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Series 86 Practice Exam 2 questions and answers verified 2024
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Series 86 Practice Exam 2 questions and answers verified 2024
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Series 86 Practice Exam 2Who should a research analyst speak to if he's concerned about the financial
performance of senior executives?
A) The chief financial officer
B) The company's executive compensation consultant
C) The chairman of the board of directors
D) The chief executive officer - correct answer ✔In order to align executive
compensation with shareholder interests, exchange-listed companies must
establish a compensation committee. The committee is made up of
independent members of the board of directors. In many cases, the
compensation committee will also hire a compensation consultant who advise
the committee on the fairness of the executives' compensation. These
consultants would provide the best perspective on executive compensation.
The CEOs and CFOs of companies will naturally be biased since they're
executives of the company.
An easing of money and credit in the economy is likely the result of which of
the following?
A) Increasing reserve requirements
B) Increasing the discount rate
C) The Fed selling securities in open market transactions
D) Decreasing the discount rate - correct answer ✔An easing of money and
credit in the economy means that more money is available and interest rates
are decreasing. Decreasing the discount rate means that banks can borrow
from the Fed at a lower rate. Banks can then lend money out at a lower rate,
thereby making more money available to consumers. Increasing the discount
rate, increasing the reserve requirement, and the Fed selling securities are all
ways to tighten the money supply which leads to higher interest rates
,Use the following information to answer the question below:
From the 2018
Balance Sheet ofTick Tock Clocks, Inc.(in millions of dollars)
Cash9.10
Accounts Payable19.50
Cash Equivalents13.25
Wages Payable3.25
Accounts Receivable15.70
Taxes Payable6.00
Inventory24.85
Interest Payable5.50
Other Current Assets3.25
Total Current Assets66.15
Total Current Liabilities34.25
What is the Quick Assets Ratio of Tick Tock Clocks, Inc.?
A) 1.11
B) 1.22
C) 1.84
D) 1.93 - correct answer ✔The Quick Assets Ratio (Acid Test Ratio) is
generally expressed as (Current Assets - Inventories) / Current Liabilities. In
the event a company has other current assets (such as prepaid expenses),
these are deducted as well. Another often-used form of the Quick Assets
Ratio is (Cash + Cash Equivalents + Accounts Receivable) / Current
Liabilities. In the case of Tick Tock Clocks, the Quick Assets Ratio can be
expressed as [66.15 - (24.85 + 3.25)] / 34.25 = 1.11, or (9.10 + 13.25 + 15.70)
= 38..25 = 1.11
,Which of the following BEST defines the term public float?
A) The number of shares held by retail investors
B) The number of shares of restricted stock held by insiders
C) The number of shares of restricted stock added to the number of shares of
outstanding stock
D) The number of shares of restricted stock subtracted from the number of
shares of outstanding stock - correct answer ✔The public float of a company
represents the number of shares held by public investors—both retail and
institutional. Public float excludes any stock that is owned by affiliated persons
of a company and is found by subtracting restricted stock from the number of
outstanding shares. By contrast, a company's market capitalization is
determined by multiplying the number of outstanding shares by the current
market price per share. Outstanding shares include restricted shares as well
as those held by institutions, retail investors, and insiders, however, treasury
stock (shares that are repurchased by the company) is not included.
Oliver has announced a takeover bid. It has offered .7 shares of Oliver
common (currently trading at $35), plus $4.00 cash, for each share of
Cromwell. Companies similar to Cromwell have been bought out at 2.5 times
tangible book value, or 2.5 times revenues. Cromwell's annual revenues are
projected to be $530 million, and it has 45 million shares outstanding.
Current assets$400,000,000
Fixed assets$300,000,000
Intangible assets$100,000,000
Total liabilities$300,000,000
Cromwell responds to the offer and claims that it's inadequate. Cromwell
believes that 2.5 times book value (not tangible book) is adequate. Oliver's
counter offer is .8 shares of its common stock and no cash. Which of the
following statements is TRUE?
A) Oliver will be grossly overpaying for the acquisition.
, B) The offer meets Cromwell's terms.
C) The new offer by Oliver is far better for the Cromwell shareholders.
D) Book value is obsolete in valuat - correct answer ✔Oliver's offer has
decreased to $28 per share ($35 x .8 shares). Cromwell's book value is $500
million ($800 million total assets - $300 million total liabilities) and since there
are 45 million shares outstanding, the book value per share is $11.11. Based
on a multiple of 2.5x book value, Cromwell's price is $27.78 ($11.11 x 2.5).
Oliver's original offer was $28.50 ($35 x .7 + $4) and is actually slightly higher
than its revised offer. Either way, both offers are greater than the price based
on 2.5x book value and meet Cromwell's terms.
An analyst is valuing a bank and the estimate of net tangible book value is
$22.45 per share and the fully diluted earnings per share is $3.10. The
sector's P/E range is 12 to 14, while the range of price/book value is 1.5 to
2.0. The enterprise value is $224.25 billion and the EV/revenue is 2.40. By
using price-to-book value and P/E as the valuation metrics, which of the
following BEST defines the price range of the bank?
A) $33.67 - $44.90
B) $33.67 - $37.20
C) $22.45 - $33.67
D) $43.40 - $44.90 - correct answer ✔If given an estimate of the net tangible
book value per share ($22.45) and the price/book value range (1.5 - 2.0),
these amounts may be multiplied to find a fair price range ($33.67 - $44.90) .
Also, if given an estimate of the fully diluted EPS ($3.10) and the
price/earnings range (12 - 14), these amounts may be multiplied to find a fair
price range ($37.20 - $43.40). By taking the lowest and highest estimates
from both valuation methods, the best fair price range is $33.67 - $44.90. The
other details in this question are not relevant.
An analyst is discussing widget production with the plant manager at
Worldwide Widgets, an industry leader. What's the MOST important factor to
discuss with the plant manager?
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