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Series 86 Practice Exam 1 questions and answers verified 2024
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Series 86 Practice Exam 1 questions and answers verified 2024
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Series 86 Practice Exam 1One of the main considerations in the sum-of-the-parts analysis is that
valuation is based on the concept that:
A) Separate segments of the company are discounted to their present values
B) Separate segments of the company may be worth more individually than
combined
C) The separate segments of the company are totaled and discounted to
present values
D) Each segment of the company will grow at the appropriate rate of return -
correct answer ✔B) Separate segments of the company may be worth more
individually than combined
The sum-of-the-parts analysis is based on the fact that the individual business
segments of the company may be separated and sold by themselves. When
added together, the total of these individual segments may be worth more
than the company as a whole.
In order to determine the free cash flow yield, the correct calculation is to:
A) Divide market price by the value per share
B) Use the reciprocal of the price to free cash flow
C) Multiply the free cash flow to the firm by the market price
D) Use the reciprocal of the free cash flow to the firm - correct answer ✔B)
Use the reciprocal of the price to free cash flow
The free cash flow yield is the reciprocal of the price to free cash flow ratio,
therefore, the calculation is to divide 1 by the price to free cash flow ratio. For
example, if the price to cash flow is 12.7, the free cash flow yield is 7.87% (1 /
12.7).
,Relevant financial information to answer the following question is found by
using Exhibit 11. What is the free cash flow per share for common
stockholders in 2020?
2019 2020
Total Assets $5,650,000,000 $5,730,000,000
Current Assets 2,970,000,000 2,995,000,000
Total Liabilities 4,700,000,000 4,716,000,000
Current Liabilities 2,795,000,000 2,835,000,000
Depreciation and Amortization 44,000,000 46,000,000
Capital Expenditures 110,000,000 115,000,000
Net Income 64,000,000 68,000,000
Common Stock ($2.00 par value) $40,000,000 $40,000,000
A) ($.05)
B) ($.80)
C) $.70
D) $1.95 - correct answer ✔C) $.70
Net Income$68,000,000
+Depreciation and Amortization$46,000,000
-Capital Expenditures$115,000,000
+Changes in Working Capital$15,000,000
=Free Cash Flow to Equity$14,000,000
,The free cash flow to equity would be divided by the number of shares of
common stock outstanding. The common stock account is $40,000,000 for
each year. Since the par value is $2.00 per share, there are 20,000,000
shares of common stock outstanding. $14,000,,000,000 = $.70 free
cash flow per share.
A company operates five diverse business lines. Some of the business lines
are profitable, but the company as a whole has had either a very small
amount of positive income or a loss over the past few years. The company is
considering a restructuring of its outstanding debt and the possible sale of one
or more of its business lines. In this situation, what's the MOST appropriate
valuation method for the entire company?
A) A discounted cash flow (DCF) analysis
B) A sum-of-the-parts (SOTP) analysis
C) The P/E ratio
D) Enterprise value/EBITDA ratio - correct answer ✔B) A sum-of-the-parts
(SOTP) analysis
A company with varying business components is normally valued using the
sum-of-the-parts (SOTP) valuation method. This is particularly true if different
valuation metrics are applied to the different business units.
A market structure in which a few suppliers control a product or service and
set prices is described as:
A) An oligopoly
B) A monopsony
C) A monopoly
D) Monopolistic competition - correct answer ✔A) An oligopoly
, An oligopoly is comprised of a small number of suppliers that dominate a
market (e.g., auto-mobile manufacturing). A monopsony is a market with only
one buyer (e.g., military aircraft built for the U.S. armed forces)
A company reported net income of $12 million and EPS of $0.40 per share in
the previous year. In the current year, net income increased to $15 million and
EPS rose to $0.50 per share. In the footnotes of the financial statement for the
current year, the company disclosed a $5 million after-tax payment based on
a successful lawsuit. Which of the following statements is TRUE?
A) Based on the current year's increase in net income and its non-adjusted
EPS, the expectation is that this will have a positive impact on the stock price.
B) Based on the current year's increase in net income and its non-adjusted
EPS, the expectation is that this will have a negative impact on the stock
price.
C) Based on the current year's increase in net income and the adjusted EPS,
the expectation is that this will have a positive impact on the stock price.
D) Based on the current year's increase in net income and the adjusted EPS,
the expect - correct answer ✔D) Based on the current year's increase in net
income and the adjusted EPS, the expectation is that this will have a negative
impact on the stock price.
Since the company reported $0.40 cents per share one year ago on net
income of $12 million, and $0.50 per share in the current year on net income
of $15 million, the number of outstanding shares would be 30 million ($15
million / $0.50). Without the one-time $5 million payment from the lawsuit in
the current year, net income would have been $10 million, and EPS would
have been $0.33 per share ($10 million / 30 million). The lower adjusted EPS
would likely have a negative effect on the stock.
A company's return on equity would increase if it:
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