesses in the United States, stocks account for approximately ________ of the total. A) 2% B) 11% C) 20% D) 40%

Q: Of the following sources of external finance for American nonfinancial businesses, the least important is A) loans from banks. B) stocks. C) bonds and commercial paper. D) loans from other financial intermediaries.

Q: Of the sources of external funds for nonfinancial businesses in the United States, corporate bonds and commercial paper account for approximately ________ of the total. A) 5% B) 10% C) 32% D) 50%

Q: Of the sources of external funds for nonfinancial businesses in the United States, loans from banks and other financial intermediaries account for approximately ________ of the total. A) 6% B) 40% C) 56% D) 60%

Q: American businesses get their external funds primarily from A) bank loans. B) bonds and commercial paper issues. C) stock issues. D) loans from nonbank financial intermediaries.

Q: Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) 8.1 Basic Facts About Financial Structure Throughout the World

Q: You have observed that the forecasts of an investment advisor consistently outperform the other reported forecasts. The efficient markets hypothesis says that future forecasts by this advisor A) may or may not be better than the other forecasts. Past performance is no guarantee of the future. B) will always be the best of the group. C) will definitely be worse in the future. What goes up must come down. D) will be worse in the near future, but improve over time.

Q: According to the efficient markets hypothesis, purchasing the reports of financial analysts A) is likely to increase one's returns by an average of 10%. B) is likely to increase one's returns by about 3 to 5%. C) is not likely to be an effective strategy for increasing financial returns. D) is likely to increase one's returns by an average of about 2 to 3%.

Q: The elimination of unexploited profit opportunities requires that ________ market participants be well informed. A) all B) a few C) zero D) many

Q: Financial markets quickly eliminate unexploited profit opportunities through changes in A) dividend payments. B) tax laws. C) asset prices. D) monetary policy.

Q: The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market, A) it will tend to go unnoticed for some time. B) it will be quickly eliminated. C) financial analysts are your best source of this information. D) prices will reflect the unexploited profit opportunity.

Q: ________ occurs when market participants observe returns on a security that are larger than what is justified by the characteristics of that security and take action to quickly eliminate the unexploited profit opportunity. A) Arbitrage B) Mediation C) Asset capitalization D) Market intercession

Q: Another way to state the efficient markets condition is: in an efficient market, A) unexploited profit opportunities will be quickly eliminated. B) unexploited profit opportunities will never exist. C) arbitragers guarantee that unexploited profit opportunities never exist. D) every financial market participant must be well informed about securities.

Q: If the optimal forecast of the return on a security exceeds the equilibrium return, then A) the market is inefficient. B) no unexploited profit opportunities exist. C) the market is in equilibrium. D) the market is myopic.

Q: According to the efficient markets hypothesis, the current price of a financial security A) is the discounted net present value of future interest payments. B) is determined by the highest successful bidder. C) fully reflects all available relevant information. D) is a result of none of the above.

Q: The theory of rational expectations, when applied to financial markets, is known as A) monetarism. B) the efficient markets hypothesis. C) the theory of strict liability. D) the theory of impossibility.

Q: Suppose Barbara looks out in the morning and sees a clear sky so decides that a picnic for lunch is a good idea. Last night the weather forecast included a 100% chance of rain by midday but Barbara did not watch the local news program. Is Barbara's prediction of good weather at lunch time rational? Why or why not?

Q: According to rational expectations, A) expectations of inflation are viewed as being an average of past inflation rates. B) expectations of inflation are viewed as being an average of expected future inflation rates. C) expectations formation indicates that changes in expectations occur slowly over time as past data change. D) expectations will not differ from optimal forecasts using all available information.

Q: If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to A) change the way they form expectations about future values of the variable. B) begin to make systematic mistakes. C) no longer pay close attention to movements in this variable. D) give up trying to forecast this variable.

Q: People have a strong incentive to form rational expectations because A) they are guaranteed of success in the stock market. B) it is costly not to do so. C) it is costly to do so. D) everyone wants to be rational.

Q: Rational expectations forecast errors will on average be ________ and therefore ________ be predicted ahead of time. A) positive; can B) positive; cannot C) negative; can D) zero; cannot

Q: According to rational expectations theory, forecast errors of expectations A) are more likely to be negative than positive. B) are more likely to be positive than negative. C) tend to be persistently high or low. D) are unpredictable.

Q: An expectation may fail to be rational if A) relevant information was not available at the time the forecast is made. B) relevant information is available but ignored at the time the forecast is made. C) information changes after the forecast is made. D) information was available to insiders only.

Q: If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are A) obviously formed irrationally. B) still considered to be formed rationally. C) formed adaptively. D) formed equivalently.

Q: If expectations are formed rationally, then individuals A) will have a forecast that is 100% accurate all of the time. B) change their forecast when faced with new information. C) use only the information from past data on a single variable to form their forecast. D) have forecast errors that are persistently low.

Q: If a forecast made using all available information is not perfectly accurate, then it is A) still a rational expectation. B) not a rational expectation. C) an adaptive expectation. D) a second-best expectation.

Q: If a forecast is made using all available information, then economists say that the expectation formation is A) rational. B) irrational. C) adaptive. D) reasonable.

Q: In rational expectations theory, the term "optimal forecast" is essentially synonymous with A) correct forecast. B) the correct guess. C) the actual outcome. D) the best guess.

Q: The major criticism of the view that expectations are formed adaptively is that A) this view ignores that people use more information than just past data to form their expectations. B) it is easier to model adaptive expectations than it is to model rational expectations. C) adaptive expectations models have no predictive power. D) people are irrational and therefore never learn from past mistakes.

Q: If during the past decade the average rate of monetary growth has been 5% and the average inflation rate has been 5%, everything else held constant, when the Federal Reserve announces that the new rate of monetary growth will be 10%, the adaptive expectation forecast of the inflation rate is A) 5%. B) between 5 and 10%. C) 10%. D) more than 10%.

Q: If expectations are formed adaptively, then people A) use more information than just past data on a single variable to form their expectations of that variable. B) often change their expectations quickly when faced with new information. C) use only the information from past data on a single variable to form their expectations of that variable. D) never change their expectations once they have been made.

Q: If expectations of the future inflation rate are formed solely on the basis of a weighted average of past inflation rates, then economics would say that expectation formation is A) irrational. B) rational. C) adaptive. D) reasonable.

Q: The view that expectations change relatively slowly over time in response to new information is known in economics as A) rational expectations. B) irrational expectations. C) slow-response expectations. D) adaptive expectations.

Q: Economists have focused more attention on the formation of expectations in recent years. This increase in interest can probably best be explained by the recognition that A) expectations influence the behavior of participants in the economy and thus have a major impact on economic activity. B) expectations influence only a few individuals, have little impact on the overall economy, but can have important effects on a few markets. C) expectations influence many individuals, have little impact on the overall economy, but can have distributional effects. D) models that ignore expectations have little predictive power, even in the short run.

Q: Increased uncertainty resulting from the global financial crisis ________ the required return on investment in equity. A) raised B) lowered C) had no impact on D) decreased

Q: The global financial crisis lead to a decline in stock prices because A) of a lowered expected dividend growth rate. B) of a lowered required return on investment in equity. C) higher expected future stock prices. D) higher current dividends.

Q: A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant. A) reduces; future sales price; expected rate of return B) reduces; current dividend; expected rate of return C) increases; required rate of return; future sales price D) increases; required rate of return; dividend growth rate

Q: A stock's price will fall if there is A) a decrease in perceived risk. B) an increase in the required rate of return. C) an increase in the future sales price. D) current dividends are high.

Q: A change in perceived risk of a stock changes A) the expected dividend growth rate. B) the expected sales price. C) the required rate of return. D) the current dividend.

Q: New information that might lead to a decrease in a stock's price might be A) an expected decrease in the level of future dividends. B) a decrease in the required rate of return. C) an expected increase in the dividend growth rate. D) an expected increase in the future sales price.

Q: Information plays an important role in asset pricing because it allows the buyer to more accurately judge A) liquidity. B) risk. C) capital. D) policy.

Q: In asset markets, an asset's price is A) set equal to the highest price a seller will accept. B) set equal to the highest price a buyer is willing to pay. C) set equal to the lowest price a seller is willing to accept. D) set by the buyer willing to pay the highest price.

Q: You believe that a corporation's dividends will grow 5% on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the stock assuming a 12% required return?

Q: In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity. A) greater than B) equal to C) less than D) proportional to

Q: One of the assumptions of the Gordon Growth Model is that dividends will continue growing at ________ rate. A) an increasing B) a fast C) a constant D) an escalating

Q: Using the Gordon growth model, if D1 is $.50, ke is 7%, and g is 5%, then the present value of the stock is A) $2.50. B) $25. C) $50. D) $46.73.

Q: Using the Gordon growth formula, if D1 is $1.00, ke is 10% or 0.10, and g is 5% or 0.05, then the current stock price is A) $10. B) $20. C) $30. D) $40.

Q: Using the Gordon growth formula, if D1 is $2.00, ke is 12% or 0.12, and g is 10% or 0.10, then the current stock price is A) $20. B) $50. C) $100. D) $150.

Q: In the Gordon growth model, a decrease in the required rate of return on equity A) increases the current stock price. B) increases the future stock price. C) reduces the future stock price. D) reduces the current stock price.

Q: Using the Gordon growth model, a stock's current price decreases when A) the dividend growth rate increases. B) the required return on equity decreases. C) the expected dividend payment increases. D) the growth rate of dividends decreases.

Q: Using the Gordon growth model, a stock's price will increase if A) the dividend growth rate increases. B) the growth rate of dividends falls. C) the required rate of return on equity rises. D) the expected sales price rises.

Q: In the generalized dividend model, the current stock price is the sum of A) the actual value of the future dividend stream. B) the present value of the future dividend stream. C) the present value of the future dividend stream plus the actual future sales price. D) the present value of the future sales price.

Q: In the generalized dividend model, a future sales price far in the future does not affect the current stock price because A) the present value cannot be computed. B) the present value is almost zero. C) the sales price does not affect the current price. D) the stock may never be sold.

Q: In the generalized dividend model, if the expected sales price is in the distant future A) it does not affect the current stock price. B) it is more important than dividends in determining the current stock price. C) it is equally important with dividends in determining the current stock price. D) it is less important than dividends but still affects the current stock price.

Q: Using the one-period valuation model, assuming a year-end dividend of $1.00, an expected sales price of $100, and a required rate of return of 5%, the current price of the stock would be A) $110.00. B) $101.00. C) $100.00. D) $96.19.

Q: Using the one-period valuation model, assuming a year-end dividend of $0.11, an expected sales price of $110, and a required rate of return of 10%, the current price of the stock would be A) $110.11. B) $121.12. C) $100.10. D) $100.11

Q: In a one-period valuation model, a decrease in the required return on investments in equity causes a(n) ________ in the ________ price of a stock. A) increase; current B) increase; expected sales C) decrease; current D) decrease; expected sales

Q: In the one-period valuation model, an increase in the required return on investments in equity A) increases the expected sales price of a stock. B) increases the current price of a stock. C) reduces the expected sales price of a stock. D) reduces the current price of a stock.

Q: In the one-period valuation model, the current stock price increases if A) the expected sales price increases. B) the expected sales price falls. C) the required return increases. D) dividends are cut.

Q: In the one-period valuation model, the value of a share of stock today depends upon A) the present value of both the dividends and the expected sales price. B) only the present value of the future dividends. C) the actual value of the dividends and expected sales price received in one year. D) the future value of dividends and the actual sales price.

Q: The value of any investment is found by computing the A) present value of all future sales. B) present value of all future liabilities. C) future value of all future expenses. D) present value of all future cash flows.

Q: Periodic payments of net earnings to shareholders are known as A) capital gains. B) dividends. C) profits. D) interest.

Q: Stockholders are residual claimants, meaning that they A) have the first priority claim on all of a company's assets. B) are liable for all of a company's debts. C) will never share in a company's profits. D) receive the remaining cash flow after all other claims are paid.

Q: A stockholder's ownership of a company's stock gives her the right to A) vote and be the primary claimant of all cash flows. B) vote and be the residual claimant of all cash flows. C) manage and assume responsibility for all liabilities. D) vote and assume responsibility for all liabilities.

Q: 7.1 Computing the Price of Common Stock

Q: Evidence against market efficiency includes A) failure of technical analysis to outperform the market. B) the random walk behavior of stock prices. C) the inability of mutual fund managers to consistently beat the market. D) the January effect.

Q: Evidence in support of the efficient markets hypothesis includes A) the failure of technical analysis to outperform the market. B) the small-firm effect. C) the January effect. D) excessive volatility.

Q: Mean reversion refers to the fact that A) small firms have higher than average returns. B) stocks that have had low returns in the past are more likely to do well in the future. C) stock returns are high during the month of January. D) stock prices fluctuate more than is justified by fundamentals.

Q: Excessive volatility refers to the fact that A) stock returns display mean reversion. B) stock prices can be slow to react to new information. C) stock price tend to rise in the month of January. D) stock prices fluctuate more than is justified by dividend fluctuations.

Q: A phenomenon closely related to market overreaction is A) the random walk. B) the small-firm effect. C) the January effect. D) excessive volatility.

Q: When a corporation announces a major decline in earnings, the stock price may initially decline significantly and then rise back to normal levels over the next few weeks. This impact is called A) the January effect. B) mean reversion. C) market overreaction. D) the small-firm effect.