10) 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.

11) In the generalized dividend model, a future sales price far in the future does not affect the current stock price because

B) the present value is almost zero.

A) the present value cannot be computed.

C) the sales price does not affect the current price.

D) the stock may never be sold.

12) In the generalized dividend model, the current stock price is the sum of

B) the present value of the future dividend stream

A) the actual 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.

13) Using the Gordon growth model, a stockʹs 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.

14) 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.

1) In asset markets, an assetʹs price is

D) set by the buyer willing to pay the highest price.

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.

3) New information that might lead to a decrease in an assetʹs 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.

4) A change in perceived risk of a stock changes

C) the required rate of return.

A) the expected dividend growth rate.

5) A stockʹs price will fall if there is

B) an increase in the required rate of return.

A) a decrease in perceived risk

C) an increase in the future sales price

6) A monetary expansion ________ stock prices due to a decrease in the ________ and an increase in the ________, everything else held constant

D) increases; required rate of return; dividend growth rate

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

7) The subprime 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.

1) 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.

4) If expectations are formed adaptively, then people

C) use only the information from past data on a single variable to form their expectations of that variable.

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

D) never change their expectations once they have been made.

6) 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.

9) If a forecast made using all available information is not perfectly accurate, then it is

A) still a rational expectation.

10) If additional information is not used when forming an optimal forecast because it is not available at that time, then expectations are

B) still considered to be formed rationally.

A) obviously formed irrationally.

11) An expectation may fail to be rational if

B) relevant information is available but ignored at the time the forecast is made.

A) relevant information was not available at the time the forecast is made.

C) information changes after the forecast is made.

D) information was available to insiders only

12) 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.

14) People have a strong incentive to form rational expectations because

A) they are guaranteed of success in the stock market.

D) everyone wants to be rational.

15) 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

16) According to rational expectations,

D) expectations will not differ from optimal forecasts using all available information

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

1) The theory of rational expectations, when applied to financial markets, is known as

B) the efficient markets hypothesis.

C) the theory of strict liability.

D) the theory of impossibility.

2) According to the efficient markets hypothesis, the current price of a financial security

C) fully reflects all available relevant information.

A) is the discounted net present value of future interest payments.

B) is determined by the highest successful bidder.

D) is a result of none of the above

3) If the optimal forecast of the return on a security exceeds the equilibrium return, then

B) no unexploited profit opportunities exist.

C) the market is in equilibrium.

4) 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

6) The efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market,

B) it will be quickly eliminated.

A) it will tend to go unnoticed for some time

C) financial analysts are your best source of this information.

D) prices will reflect the unexploited profit opportunity

chapter 7

Authored by Hà Danh

English

University

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

1) A stockholderʹs ownership of a companyʹs 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.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

2) Stockholders are residual claimants, meaning that they

A) have the first priority claim on all of a companyʹs assets.

B) are liable for all of a companyʹs debts.

C) will never share in a companyʹs profits.

D) receive the remaining cash flow after all other claims are paid.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

3) Periodic payments of net earnings to shareholders are known as

A) capital gains.

B) dividends.

C) profits.

D) interest

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

4) 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.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

5) In the one-period valuation model, the value of a share of stock today depends upon

A) the present value of both 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.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

6) 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.

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

7) 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

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chapter 7

1) A stockholderʹs ownership of a companyʹs stock gives her the right to

2) Stockholders are residual claimants, meaning that they

3) Periodic payments of net earnings to shareholders are known as

4) The value of any investment is found by computing the

5) In the one-period valuation model, the value of a share of stock today depends upon

6) In the one-period valuation model, the current stock price increases if

7) In the one-period valuation model, an increase in the required return on investments in equity

8) 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

9) 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

10) In the generalized dividend model, if the expected sales price is in the distant future

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