Series 86 Practice Test exam 2024/2025 with 100% correct answers
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Course
Series 86 Practice Te
Institution
Series 86 Practice Te
Coefficient of Elasticity correct answers% Change in Quantity / % Change in Price. For elasticities greater than 1, the change in quantity demanded will be greater than the corresponding price change. A coefficient =2, a 1% price change will result in a decrease of 2% in the quantity demanded.
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Coefficient of Elasticity correct answers% Change in Quantity / % Change in Price. For elasticities greater
than 1, the change in quantity demanded will be greater than the corresponding price change. A
coefficient =2, a 1% price change will result in a decrease of 2% in the quantity demanded.
Using dividend yield to determine market price correct answersAnnual dividend / dividend yield
When the co recognizes rev sooner than permitted under accrual accounting correct answersAccounts
receivable will be overstated b/c sales are recognized earlier and inventory will be understated b/c
inventories are charged earlier than permitted.
Free Cash Flow to Equity correct answersNet Income
+Depreciation & Amortization
- Capital Expenditures
+Changes in Working Capital (current assets - current liabilities)
= FCF to Equity
*If working capital has increased, FCF is reduced by the amount of the increase. If working capital has
decreased, FCF will be increased by the amount of the decline.
Diluted EPS correct answersNet income, adjusted for the after-tax cost of the debt, divided by the
average # of shares after conversion.
1) Add back the after cost of debt (par value of the bonds x the interest rate x the complement of the tax
bracket)
2) Determine the average # of shares after conversion
Cost of Debt correct answersAdjust the nominal yield (the coupon rate) by the tax rate.
, Valuation Methods correct answersThe use of DCF or price/cash flow is problematic for the companies
showing negative cash flow.
Cash generated from operations of the co correct answersRevenue - operating expenses is based on
adjustments to net income of a co. It is a valuable measure of a co's viability since a biz may produce
profits but have insufficient cash flow to meet current obligations. The operating cash flow includes
noncash expenses such as depreciation & amortization and would be expected to be greater than net
income.
WACC correct answersIf the risk-free rate increases, while the expected market return remains stable, a
co that has a beta less than 1.0 will experience an increase in the WACC. This would have a negative
effect on the val'n of the co.
An increase in the debt to equity ratio correct answersIf a co issues debt, the direct cost of interest
expense is greater than either the change to the FCFF or the amount of funds available to eqty
shareholders
Extraordinary Items correct answersExtraordinary items are reported as separate items and net of
income tax
Price Elasticity of Demand correct answersDivide the % change in demand / the % in price (.2/.1 = 2)
WACC correct answersIf the risk free rate increases while the expected market return remains
unchanged, the risk premium will decline and the following will result:
A co with a beta less than 1 will increase eqty cost of capital, a co greater than 1 will decrease eqty cost
of capital
WACC correct answersIf WACC increases, the val'n of a company (including terminal value) decreases.
Using a DCF approach in calculating the terminal value, the formula is, the last expected cash flow /
(WACC - terminal growth rate)
Quick Asset Ratio correct answersThe quick asset ratio is a stringent method of computing liquidity.
Cash, marketable securities, and AR are divided by current liabilities. This is not a measurement of
solvency.
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