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Series 86 Wrong Answers questions and answers verified 2024
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Series 86 Wrong Answers questions and answers verified 2024
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Series 86 Wrong AnswersWhen do diminishing returns occur?
when average total costs begin to rise.
Interest rates should increase if
- supply of money decreases
- demand for money increases
*interest rates are the price of borrowing
A company is required to make a payment in perpetuity of $200,000 per year.
Assuming a 10% annual return, how much principal would the company
need?
The company would need to deposit $2,000,000. To calculate the required
principal, take the annual payment in perpetuity of $200,000 and divide it by
the annual rate of return of 10% ($200,000 / .10 = $2,000,000). The phrase in
perpetuity may also be referred to as a perpetual payment, meaning that
payments will continue to be made forever.
formula for principal needed based on a payment in perpetuity and annual
return
annual payment in perpetuity / annual rate of return
,Bad Debt Expense
The amount of the adjustment to the allowance for uncollectible accounts,
representing the cost of estimated future bad debts charged to the current
period.
- reduction in bad debt expense increases profitability by reducing expenses
- if there are low reserves for bad debt expenses, it means the company will
not have reserves to cover for these losses
Use the following information to answer the next question:
The company's present value of expected cash flows is $1.2 billion.Currently,
there are 19 million shares of common stock outstanding.There are six million
employee stock options with an exercise price of $25.The current stock price
is $40.The company has $250 million of debt.
What's the intrinsic value per share of the company's common stock?
$45
The intrinsic value of a company's stock can be calculated using the present
value of cash flows. Since the present value of cash flows typically represents
the intrinsic enterprise value, the debt must be subtracted and then the result
is divided by the number of outstanding shares. Using this method, the equity
value of the company is $950 million ($1.2b PV - $250m).
The company has 19 million shares outstanding, but also has options with a
$25.00 strike price. Using the treasury method, the exercised options will
generate proceeds to the company of $150 million (6 million options x
,$25.00). This permits the company to repurchase 3.75 million shares from the
market ($150 million/$40.00 market price). The company will still need to
issue 2.25 million shares (6m needed for options - 3.75m bought back). This
brings the number of shares outstanding to 21.25 million (19 million
outstanding + 2.25 million shares issued for options).
The intrinsic value per share is $44.71 or $45.00 rounded to the nearest dollar
($950m equity value / 21.25m shares outstanding). Although equity value can
be calculated using the market price of the stock, it would not be an intrinsic
value. Intrinsic values are derived from projections or estimates about the
company itself, rather than the extrinsic market price.
You have been asked to analyze an M&A transaction involving Bergen Labs,
the target company in an acquisition. Bergen Labs current stock price is
$91.53. There are 27.48 million shares outstanding and the offer price for
Bergen Labs is $108.00 per share. The acquirer, Negiac, has offered 75%
stock and 25% cash. Negiac has 231.13 million shares outstanding, and its
stock price is $21.50. What percentage of the combined company will Bergen
Labs' shareholders own after the merger?
31%
To determine Bergen Labs' percentage ownership after the merger, it is
necessary to determine the exchange ratio, and calculate the new number of
shares issued. The new number of shares to be issued is added to Negiac's
outstanding shares to find the total number of shares for the combined
company. The new shares issued are divided by the combined company total.
The exchange ratio is found by dividing the offer price by Negiac's stock price
($108 / $21.50 = 5.023), multiplied by the percentage of stock offered (75%),
which equals an exchange ratio of 3.767 (5.023 x .75). The new shares issued
equal 103.52 million (3.767 x 27.48 million). The total number of shares of the
, combined company is 334.65 million (103.52 + 231.13). Bergen Labs will own
31% of the combined company (103..65).
Relevant financial information to answer the following question is found by
using Exhibit 66. Calculate the debt-to-total-capital ratio for S-Works
Industries.
- shareholders equity =494,500
- long term debt = 115,800
- short term debt = 60,800
19%
*short term debt is not included in total capital
*total capital is shareholders equity PLUS debt
A company has a price-to-earnings ratio of 26 and a dividend yield of 2.95%.
Its dividend payout ratio is:
77%
The calculation of the dividend payout ratio is determined by dividing the
dividend yield by the earnings yield. The earnings yield is the reciprocal of the
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