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Series 86 b questions and answers verified 2024
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Series 86 b questions and answers verified 2024
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Series 86 - Exam 2EBITDA may be an inadequate valuation tool because it ignores:
A- Taxes
B- Research and development
C- Capital expenditures
D- Special charges - correct answer ✔Earnings before interest, taxes,
depreciation, and amortization may be an inadequate measurement when
comparing companies with similar financial statements because it ignores
capital expenditures. Capital expenditures are necessary to maintain and
grow the business.
When a company decides to expand its business, certain decisions must be
made about the cost of capital. All of the following statements are TRUE
regarding the cost of capital, EXCEPT:
A- If the cost of capital is not covered, the project should not be recommended
B- The cost of capital must include the expenses of underwriting the project
C- If the cost of capital is not covered, shareholders will not be affected
D- If the return on invested capital is expected to exceed the weighted
average cost of capital, the project should warrant a positive recommendation
- correct answer ✔If the cost of capital is not covered, value will not be
added to the company, which is detrimental to shareholders' equity. If the
required returns are not met, the value of shareholders' equity may decrease.
When comparing GAAP reporting to tax reporting, which TWO of the following
statements are TRUE during the early years of an asset's life?
I. Depreciation expenses are generally higher under GAAP reporting
,II. Depreciation expenses are generally lower under GAAP reporting
III. Accelerated depreciation will understate earnings on the report to
shareholders
IV. The use of accelerated depreciation will increase deferred tax liabilities
A- I and III
B- I and IV
C- II and III
D- II and IV - correct answer ✔Many firms use accelerated depreciation for
tax reporting, while using straight-line for GAAP reporting to shareholders.
Accelerated depreciation provides a larger level of expenses in the earlier
years of an asset's life, creating a lower earnings level reported for tax
purposes. The difference in the taxes reported to the shareholders and the
taxes paid is treated as a deferred tax liability on the report to shareholders.
Straight-line depreciation is used for reports to shareholders; therefore, the
reported earnings are unaffected by the use of accelerated depreciation for
tax purposes.
Which of the following choices is an example of a variable cost?
A- Rent
B- Material used in the production of a product
C- The machinery used in the production of a product
D- The utility cost to operate a factory - correct answer ✔There are two types
of cost to operate a business, fixed and variable. Fixed costs are incurred by a
company regardless of the amount of goods and services sold by the
business. Examples include rent, the machinery and utility costs to operate a
factory, and general administrative overhead. Variable costs vary with the
amount of output produced by a company. They include direct manufacturing
costs and wages used to produce a company's goods and services.
, The trailing P/E on the S&P 500 is 20. Sanders Corporation has a trailing P/E
of 16. What conclusion can be drawn?
A- Sanders is a growth stock
B- Sanders' earnings will rise in the next year
C- Sanders' earnings are not growing as fast as the market
D- Sanders will outperform the market in the next year - correct answer
✔Many investors use the P/E as a proxy for the earnings growth rate. If the
perceived growth is less than the growth of a benchmark index, it will be
reflected in the P/E. This would be true for both a trailing P/E and a forward-
looking P/E.
A research analyst is comparing two companies that are similar in all
respects, except for their lease arrangements. Which of the following is a
characteristic of a company that has finance leases rather than operating
leases?
A- It has higher assets at the commencement date of the lease.
B- It has higher liabilities at the commencement date of the lease.
C- It has higher financing cash flows.
D- It has both amortization and interest expenses on the income statement. -
correct answer ✔Both operating and finance leases will increase assets and
liabilities. Operating lease payments will be shown as a single expense on the
income statement; however, finance lease payments will be separated into
interest and amortization expenses.
Negative P/Es are not meaningful for valuation or comparison. If a company's
financials indicate a negative P/E, an analyst may use alternative methods.
Which TWO of the following factors would be appropriate in dealing with
negative P/E ratios?
I. Using trailing earnings per share in the calculation
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