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Series 86 Practice Exam 3 queestions and answers verified 2024
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Series 86 Practice Exam 3 queestions and answers verified 2024
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Series 86 Practice Exam 3A cinema chain has determined that 50,000 buckets of popcorn can be sold
per week at a price of $4 per bucket. At a price of $3.50 per bucket, 70,000
buckets can be sold. This situation is best described as:
A) Supply inelasticity
B) Demand inelasticity
C) Supply elasticity
D) Demand elasticity - correct answer ✔Elastic demand is a situation where
demand is price sensitive. In this case, a 13.3% reduction in price, created a
33% increase in demand.
A broker-dealer has been approached by a client who wants to sell his
company. The firm has determined that, prior to the sale, it should improve its
total enterprise value to EBITDA (TEV / EBITDA). Which of the following
choices would be MOST helpful to achieve this result?
A) Change the method of depreciation in order to reduce the company's taxes.
B) Slow sales growth by closing stores.
C) Reduce administrative costs by outsourcing certain human resources
functions.
D) Change the inventory method from FIFO to LIFO. - correct answer ✔In
order to improve its TEV / EBITDA, the company can focus on its EBITDA
growth strategy (increase revenue and decrease costs). Of the choices listed,
reducing administrative costs by outsourcing certain human resources
functions could accomplish this goal. Other methods include general business
expansion and growth through acquisitions, as well as other types of cost
reductions and restructuring (e.g., selling off a losing business unit). Slowing
revenue or sales growth by closing stores would not help. In addition,
changing the method of depreciation in order to reduce the company's taxes
would have no effect on EBITDA since it's a pre-tax number. Changing the
inventory method from FIFO to LIFO would increase (not decrease) expenses
,since a rising price environment should be assumed. During an inflationary
period, LIFO would show a lower operating profit.
A company that uses GAAP will include which of the following choices as
expense items?
A) Stock option expenses
B) Capitalized software development costs
C) Amortization of goodwill
D) Capitalized interest expenses - correct answer ✔Stock option expenses
are required to be reported as an expense item. Research and development
expenses are also reported as expense items. Capitalized development costs
are not recorded as expenses in the accounting period in which they're paid.
Goodwill doesn't have a pre-determined life and is not amortized.
In an M&A transaction, which of the following factors is MOST important in
determining the long-term value created by a potential acquisition to the
acquiring company?
A) A positive change in operating margin of the combined companies
B) Whether the acquisition is accretive to EPS
C) The growth rate of the combined companies
D) Whether the acquisition will increase its return on invested capital - correct
answer ✔This question is asking for the most important factor. The acquiring
company should look to the return on invested capital, and whether the
acquisition will provide returns that cover the cost of invested capital. If this is
accomplished, the expectation would be reflected in improvements such as
earnings per share and operating margins. The acquisition being accretive to
EPS is important in the short term but, in the long term, it is return on invested
capital (ROIC).
, The EXM Corporation has a debt-to-equity ratio of 50% and a beta of 1.1. The
cost of debt is 8.50% and the company has a marginal tax rate of 20%. If the
risk-free rate of return is 5% and the expected return of the market is 12%,
what is the company WACC?
A) 9.75%
B) 10.75%
C) 11.91%
D) 21.2 - correct answer ✔If the debt-to-equity ratio is 50%, the company's
capital structure is 1/3 debt and 2/3 equity. Based upon the information given,
we need to calculate the cost of retained earnings financing using the CAPM
method. We need to add the risk-free rate plus the difference between the
expected return of the market and risk-free rate of return multiplied by the
beta.
.05 + (.12 - .05) x 1.1 = .127.67 equity x .127 = .0851 (cost of equity)
The after-tax cost of debt is calculated by taking the pretax cost of debt and
multiplying by the complement of the marginal tax rate.
.085 x (1.00 - .20) = .068.33 debt x .068 = .0224 (cost of debt)
WACC = .0851 + .0224 = .1075 or 10.75%
Use the information in the table to answer the question.
Sales Net Income Forward P/E Multiple Range Expected-Growth-Rate
$280MM $30 MM 18.00 - 24.00 9%
What is the implied equity value range for this company??
A) $588,600,000 to $784,800,000
B) $540,000,000 to $720,000,000
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