Series 79 Mock Quiz V1 75 questions

Which of the following combines the aspects of both a partnership and a corporation? A) LLC B) REIT C) DPP D) C Corp

A A limited liability company (LLC) is an entity that combines the aspects of both a partnership and a corporation.

Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) on the firm's income statement indicated as earnings before interest and taxes (EBIT). B) on the firm's most recent balance sheet. C) on a firm's income statement by subtracting preferred dividends from EBIT. D) by contacting the IRS.

A EBIT is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.

Officers and directors of a publicly traded issuer are prohibited from doing which of the following? - Shorting the issuer's stock - Shorting the issuer's stock against the box - Taking short-swing profits on the issuer's stock - Writing covered calls on the issuer's stock A) I and III B) I and II C) II and IV D) III and IV

A Insiders cannot short the issuer's stock, nor can they take short-swing profits. A short-swing profit is a profit earned by buying and selling the issuer's stock in a six-month period or less, and any short-swing profit must be returned to the issuer. Insiders are permitted to short the issuer's stock against the box provided the position is closed out within 20 days. Writing calls against a long stock position is an acceptable income strategy.

SEC Rule 145 requires that securities issued as part of a business combination, such as a merger or acquisition A) must be registered and are subject to the same registration requirements as other issues. B) can be registered through the Form S-4 for foreign companies. C) are not required to be registered if security holders are asked to vote for a plan or consent to an agreement. D) can be registered through the Form F-4 for domestic companies.

A SEC Rule 145 requires that securities issued as part of a business combination, such as a merger or acquisition, must be registered and are subject to the same registration requirements as other issues. Securities involved in these combinations must be registered if security holders are asked to vote or consent for a plan or agreement involving any of these transactions. Registration is required whether or not securities holders consent, and whether they receive new or different securities. The securities are registered using the short-form registration statement, Form S-4, for domestic companies and F-4 for foreign companies.

If a registered representative is found to have engaged in insider trading, the member firm can be fined up to three times the profit gained or loss avoided, or A) $1 million, whichever is greater. B) $5 million, whichever is greater. C) $500,000, whichever is greater. D) $2.5 million, whichever is greater.

A The member firm, which must have procedures in place to prevent insider trading, can be fined up to three times the profit gained or loss avoided, or $1 million, whichever is greater. The representative found guilty of insider trading could suffer criminal penalties up to $5 million and 20 years in prison.

The working capital of a corporation includes all of the following except A) convertible bonds. B) cash. C) accounts receivable. D) marketable securities of other companies.

A The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.

An independent fairness committee would be required to A) have a process in place to determine that the valuation analysis was appropriate. B) have qualified independent accountants. C) be a registered broker-dealer. D) have third party members independent from the deal team.

A When broker-dealers write a fairness opinion, they are required to have a process in place to determine whether the valuation analysis used in the opinion was appropriate. A frequent method of determining the appropriateness is by instituting an independent fairness committee.

Expenses such as lawsuit costs, nonoperating assets, and asset depreciation costs are examples of which of the following? A) General operating offsets B) Nonrecurring costs C) Bad management D) Normal expenses

B Companies often incur certain nonrecurring costs that are not part of the day-to-day expenses. When the expenses comprise a huge proportion of a company's annual costs, it may experience a significant dip in its annual earnings due to nonrecurring expenses.

Form 144 must be filed with the SEC A) within 10 business days of the sale. B) concurrently with the sale or earlier. C) within 10 calendar days of the sale. D) 5 business days before the sale.

B Form 144, which alerts the SEC to the impending sale of unregistered or control stock, must be filed concurrently with or before the sale.

Which of the following would not be used for comparison when taking a company public? A) Precedent M&A transactions B) Sum of the parts analysis C) Comparable publicly traded companies D) Discounted cash flow

B Sum of the parts analysis is usually associated with a company being brokered into its separate divisions or components or those separate divisions being spun-off.

A definitive agreement would contain all the following representations except A) identification of all contracts. B) no material adverse changes are present. C) restrictions on special dividends. D) complete financial statements.

C Restrictions on special dividends would be a separately addressed covenant not a representation. Covenants ensure the company is not materially altered before closing the transaction. They are designed, so the buyer and the seller will act in good faith and use their best efforts to complete the transaction.

Refer to Exhibit 4. (13500) The balance sheet entry for inventory, compared with the previous year's, would be A) lower by $9,000. B) higher by $9,000. C) higher by $13,500. D) lower by $13,500.

C When preparing the statement of cash flows through the indirect method, increases in inventory (a use of cash) are subtracted and decreases (a source of cash) are added. ABC Clothiers, Inc.'s balance sheet would show inventory to be higher by $13,500 compared with the previous year's.

How long before a purchaser of an intrastate offering can resell the security to a nonresident of the state? A) 12 months from original sale date B) 1 month from original sale date C) 12 months from end of distribution D) 9 months from end of distribution

D A purchaser must wait 9 months from the date of the last sale before offering the securities out of state.

Which of the following registers the securities and packages the program for a limited partnership? A) Property manager B) Limited partners C) General partner D) Syndicator

D A syndicator handles the registration of the limited partnership units.

Operating cash flow minus capital expenditures (CAPEX) is known as A) pre CAPEX cash flow. B) after CAPEX cash flow. C) CAPEX cash flow. D) free cash flow (FCF).

D By definition, FCF represents cash available to all potential providers of debt and equity financing.

Regarding limited partnerships, which of the following are true? - A general partner can be held personally liable for business losses and debts. - A limited partner can be held personally liable for business losses and debts. - A general partner business decisions are legally binding on the partnership. - A limited partner business decisions are legally binding on the partnership. A) II and IV B) I and IV C) II and III D) I and III

D General partners have unlimited liability, meaning that they can be held personally liable for the partnership's losses and debts. In their role to manage the partnership, they make decisions that are legally binding on the partnership.

For hedge funds organized as private investment partnerships, which of the following is true? A) They can limit the number of investors and typically have no minimum initial investment requirement. B) They will allow unlimited numbers of investors and require large or minimum initial investments. C) They will allow unlimited numbers of investors and allow small initial investments. D) They can limit the number of investors and require large or minimum initial investments.

D Hedge funds organized as private investment partnerships typically limit the number of investors and require large minimum initial investments. This would be the opposite of a regulated investment company, such as an open- or closed-end fund company.

Refer to Exhibit 19. ABC's income tax expense is A) $36.75 million. B) $21 million. C) $31.5 million. D) $24.5 million.

D Income tax expense is calculated by multiplying pretax income (EBT) by the corporate tax rate.

ABC Company shows a 50%-50% split of its capital structure between equity and debt. The cost of equity is 15% and the cost of debt is 8%. The company's marginal income tax rate is 35%. What is its weighted average cost of capital (WACC)? A) 7.5% B) 13.0% C) 12.7% D) 10.1%

D Multiply the cost of equity by the percentage of equity in the capital structure = 15% × 50% = 7.5%. After-tax cost of debt = 8% × (1 - 35% tax rate) = 5.2%. Multiply the after-tax cost of debt by the percentage of debt in the capital structure: 5.2% × 50% = 2.6%. WACC is the sum of the two = 7.5% + 2.6% = 10.1%.

The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is A) reported as cash income on the income statement. B) an integral part of the footnotes to the balance sheet required by generally accepted accounting principles. C) reported as a separate line item on the balance sheet. D) the net change in the cash position of the firm for the reporting period.

D The total of the cash from operations, investing, and financing, as reported on the statement of cash flows, is the net change in the cash position of the firm for the reporting period. The sum total, or the net change in cash, is not reported on either the balance sheet or the income statement. It is the sum total of the entries on the statement of cash flows which is a separate financial statement.

Which of the following types of organizational structures has perpetual life? - C corporation - Limited partnership - S corporation - Limited liability company (LLC) A) I and III B) II and III C) I and IV D) II and IV

A Corporations (both C and S) have perpetual life. Limited partnerships and limited liability companies exist for a stated number of years, as defined in the operating agreement, and they may be dissolved at the death or retirement of a member or partner.

A corporation plans to issue stock to the public at $10 per share. If the manager's fee is $0.10 per share, the underwriting fee is $0.25 per share, the concession is $0.45 per share, and the re-allowance is $0.20 per share, the spread is A) $0.80. B) $0.70. C) $1.00. D) $0.90.

A In a corporate offering, the spread has three components: the manager's fee, the underwriting fee, and the concession. The re-allowance is not a separate item; rather, it is part of the concession and represents a give-up if a member of the selling group sells to a nonmember.

Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm? A) Agreement among underwriters B) Registration statement C) Letter of intent D) Underwriting agreement

A The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities.

An analyst uses the dividend growth model to assist in determining appropriate stocks to recommend. This analyst would consider all of the following factors except A) dividend payout ratio. B) current dividend. C) growth of the dividend. D) required rate of return

A The classic definition of the dividend growth model is "a stock valuation model that deals with dividends and their growth, discounted to today." The payout ratio has nothing to do with this; it is strictly the amount of the dividend that counts.

A review of WRJ Corporation's financial statements reveals that they have $10,000,000 in assets, $7,000,000 in total liabilities, and 3,500,000 shares outstanding. What is WRJ Corporation's debt-to-equity ratio? A) 2.33 B) 0.41 C) 0.70 D) 2.00

A WRJ Corporation's debt-to-equity ratio is calculated by dividing total debt (liabilities) by total equity (assets - liabilities). Shares outstanding do not affect a firm's debt-to-equity ratio. WRJ's debt-to-equity ratio is 7,000,000 / (10,000,000 - 7,000,000) = 2.33

Which of the following investors would not be allowed to own shares of an S corporation? A) A nonprofit corporation, recognized under § 501(c)3 of the Internal Revenue Code B) A company filing taxes as a subchapter C corporation C) The CEO of the company D) An individual investor with no other affiliation with the company

B According to the Internal Revenue Code (IRC), individuals, estates, and nonprofits can invest in a subchapter S Corporation. Other corporations (as in a C corp) cannot be investors in an S corp.

In which of the following types of offerings does a brokerage firm have no financial obligation for unsold securities? - Standby - All-or-none - Best efforts - Mini-max A) II and III B) I and II C) II, III, and IV D) I, II, and III

C In a best efforts underwriting, the underwriter serves as an agent with no financial obligation for unsold securities. In an all-or-none (AON) offering, the underwriter agrees to devote its best efforts to sell the issue, but the entire offering is canceled if all shares cannot be sold. In a standby underwriting, the underwriter agrees to purchase any unsold shares remaining after the expiration of a rights offering (firm commitment). A mini-max is a form of best efforts underwriting, giving a minimum and maximum value for funds raised.

Which of the following may be affected when a company declares a cash dividend? - Shareholders' equity - Total assets - Total liabilities - Working capital A) III and IV B) I only C) I, III, and IV D) I, II, III, and IV

C When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Increasing current liabilities, with no change in current assets, will reduce working capital. Assets are not affected until the cash is paid out several weeks later.

How to calculate the Current Ratio

Current ratios are calculated by dividing current assets by current liabilities. Company M's current liabilities are found by subtracting its working capital (current assets - current liabilities) from its current assets. Therefore, Company M's current ratio is $5,400,000 / ($5,400,000 - $2,000,000) = 1.59.

After the filing of its 10-Q for its recently finished fiscal third quarter, a public company announces an acquisition to be financed entirely with a new bond issue. In making the acquisition, the acquirer will also be repaying all of the target's existing debt. In calculating the pro forma enterprise value / LTM EBITDA trading multiple for the company, what adjustments does the banker need to make? A) Add target's debt amount to the acquirer's debt as of Q3 and the target's LTM EBITDA (including synergies) to the acquirer's LTM EBITDA. B) Add target's debt amount to the acquirer's debt as of Q3 and the target's tax-effected LTM EBITDA to the acquirer's LTM EBITDA. C) Net the dollar value of the new bond against the target's debt amount and add the target's LTM EBITDA to the acquirer's LTM EBITDA. D) Add new bond dollar value to the acquirer's debt as of Q3 and the target's LTM EBITDA (including synergies) to the acquirer's LTM EBITDA.

D Both the numerator and the denominator need to be adjusted to calculate the pro forma enterprise value / LTM EBITDA trading multiple for the acquirer. For the numerator, the acquirer's enterprise value is increased by the dollar amount of the new bond, while the denominator is increased by the target's LTM EBITDA (including synergies).

"Below the line" items on an income statement include all the following except A) extraordinary items. B) adjustments for previous misstatements. C) income (loss) from discontinued operations. D) infrequent items.

D Misstatement adjustments, discontinued operations, and extraordinary items are all entered "below the line" or after net income. Items that occur infrequently, but are not unusual, are not extraordinary and are reported "above the line."

Which of the following exemption provisions of the Securities Act of 1933 may not be used for an initial offering of securities? A) Rule 147 B) Regulation D C) Regulation A D) Rule 144

D Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

Which items would change if a company buys equipment for cash? - The working capital - The total assets - The total liabilities - The shareholders' equity A) IV only B) I and II C) III and IV D) I only

D The general balance sheet formula is assets equals liabilities plus shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it affects neither total liabilities nor equity.

Long term debt to capital ratio calculation

Long-term debt-to-capital ratio is long-term debt ÷ (long-term debt + equity). Long-term debt is found by subtracting short-term debt (current assets - working capital) from total liabilities. After determining long-term debt, the only variable left to find is equity. Equity is found by dividing total liabilities by the debt-to-equity ratio.

How to calculate ROIC

Return on capital is computed by taking the net income (EBIT × (1 - corporate tax rate)) and dividing it by the total capital (debt + equity). In this instance, the return on capital is 105 × 65%) / (350 + 75) = 16%.

Effective Tax rate Calculation

The effective tax rate of a company is its income tax expense divided by its taxable income (EBT). PDQ's tax expense is calculated by subtracting net income from its EBT (operating income less interest). Tax expense is therefore $12,300 - $430 - $10,770 = $1,100, and EBT is $11,870. Using this information, the effective tax rate equals $1,100 ÷ $11,870 = 9.3%.

How does the Div Discount model work?

Using the dividend discount model, the investor would calculate the appropriate price of Company A as next year's dividend payment ÷ the required rate of return (less growth rate). The DDM, therefore, indicates that the appropriate price for Company A is (1.06) × (1.25) ÷ (0.09 ‒ 0.06) = 44.17.