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Series 86,., Questions and answers verified 2024
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Series 86,., Questions and answers verified 2024
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Series 86 - Exam 4A firm is considering expansion of its capital base. Management of the
company is concerned about the recent yield increases in the bond market.
Which of the following statements is NOT TRUE in a rising interest-rate
environment?
A- There is a negative impact on DCF
B- WACC will tend to decline
C- The cost associated with debt issues will increase
D- The risk-free rate would trend higher - correct answer ✔If rates are rising,
the cost of debt capital would increase, leading to a higher weighted average
cost of capital. Higher interest rates will hurt discounted cash flows, and will
cause the cost associated with debt issues to increase. The risk-free rate is
associated with the yield on Treasury bills. This yield will trend higher as
interest rates increase.
A company switching its inventory accounting method from first-in, first-out
(FIFO) to last-in, first-out (LIFO) during an inflationary environment will
experience which TWO of the following choices?
I. The cost of goods sold will increase
II. The cost of goods sold will decrease
III.The company will have a lower EBITDA
IV. The company will have a higher EBITDA
A- I and III
B- I and IV
C- II and III
,D- II and IV - correct answer ✔Last-in, first-out accounting would reflect a
higher cost of goods sold. The latest inventory would be produced at a higher
cost. Since this inventory is used first, it is more expensive than the first-in
inventory method during an inflationary period. Changing the inventory
method from FIFO to LIFO would increase expenses, not reduce expenses,
since we assume a rising price environment. With this inventory method
(LIFO), the company would show a lower EBIT and, therefore, lower EBITDA.
A company's return on equity will increase if:
A- A loss is realized on the sale of an asset
B- A gain is realized on the sale of an asset
C- The company's earnings per share decreases
D- The company issues more shares - correct answer ✔The formula for
calculating a company's return on equity (ROE) is net income divided by its
shareholders' equity. Realizing a gain on the sale of an asset will increase net
income as well as the return on equity. Conversely, realizing a loss on the
sale of an asset and declining earnings per share will mean that a company's
return on equity is falling. In the short-term, issuing shares will most likely
decrease the return on equity.
The quick asset ratio:
I. Is a stringent liquidity measurement
II. Is used primarily to evaluate solvency
III. Does not include work-in-progress inventory, but does include finished
inventory
IV. Would include accounts receivable in the liquid asset category
A- I and II only
B- I and IV only
,C- II and III only
D -II, III, and IV only - correct answer ✔The quick asset ratio is a stringent
method of computing liquidity. Cash, marketable securities, and accounts
receivables are divided by current liabilities. Inventory is not included. This is
not a measurement of solvency, which is the company's long-term ability to
stay in business.
If electric car companies are taking market share from hybrid auto makers,
fossil fuel costs continue on an upward trend, and hybrid auto makers do not
change their business plans, what is the forecast for the hybrid auto industry?
A- They die in the business cycle
B- Bearish short-term and long-term
C- They will recover, because fossil fuel prices can decline as well
D- Bullish over the long-term, because electric cars are incredibly expensive -
correct answer ✔Based on the fact pattern in the question stem and the
assumption of rising fossil fuel prices, electric auto makers will continue to
gain market share versus manufacturers of gas and hybrid vehicles.
This year, Fly by Knight Airlines is using an 8.00% discount rate to calculate
its defined benefit plan liability. Royal Flush Airlines uses a 4.00% discount
rate to calculate its defined benefit plan liability. Which of the following
statements is TRUE?
A- Royal Flush is using a more aggressive method of accounting
B- Royal Flush will have higher pension fund assets
C- Fly by Knight will have higher pension fund assets
D- Fly by Knight is using a more aggressive method of accounting - correct
answer ✔Aggressive accounting refers to a method of accounting that is
used to report lower expenses and higher income, or to overstate assets while
understating (not recognizing or lowering) liabilities. In regard to accounting
, practices for defined benefit pension plans, using a low discount rate is
conservative, and using a higher discount rate is aggressive. The present
value calculation is based on dividing the liabilities by (1.0 + discount rate).
Therefore, the higher the discount rate, the lower the present value of the
fund's long-term liabilities.
Which of the following scenarios would benefit a coal mining company?
A- Competition entering the market
B- An electric utility plant opens nearby
C- Stricter environmental laws
D- High unemployment - correct answer ✔A substantial number of electric
utility plants are coal-powered. A plant operating nearby the coal producer
would be beneficial based on lower transportation costs of the coal.
According to generally accepted accounting principles, a company will show
an increase in operating cash flows through:
A- A reduction of current assets
B- A reduction of current liabilities
C- A decline in capital expenditures
D- The sale of an investment - correct answer ✔Operating cash flows is part
of the Statement of Cash Flows and may be described as revenues minus
operating expenses. If current assets decline, this is a source of cash for the
company. For example, if balance sheet entries for inventories decline from
Period 1 to Period 2, this reduction of inventory indicates increased cash flows
due to the sale of the inventory. The same is true of a reduction of accounts
receivable. Conversely, a decline in current liabilities indicates a use of cash.
Lower capital expenditures are a part of investing cash flows. The sale of an
investment will increase investment cash flows, rather than operating cash
flows.
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