Exam Corrections

Broker Dealer A (domiciled in the U.S.) learns that one of its client's foreign subsidiaries has been paying kickbacks to foreign government officials to win lucrative contracts. Which of the following best describes the Broker Dealer's obligation?

The Foreign Corrupt Practices Act requires financial institutions to report any incidents involving government kickbacks to the Department of Justice. An SAR is for incidents concerning terrorism or money laundering.

Which of the following best describes the OTC Bulletin Board?

The OTCBB is a quotation facility for equity and equity-like securities (e.g. ADRs). The OTCBB does not provide a venue for trading these securities trading of OTCBB securities is typically done directly between broker-dealers, either on the phone or on another trading venue.

A preliminary prospectus must be delivered to a potential purchaser no later than

A preliminary prospectus when used in conjunction with an IPO is required to be delivered by the broker-dealer at least 48 hours prior to the confirmation of sale

Which of the following would be found in a company's proxy statement?

A proxy statement must include a list of all directors who did not attend at least 75% of the previous year's meetings. The other items are not required disclosures in a proxy filing.

All of the following collateralize asset-back securities EXCEPT

An asset-backed security is collateralized by a loan, lease or receivables against assets other than real estate and mortgage-backed securities.

After a company has met the listing standards of the NYSE and has started trading

Companies that trade on the NYSE must meet standards for continued listing. These standards are somewhat less strict than those required for initial listing. A company cannot delist its stock without notification to the NYSE and approval from the SEC. The NYSE, however, can delist a company's stock if it determines it has not met listing standards, or if its continued listing is not in the best interest of shareholders. A company's share price cannot fall below $1 to maintain NYSE listing. NYSE listed companies must provide annual reports to shareholders

A bond that is trading at 110 is convertible at $40 per share. If the common stock is trading at 10% above its parity price, what is the current price of the company's common stock?

To calculate the stock price, start by determining the conversion ratio, which is found by dividing par value of the original bond by the conversion price. 1000/$40 = conversion ratio of 25 shares. If the bond is trading at 1100 and converts into 25 shares, the parity price of the common stock = 1100/25 = $44. If the stock is trading at 10% above its parity price, its current price is $44 + $4.40 or $48.40.

An investor who purchases Treasury Bills can expect which of the following? I. Interest that is paid on a monthly basis II. The face value of the bill paid at maturity III. A minimum investment of $1,000 IV. A minimum investment of $100

Treasury Bills are purchased at a discount and mature to face value; no periodic interest is paid (i.e. they are zeroes). The minimum purchase amount of Treasury Bills is $100.

A "mini-tender" offer is subject to minimum filing and dislosure requirements, provided that is seeks to acquire

A "mini-tender" offer can avoid some filing and disclosure requirements, but it must not seek to acquire more than 5% of the outstanding shares of the target company

Which of the following statements regarding Regulation M is TRUE?

"Actively-traded securities," which are those with an ADTV value of at least $1 million and are issued by a company with common equity securities that have a public float of at least $150 million, are classified as "excepted securities" to Rule 101

Nonagricultural employment is what kind of economic indicator?

Nonagricultural employment is a coincident indicator while average duration of unemployment is a lagging indicator as it must be calculated after an individual has successfully found a new job

Under Regulation M the default restricted period begins

The "restricted period" normally begins five business days before securities are priced and lasts through the day of pricing. Alternatively, it may begin with the initial filing and end on the day of pricing, if this period is shorter than five days.

A customer purchased a Treasury bond in a regular way transaction on Monday, April 4th. The bond is a J&J bond. How many days of accrued interest will the seller receive?

Treasury bonds accrue interest on an actual days basis and use a 365 day year. They settle T+1, in this case on Tuesday, April 5th. Interest accrues from the last interest payment date (January 1st), up to, but not including the settlement date: January 31 days February 28 days March 31 days April 4 days 94 days

A company has issued 8% preferred stock with a par value of $30 per share. The preferred stock currently is selling for $40 per share. The annual dividend paid to holders of the preferred shares will be

The annual dividend in preferred stock is expressed as a percentage of par value. "8% preferred stock" would pay 8% of par value annually. 8% x $30 = $2.40 per year.

Under discounted cash flow (DCF) analysis, what type of company often includes a size premium in determining the weighted average cost of capital (WACC)?

The size premium is added to the WACC of smaller companies to account for risk not reflected in the stock's beta due to a lack of liquidity

Which of the following is TRUE regarding the restricted period in connection with a merger?

According to the definition of restricted period in Rule 100 of Regulation M, the restriction period begins on the date that the proxy statement or prospectus materials are sent to target shareholders and ends upon completion of the distribution.

Under FINRA Rule 2111, which of the following entities would be considered an "institutional customer" for purposes of gathering customer suitability information? I. Pension fund with assets of $27 million II. Insurance company III. Individual with assets of $60 million IV. Bank

An individual can be an institution, if total assets are at least $50 million. A pension fund, foundation or endowment is not considered an institution unless it has assets of at least $50 million.

An individual is LEAST likely to owe a duty of trust with regard to material information in which of the following situations?

An individual has a duty of trust when he has assured or led the communicating party to believe that he can be trusted to keep information confidential. An employee who learns of material inside information while engaged in an assignment for his employer has a duty of trust. Information communicated by a spouse or other family member is not always subject to this duty of trust. The duty of trust applies only if it is reasonably known the information shared is confidential and that it is not passed on to others

As compared to an issuer's non-convertible debt, convertible bonds I. Pay a higher coupon II. Pay a lower coupon III. Are typically classified as subordinated debt IV. Are typically classified as non-subordinated debt

Convertible bonds provide the holder the choice of converting to shares of common stock. Because of this benefit to investors, convertible bonds pay less interest. When compared to non-convertible bonds, convertibles are classified as subordinated debt, which means they have a lower claim to the assets of the issuer in the event of liquidation

A bond is quoted at 99 1/8. From this quote, which of the following can be reasonably concluded? I. The bond is a corporate bond II. The bond is a government bond III. An investor would pay $991.25 to purchase the bond at the current market price IV. An investor would pay $99.125 to purchase the bond at the current market price

Corporate bonds are quoted in 1/8th increments, so a quote of 99 1/8 represents 99.125% of par ($1,000), or $991.25. Treasuries are typically quoted in 1/32nd increments (e.g. 99 10/32)

ABC Company, Inc. recently announced basic earnings per share of $2.75 and fully diluted earnings per share of $1.80 for its most recently completed fiscal year. It also pays a $0.25 quarterly dividend. What is the company's dividend payout ratio?

Dividend payout ratio = (quarterly dividend x 4)/basic earnings per share = ($0.25 x 4)/$2.75 = 36%. Diluted EPS is not used in the calculation of the dividend payout ratio because the company does not pay dividends on convertible bonds, options, and other securities that have not yet been exchanged or converted into common stock

An investment bank (a FINRA member) is rendering a fairness opinion in a merger transaction. The firm will be paid a base fee of $750,000 for writing the opinion, whether or not the deal closes. It will also receive a contingent bonus of $250,000 if the deal closes. Is this fee structure allowed, and if so what part of compensation must be disclosed?

FINRA members must provide required disclosures of any contingent fees they are paid for fairness opinions, in which the contingency is the deal's successful closing. In this case, the bonus is such a contingency. The base fee is not a contingency.

A registered representative requests permission to participate in a private securities transaction for compensation. If the firm approves participation in the transaction it is required to

FINRA requires that member firms that approve private securities transactions to supervise them and keep books and records of the transaction and compensation received. There is no requirement to file a quarterly private securities transactions report with FINRA.

For the purpose of FINRA rules involving sharing in customer accounts, an immediate family member is a(n)

FINRA rules regarding sharing in customer accounts define immediate family members as parents, mother-in-law or father-in-law, husband or wife, children or any relative to whose support the member or person associated with a member otherwise contributes directly or indirectly

For the purpose of FINRA rules involving borrowing and lending money to customers, an immediate family member is a(n) I. grandparent II. Aunt or uncle III. Cousin

FINRA rules regarding the borrowing and lending of money to customers broadly defines the following persons as immediate family members: parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and shall also include any other person whom the registered person supports, directly or indirectly, to a material extent. Note that immediate family members under the rules on IPO distributions (FINRA Rule 5130) are defined more narrowly

An attorney representing a company in bankruptcy has priority of the debtor's assets

Fees for bankruptcy attorneys have a claim after secured creditors but before recent employee wages

When in the process of hiring a registered representative, an employing firm must check employment history for the previous

Firms are required to check the employment history of persons they will sponsor for registration for the previous three years even though the rep will disclose the last 10 years on a form U4.

Firms are required to file Currency Transaction Reports (CTRs) with FinCEN for cash receipts or disbursements for one customer that exceed

Firms are required to file CTRs with FinCEN for cash receipts or disbursements in excess of $10,000 in one business day. If several smaller transactions for one person are made in one business day and exceed the $10,000 limit, a CTR must also be filed.

Internal Revenue Code Section 338(h)10 describes which of the following transactions?

IRC Section 338(h)10 permits an equity sale to be treated as an asset sale. This is a benefit for the buyer as the assets can be stepped-up to the purchase price, allowing the buyer to take more depreciation

A company with inventory of $250 million, COGS of $1.0 billion, and sales of $1.5 billion in a given year would have inventory turns of

Inventory turns measures the number of times a company turns over its inventory in a given year. As with DIH, inventory turns is used together with COGS to determine inventory management efficiency. Inventory turns is calculated as COGS/inventory. As such, COGS of $1.0 billion divided by inventory of $250 million equals inventory turns of 4.0x.

Use exhibits 91 through 94 to answer the following question. Calculate Rick's, Inc.'s Return on Assets for the year ended September 30, 2013

Return on Assets = Net Income / Average Assets. Net Income = $9,402,000, from income statement. Average Assets = Average assets from end of year and beginning of year = $192,393,000 beginning assets + $223,100,000 ending assets / 2 = $207,746,500. ROA = Net Income / Average Assets = $9,402,000 / $207,746,500= 4.53%

Use exhibits 91 through 94 to answer the following question. Calculate Rick's, Inc.'s Return on Equity for the year ended September 30, 2013

Return on Equity = Net Income / Average Shareholders Equity. Net Income = $9,402,000, from income statement. Average Shareholders Equity = Average shareholders equity from end of year and beginning of year = $87,612,000 beginning SE + $97,082,000 ending SE / 2 =$92,347,000. ROE = Net Income / Average shareholders equity = $9,402,000 / $92,347,000 = 10.18%

Which of the following are used to calculate a company's return on equity (ROE)? I. Net income II. EBITDA III. Market value of equity IV. Book value of equity

Return on equity measures profits earned on each shareholder dollar invested in common stock. It is net income for a period (usually one year) divided by the average book value of shareholder equity (from the balance sheet). Since it is an equity calculation, only a post-interest profit measure is used. EBITDA is pre-interest and is not appropriate for the ROE calculation

For a given M&A sale process, at what point does the data room typically start getting populated?

The sell-side bankers work closely with the target's legal counsel and selected employees to organize, populate, and manage the data room. While the data room is continuously updated and refreshed with new information throughout the auction, the aim is to have a basic data foundation in place by the start of the second round. Access to the data room is typically granted to those buyers that move forward after first round bids, prior to, or coinciding with, their attendance at the management presentation.

A company has $200 million of EBITDA, $80 million of Net Income, and a 40% tax rate. Assuming the company reports a one-time, after-tax restructuring charge of $30 million, what are Adjusted EBITDA and Adjusted Net Income, respectively?

The entire after-tax restructuring charge of $30 million is added backed to $80 million of Net Income, resulting in Adjusted Net Income of $110 million. For EBITDA, however, the after-tax restructuring charge of $30 million must be grossed up at the 40% tax rate ($30mm/(1-tax rate) = $30mm/60% = $50mm) before being added to the $200 million of EBITDA, resulting in $250 million of Adjusted EBITDA

A company has a DSO of 60.83 days and sales of $1.5 billion, what is the company's accounts receivables balance?

Days sales outstanding (DSO) provides a gauge of how well a company is managing the collection of its A/R by measuring the number of days it takes to collect payment after the sale of a product or service. It is calculated as accounts receivable divided by sales multiplied by 365. Hence, if sales and DSO are known, the size of the accounts receivables balance is determined by sales divided by 365 multiplied by DSO. Accounts receivable of $250 million is calculated as $1.5 billion/365 x 60.83

Which of the following refers to a stock sale which is treated as an asset sale for tax purposes thereby allowing the target's assets to be written up and depreciated over time?

§338 (including its various subsections such as §338(h)(10) of the Internal Revenue Code permits, if all conditions are met, a stock sale to be treated as an asset sale for tax purposes. This allows the seller the benefits of a stock sale (i.e. clean exit of the business) and provides the buyer with potential value enhancement from the tax shield generated from the asset step-up

All of the following are examples of growth synergies in an M&A deal EXCEPT

- the acquirer is able to sell target's similar products to shared customers - Too much overlap in terms of products and customers may actually result in negative synergies. This is due to the fact that customers often choose to diversify their vendor base so as to mitigate potential over-concentration with any one supplier. All of the other examples above represent growth opportunities for the combined entity to sell more products

In an inflationary environment, and assuming all else is equal, which of the following would be true regarding a profitable company changing from FIFO to LIFO for inventory valuation?

A change from FIFO (first in, first out) to LIFO (last in, first out) will increase cost of goods sold because, in an inflationary environment, newer inventory will be more expensive. Although this will decrease both gross profit and net income, net income is an after-tax figure and, as a result will decrease by a smaller amount. For example, for a company with a marginal tax rate of 38%, a $100,000 increase in COGS will decrease gross profit by $100,000 but will only decrease net income by $62,000. The after-tax impact to net income is calculated as $100,000 x (1-tax rate) = $100,000 x 62% = $62,000.

Securities that are included in the Pink OTC Markets are

A market maker determines whether to quote a Pink Sheets security, and initiates quotations by submitting Form 211 to FINRA. It is possible for a market maker to quote securities in the Pink Sheet Quote system without the knowledge or permission of the issuer of the securities. Pink Sheet Securities are not always registered with the SEC, and are often thinly traded. All OTC equity securities are required to report last sale and trading volume information

Which of the following categories of filers must file their Form 10-K within 75 calendar days of fiscal year end?

Accelerated filers, with a non-affiliate worldwide market cap of $75mm (but less than $700mm), have 75 calendar days to file a Form 10-K

Asset backed securities are I. backed by mortgages II. fixed income securities III. equity securities IV. derivative instruments

Asset backed securities are fixed income, derivative instruments. They are a pooling of small assets (auto loans, credit card loans, other receivables, etc.) that could not individually be easily sold. They generate a coupon, which provides predictable cash flow to the investor. They are considered derivative securities because their value is based on the underlying instruments that have been packaged together.

An analyst calculates that the EV/EBITDA multiple for a company is 10.5x. Based on synergies of a proposed acquisition, the analyst believes that EBITDA will increase by 10% and the EV/EBITDA multiple will increase by 20%. Based on these assumptions, how much will EV increase as a result of the acquisition?

Assume that EBITDA = 1.0 pre-acquisition and EV therefore is 10.5. EBITDA will increase to 1.1 post-merger. The multiple will increase to 10.5 x 120% = 12.6. Therefore, pro forma enterprise value = 1.1 EBITDA x 12.6 multiple = 13.89. Enterprise value growth = 13.89 pro forma EV/10.5 standalone EV 1 = 32%

At maturity, an investor who holds a 6% bond issued by ABC Corporation will receive

At maturity, a corporate bondholder will receive the face amount, or par value of the bond ($1000), plus the remaining semi-annual interest payment. A bond with a coupon of 6% pays $60 of interest per year, or $30 semi-annually. $1000 + $30 = $1030.

An award in a FINRA arbitration

Awards in FINRA arbitrations must be paid in cash within 30 days of the decision. The arbitrators will render a decision within 30 days after the case is closed. Arbitration decisions are final and binding; they are not subject to a court appeal. Information on arbitration decisions is publicly available.

Which of the following statements are true about a bond's duration? I. It is a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows II. It is a measurement of the relative term to maturity of all series of a bond issue III. Bonds with higher duration have more price volatility IV. Bonds with lower duration have more price volatility

Bond duration is a dynamic measurement of how many years it takes for the price of a bond to be repaid by its coupons and the final principal payment. Bonds with a higher duration require a greater number of years for repayment, and therefore have greater risk and higher price volatility.

Company A issues $200,000,000 in bonds at 99. Underwriting fees are 75 basis points. What are the proceeds received by Company A, net of underwriting fees?

Company A is issuing these bonds at a discount from par, so the public offering price = $200,000,000 x 99% = $198,000,000. Also, the underwriter receives a spread of 75 basis points, calculated as a percentage of par value: $200,000,000 x 75 basis points = $1,500,000. Note that 75 basis points would be entered into a calculator as .0075. Therefore, the net proceeds received by Company A = $198,000,000 proceeds from sale to public - $1,500,000 spread to underwriter = $196,500,000.

A company might issue convertible bonds for all the following reasons EXCEPT:

Convertible bonds are considered debt, so they do increase leverage. Impacts of convertible bonds include lower interest (due to the conversion feature) and an eventual impact to outstanding shares (upon conversion)

Which of the following securities does not trade on the OTCBB?

OTCBB securities include national, regional, and foreign equity issues, warrants, units, American Depositary Receipts (ADRs), and Direct Participation Programs (DPPs). Debentures are debt securities; only equity securities are included in the OTCBB.

Which of the following is a prohibited activity under Regulation M?

Reg M Rule 104 requires underwriters to notify the SEC prior to entering a stabilization bid. The notification requirement does not apply to syndicate covering transactions, however. Investors are prohibited from investing in a follow-on offering if the stock was sold short within five days prior to pricing. Finally, unsolicited orders from customers are permitted in almost all circumstances, including during the Reg M restricted period

When an issuer makes periodic payments to a trustee who retires parts of the issue periodically by purchasing bonds in the open market, the money paid to the trustee is set aside in a(n)

Sinking funds are commonly used to retire corporate debt. Issuers set aside money each year by making payments to a trustee who retires part of the issue by purchasing the bonds in the open market.

A company has earnings of $2.40 per share for the most recent quarter and a stock price of $48. It also pays a dividend of 30 cents per quarter. What is its dividend payout ratio?

The dividend payout ratio expresses the portion of earnings for a given period (quarter, year) that is paid out in dividends for the same period. The ratio can be calculated for any time frame, provided that the same period is used for both dividends and earnings. In this example, the dividend of .30 per quarter/earnings of $2.40 per quarter = 12.5%

During the second round of a M&A sale, the buy-side adviser typically performs all of the following analyses for its client EXCEPT

The second round of the auction centers on facilitating the prospective buyers' ability to conduct detailed due diligence and analysis so they can submit strong, final (and ideally) binding bids by the set due date. The buy-side adviser fine-tunes its valuation work for the most recent due diligence findings, company performance trends and capital markets (financing) conditions. However, the buy-side adviser does NOT typically perform a detailed study of the target's manufacturing processes and software applications. These operational items are left to the expertise of the buyer's functional experts and consultants

Use Exhibits 56, 57, 58 and 59 to answer this question. GoodPerson had two one-time charges in 2009: 1. $2mm in legal fees for a settlement 2. $1.5mm, net, restructuring charge What are 2009 adjusted EBITDA and Net Income?

2009 EBITDA = 2009 EBIT (Operating Income) + Depreciation + Amortization = $12.8 million (from income statement) + $3.3 million depreciation (from cash flow statement) + $2.0 million amortization (from cash flow statement) = $18.1 million. Also, to make adjustments it will be necessary to use the effective tax rate, as the marginal tax rate is not provided. Effective Tax Rate = Income Taxes / Pre-tax Income = $5,037,000 / $12,800,000 = 39.4% When making adjustments, these charges will be added back into EBITDA and Net Income. The adjustments to EBITDA must be pre-tax numbers, so the restructuring charge (which is given net of tax) must be grossed up: $1,500,000 / (1 effective tax rate) = $1,500,000 / 60.6% = $2,475,250 When making an adjustment to Net Income, the charges must be added back on a "net" basis to reflect the taxes paid on the additional earnings. Therefore, the legal fees (which is presented on a gross basis, excluding the impact of tax) must be grossed down: $2,000,000 x (1 tax rate) = $2,000,000 x 60.6% = $1,212,000 Adjusted EBITDA = $18.1mm EBITDA + $2.0mm legal fees (pre-tax) + $2.4mm restructuring charge (pre-tax) = $22.5mm (solution is rounded). Adjusted Net Income = $7.8mm Net Income + $1.2mm legal fees (after-tax) + $1.5mm restructuring charge (after-tax) = $10.5mm (solution is rounded)

A Chapter 7 bankruptcy filing I. results in the liquidation of an insolvent firm II. allows corporations to discharge debts III. usually wipes out equity holders

A Chapter 7 bankruptcy case usually results in the liquidation of an insolvent firm, with its assets distributed to creditors and equity holders wiped out. This type of filing allows individuals, not partnerships or corporations, to discharge debts. For this reason, Chapter 7 filings are rare in the corporation world

John Beam, a securities client of HonestBrokerDealer, deposits $9,000 into his securities account on each of 3 consecutive days, an activity inconsistent with his pattern of usual deposits in the past. Which action would most likely be taken by HonestBrokerDealer?

A Currency Transaction Report (CTR) is required if in aggregate, a customer deposits $10,000 in cash in an account on any given day. In this scenario, a CTR would not be required, since only $9,000 was deposited on a given day. However, it appears as though John is trying to stay just below the $10,000 threshold (known as laddering), so a Suspicious Activity Report would be filed.

Which of the following is a highly negotiated rep in the Definitive Agreement that is revisited when assessing closing conditions to the deal?

A MAC stands for material adverse change; also called material adverse effect (MAE). This is a highly negotiated provision in the definitive agreement, which may permit a buyer to avoid closing the transaction in the event that a substantial adverse situation is discovered after signing or a detrimental post-signing event occurs that affects the target. A fairness opinion is NOT a rep in the Definitive Agreement; rather it is a letter opining on the "fairness" (from a financial point of view) of the consideration offered in a transaction. The squeeze-out provision is also not a rep; it applies in a tender offer when a requisite threshold of tendered shares is reached as designed (typically 90%). The breakup fee refers to the fact that in some circumstances, one party may owe a termination fee to the other party.

Jane, a member of the deal team structuring an IPO for a client company, discovers during due diligence that the company does significant business with the Cuban government. After consulting with her manager and the firm's AML compliance officer, Jane's broker-dealer decides to file a Suspicious Activity Report. Under federal AML regulations, this report should be filed

A SAR must be filed with FinCEN within 30 days of the discovery of the suspicious activity, regardless of when the firm actually decides to file the report

What does the bring-down session prior to closing refer to?

A bring-down session, also known as a "bring-down due diligence session" is a session where the accuracy of the reps and warranties (typically the seller's) are confirmed. It is often telephonic and routine, led by selected advisers and conducted just prior to the closing of the deal to ensure that key financial data and other material information for the deal cannot change in between the bring-down session and closing. On a related note, the "bring-down" condition in the Definitive Agreement is the closing condition related to ensuring the accuracy of the other party's reps and warranties as of the closing date

A brokerage firm that has been registered with the SEC I. Is subject to the SEC's regulation and oversight II. Has been approved by the SEC as part of its registration process III. Can sell both exempt and non-exempt securities

A broker-dealer that is registered with the SEC is subject to the SEC's regulations, but is not approved by the SEC. SEC-registered broker-dealers may sell both exempt and non-exempt securities

Under SEC Reg M, all of the following are considered "distribution participants" EXCEPT

A distribution participant is defined under Regulation M as any underwriter, prospective underwriter, broker, dealer or other person who has agreed to participate or is participating in a distribution. These persons are all subject to the provisions of Reg M

The underwriting commitment for an acquisition financing is most likely to be a

A firm commitment is seen in almost all underwritten transactions. In this scenario, the underwriters make a commitment to buy the securities as opposed to using their best efforts to find investors.

A brokerage firm's Customer Identification Procedures require all of the following EXCEPT

A firm's Customer Identification Procedures require that the customer's identity is verified either before or within a reasonable time of account opening

For a non-automatic shelf registration, what is the maximum period of time that may elapse after the effective date of the prior registration in order to offer securities?

A non-automatic shelf registration may be offered for up to 180 days after the third anniversary of the prior registration's effective data. The filing of a new registration statement will "refresh" this period

Which of the following is TRUE regarding preliminary proxy statements?

A proxy statement is required to be distributed to shareholders prior to a vote, either at an annual meeting or on a proposed merger transaction. A preliminary proxy is a draft of the proxy statement that will ultimately be distributed to shareholders. When required, it is filed with the SEC at least 10 days before the definitive proxy is distributed to shareholders. A preliminary proxy is not required if the only voting matters are related to election of the board of directors, executive compensation and shareholder proposals. A preliminary merger proxy is always required to be filed with the SEC.

Two prospective investors, Joe and Jane, each attend separate distributions of the same electronic road show, scheduled one week apart. The version of the road show attended by Joe is substantially similar to the one attended by Jane one week later. Which version of the road show must be filed with the SEC?

A recorded road show must be made available no later than the date of first use. It also must be filed with the SEC prior to viewing. This version can't be the one viewed by Jane, because a different version was presented sooner to Joe. Variations in electronic road shows are permissible, as long as all investors receive the same "core presentation." Also, this filing is considered free-writing a prospectus.

In which of the following situations would it be appropriate for a registered representative to lend money to a client without receiving permission from the firm?

A registered representative can lend money to, or borrow money from, a client if the client is a bank or a family member, or there is some type of outside personal or business relationship. If the client and rep have been friends for a long time that would potentially qualify. It is important to note though, that it would still require permission from the firm. If the client happens to be a bank or family member, permission from the firm would not be required

A registered representative works in a branch office in North Carolina. Her firm's home office is in the state of New York. While on vacation in Florida, she transacts general securities business. The representative must be registered in I. North Carolina II. New York III. Florida

A registered representative must be registered wherever he or she transacts business. In this case, the representative must be registered in the state of her branch office location (NC) and FL, where she transacted business while on vacation

A registered representative that has been fined by FINRA due to a disciplinary action I. Must pay the fine promptly II. Must pay the fine within 60 days III. Is liable for the costs of the proceeding in addition to the fine IV. Is not liable for the costs of the proceeding in addition to the fine

A representative or firm that has been fined due to disciplinary action must pay any fine promptly to FINRA. If the fine has not been paid and FINRA issues a written notice, the fine is payable within 7 days. If it is not paid after the notice, the representative of the firm may be subject to suspension or revocation of registration. A disciplined firm or associated person is also liable for costs of the proceeding as determined by the Adjudicator

At what point does a settlement reached under Mediation become binding on all parties?

A settlement reached via a mediation proceeding becomes binding when the parties sign a Memorandum of Understanding

DJ is preparing a pitch book for a potential acquisition. The target is privately held and presents considerable opportunities for a purchaser that can make appropriate operational and strategic changes. When running the numbers which of the following of the target's items would DJ least likely adjust when computing a normalized set of financials or EBITDA figure?

A special stock dividend would be the least likely event to adjust for as it is not relevant to the calculation of EBITDA. Adjustments to a financial statement or EBITDA for excessive executive compensation, corporate jet expenses, or legal settlements would more likely be adjusted

In a targeted auction, how many competitors is a buyer typically competing against in order to get past the first round?

A targeted auction focuses on a few clearly defined buyers that have been identified as having a strong strategic fit and/or desire, as well as the financial capacity, to purchase the target. This process is more conducive to maintaining confidentiality and minimizing business disruption to the target. Therefore, typically no fewer than 5 potential buyers and no more than 15 are invited to participate in a targeted auction

Calculate FSI Incorporated (exhibits 79-82) debt to capitalization ratio as of November 30, 2012, with a given stock price of $37.98.

All of the information used to calculate the answer to this question can be sourced from the balance sheet. Debt to capitalization = Total Debt / (Total Debt + Shareholders Equity). Total Debt = Short-term debt (sometimes referred to as current maturities) + loans + notes + bonds + debentures + capital leases = $11,217,000 Current capital lease obligations + $1,496,938,000 Debt & capital lease obligations = $1,508,155,000 total debt. Shareholders equity for the purposes of a debt-to-capitalization calculation refers to shareholders equity from the balance sheet, here $6,665,182,000. Do not use the market value of equity for this calculation. Therefore, debt-to-capitalization = $1,508,155,000 / ($1,508,155,000 + $6,665,182,000) = 18%.

In which two of the following scenarios would a buyer be expected to pay a higher premium for a given public target? I. All-cash deal II. All-stock deal III.Target trading at a 52-week low IV. Target trading at an all-time high

All-cash deals tend to result in a higher premium paid for a given target because in selling for cash, target shareholders forego the ability to participate in value creation opportunities that result from combining the two companies. Targets trading at a 52-week low tend to require a higher premium paid because their shareholders are wary of selling on the cheap. Similarly, shareholders may be willing to accept a lower premium if they are selling at an all-time high stock price

ForeignCo, with offices in 15 countries, including the US, engages Jim Securities, Inc. as an advisor to make corporate acquisitions for cash and securities. Shortly after signing an engagement letter, ForeignCo's CFO gives Robert, a banker on the deal team, a mandate to screen for potential acquisition targets with significant business in Cuba, Venezuela and North Korea. At this point, Robert should

Although any suspicious activity, especially with countries hostile to the US, requires the submission of a Suspicious Activity Report, it is ultimately the decision of a principal or the firm's designated AML Compliance person to file such a report. In this question the best answer is that Robert should bring the attention to his superiors. If an SAR is ultimately filed with FinCEN, the client is not notified of this event.

A cash dividend has been declared on ABC stock which is payable on Friday, June 20th to shareholders of record on Friday June 13th. Which of the following statements are true? I. An investor must purchase the stock before Wednesday, June 11, to receive the dividend II. An investor must purchase the stock before Thursday, June 12, to receive the dividend III. An investor who sells ABC stock on Thursday, June 5, regular way settlement, will receive the dividend IV. An investor who purchases ABC stock on Thursday, June 12, regular way settlement, will not receive the dividend

An investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. In this example, ABC stock must be purchased no later than Wednesday, June 11, as the ex-date is Thursday, June 12th. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Stock that is purchased after the ex-date will trade ex-dividend, or without the dividend. Note: This question reflects regular way settlement of T+2, effective as of Sept 5, 2017.

All of the following statements about unsponsored ADRs are true EXCEPT

An unsponsored ADR is one that is issued without the involvement of the foreign company whose stock underlies the ADR. Shareholder benefits, voting rights, and other attached rights may not be extended to the holders of these particular securities. These securities trade over-the-counter rather than on Nasdaq or the NYSE

Karen is a broker who has a control relationship with the issuer of securities that she is offering. Under Rule 15c1-5, when must she disclose this relationship in writing to avoid manipulation and deceptive practices?

Any control relationship must be disclosed to the client who is offered securities, in writing, before completion of the transaction. The disclosure of control relationships is required of all securities sales, not just offerings or new issues

After an arbitration proceeding has been completed, a decision is to be rendered by the arbitrators within

Arbitrators are to render a decision within 30 days of the completion of arbitration proceedings

Company DEF, which has $1,500,000,000 in revenue, $180,000,000 in EBITDA, and $150,000,000 in book value is preparing an initial public offering to raise $75,000,000. Company DEF will have $75,000,000 in debt after the IPO. To increase demand, the shares will be offered at a 15% discount. The average multiples for companies in the same sector are 1x EV/SALES, 6.5x EV/EBITDA, and 2.5x Price/Book. Based on the above data, what is the most likely valuation of Company DEF?

Because this is a profitable company, the best comparable to use for this question is the EBITDA multiple. Company DEF's valuation using the EBITDA multiple is $180,000,000 x 6.5x = $1,170,000,000. However, to increase demand, the shares will be offered at a 15% discount. Therefore, the valuation after the discount is $1,170,000,000 x (1 - 15%) = $994,500,000

Company E issues $500,000,000 in bonds at 99.25. Underwriting fees are 100 basis points. What are the proceeds received by Company E, net of underwriting fees?

Company E is issuing these bonds at a discount from par, so the public offering price = $500,000,000 x 99.25% = $496,250,000. Also, the underwriter receives a spread of 100 basis points, calculated as a percentage of par value: $500,000,000 x 100 basis points = $5,000,000. Note that 100 basis points would be entered into a calculator as .0100. Therefore, the net proceeds received by Company E = $496,250,000 proceeds from sale to public - $5,000,000 spread to underwriter = $491,250,000

Using the information provided in Exhibit 30, what is the company's interest coverage ratio, assuming LIBOR of 1% and EBITDA of $75 million?

Coverage is a broad term that refers to a company's ability to meet ("cover") its interest expense obligations. Coverage ratios are generally comprised of a financial statistic representing operating cash flow (e.g., LTM EBITDA) in the numerator and LTM interest expense in the denominator. The interest expense calculated from Exhibit 30 is $37.6 million, based on the interest due on each tranche of debt. Given EBITDA of $75 million, interest coverage is 2.0x ($75 million / $37.6 million).

All of the following are subject to completion of a broker-dealer's Firm Element program EXCEPT

Covered persons who deal with the public are required to complete Firm Element training requirements. A firm may include other non-registered persons at its discretion

Use Exhibit 65 to answer the following question. In 2013, Company B expects Net Income to increase by 12% and it plans to increase dividends per share by 10%. Also, at the beginning of 2013 the company will repurchase 500,000 shares of stock. What is the company's expected dividend payout ratio in 2013?

Dividend payout ratio = Annual Dividends / Net Income OR Annual Dividend per Share / EPS. You can use the formula either way to calculate the solution. This solution will use Annual Dividends / Net Income 2012 Net Income = 2011 Net Income x (1 + 12% net income growth) = $13,440,000. 2011 Dividends per Share = 2011 Dividends / 2011 Outstanding Shares = $2,000,000 / 8,000,000 = $0.25. 2012 Dividends per Share = 2011 Dividends per Share x (1 + 10% dividend growth) = $0.2750. 2012 Pro Forma Outstanding Shares = 8,000,000 outstanding shares 500,000 shares repurchased = 7,500,000 shares. 2012 Total Dividends Paid = $0.2750 dividends per share x 7,500,000 pro forma shares = $2,062,500. Therefore, Dividend Payout Ratio = $2,062,500 dividends paid / $13,440,000 Net Income = 15.35%.

Who assumes share price movement risks in a floating exchange ratio, assuming no structural protections?

Due to the guaranteed value implicit in a floating exchange ratio, the acquirer assumes all share price risks.

All of the following are permitted activities, EXCEPT

During a tender offer, an investor can tender only up to the amount of their net long position. An investor could not tender more than their net long position. Stabilizing, overselling a new issue and publishing research on unrelated products are all permitted activities

Which of the following are "Excepted Activities" of Rule 102 of Regulation M? I. Odd-lot transactions II. Transactions by closed-end investment companies III. Redemptions by commodity pools or limited partnerships IV. Exercises of securities (e.g. options, warrants, rights, or any conversion privileges)

Each of the items above are excepted activities, and therefore permitted, under Reg M Rule 102. In addition, Rule 102 excepts (permits) offers to sell or the solicitation of offers to buy, unsolicited purchases, and transactions in Rule 144A securities.

A company buys back 100,000 shares of common stock for cash at a cost of $50 per share. At the same time, the company raises cash by selling $20mm in bonds with a coupon of 9%. What is the impact on enterprise value of these two transactions?

Enterprise value is the sum of all ownership interests in the company and claims on assets. It is considered independent of changes in capital structure, meaning that changes in capital structure do not affect it. Buying back stock for cash and selling bonds to raise cash are changes in capital structure. Enterprise Value = Equity value + total debt + preferred stock + noncontrolling interest cash; so as cash is generated or used to issue or repurchase debt or equity, changes in cash exactly offset changes in equity value and total debt in the equation

All of the following may provide insight on comparable companies for a given private company EXCEPT

For private targets, public competitors' 10-Ks, proxy statements, investor presentations, equity research reports, and broader industry reports are often helpful sources for locating comparable companies. An additional source for locating comparables is the proxy statement for a relatively recent M&A transaction in the sector ("merger proxy"), as it contains excerpts from a fairness opinion. The banker may also screen for companies that operate in the target company's sector using SIC or NAICS codes. EDGAR, or the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required to file forms with the SEC. While it provides a gateway to SEC filings that may contain information on comparable companies, EDGAR in of itself does not put forth data on comparable companies

Who is required to sign-off on the final registration statement, after any deficiencies have been addressed? I. Corporate officers of the issuer II. Underwriters III.The state securities commission in the issuer's jurisdiction

For securities registration, the final sign-off is required of corporate officers of the issuer and underwriters.

How often does Form 13F need to be filed?

Form 13F is initially filed at the end of the first year that the manager exceeds $100 million in discretionary assets. Subsequently, the manager must then file within 45 days of the end of each calendar quarter. The manager is required to disclose all long equities positions

For a company that has no change in working capital, what adjustment should be made to EBIT to calculate free cash flow (FCF)?

Free cash flow = EBIT Taxes + D&A increase in net working capital capex. The FCF calculation focuses on actual cash generated (not accounting profit) by subtracting capex and adding back D&A. Any increase in working capital absorbs cash, so it also must be subtracted

Consider Exhibits 50-53. What is GoodPancakeHouse Inc's 2009 Net Debt-to-EBITDA ratio?

From the balance sheet we find five components of Net Debt: Current maturities of notes and debentures; Current maturities of capital lease obligations; Notes and debentures, less current maturities; Capital lease obligations, less current maturities; and Cash and cash equivalents. This gives net debt of 900+3,725+254,357+19,684-26,525 = 252,141. EBITDA = EBIT (shown as Operating Income) + Depreciation and amortization = 72,429 + 32,343 = 104,772. Finally, we get a Net Debt-to-EBITDA ratio of Net Debt/EBITDA = 252,141/104,772 = 2.41

Which of the following characteristics would likely translate into higher trading valuation multiples? I. High growth II. High enterprise value III. High inventory IV. High ROIC

High inventory level is usually a bad financial indicator for a company as it constricts return metrics and may indicate operational inefficiency and/or slowing sales demand for its products. Enterprise value represents the sum of ownership interests in the company and, taken alone, cannot be extrapolated to a trading multiple

An investor is only interested in investing in stocks with steady growth but which are not overvalued. A registered rep would most likely classify this investor as being interest in

GARP investors are interested in investments with steady growth but also seek to avoid lofty valuations

Use the information in Exhibit 64 to answer the following question. Given the sector information in Exhibit 64, what could be concluded about the business strategy of Company D in 2011 and 2012?

Given that Company D entered the market in 2011 & 2012 but companies A, B and C did not lose business, it could reasonably be concluded that Company D either found a new customer base or created a new product. Company D does not appear to have taken away market share from the other companies.

Use Exhibit 55 to answer the following question. Of the four companies listed, which one is the best value?

Given the data provided, the PEG Ratio (Price to Earnings Growth) will yield the best value. PEG Ratio = P/E Multiple / Earnings Growth. Company W = 15.4 / 7.5 = 2.1x. Company X = 17.8 / 10.4 = 1.7x. Company Y = 12.7 / 5.4 = 2.4x. Company Z = 13.5 / 7.0 = 1.9x. Company X has the lowest PEG ratio, and is therefore the best value

Blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange are known as

Global Depository Receipts (GDRs) are blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange. Global Depository Shares (GDSs) refer to the individual shares of a GDR. American Depository Shares (ADSs) refer to the individual shares of an ADR. Though ADSs represent claims on foreign shares, they are subject to fluctuations in currency prices. American Depository Receipts (ADRs) are used by non-U.S. companies to enable U.S. investors to purchase shares of their company's stock and for that stock to trade on a U.S. stock exchange. ADRs are issued by a U.S. depository bank and are quoted and pay dividends in U.S. dollars

Acme Industries buys Delta Company for $250 million in an all cash deal. At the time of the acquisition Delta had equity of $175 million, carried $35 million of bank notes, $15 million in 7% debentures due in 2025, and $25 million of secured bonds with a 4.5% coupon. The market value of Delta's net assets is $220 million. In connection with the acquisition, what will Acme record, if any, as goodwill on its balance sheet?

Goodwill is calculated as the difference between the purchase price and the market value of the purchased net assets. Here, Acme paid $250 million for net assets worth $220 million, and will record $30 million of goodwill. Answering the question does not require the use of Delta's debt or equity figures

Widgets Manufacturing, Inc. (WMI), with locations spread out along the Atlantic-coast, is preparing a registration statement for a possible IPO. A banker doing due diligence reads the following risk disclosure in the registration statement: "WMI has significant production facilities in hurricane prone regions. Any damage to one of these facilities could significantly impact our ability to meet customer demand. We have a flood insurance policy which would off-set any lost revenue as a result of this event." After reading this passage, what is the most prudent course of action for the banker to take?

If a company has flood insurance or disaster insurance; the insurance will only pay for damage to the company's property. It will not provide coverage for any lost revenue. Therefore, the passage in question is misleading. To know if any lost revenue or income would be covered in the case of such an event, a banker would want to investigate to see if the company also had business interruption insurance. However, that does not impact the lack of accuracy of the statement in the prospectus. It still needs to be brought to the attention of legal counsel

To appeal a decision of the National Adjudicatory Council against the membership of a firm, a written request for review must be filed within

If a firm has been denied FINRA membership, it may file a request for a review of the decision within 25 days of the service of the decision

If a syndicate manager expects the closing of an offering to be delayed, the firm is required to notify FINRA of this fact

If a syndicate manager expects the closing of an offering to be delayed; it is required to notify FINRA's Corporate Finance Department immediately, but no later than the scheduled closing date

Lawrence had his personal brokerage account at Syntek Securities, a member firm. If he is hired by a rival member firm, Waxman LLC, how long can he maintain the Syntek account, without disclosing it to Waxman?

If an account was opened or otherwise established prior to a person's association with a member firm, the associated person must obtain the written consent of the employer member within 30 calendar days of being hired. Lawrence has 30 days to either close the Waxman account or obtain Syntek's consent to maintain it. Note that prior to April 2017, the rule required the opening firm to notify the employer of the account. However, the new rule requires the employee to receive permission from the employer prior to opening the account.

Company O enters into a Definitive Agreement to purchase Company N. Company O plans to execute the merger via a two-step merger, beginning with a tender offer to Company N shareholders, including the CEO. Contingent on the closing of the deal, the CEO will also be receiving a compensation package for taking on a new role at Company O. This compensation package would be permitted only with approval from

If an investor tendering shares also receives additional compensation, such as an employment package, approval is required from the compensation committee of the board who provided the compensation.

Company B reports net income of $150 million on its most recent 10k. During the period it also sold an asset at a $35 million loss. The company has a marginal tax rate of 40% and an effective tax rate of 32%. Assuming a banker views the asset sale as a one-time event, what would be the company's adjusted net income for the period?

If the banker views the asset sale as a one-time loss, the loss must be excluded from the company's income statement, thus increasing net income. Removing the one-time item and tax-effecting it (because the loss served as a tax-shield) increases net income by $35mm x (1 marginal tax rate) = $35mm x 60% = $21mm. Adjusted Net Income = $150mm + $21mm = $171mm. When adjusting non-recurring items, use marginal tax rate on the examination, whenever it is provided

A company accelerates its taxable income so that the income reported for tax purposes is $10 million greater than the income reported on its 10-K. If the company has a 40% marginal tax rate and a 36% effective tax rate, which of the following is created by this bookkeeping difference?

If the company declares greater income for tax filings than in its SEC filings, it pays greater cash taxes than it appears on its 10-K. This creates a deferred tax asset, as at some point in the future the company will pay less taxes to offset the higher amount it paid in the current year. The amount of the asset = bookkeeping difference x marginal tax rate = $10mm x 40% = $4.0mm. The effective tax rate is a blended rate, and is not used to make adjustments to a company's financials

A syndication where the arranger agrees to provide less than the aggregate amount of the offering, but agrees to use reasonably commercial efforts to fulfill the capital raise is known as a

In a best efforts offering, the arrangers agree to use reasonably commercial efforts to find investors to fill the capital raise

Brokers Dealer A and Broker Dealer B are co-bookrunners on a debt offering for XYZ Co, Inc. BD A has a 30% allocation, BD B has a 20% allocation, and other underwriters share the remainder. During price talk between the co-bookrunners and XYZ, the deal is expected to raise between $400 million and $900 million of debt at a rate of UST +80. The deal ends up being priced at $700 million. XYZ is disappointed that the final pricing was below the top end of the range. Who is responsible for the $200 million in debt that is unsold?

In a firm commitment, the underwriters are responsible for selling only the final amount that is agreed to when the deal is priced. In this case, that would be $700 million. The fact that the securities were priced near the mid-point of the range is typical. The underwriters only have liability if they cannot sell the final pricing amount that is agreed to in the Underwriting Agreement. Also, the reference to "UST +80" indicates the bonds will be priced at an interest rate 80 basis points above U.S. Treasuries

All of the following are key Representations ("Reps") and Warranties made by a seller in a definitive agreement EXCEPT

In an M&A transaction, the seller makes reps about the target's business to help assure the buyer it is getting what it thinks it is paying for. These reps also serve as a baseline for closing conditions and indemnification. Closing conditions are not a rep; rather they are a separate part of the Definitive Agreement. Examples of seller reps include: financial statements must fairly present the current financial position no material adverse changes (MACs) all material contracts have been disclosed

A bond that is trading flat

In certain bond markets accrued interest is included in the trading price, and in other markets it is added on after trading. A bond trading with accrued interest is trading at its "full" price; a bond trading without accrued interest is trading "flat." Examples of bonds that trade flat include zero coupon bonds and bonds in default

OrangeCo, Inc. announces that it has entered into a Definitive Agreement to be acquired by AppleCo, Inc. Under the terms of the agreement, OrangeCo, Inc. will be acquired for $50,000,000, with 80% of the consideration in newly issued AppleCo, Inc. common stock and the rest in cash. The cash will be financed with debt, at a pre-tax cost of 13%. Furthermore, AppleCo, Inc. expects to recognize $350,000 in after-tax transaction synergies upon closing the deal. Using the information provided here, along with the data in Exhibit 102, which of the following is true regarding this transaction?

In order to complete the accretion/(dilution) analysis, it is first necessary the calculate AppleCo, Inc.'s standalone diluted shares outstanding and standalone net income. Because the outstanding options are in-the-money, there will be new shares issued, and the proceeds used to repurchase shares in the open market. The net new number of shares issued, using the Treasury Stock Method = (current stock price avg exercise price)/(current stock price) x number of options shares = ($47.32 - $31.25)/$47.32 x 5,500,000 = 1,867,815. Standalone diluted shares outstanding = reported shares outstanding + net new shares issued for options = 83,000,000 + 1,867,815 = 84,867,815. Standalone net income = reported EPS x reported outstanding shares = $1.78 x 83,000,000 = $147,740,000. Also, standalone diluted EPS = net income/diluted shares outstanding = $147,740,000/84,867,815 = $1.74. AppleCo, Inc. will issue new shares to finance the transaction. The number of new shares issued = (Purchase price for target x % stock consideration)/current stock price = ($50,000,000 x 80%)/$47.32 = 845,309. Therefore, the pro forma diluted shares outstanding, after the transaction = AcquirerCo standalone shares outstanding + new shares issued for transaction = 84,867,815 + 845,309 = 85,713,123. Finally, it is necessary to calculate the combined entity's pro forma net income, taking into account the synergies and the after-tax cost of debt. The cash consideration of 20% (100% - 80% stock consideration), will require AppleCo, Inc. to issue new debt of $10,000,000 (20% x $50,000,000 total purchase price). The interest expense on the debt = cost of debt x $10,000,000 = 13% x $10,000,000 = $1,300,000. Since interest expense is tax deductible, the after-tax cost of debt = pre-tax interest x (1 tax rate) = $1,300,000 x (1 - 42%) = $(754,000). This is a negative number because it will be a deduction from combined net income. The combined entity's net income = AcquirerCo net income + TargetCo net income + synergies + after-tax cost of debt = $147,740,000 + $7,500,000 + $350,000 + $(754,000) = $154,836,000. Therefore, pro forma EPS = Pro forma net income/pro forma outstanding shares = $154,836,000/85,713,123 = 1.81. Since the combined EPS is greater than AppleCo, Inc.'s standalone diluted EPS of $1.74, the transaction is said to be accretive, by $0.07 (1.81 - $1.74).

Use Exhibit 101 for this question. ProctorCo, Inc. announces that it has entered into a Definitive Agreement to be acquired by JohnsonCo, Inc. Under the terms of the agreement, ProctorCo, Inc. will be acquired for $80,000,000, with 30% of the consideration in newly issued JohnsonCo, Inc. common stock and the rest in cash. The cash will be financed with debt, at a pre-tax cost of 10%. Furthermore, JohnsonCo, Inc. expects to recognize $100,000 in after-tax transaction synergies upon closing the deal. Using the information provided here, along with the data in Exhibit 101, which of the following is true regarding this transaction?

In order to complete the accretion/(dilution) analysis, it is first necessary the calculate JohnsonCo, Inc.'s standalone fully diluted shares outstanding and standalone net income. Because the outstanding options are in-the-money, there will be new shares issued, and the proceeds used to repurchase shares in the open market. The net new number of shares issued, using the Treasury Stock Method = (current stock price avg exercise price)/(current stock price) x number of options shares = ($27.95 - $22.12)/$27.95 x 1,200,000 = 250,304. Standalone fully diluted shares outstanding = reported shares outstanding + net new shares issued for options = 12,358,000 + 250,304 = 12,608,304. Standalone net income = reported EPS x reported outstanding shares = $2.52 x 12,358,000 = $31,142,160. Also, standalone fully-diluted EPS = net income/fully diluted shares outstanding = $31,142,160/12,608,304 = $2.47 JohnsonCo, Inc. will issue new shares to finance the transaction. The number of new shares issued = (Purchase price for target x % stock consideration)/current stock price = ($80,000,000 x 30%)/$27.95 = 858,676. Therefore, the pro forma fully diluted shares outstanding, after the transaction = AcquirerCo standalone shares outstanding + new shares issued for transaction = 12,608,304 + 858,676 = 13,466,980. Finally, it is necessary to calculate the combined entity's pro forma net income, taking into account the synergies and the after-tax cost of debt. The cash consideration of 70% (100% - 30% stock consideration), will require JohnsonCo, Inc. to issue new debt of $56,000,000 (70% x $80,000,000 total purchase price). The interest expense on the debt = cost of debt x $56,000,000 = 10% x $56,000,000 = $5,600,000. Since interest expense is tax deductible, the after- tax cost of debt = pre-tax interest x (1 tax rate) = $5,600,000 x (1 - 38%) = $(3,472,000). This is a negative number because it will be a deduction from combined net income. The combined entity's net income = AcquirerCo net income + TargetCo net income + synergies + after-tax cost of debt = $31,142,160 + $10,000,000 + $100,000 + $(3,472,000) = $37,770,160. Therefore, pro forma EPS = Pro forma net income/pro forma outstanding shares = $37,770,160/13,466,980 = 2.80. Since the combined EPS is greater than JohnsonCo, Inc.'s standalone fully diluted EPS of $2.47, the transaction is said to be accretive, by $0.33 (2.80 - $2.47).

"Know-your-customer" rules apply to

Know-your-customer rules apply to customer accounts, not transactions or strategies. The essential facts that members must use in opening and maintaining accounts include the customer's financial profile and investment objectives or policy

Which of the following is the best example of misappropriation of inside information?

Misappropriation occurs when persons steal information from their employer and trade on that information in any stock, not just their employer's stock. The misappropriation theory broadens the liability for misuse of inside information and is illegal.

A company has shareholder's equity of $800 million. Its current assets are $80 million and cash or cash equivalents are $25 million. If net debt is $50 million and short-term debt is $20 million, then long-term debt must be

Net debt = long-term debt + short-term debt cash or cash equivalents. $50 million net debt - $20 million short-term debt + $25 million cash = $55 million long-term debt

An underwriter wishes to engage in stabilization of an issue's price. The offering price is $25 a share and the highest bid for the security in the principal market where it trades is $24. No stabilizing bid may be made at a higher price than

No stabilizing bid can be made at a price higher than the lower of: 1) the offering price; or 2) highest bid for the security in the principal market where it trades. In this case, the lower of those prices is $24.

An investment banker doing due diligence on a target company would be least likely to interview which of the following individuals?

Of the choices listed, the buy-side adviser would be least likely to interview a large shareholder of the target company. The shareholder would subsequently be receiving non-public information. Also, it is possible that the shareholder would launch a competing bid for the company

Judy is an investment banker helping her client understand ways to raise capital. The client is a privately held seafood company that is seeking capital to finance the purchase of additional ships and increase operations. Judy suggests an IPO as a potential option; which of the following sequences is the most typical in an equity IPO?

Of the steps listed, the typical IPO process would start with 1) Bake off (the banks compete for the business), 2) Mandate (the client selects an investment bank), 3) Book Build (the bank will collect IOIs from potential purchasers) 4) Confirm allocations (actually sell the shares once they are registered).The complete sequence is: 1) Pitch for business (bake-off), 2) Win mandate, 3) Sign engagement letter, 4) File registration statement, 5) Book building/marketing, 6) Go effective (shares are registered under '33 Act), 7) Confirm allocations and distribute securities to investors

Which of the following would be an example of a Regulation A+ offering?

Offerings under Regulation A+ are $50 million or less and are qualified for a simplified registration process, thus being exempt from standard SEC registration requirements

Information found within a prospectus cannot be more than

Once a prospectus has been in use for more than nine months, no information within a prospectus can be more than 16 months old. This is the correct rule, though it conflicts with book.

Section 4(a)(5) of the Securities Act of 1933 governs which of the following?

Only "accredited investors," a defined term under Regulation D, are able to participate in private placements under Section 4 of the '33 Act.

In the event the lead bookrunner of a follow-on offering seeks to exercise an overallotment option, at what point is the distribution deemed completed?

Only when all of the securities have been distributed, and after any stabilization and trading prohibitions have been terminated, can the distribution be deemed completed. If an overallotment option is exercised at a later date, the distribution is still deemed completed, unless the overallotment is exercised for an amount greater than any short position by the syndicate at exercise

ABC Corp. has $160 million of gross profit, operating expenses of $72 million, depreciation and amortization of $18 million, and COGS of $32 million. For accounting purposes, the company includes depreciation within operating expenses. What is its operating margin?

Operating margin is also called "operating profit margin," or "EBIT margin." It is a measure of operating income (EBIT) divided by sales. EBIT = $160 mm gross profit - $72mm operating expenses = $88 million. Sales = $160mm gross profit + $32mm COGS = $192mm. Operating margin = $88mm EBIT/$192mm sales = 45.8%. Note that depreciation is already included within operating expenses.

Consider Exhibit 55. What is the mean PEG ratio?

PEG = (PE Multiple) / Earnings Growth. The PEG ratios of Company W, X, Y and Z are 2.05, 1.71, 2.35 and 1.93 respectively. The mean of those four numbers is 2.01

Use Exhibit 66 to answer the following question. What is Company N's Price / Tangible Book Value Ratio?

Price / Tangible Book Value = Equity Value / (Shareholders Equity Goodwill). Equity Value = $24.00 stock price x 70,000 outstanding shares = $1,680,000. Tangible Book Value = Shareholders Equity Goodwill = $1,800,000 $1,300,000 = $500,000. Price / Tangible Book Value = $1,680,000 / $500,000 = 336%

Regulation A+ authorizes the SEC to exempt registration for

Regulation A+ exempts the registration of small securities offerings of no more than $50 million in any 12-month period. Regulation A (as opposed to A+) had a limit of $5 million until passage of JOBS Act legislation and a new SEC rule, which increased the limit to $50 million

A company is engaged in an intensive research effort that is increasing its spending on research and development substantially. What will be the immediate impact of this spending on the company's gross profit margin, assuming that it does not expect to recognize revenues from this increased spending for a number of years?

Research and development (R&D) is an operating expense, which does not factor into the calculation of gross profit margin (gross revenue - cost of goods sold). R&D factors into the calculation of operating margin

When comparing rights and warrants, which of the following statements are TRUE?

Rights are short term instruments that allow the holder to buy the stock at a price that is typically lower than the current market price of the stock. Warrants are long-term instruments. The exercise price of the stock is typically higher than the market price of the stock at the time the warrants are issued. Warrants have value only if the price of the stock appreciates.

Under Rule 10b-18 which of the following is TRUE regarding the maximum number of shares an issuer can repurchase in any given day to be within the SEC's safe harbor?

SEC Rule 10b-18 requires that issuers repurchase no more than 25% of the stock's average daily trading volume (ADTV) over the previous four weeks if they wish to remain within the SEC's guidelines of the safe harbor. The safe harbor allows the issuer to repurchase shares in a manner that the SEC generally does not consider manipulative to the company's stock price.

In a business combination that requires a vote of shareholders to approve a proposed deal, involving a change of securities, a prospectus

SEC Rule 153a requires that a prospectus be delivered prior to the vote, in business combinations that depend on a shareholder vote and involve a change of securities

If a SIPC member corporation were to go bankrupt, the trustee appointed would be responsible for all of the following EXCEPT

SIPC does not supervise the distribution for commodity accounts because commodities are not a security. SIPC supervises the distribution of cash and securities in securities accounts only.

In 2009, Computers & Things, Inc. had a $5 million inventory write-down and a $15 million restructuring charge related to severance from closing a facility. Given the income statement shown in Exhibit 11 and a 40% marginal tax rate, what is the company's 2009 adjusted net income?

The add-back of the inventory write-down of $5 million decreases cost of goods sold, and the elimination of the restructuring charge increases operating income, resulting in a total $20 million increase in pre-tax income. The $20 million gain is then tax-effected at the company's 40% marginal tax rate, for a net gain of $12 million to the bottom-line (20mm x 60%)

A company's EBITDA, as reported for a fiscal year, is $290 million before adjustments. Adjusted financial statements show a $10 million inventory write-down and a $20 million restructuring charge related to closing a facility. The company's marginal tax rate is 40% and its effective tax rate is 34%. What will its adjusted EBITDA be?

The adjustments for inventory write-downs and restructuring charges added back to reported EBITDA to create an adjusted EBITDA, as if the one-time items did not occur. Adjusted EBITDA = $290mm reported + $30mm adjustments = $320mm. Since EBITDA is reported before income taxes, the numbers are not tax-effected. However, when tax-effecting the items for net income, the marginal tax rate is used.

Use the data in Exhibit 201 to answer the following question. JoePrivateCo intends to raise capital by selling 100 million shares of common stock in an IPO. The investment bank rep advising JoePrivateCo on the transaction estimates that comparable companies in its sector tend to trade at a multiple of 10 - 12 times 2010's expected earnings. The equity capital markets rep advising JoePrivateCo advises the company to price the shares at a 20% discount to satisfy demand for the securities. Assuming JoePrivateCo intends to float 40% of its total equity in the IPO, and assuming it expects its current trend in earnings growth to continue, what is the mean offering price for the transaction?

The average equity value for this industry is 11.0x next year's earnings (average of high end P/E range + low end P/E range). The current growth rate for JoePrivateCo's earnings = 2009 earnings/2008 earnings 1 = $127.0mm/$115.0mm 1 = 10.4%. Assuming that trend continues, JoePrivateCo's next fiscal year earnings = 2009 earnings x (1 + annual earnings growth) = $127.0mm x (1 + 10.4%) = $140.3mm. This yields an implied equity value = Avg FY1 P/E x FY1 earnings = 11.0 x $140.3mm = $1,542.8mm. Since the company is only offering 40% of its equity to the public, the total equity sold would be 40% x $1,542.8mm = $617.1mm, or $6.17 per share ($617.1mm equity float/100mm shares offered). After the 20% IPO discount is applied, the mean offering price is $4.94

Which two of the following due diligence process tasks do buy-side advisers perform in the second round? I. Deliver the first draft of the Definitive Agreement template to target legal counsel II. Schedule site visits III. Receive the CIM IV. Schedule management presentations

The buy-side advisor typically works with its client and the target sell-side advisers to schedule site visits, management presentations and other due diligence process points. The receipt of the CIM is a first round event. The first draft of the Definitive Agreement is typically sent out by the sell-side adviser NOT the buy-side adviser

A company has 100,000 convertible preferred shares outstanding, with each preferred share convertible into one share of common stock. The quarterly dividends paid on these preferred shares totals $120,000. What is the impact of these preferred shares on the calculation of diluted earnings per share?

The calculation of diluted earnings per share assumes all convertible preferred shares are converted to common stock, which results in an addition in shares outstanding. At the same time, the preferred dividends are no longer paid on the converted shares, so earnings available to common stockholders will increase by $120,000

A shareholder submits a bid in a Dutch auction tender that becomes the "clearing bid." Which of the following statements is TRUE about this bid?

The clearing bid in a Dutch auction tender may not be the highest or lowest bid, but it is an accepted bid. It establishes the price that the company pays for all accepted bids. Any bids at this price or lower are accepted

A company has set up an unfunded deferred compensation plan for its executives. It accrues an expense on its income statement of $5 million per year, but the income tax deduction for these expenses is not taken until deferred compensation is paid out in the future. If the company has a 40% marginal tax rate and a 32% effective tax rate, each year in which the company funds the plan it will recognize a

The company has already recorded charges to its books which it will use to reduce taxes in future years. As a result, this creates a deferred tax asset. This is shown as a deferred tax asset equal to $5 million x 40% marginal tax rate = $2mm. The effective tax rate is a blended rate that is not generally used for making adjustments to financial statements.

Which type of corporation is eligible to claim a "dividends received deduction?"

The dividends received deduction offers tax relief for dividends paid by one C corporation to another C corporation

A company has only one debt issue outstanding, a 20-year bond that pays a 9.0% coupon. The bond currently is trading at a price of 106. The current rate on Treasury bills is 4.0% and on 10-year Treasury notes it is 5.0%. The company has a marginal tax rate of 35%. What is the after-tax cost of debt that would be used to calculate cost of capital?

The cost of debt (included in WACC) is based on the current yield of a company's debt issues. Current yield = coupon/market price = 9%/106 = 8.5%. However, since interest expense is tax deductible, it must be tax-effected to produce after-tax cost of debt = 8.5% x (1-tax rate) = 8.5% x 65% = 5.5%

The industrial production index is what type of economic indicator?

The industrial production index is a coincident economic indicator. Another example of a coincident indicator is monthly non-agricultural payrolls

An effective buy-side adviser may use all of the following non-financial items to make its client's offer more appealing to the target EXCEPT

The material adverse effect (MAE), or material adverse clause (MAC), is typically a highly negotiated provision in the definitive agreement, which may permit a buyer to avoid closing the transaction in the event that a substantial adverse situation is discovered after signing or a detrimental post-signing event occurs that affects the target. As a general rule, buyers prefer loose MACs that afford wiggle room in the event that company performance or market conditions, for example, deteriorate; sellers, on the other hand, prefer very narrowly defined MACs that make it very hard for buyers to walk away. A meaningful role for management post-transaction, greater speed to closing, and no antitrust risk all would make a buyer's offer more attractive.

An accretion/(dilution) analysis shows that on a standalone basis a company will have 64 million diluted shares outstanding and earn $1.40 per share in Year 1. On a pro forma basis, after an acquisition, the number of shares will increase by 22 million and the pro forma earnings will increase by 14 cents per share. What is the percentage accretion in this deal?

The percentage accretion is calculated by comparing standalone EPS (before the transaction) and pro forma EPS (after the transaction) for the same period. The transaction is accretive by $.14 (as stated in the question) for a percentage of $.14/$1.40 = 10%

A stipulation in a bond indenture that permits the borrower to redeem a bond prior to maturity by making a lump-sum payment equal to the present value of future interest payments that will not be paid because of the early call is known as

The provision that makes the bondholder whole by providing compensation for interest payments that are missed because of an early redemption is known as a make-whole provision. Details of this provision are found in the bond indenture

Prior to process launch, the sell-side adviser typically conducts due diligence on the target through all of the following mediums EXCEPT

The sell-side adviser seeks to learn as much as possible about the target prior to process launch so as to better prepare key marketing materials, anticipate buyer concerns, and position the company. This due diligence involves reviewing various company documents and presentations, as well as having an in-person session with company senior management that is usually accompanies by key site visits. Formal interviews with the target's key suppliers and customers are highly unusual for this type of due diligence

The sell-side adviser performs all of the following functions with regard to the virtual data room EXCEPT

The sell-side advisor monitors dataroom access throughout the process, including the viewing of specific items. This enables them to track buyer interest and activity, draw conclusions, and take action accordingly. The sell-side adviser also ensures new data is uploaded to the dataroom in a timely fashion. Upfront, the adviser makes a recommendation on potential dataroom vendors. The programming of enhanced functionality of the dataroom is the domain of the vendors, not the bankers

Which criteria do investment banks traditionally use to evaluate final bids? I. Potential regulatory hurdles II. Offer price III. Committed financing package from bidder IV. Bid structure

The sell-side advisor works together with the seller and its legal counsel to conduct a thorough analysis of the price, structure, and conditionality of the final bids, including regulatory hurdles and financing package (or lack thereof). Purchase price is assessed within the context of the first round bids and the target's recent financial performance, as well as the valuation work performed by the sell-side advisors. The deemed binding nature of each final bid, or lack thereof, is also carefully weighed in assessing its strength. For example, a bid with a superior headline offer price, but significant conditionality, may be deemed weaker than a firmer bid at a lower price

To begin quoting a security on the OTCBB, a market maker must first register by filing a form with

To begin quoting an OTCBB security, a market maker must first register by filing a Form 211 with FINRA OTC compliance

A firm's request to delist its stock from the NYSE is effective only if

To delist its stock from the NYSE, a firm must notify the NYSE and file with the SEC. Delisting will take place if the SEC does not deny the request

In order to receive a cash dividend payment based on regular way settlement process, an investor must purchase stock no later than

To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process. Note: This question reflects regular way settlement of T+2, effective as of Sept 5, 2017

Use exhibits 50 through 53 to answer the following question. What is the total debt of GoodPancakeHouse, Inc. (GPH) as of December 30, 2009?

Total Debt = Short-term debt (sometimes referred to as current maturities) + loans + notes + bonds + debentures + capital leases. Therefore, total debt = $900,000 Current maturities of notes and debentures + $3,725,000 Current maturities of capital lease obligations + $254,357,000 Notes and debentures + $19,684,000 Capital lease obligations = $278,666,000 total debt

U.S. Government securities offer investors I. interest that is exempt from taxation at the federal level II. interest that is exempt from taxation at the state level III. backing by the full faith and credit of the U.S. government IV. interest that is slightly higher than that paid by AAA-rated corporate securities

U.S. government securities are backed by the full faith and credit of the U.S. government. Because of their low default risk they pay less interest than corporate issues. Interest on U.S. government securities is taxed at the federal level, but exempt at the state and local levels

The safe harbor exemptions under Regulation S are subject to which of the following general conditions? I. The seller reasonably believes the buyer is offshore at the time of the offer or sale II. The seller must have verification that the funds to purchase the offering are in U.S. dollars III. No directed selling efforts are be made in the U.S. by the issuer, investment bank, advisor, or affiliate IV. The offshore buyer is a QIB

Under Reg S, if the seller does not reasonably believe the buyer is offshore at the time of the sale, the transaction can still take place if it occurs on a designated offshore securities market. Other than that exception the seller must be a non-U.S. resident

Under SEC Rule 10b-18, an issuer that purchases its own shares is limited to daily purchases of no more than

Under SEC Rule 10b-18, an issuer cannot purchase more than 25% of the average daily volume of its own shares.

An acquirer has announced a definitive agreement to acquire a target in an all stock transaction valued at $1 billion. Under the terms of the agreement, target shareholders will receive, at a fixed exchange ratio, 0.50 shares of the acquirer's stock for every share of target stock. If the acquirer's shares are trading at $40.00, what price do target shareholders receive, on a per share basis?

Under a fixed exchange ratio structure, the offer price per share is calculated as the exchange ratio multiplied by the acquirer's share price. At an exchange ratio of 0.50 and an acquirer share price of $40.00, the offer price per share is $20.00 (0.50 x $40.00)

Fast Movers, Inc. buys a new van for $40,000. The van has a useful life of 8 years and a salvage value of $3,000. For accounting purposes, Fast Movers, Inc. depreciates the van on a straight line basis. For tax purposes, it uses a form of accelerated depreciation and books $18,500 of depreciation expense at the end of the fiscal year. Fast Movers, Inc. has a marginal tax rate of 45% and an effective tax rate of 40%. Which of the following is true regarding the effect of these transactions as of the end of the fiscal year

Under straight-line depreciation, the annual depreciation = (purchase price salvage value)/useful life = ($40,000 - $3,000)/8 years = $4,625. Since the company declares a greater depreciation expense for tax purposes, this will lead to lower declared income and lower taxes paid than it actually reports. As a result, this creates a deferred tax liability the company will need the pay the difference at some point in the future. The amount of the deferred tax liability = (tax depreciation accounting depreciation) x marginal tax rate = = ($18,500 - $4,625) x 45% = $6,244. The effective tax rate is a blended rate that is not used when adjusting financial statements

ABC Corp. is the acquiring company in an acquisition of XYZ Corp. The offering will be made to shareholders of XYZ (the target company) to exchange their common stock for shares of ABC. The deal is contingent on majority shareholder approval. Which company normally will be involved in preparing the registration statement and prospectus?

Unlike a tender offer, in which each shareholder makes an individual decision, a business combination (such as a merger or acquisition) is contingent on board action or majority shareholder approval. Both the acquirer and target company normally prepare a combined S-4 registration, prospectus and proxy disclosures. Both companies are described in the documents and disclosures.

On March 15, 2011, an investor buys a $1,000 par value 6% J&J 15 bond that can be called away at 103.75. If the bond is called on July 15, 2016, how much would the investor receive at redemption?

When a bond is called away the investor receives a call premium along with any interest accrued since the previous coupon date. In this case, the investor would receive 103.75% of par ($1,037.50) along with the final semi-annual coupon payment of 3% ($30)

When an issuer repurchases stock for a price in excess of par value, what is the impact to capital surplus?

When a company repurchases stock for a price in excess of par value, the par value account is reduced by: par value per share x the number of shares repurchased. The excess of the acquisition price over par value is deducted from capital surplus.

When an IPO trades above the Public Offering Price which of the following is the most likely way the underwriter will cover an oversold transaction?

When a new issue trade above the public offering price, the underwriter is likely to exercise a Greenshoe clause. This allows the underwriter to purchase up to 15% more shares from the issuer at the POP, thereby avoiding a scenario where the underwriter is required to purchase additional shares in the open market at a price higher than the public offering price

Which of the following is true regarding the impact that a share repurchase program will have on a company's Balance Sheet?

When an issuer repurchases stock in the open market, cash and shareholders' equity will both decrease by the actual acquisition cost of the repurchased shares. Within shareholders' equity, Treasury Stock will increase which, as a contra-equity account, produces the decrease in shareholders' equity.

Which of the following is a characteristic of a corporate zero-coupon bond?

Zero-coupon bonds are generally long-term bonds that are purchased at a deep discount and mature to their face value. Because of the deep discount, their prices generally fluctuate more than prices of other bonds that are traded in the secondary market. They pay interest only at maturity, although imputed interest must be reported for tax purposes each year.