Name
Career and Financial Management
Chapter 12 Study Guide – Investing in Stocks
Part I Fill in the Blank Directions: Fill in the missing word(s) in the space provided at the
right. (2 points each)
Bear
Bull
Cyclical
Dividend reinvestment
Growth
Market
Stock Index
Blue Chip
Buying on Margin (leverage)
Defensive
Earnings per share
Income
Par Value
Stock Split
1. A(n) _________ is the use of money to earn the best possible
Board of Directors
Corporation
Dividends
Floor Brokers
Investment
Securities Exchange
1. ______________________
return with the least amount of risk.
2. A public _________ issues stock that may be traded openly on the
2. ______________________
stock markets or over-the-counter.
3. When a company is profitable, the stockholders often receive a
3. ______________________
distribution of money called _________.
4. Common stockholders vote for members of the _________.
4. ______________________
5. A(n) _________ is an increase in the number of outstanding shares
5. ______________________
of a stock.
6. _________ means using dividends previously earned on stock to
6. ______________________
buymore shares.
7. Stocks that pay high dividends over time are called _________
7. ______________________
stocks.
8. Stocks in companies that reinvest profits, rather than pay
8. ______________________
dividends, are called _________stocks.
9. A(n) _________ is a benchmark that stock investors use to judge
9. ______________________
investment performance.
10. Stocks of large, well-established companies are called
__________ stocks.
11. A(n) stock is one that remains stable during an economic decline.
12. _________ stocks do well in a good economy but poorly in a bad
one.
10. _____________________
11. _____________________
12. _____________________
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Chapter 12 Study Guide
13. The _________ is an assigned dollar value that is printed on a
13. _____________________
stock certificate.
14. When you buy stock, you pay _________ value.
14. _____________________
15. A corporation’s after-tax earnings divided by the number of
15. _____________________
common stock shares outstanding is _________.
16. A(n) _________ market is characterized by rising stock prices
16. _____________________
and optimism.
17. A(n) _________ market is characterized by the selling of stocks
17. _____________________
and pessimism.
18. A marketplace where brokers buy and sell securities is called
18. _____________________
a(n) _________.
19. Stocks are bought and sold by _________.
19. _____________________
20. Borrowing money to buy stock is called _________.
20. _____________________
Part II True False Directions: Before each of the following statements, write T for a true
statement or F for a false statement. (2 points each)
1. _______
With preferred stock, dividends are fixed, regardless of how the company is doing.
2. _______
You can assign your stock voting rights to someone else by completing a proxy.
3. _______
Stock is purchased on a stock exchange at its par value.
4. _______
The securities market is where you buy and sell stocks and bonds.
5. ________
Buying on margin is an illegal activity.
Part III Multiple Choice Directions: Circle the letter that represents the word or group of
words correctly completing the sentence or answering the question. (2 points each)
1. The letter “s” next to a stock in the stock listings would mean
(a) no stock sold,
(b) common stock,
(c) stock split,
(d) no dividends.
2. Which of the following is true?
(a) You can buy and sell stocks online.
(b) Most major stockbrokers have Web sites that allow online transactions.
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Chapter 12 Study Guide
(c) You can use Internet sites to follow stock prices.
(d) All of these are true.
3. What represents the cost of dividends as a percentage of the current price?
(a) P/E ratio,
(b) par value,
(c) yield,
(d) net change
4. What is the long-term technique where investors buy stock directly from a corporation?
(a) dividend reinvestment,
(b) stock split,
(c) direct investment,
(d) buy and hold
5. What strategy lowers the selling price of a stock and encourages more stock purchasing?
(a) stock split,
(b) dividend reinvestment,
(c) dollar-cost averaging,
(d) P/E analysis
6. Which of these strategies is a short-term technique?
(a) buying on margin,
(b) buy and hold,
(c) dollar-cost averaging,
(d) direct investment
7. Which of these strategies is a long-term technique?
(a) buying on margin,
(b) selling short,
(c) buy and hold,
(d) all of the above
Activity 1: Stock Dividends (9 points)
Directions: Based on the information given, compute yearly total dividends as well as dividends
per share paid to common and preferred stockholders.
1. There are 5,000 shares of $50 par value preferred stock outstanding, and 25,000 shares of common
stock outstanding. Preferred stock has an 8 percent guaranteed rate of return. Dividends are declared of
$1.25 per share of common stock, together with the guaranteed rate for preferred stock.
2. There are 10,000 shares of $20 par value cumulative 7 percent preferred stock outstanding, and 90,000
shares of common stock outstanding. Last year, the preferred stock did not receive its dividend because of
a loss. This year, dividends of $50,000 are distributed to shareholders.
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Chapter 12 Study Guide
3. There are 7,500 shares of $10 par value participating 9 percent preferred stock outstanding, and 32,500
shares of common stock outstanding. The common stock cash dividend is $.50 per share, and total
dividends of $50,000 are distributed. Remaining dividends are shared equally between common and
preferred stockholders.
Activity 2: Computing Stock Returns (12 points)
Directions: Based on the information given, compute stock returns. Refer to Figure 12-1 in your
textbook for the formula for computing a stock’s one-year return.
1. John Adams purchased 100 shares of XYZ Corporation for $25 a share and paid a commission of $125.
The current price of the stock is $32 per share. Last year, John received dividends of $1 per share.
2. Sally Clark purchased 500 shares of ABC Corporation for $10 per share and paid a total commission of
$200. The current price of the stock is $12 per share. Last year, Sally received dividends of $2 per share.
3. Alice Kruse purchased 1,000 shares of Kendall Corporation for $22.50 per share and paid a total
commission of $575. The current price of the stock is $25 per share. Last year, Alice received dividends
of $880.
4. Mike Welch purchased 5,000 shares of Grass Roots stock for $82 per share and paid a commission of 1
percent on the purchase price. The current value of the stock is $96 per share. Mike received no dividends
last year.
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Chapter 12 Study Guide
Activity 3: Buying on Margin (6 points)
Directions: Based on the information given, compute the rates of return for the following margin
transactions. Use Figure 12-2 as your model.
1. Rick Mendez bought stock for $5,000, using $2,500 of his own money and $2,500 borrowed from
the broker. One month later, the stock is sold for $5,650. Interest owed to the broker is $30;
brokerage commissions to buy and sell the stock totaled $300.
2. Julie Martin bought stock for $3,000, using $2,000 of her own money and $1,000 borrowed from the
broker. One month later, the stock is sold for $3,850. Interest owed to the broker is $15; brokerage
commissions to buy and sell the stock totaled $150.
Activity 3: Buying on Margin (10 points)
Directions: Using the financial section of your local newspaper, record the progress of five
different stocks for five consecutive days, listing for each stock the closing price and daily
change. Fill in your information in the following chart.
Name of
Stock
Day 1
2
Closing Price
3
4
5
Day 1
2
Daily Change
3
4
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Chapter 12 Study Guide
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