Series 79 Diagnostic Exam 1

Under what circumstance would a privately held company be obligated to make SEC filings?

The company has registered public debt securities

The advantages of owning American Depository Receipts include all of the following EXCEPT

The owner of the shares does not have foreign currency risk

An investor buys an 8% coupon bond to yield 7%. What will most likely happen to the price of the bond as maturity approaches?

The price will decrease towards par

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

The target company's largest shareholder

OrangeCo. announces that it has entered into a Definitive Agreement to be acquired by AppleCo. Under the terms of the agreement, OrangeCo. will be acquired for $50 million, with 80% of the consideration in newly issued AppleCo. common stock and the rest in cash. The cash will be financed with debt, at a pre-tax cost of 13%. Further, AppleCo. expects to recognize $350K 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?

The transaction is accretive by $0.07 per share on a diluted basis

Which of the following statements is true about both equipment trust bonds and collateral trust bonds?

They are collateralized by equipment or assets of the corporation

Due to a weaker demand than anticipated, XYZ broker-dealer stabilizes an IPO immediately after syndication. Which of the following is true regarding stabilization expenses?

They are deducted from the underwriting fee

Which of the following statements is TRUE regarding the statements contained in a 10-Q?

They are unaudited

A company has set up a tax-deferred compensation plan for its senior executive team, but it has not set aside any funding to pay the cost of the plan. The company's obligations under the plan will be made on a "pay-as-you-go" basis. The plan meets all IRS requirements for deferring taxable income to executives. If the company goes bankrupt, where will its executives stand in claiming their benefits?

They will be on par with other unsecured creditors

How often does Form 13F need to be filed?

Within 45 days of the end of each calendar quarter

A decrease in a company's current liabilities equates to

a decrease in cash

In a "reverse takeover" transaction, a public company is acquired by

a privately held company

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

a public offering of $15 million

A comany has an EV to sales ratio of 4.0. The Company has annual sales of $500 million, $300 million in total debt, $100 million in cash and no preferred stock or noncontrolling interest. What is its equity worth?

$1.8 billion EV = $500MM x 4 = $2 billion EquityV = $2 billion - $300MM + $100MM = $1.8 billion

An analyst estimates the implied share price for a company using a range of forward P/E ratios for similar companies in the same industry. The top-end of the range in 16.0x and the bottom-end is 14.5x. Based on estimated company earnings of $80 million for the next fiscal year and 70 million diluted common shares outstanding, what will the range be?

$16.57 to $18.29 $80MM x 16 = $1.28B / 70MM = $18.29 $80MM x 14.5 = $1.16B / 70MM = $16.57

At the end of 2013, Company A has retained earnings of $25,000,000. During 2014 the company earns pre-tax income of $5,000,000. Also, in December 2014, the company declares a dividend of $0.20 per share on 2,000,000 outstanding shares, to be paid in January 2015. The company has a marginal tax rate of 40% and a corporate tax rate of 35%. What are Company A's retained earnings at the end of 2014?

$27,600,000 ERE = BRE + NI - Div NI = $5MM x (1 - 40%) = $3MM Div = $0.20 x 2MM = $400K ERE = $25MM + $3MM - $400K = $27.6MM

A public company has an enterprise value of $450 million, total debt of $150 million and cash of $50 million. Assuming no noncontrolling interest or preferred shares, what is its market capitalization?

$350,000,000 EV = EquityV (MktCap) + Debt + PrefStock + Noncontrolling Int - Cash $450MM = MktCap + $150MM - $50MM MktCap = $350MM

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?

$4.0 million deferred tax asset

For the quarter, ABC Corp. has gross income of $1 million, depreciation of $100,000, interest expense of $50,000 and operating expenses (excluding depreciation) of $500,000. What is its operating income?

$400,000 OI = GP - Exp - D EBIT = $1MM - $500K - $100K = $400K

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?

$48.40 1000/$40 = 25 shares 1100/25 = $44 $44 + $4.40 = $48.40

An investor in an IPO paid $20 per share. The investor then claims there was untrue or omitted information contained in the prospectus, and she sues the underwriter who sold the shares. She ultimately sold the shares at $15 a share, a loss of $5 per share. What damages is she entitled to claim under Section 12 of the Securities Act of 1933?

$5 per share plus interest

Use the information in Exhibit 33 to answer the following question. Company E is considered comparable to Companies A, B, C and D. Company E had LTM EPS of $1.25 and reported 300 million total shares outstanding on its last 10-Q. Using this data, what is the most reasonable estimate of Company E's equity value?

$6 billion Avg P/E = 15.6x 15.6 x 1.25 x 300MM = $5.85 billion; round

What is the threshold for defining a "large accelerated filer," for purposes of determining the filing deadline for a company's 10-K report?

$700 million worldwide non-affiliate market capitalization

If a company has net operating profit after tax of $95 million, what will its free cash flow be, assuming capital expenditures of $30 million, depreciation and amortization of $18 million and decrease in working capital of $9 million?

$92 million FCF = NOPAT - CapEx + D&A + dec in NWC FCF = $95 - $30 + $18 + $9 = $92

What is the maximum number of shareholders allowed for an S corporation?

100

A stock has a Beta of 1.5, T-bills have a yield of 3% and the S&P500 has expected returns of 10%. What is the expected return of this stock, calculated using the CAPM?

13.5% 3% + (1.5 x (10% - 3%)) = 13.5%

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

18% DtoC = Debt / (Debt + SE) Debt = Short + Loans + Notes + Bonds + Debentures + Capital Leases $1,508MM / ($1,508MM + $6,665MM) = 18%

A company's stock is selling for $30 a share. Last 12 month earnings per share were $1.50. Over the next five years, earnings are estimated to grow by 10% per year. What is its PEG ratio?

2 (30/1.50) / 10% = 2; rounded to whole number

A company pays a quarterly dividend of $0.05 per share and its shares are currently trading at $10. What is the dividend yield?

2% ($0.05 x 4) / $10 = 2%

A company has the following schedule of liabilities: $10 million due in 6 months $20 million due in 9 months $10 million due in 10 months $20 million due in 14 months $30 million due in 20 months The company also has $90 million of current assets. What is its current ratio?

2.25

An analyst wishes to calculate an LTM P/E ratio for a company with a current stock price of $36, as of the end of the company's second fiscal quarter in 2011. The company has reported the following earnings per share in 2010 and 2011: Fiscal year 2010 - $1.10 Q1 & Q2 2011 - $0.98 Q1 & Q2 2010 - $0.30 The LTM P/E ratio is

20.2x $1.10 + $0.98 - $0.30 = $1.78 $36 / $1.78 = 20.2x

XYZ Corp. reports 25 million shares outstanding on its most recent 10-Q. In addition, the company reports exercisable in-the-money employee stock options covering 1.2 million shares with a weighted average strike price of $10. Assuming XYZ Corp. common stock is currently trading at $14.10, what are XYZ Corp.'s diluted shares outstanding, in accordance with the treasury stock method?

25.35 million $1.2MM x $10 = $12MM $12MM / $14.10 = 851,064 1.2MM - 851,064 = 348,936 25,000,000 + 348,936 = 25,348,936

Use exhibits 79-82 to answer the following question. What is the effective tax rate for FSI Inc. for the year ended November 30, 2012?

25.6% $286K/$1.118MM = 25.6%

ABC Corp. 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?

36% DivPayRatio = (Q Div x 4) / $2.75 = 36%

Use Exhibits 302A and 302B to answer the following question. What is Bears Ent. diluted total shares outstanding, calculated in accordance with the Treasury Stock Method?

45,292,378 ($25.78 - $19.75) / $25.78 x 1,250,000 = 292,378 45,000,000 + 292,378 = 45,292,378

A company with accounts payable of $100 million, COGS of $750 million, and sales of $1 billion in a given year would have a DPO of

48.67 ($100 / $750) x 365 = 48.67

ABC Corp. reports annual EBIT of $130 million, depreciation and amortization of $21 million, and capital expenditures of $13 million. There is no change in net working capital. If the current market price is $40 and there are 50 million total shares, what is the free cash flow yield, excluding any provision for income taxes?

6.9% FCF = EBIT + D&A + NWC - CapEx FCF = $130 + $21 + 0 - $13 = $138 FCFY = FCF / Stock Price FCFY = $138MM / $40 = 6.9%

An individual that has been promoted from a sales representative to a sales supervisor is requires to pass the appropriate qualification exam within

90 days

REITs are required to distribute what percentage of their net income to shareholders?

90%

What is the typical tender squeeze-out threshold in the US?

90%

Under normalized market conditions, which type of buyer would be expected to pay the highest price for a given target?

A multi-billion dollar strategic buyer in the same line of business as the target

Which of the following best describes the OTC Bulletin Board?

A quotation facility for equity securities

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?

Add 100,000 shares outstanding; add $120,000 to earnings available to common

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?

After the securities have been distributed and trading restrictions are terminated

Which of the following securities could be quoted on the OTCBB?

An NYSE stock that has voluntarily delisted from the exchange

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?

Before completion of the transaction

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

Both ABC and XYZ

A location where one or more associated persons of a member firm regularly conducts securities transactions is a(n)

Branch office

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

By the start of the second round

If a registered representative does not complete the Regulatory Element of continuing education within the required time frame, the representative is subject to

CE Inactive status by FINRA, and cannot be associated with a member firm in a position requiring registration

The safe harbor provisions of SEC Rule 10b-18 apply to an issuer purchasing its own

Common stock

Company A and Company B each have EV/EBITDA multiples of 7.0x. If Company A has a higher enterprise value than Company B, which of the following must be true?

Company A has a higher EBITDA

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?

Company D was able to gain market share by targeting a niche market with a new product

ABC Corp. is considering a change in its inventory accounting treatment from FIFO to LIFO. The company typically pays price increases of 5-7% for its inventory. Assuming all else stays the same, which of the following statements is likely to be true about the change from FIFO to LIFO?

Cost of goods sold will increase

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

Debentures

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

Decrease leverage

ABC Co. is evaluating an acquisition of XYZ Co. for stock and cash. Before the transaction, ABC had 80 million of standalone fully diluted shares outstanding. It projects Year 1 standalone earnings of $275 million. After the transaction, it projects 95 million pro forma fully diluted shares and Year 1 pro forma combined diluted earnings of $312 million. What is Year 1 impact of the transaction in terms of accretion/dilution?

Dilutive by $0.16 per share $275 / 80 = $3.44 per share $312 / 95 = $3.28 per share EPS is lower on a pro forma basis, so $3.44 - $3.28 = $0.16; dilutive

Which of the following valuation multiples would typically be used to value a company with little or no cash flow earnings?

EV/Sales

A broker-dealer is facilitating a private placement on behalf of Company A in order to finance an acquisition of Company B. Which group would the broker-dealer be LEAST likely ti target as investors in the private placement?

Employees of Company A

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 $20 million in bonds with a coupon of 9%. What is the impact on enterprise value of these two transactions?

Enterprise value is not affected

Company A, a public company is planning to make a tender offer to acquire all of the shares of Company B, another public company, for cash. Company A is planning to offer a 30% premium to the market price of B's shares, based on the expected synergies of the deal. Why would Company A's board want to obtain a fairness opinion?

Expected synergies in corporate combinations are hard-to-measure

Company X agrees to purchase Company Y in a privately negotiated sale. Which provision of the Definitive Agreement would allow Company Y to achieve a higher purchase price?

Go-Shop provision

During due diligence on the purchase price allocation of an asset to the acquirer's financial statements, the banker's initial model assumed a book value of $600,000. After completing due diligence, the banker realizes the asset is actually worth $1.3 million. How will this information impact the banker's model for the transaction?

Goodwill will decrease; depreciation will increase

During the pre-filing period, an issuer communicates with the public in a way that arouses public interest in the upcoming offering. This prohibited practice is known as

Gun-Jumping

Which two of the following risks are typically identified during buyer due diligence in the first round?

I. Financial projections trajectory III. Target company end markets

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 III. Bonds with a higher duration have a higher volatility

Which of the following are used to calculate a company's return on equity?

I. Net Income IV. Book value of equity

An individual has made a trade based on material non-public information she learned from her neighbor. Which of the following statements are true?

I. The neighbor who shared the information has violated insider trading rules II. The individual who made the trade has violated insider trading rules

A Chapter 7 bankruptcy filing

I. results in the liquidation of an insolvent firm III. usually wipes out equity holders

Exit strategies for private equity investors include

I. sale to a strategic buyer III. sale to another private equity firm IV. an IPO

Under Sections 11 and 12 of the Securities Act of 1933, which of the following entities may be held liable for untrue or omitted information in a registration statement?

II. Professionals preparing and clarifying reports IV. All directors and partners of the issuer

In which scenarios does the acquirer need to file a registration statement?

II. When shares are issued as part of the purchase consideration for a public target IV. When public debt securities are issued as part of the purchase consideration for a public target

A customer complaint involving theft or forgery must be reported to FINRA

II. Within 10 days IV. Regardless of the dollar amount

John Darniels, a securities client of Bedrock Securities, Inc., calls Robert, his registered rep to complain about the service and attention he has received from the firm. Which of the following best describes the status of John's grievance?

If John communicates the complaint to Bedrock Securities in any written manner, it becomes a complaint

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

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

A company has 10 million shares of common stock outstanding at a share price of $6.50. What will be the impact on market capitalization if the company buys back 1 million shares for treasury stock and the share price increases to $7.50?

Market cap will increase by $2.5 million 10MM x $6.50 = $65MM 9MM x $7.50 = $67.5MM

In a corporate underwriting, which of the following would be considered compensation to the underwriter?

Marketing expenses

A company announces that it is buying back 10% of its common shares in the open market. The company currently pays no dividends to common shareholders. assuming that net income and the share price remain the same as before, what will be the impact of the buy-back on the company's P/E ratio?

P/E will decrease Shares go down, EPS goes up and P/E goes down

Which of the following is NOT part of the tender offer process?

Proxy statement filing by the purchaser

The rule addressing the required disclosures to investors in a corporate transaction is known as

Regulation M-A

A company has 10 million common shares outstanding. It announces that it has plans to increase its annual dividend payout by $0.50 per share. What will be the impact of the change on retained earnings over the next two years, compared to the former dividend payout rate?

Retained earnings will decrease by $10 million

The SEC form on which "proxy statement information" is filed is

Schedule 14A

Which of the following is true regarding the impact that a share repurchase program will ave on a company's balance sheet?

Shareholder's Equity will decrease by the acquisition cost of the repurchased shares

An individual or controlling group that acquires more than 5% of a public company's voting equity securities must file a(n)

beneficial ownership report

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

bring the issue to the attention of his manager, who will make a determination of whether an SAR should be filed

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

less than 5% of the outstanding shares

Operating leverage is best described as

the extent to which sales growth results in growth at the operating income level

A free writing prospectus is required to contain a legend informing investors that

the issuer has filed a registration and prospectus, which should be read before investing

Once preliminary bids are received, the sell-side advisor is responsible for all of the following EXCEPT

written explanations to losing bidders on why they are not proceeding

FINRA recordkeeping requirements for customer complaints require all of the following EXCEPT

written summaries of all oral complaints and follow up action taken

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 interested in

growth at a reasonable price stocks

A firm's anti-money laundering program must be independently tested for compliance

annually

A company that has been subject to Securities Exchange Act of 1934 reporting requirements for five years and has an aggregate worldwide market cap of $300 million in considered a(n)

accelerated filer

Under the SEC's Regulation D, a private placement may be offered to

accredited investors, with a limited number of non-accredited investors accredited = unlimited non-accredited = 35

During the book building process of an IPO, an investor is allotted a number of shares with the understanding that he will increase his position by purchasing shares in the secondary market on or after the effective date. This practice is

prohibited under all circumstances

Regulation A+ authorizes the SEC to exempt registration for

public offerings not exceeding $50 million in any 12-month period

All of the following are permitted activities, EXCEPT

short tendering stock

As part of its due diligence on potential buyers, the sell-side advisor typically performs all of the following analyses EXCEPT

site visits

A registered representative of a broker-dealer is convicted of a securities-related misdemeanor. This will most likely lead to

termination of the representative's registration and termination of the representative's employment with the firm

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