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Series 86 Practice Exams. questions and answers verified 2024
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Series 86 Practice Exams. questions and answers verified 2024
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Series 86 Practice ExamsWhich TWO of the following events will affect EPS and the P/E ratio if the
price of common stock remains unchanged after the event?
I. Acquiring a company that is neutral to earnings
II. Issuing debt at a rate that is lower than WACC
III. Issuing debt to build an office complex
IV. Purchasing debt at a rate that is below WACC
A. I and III
B. I and IV
C. II and III
D. II and IV - correct answer ✔D. II and IV
Normally, issuing debt will increase a company's interest expense, lowering
EPS and increasing the P/E ratio. However, issuing debt to finance a fixed
asset (in this case an office building) would not immediately affect the
company's earnings. The interest expense in such cases is capitalized and
added to the cost basis of the asset. Acquiring a company that is neutral to
earnings would be neutral to EPS. As such, it would not affect EPS or the P/E
ratio if the price of the stock is unchanged. The purchase of debt would affect
the investment account of a company. The investment income would be
shown as other income on the income statement (below EBIT) and would
increase pretax income, therefore, increasing EPS.
An analyst is discussing widget production with the plant manager at
Worldwide Widgets, an industry leader. Which TWO of the following choices
are MOST important to discuss with the plant manager?
I. Shortfalls in the company's pension plan
II. Information on components and parts
,III. Product pricing
IV. Supply chain bottlenecks
A. I and III
B. I and IV
C. II and III
D. II and IV - correct answer ✔D. II and IV
The plant manager is concerned with meeting a production schedule and
having the necessary inputs and resources to meet those objectives. This
includes the availability of inputs and knowledge of supply chain obstacles,
such as parts shortages, transportation problems, and labor concerns. Neither
pension plan shortfalls nor product pricing are concerns of a plant manager.
They are concerns for senior management.
Use the following information to answer this question.
Adobe & Mudd Bricks, Inc.
(Figures shown in $ MM)
Net Income 20XX - 350
Common dividends - 30
Common equity (year-end) - 1,850
What was the company's return on common equity for 20XX?
A. 17.3%
B. 18.9%
C. 20%
,D. 20.7% - correct answer ✔D. 20.7%
The formula for return on equity is net income divided by average common
stockholders' equity. The year-end equity is given, but it is necessary to
determine the beginning value. The year-end equity ($1,850 MM) has
increased by $320 MM. This is based on net income generated of $350 MM,
of which $30 MM was paid out in dividends. The beginning period equity for
the company was$1,530 MM ($1,850 MM - $320 MM). The average equity
was $1,690 MM([$1,530 MM + $1,850 MM] / 2). The return on equity is 20.7%
($350 MM / $1,690 MM).
Under the percentage of completion method, first year's income is computed
by multiplying the contract price by:
A. The ratio of first year's billings to estimated total costs
B. The ratio of first year's collections to contract price
C. The ratio of first year's billings to contract price
D. The ratio of first year's costs to estimated total costs - correct answer ✔D.
The ratio of first year's costs to estimated total costs
IRS Section 460 requires most long-term contracts to be accounted for under
the percentage of completion method. The PCM requires income from the
contract to be reported annually over the life of the contract and requires
contract expenses to be deducted in the year that they are incurred. The
income reported is that amount which is proportionate to the actual costs
incurred as a percentage of total estimated costs. At the point when 50% of
the estimated costs have been incurred, one should have reported 50% of the
estimated income.
First year's income, under the percentage of completion method, is computed
by multiplying the contract price times the ratio of first year's costs to
estimated total costs.
, What would be the effect on the debt/equity ratio and the current ratio if a
company capitalizes a lease rather than treats the lease as an operating
lease?
..........Debt/Equity Ratio......Current Ratio
A. Increase ....................Decrease
B. Decrease ...................Decrease
C. Decrease ...................Increase
D. Increase .....................Increase - correct answer ✔A.
Increase ....................Decrease
If a lease is capitalized, the firm would book the capitalized value of the lease
to Fixed Assets, book the long-term portion of the lease to Long-Term Debt,
and book the short-term portion of the lease to Current Liabilities. This would
cause the Current Ratio to fall due to the increased Current Liabilities. The
Debt/Equity ratio also increases due to the increased amount of recorded
debt.
Which of the following changes is LEAST likely to affect the valuation of a
company using a discounted cash flow (DCF) model?
A. The terminal growth rate increases
B. Interest rates decline
C. The company's common stock declines in value
D. The company repurchases a portion of its outstanding common stock -
correct answer ✔C. The company's common stock declines in value
Valuation using discount cash flow models are based on dividing the present
value of the FCF by (1 + WACC). A change in the terminal growth rate will
affect the present value of the FCF. A change in valuation will occur if any of
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