Test 1
A firm must report to FINRA a change in the person named as its Anti-Money Laundering Officer within
D) 30 days of the change
Which metric is a banker least likely to use?
D) EV / Net income Equity value/Net Income and EV/EBITDA are both widely used valuation ratios. Equity Value/Dividends is usually computed as Dividend Yield = Dividends/Equity value, but is still a valid ratio. EV/Net income, however, should never be used because Enterprise Value includes both Debt and Equity whereas Net Income is after Interest payments have been made.
At what point during an auction is the Initial Bid Procedures Letter typically distributed to bidders?
D) Following distribution of the CIM The initial bid procedures letter is typically sent out to prospective buyers following distribution of the CIM so as to give bidders enough time to formulate their bids and respond to the requested information by the required date.
At what point during an auction is the Initial Bid Procedures Letter typically distributed to bidders?
D) Following distribution of the CIM The initial bid procedures letter is typically sent out to prospective buyers following distribution of the CIM so as to give bidders enough time to formulate their bids and respond to the requested information by the required date.
Which of the following statements regarding statutory disqualification are TRUE? I. An individual or firm may be subject to a statutory disqualification II. Certain persons may re-enter or continue in the securities industry following a statutory disqualification III. Disqualifying events can include bars, injunctions suspensions and expulsions from certain activities, SROs and exchanges IV. Once it becomes aware of a statutory disqualifying event a member is obligated to report the event to FINRA
D) I, II, III and IV A statutory disqualification occurs when an individual or member firm has violated securities regulations and has been barred, suspended, expelled, enjoined, fined or possibly jailed for the activity for a period of time. Whenever a member firm becomes aware of a statutory disqualification it is required to report the event to FINRA. Certain persons or firms may be allowed to continue in the securities industry following a statutory disqualification but only with written approval from FINRA and heightened supervision.
Which of the following are among the requirements of the "summary term sheet" as part of a proxy announcing a definitive agreement? I. HSR approval II. The use of plain English III. A fairness opinion IV. Include a brief bullet-point summary
D) II and IV The summary term sheet is required in proxies for business combinations. It must be written in plain English, include a brief bullet-point summary, and contain essential features of the transaction. It also must cross-reference a more detailed discussion to securities holders. HSR approval and the fairness opinion are in separate documents.
The purpose of a lock-up period following an IPO is to
D) avoid negative perception of the transaction. Lock-up periods prohibit company executives from selling their shares in the secondary market for a certain period of time following the effective data. The length is subject to negotiation with the issuer and is disclosed in the prospectus. The purpose of a lock-up period is the help ensure a stable share price by reducing selling pressure and to avoid negative perception that can be create when corporate insider liquidate immediately following a new issue.
In which SEC filing would a fairness opinion typically be located?
DEFM14A is the definitive proxy statement filed by a target company in order to obtain approval from its shareholders for a given deal through a vote at a shareholder meeting. The proxy statement contains a summary of the background and terms of the transaction, a description of the financial analysis underlying the fairness opinion(s) of the financial advisor(s), a copy of the definitive purchase/sale agreement ("definitive agreement"), and summary and pro forma financial data (if applicable, depending on the form of consideration).
n administering Regulatory Element Continuing Education, a broker-dealer is required by FINRA to do all of the following EXCEPT
Develop an annual needs analysis and training program. FINRA does not require firms to develop their own Regulatory Element programs. Regulatory Element CE is administered and delivered by FINRA. This requirement applies to Firm Element. On an annual basis, a broker-dealer is required to conduct a needs analysis and training plan for the delivery of Firm Element training. you can do -Designate a contact person to receive Regulatory Element email notifications -Restrict CE inactive persons from performing prohibited activities -Review quarterly Regulatory Element performance reports to determine topics where additional training may be needed
An oil and gas drilling deal structured with a general partner who makes management decisions and several passive limited partner investors is referred to as a
Direct Participation Program
are dividend payments guaranteed to shareholders?
Dividend payments are not guaranteed to outstanding shareholders, so it is not a violation of shareholder rights to skip a dividend.
duration
Duration measures a bond's sensitivity to movements in interest rates. Duration is typically expressed in terms of a number of years it takes for the internal cash flows from a bond to equal the initial investment. The greater a bond's duration, the greater its sensitivity to movements in interest rates.
Earnings Yield =
EPS / Price = 1 / (Price / EPS)
Under most circumstances a general securities firm is required to have a minimum of
FINRA generally requires that general securities firms have a minimum of two principals. They must also have access to a Financial and Operations Principal.
In accordance with the Securities Exchange Act of 1934, an issuer that repurchases its own outstanding stock
I. May purchase shares through only one broker-dealer each day during normal market hours IV. Can purchase no more than 25% of the average daily trading volume Tule 10b-18 of the Act of 1934 requires that an issuer repurchase its own securities through one broker dealer per day. The issuer cannot purchase more than 25% of the average daily volume.
Rule 144 applies to the sale of securities that
I. were acquired by investors through unregistered, private transactions II. are considered control securities because they are held by an affiliate of the issuer Rule 144 allows public resale of restricted and control securities if a number of conditions are met. Restricted securities are those securities that have been acquired through a private placement or other exempt transaction (i.e. Regulation S for overseas offerings), and are not registered. Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as a director or large shareholder, in a relationship of control with the issuer. Control securities are not always subject to a holding period. They must satisfy a holding period only if they are also restricted. Securities acquired by non-affiliates through an open market transaction are neither restricted nor control stock, and are not subject to Rule 144.
A Eurodollar bond is
II. Issued outside of the U.S. IV. Not subject to SEC registration A Eurodollar bond is issued in a country outside of the United States but denominated in U.S. dollars. Because Eurodollar bonds are issued outside the U.S. they are not subject to registration with the SEC.
Which two of the following company executives are essential for participating in the management presentation for a company that is seeking a buyer?
In a sell-side process, the speaker lineup for the management presentation needs to include the CEO and CFO of the company. Buyers will insist on hearing about the company from those top executives that run the business. The CEO and CFO themselves are a key part of the due diligence process for buyers and therefore need to be assessed and tested. While the general counsel and investor relations executive for a given company may be present at the management presentation and potentially present a portion, their participation is typically not essential.
The Hart-Scott-Rodino Act of 1976 applies to
M&A activity compliance with antitrust guidelines -Depending on the size of the transaction, the HSR Act requires both parties to an M&A transaction to file respective notifications and report forms with the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ).
Master Limited Partnership - list stocks on exchange?
Master Limited Partnerships (MLPs) are limited partnerships that can do a public offering and list stock on an exchange. Hedge funds, real estate firms and oil & gas firms are commonly organized as MLPs. S-Corps (max 100) and sole proprietorships do not have enough shareholders to list on an exchange. LLCs are pass through vehicles that are rarely listed. -likely list stocks on exchange
PEG ratio=
P/E / growth %
does preferred stock offer voting rights?
Preferred stock typically does not include voting rights. It typically pays dividends and may offer shareholders the right to convert to common. It also has a higher priority to corporate assets in a liquidation.
Regulation M Rules 101 and 102
Rules 101 and 102 of Regulation M address notification requirements for offering participants. The rules specify that offering participants are required to make notification to FINRA for distributions of both listed and unlisted securities, and such notice is required whether or not a restricted period applies. The notice must include the basis for the determination of the length of the restricted period which, depending on the liquidity of the issuer's stock, could begin 5 business days or 1 business day before pricing of a new issue.
Subchapter C Corporations are characterized by ___ taxation practices
Taxation at the corporate level
The thirty companies that are represented in the Dow Jones Industrial Average include which of the following industries?
The Dow Jones Industrial Average includes 30 industrial companies from sectors such as retail, financial and technology. Transportation and Utilities are included in separate averages.
Sales assistants with no customer contact - required to get Firm Element continuing education?
The Firm Element requirement applies to all persons who have contact with public customers or who supervise those persons that do. "Customers" include retail, institutional and investment banking customers, but not other broker-dealers.
The role of the specialist (Designated Market Maker) is most closely associated with which of the following markets?
The NYSE relies on specialists (also referred to as designated market makers) to match buyers and sellers. Market makers facilitate trades on the Nasdaq and OTCBB.
rights and warrants
The exercise price of a right is generally below the price of the stock when the right is issued; the exercise price of the warrant is generally above the price of the stock when it is issued ights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution.
what is the maximum amount of common shares that the company may have sold under an S-3 in the previous 12 calendar months?
The limit for an issuer to be able to file a Form S-3 is one-third or 33.3% of the public float within the previous 12 calendar months. The public float is defined as shares held by the public - i.e. not officers, directors or shareholders with a 10% voting interest.
The market where short-term obligations such as Treasury Bills, commercial paper and bankers' acceptances are bought and sold is the
The money market is the global financial market for short-term borrowing and lending. Short-term obligations such as Treasury Bills, commercial paper and bankers' acceptances are bought and sold in the money market. Money market securities are defined as debt securities with one year or less to maturity.
Jones Securities, Inc. is the lead underwriter for NewCo, which plans to sell 5 million shares of stock to the public at an offering price of $27.00 per share. The manager's fee is $.25, the underwriting fee is $.20 and the full takedown is $.85. What is the total proceeds received by NewCo?
The total spread to the syndicate is the manager's fee of $.25 plus the $.85 full takedown, for a total of $1.10. The underwriting fee is a component of the full takedown, so is not taken into account in the calculation. The issuer receives the offering price minus the spread: $25.90 per share x 5 million shares = $129.5 million
The underwriting spread is defined as the difference between the
The underwriting spread is the difference between the price paid to the issuer, known as the underwriting proceeds, and the public offering price, or POP. It is divided into the manager's fee, the underwriting fee and the selling concession.
In order to qualify as a WKSI, an issuer must have a non-affiliate market capitalization of at least
To be a WKSI, an issuer must have a worldwide stock market capitalization of $700 million held by non-affiliates only. Alternatively, an issuer can qualify as a WKSI if it has issued $1 billion in non-convertible debt in the previous three years.
A real estate Direct Participation Program raises $50 million in gross proceeds. What is the maximum amount that it may spend on total organization and offering expenses (O&O)?
Total O&O in DPP programs is limited to 15% of the deal's gross proceeds. For a $50 million offering, the limit would be $7.5 million.
Treasury bills - issued at
Treasury Bills are always issued at a discount and mature to their face value, as they are zero coupon securities. All zeroes are issued at a discount.
At minimum, balance sheets must be included for how many years?
Two years of audited balance sheets are required for the registration, although more may be supplied. They must be for the two most recently completed fiscal years. Unaudited balance sheets are not allowed in a registration statement.
D) U.S. Savings Bonds
U.S. Savings bonds are bought at a discount and redeemed by agents of the government, like banks. They cannot be transferred through secondary market transactions.
what can finra firms do with returned shares from allocation?
Under FINRA 5131, a member firm with returned shares can use the shares to cover a short, allocate them to investors randomly or donate the profits to charity (anonymously). The shares cannot be placed in the member firm's investment account.
The CEO of XYZ Corp. attends a banquet with a number of equity research analysts. At the banquet, the CEO intends to make an announcement regarding the company's earnings. Under Regulation FD, when is the company required to release this information to the public?
Under Regulation FD, intentional disclosure of material, non-public information, requires simultaneous public disclosure. If the disclosure had been inadvertent, public disclosure would have been required within 24 hours or by the open of the next business day's trading, whichever is later.
What is the maximum number of shares that could be sold by a corporate insider over the next three months?
Under Rule 144, a corporate insider can seller the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks.
how much stock can a corporate insider sell?
Under Rule 144, a corporate insider can seller the greater of 1% of the outstanding shares or the average weekly trading volume over the previous four weeks.
who may use free writing prospectuses prior to the filing of a registration statement?
WKSIs - Well-known seasoned issuers, This allows WKSIs to make written offers to sell securities that automatically become part of the free writing prospectus, regardless of when or whether a registration has been filed. Given their size and how widely their securities are held, WKSIs are granted great latitude through the registration process.
A person who has not been registered for the past three years has now become newly registered with another broker-dealer. With regard to Regulatory Element, this representative
When an individual has left the securities industry for more than two years, and becomes newly registered and qualified, the individual is subject to the Regulatory Element as if entering the program for the first time. The individual would be required to complete the program within a120-day period that commences with the second anniversary of the new securities registration, and every three years thereafter.
The cooling off period after the filing of a registration statement ends
When the SEC declares the registration effective The waiting period is defined by the registration statement and effectiveness. It begins with the filing and ends when the SEC declares the registration effective. During this time, the issuer and related parties may communicate with the public to gauge the demand for the offering.
are prospective bidders required to submit proof of receipt of relevant HSR and other regulatory approvals in writing as part of following bid
While bidders are asked to provide information on required regulatory approvals and timeline for completion, they are not expected to receive regulatory approval until after a definitive agreement has been signed.
When is a Schedule 14D-9 required to be filed?
Within 10 business days of Schedule TO filing In response to a tender offer, the target files a Schedule 14D-9 within 10 business days of the filing of a Schedule TO. In the filing, the Board of Directors either accepts, rejects, or declines to comment on the tender offer.
Regulation A
exemption from SEC registration requirements -Regulation A allows a simplified issue process for small offerings. The maximum size of the offering can by no more than $5 million per issuer for any 12 month period, and an offering circular of condensed highlights is permitted instead of a full prospectus.
In an M&A process, who typically leads bid evaluation at the end of the first round and presents a recommendation on which buyers should proceed further in the process?
investment bankers -On the first round bid date, the sell-side advisor receives the initial indications of interest from prospective buyers. Over the next few days, the deal team conducts a thorough analysis of the bids received, assessing indicative purchase price as well as key terms and other stated conditions. The bid information is then summarized and presented to the seller along with a recommendation on which buyers to invite to the second round.
Inventory turns
measures the number of times a company turns over its inventory in a given year. Inventory turns is calculated as COGS/inventory. Hence, if the inventory turns multiple and COGS are known, then the inventory balance equals COGS/inventory turns. As such, COGS of $750 million divided by inventory turns of 4.0x equals inventory of $187.5 million.
Underwriting group members making allotments to their customers only if such customers agree to make some comparable purchase in the open market after the issue is initially sold - allowed?
no
is the the unemployment rate a coincident economic indicator
no
In the fixed income market, the risk that is created by a downward trend in interest rates is referred to as
reinvestment rate risk. Downward trends in interest rates cause reinvestment risk because it may be difficult to find comparable yields for reinvestment of principal or interest payments. Interest rate risk occurs as interest rates increase, causing a subsequent decline in bond prices.
if company issues 100mm in debt, what happens to EV?
stays the same, as new cash offsets increased debt
For equity value (or share price) multiples
the denominator must be a financial statistic that flows only to equity holders, such as net income (or diluted EPS). The price-to-earnings (P/E) multiple, a common equity value multiple, is viewed as a measure of how much investors are willing to pay for a dollar of a company's current or future earnings. In addition, equity value multiples are particularly relevant for mature companies that have a demonstrated ability to consistently grow earnings. For enterprise value multiples, the denominator employs a financial statistic that flows to both debt and equity holders, such as sales, EBITDA, and EBIT
Internal Revenue Code 338(h)(10) describes which of the following?
-stock sale -Internal Revenue Code 388(h)(10) describes an equity sale which can be treated as an asset sale for tax purposes, allowing the assets to be marked up to their purchase price. This affords favorable tax treatment to the purchaser in the form of increased depreciation.
Which two of the following presentations does the buyer's financial adviser typically provide during an auction's second round in helping prepare a bid?
1. I. The preliminary valuation analysis for the buyer's management team IV. The board presentation on the M&A opportunity and financial analysis The buyer's financial adviser typically provides a preliminary valuation analysis for the buyer's management team, eventually followed by a more formal presentation to the Board of Directors on the M&A opportunity and financial analysis. In the event a fairness opinion is being provided, this would also be provided to the Board just prior to signing the definitive agreement. It is highly unusual for a buyer to present its valuation analysis to the target's management. The management presentation is provided by the target's management team.
Prior to the sale of a fixed price IPO, a member must have obtained a representation of an investor's eligibility to invest in IPOs within the previous
12 months Under FINRA Rule 5130, a restricted person may participate in a fixed price IPO only if that person represents that they are not a restricted person. This representation must have been obtained within the 12 months prior to the sale.
Current Ratio
= Current Assets/Current Liabilities = "Total current assets"/"Total current liabilities" = 43,384/15,678 = 2.77×
Debt-to-Capital
= Debt/(Debt + Equity) = 580/(580 + 570) = 50.4%. Note that it is Book Equity that is required, the share price and Shares Outstanding are not required.
Net debt
= total debt - cash. Total debt = Short-term debt (sometimes referred to as current maturities) + loans + notes + bonds + debentures + capital leases.
required # of designated principals in OSJ?
A member firm is required to develop and maintain a supervisory system that includes written procedures. It must designate principals to carry out supervisory functions and assign each registered representative to an appropriately registered individual for supervision. A firm is required to designate one principal, not two, to supervise an Office of Supervisory Jurisdiction (OSJ).
under selected dealer agreements -
A selected dealer agreement specifies the terms between the managing underwriter and the selling group members. Selling group members act as agents because they have no financial responsibility for unsold securities. Distributions subject to a selected dealer agreement include both registered and exempt securities (e.g. municipal bonds).
Which of the following valuation multiples is most helpful when valuing divisions of public companies?
A) EV/EBIT EV/EBIT is helpful in situations where D&A is unavailable (e.g., when valuing divisions of public companies) or for companies with high capex. EV/EBITDA serves as a valuation standard for most sectors, but is difficult to calculate for a specific division of a company. It is independent of capital structure and taxes, as well as any distortions that may arise from differences in D&A among different companies. In certain sectors, as well as for companies with little or no earnings, EV/sales may be relied upon as a meaningful reference point for valuation. The P/E ratio, calculated as current share price divided by diluted EPS (or equity value divided by net income), is the most widely recognized trading multiple, but difficult to calculate for a specific division.
All of the following are key Representations ("Reps") and Warranties made by a seller in a definitive agreement
A) Financial statements must fairly present the current financial position B) All material contracts have been disclosed C) No material adverse changes (MACs) -not: Closing conditions
When compared to a corporate debenture, a mortgage bond I. tends to yield a lower rate of return II. tends to yield a higher rate of return III. has higher priority in a corporate liquidation IV. has lower priority in a corporate liquidation
A) I and III A mortgage bond is backed by real property owned by the corporation, while a corporate debenture is backed by the good faith and credit of the issuer. Because of the greater degree of safety, mortgage bonds pay a lower rate of return than unsecured corporate bonds. Secured bonds like mortgage bonds have higher priority in a corporate liquidation.
Which of the statements below correctly describe the par value of common stock? I. Par value and market value are rarely equal II. Par value and market value are typically equal III. Par value of common stock is typically $1 or less IV. Par value of common stock is typically $100
A) I and III Par value is assigned to common stock when it is issued. It is typically $1 or less for common stock, and is simply an accounting value that is not related to the market value of the stock.
For a company organized under Subchapter S of the Uniform Practice Code, which of the following is TRUE regarding its capital structure?
A) The corporation will pass through gains and losses. NOT B) Limited Partnerships and Limited Liabilities Companies can be investors. C) They can qualify for listing on the New York Stock Exchange. D) They can have an unlimited number of shareholders, provided that all investors are domestic. In a Subchapter-S corporation, ownership rules are somewhat limited, due primarily to the ability to pass through gains and losses. All investors must be individual investors and they must be domestic investors. Even then, there is a limit of 100 shareholders, which would preclude listing on an exchange.
After a company has met the listing standards of the NYSE and has started trading (listing requirements)
A) it must continue to meet standards for maintaining its listing, which are typically less stringent than the original standards 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. See
A pink sheet security is one that
A) might also be a penny stock Pink sheet securities are referred to as penny stocks if they trade for $5 per share or less. To become a pink sheets company, only one market maker is needed to quote the stock. Issuers do not pay a fee for listing, but market makers pay a monthly fee to quote the stock. Pink sheet stocks are not required to register with the SEC, and as a result are not required to be sold with a prospectus in a primary offering.
In an auction process, a re-trade occurs when
A) the bidder re-bids at a later point in the process at a lower price A re-trade occurs when a bidder goes back on its original bid by re-bidding at a lower price later in the process. The classic re-trade occurs when a potential buyer bids at a high level to ensure being selected to get into the second round of a process (or gain exclusivity), only to "re-trade" and bid again later at a lower price once there are fewer (or no) competitors. An effective sell-side advisor may be able to discern which bids are "real" (i.e., less likely to be re-traded).
All-or-None
An All-or-None is a specific type of best efforts underwriting whereby if the underwriter is not able to sell all the shares being offered, none of the shares will be offered and the offering will be canceled.
Rule 144 provides?
An exemption from the '33 Act and permits the resale of restricted or control securities to the public
Under which circumstance can a seller cancel the sale process after it has accepted first round bids?
At any time with no approvals necessary The seller can cancel the sale process at any time under any circumstances without receiving approvals or need to provide cause. The only risk is reputational. An unsuccessful sale process can create a meaningful "taint" for the company in the market that may prevent it from re-engaging buyers in a sale process until a meaningful amount of time has passed.
Rule 144 provides which of the following?
B) An exemption from the '33 Act and permits the resale of restricted or control securities to the public SEC Rule 144 provides a safe harbor permitting the sale of restricted and affiliate securities, in limited amounts without requiring registration of the securities sold.
At what point during the sale process does the financing provider typically commit to the final staple terms and conditions?
B) During the second round of the sale process, prior to submission of final bids. While an overview of the expected basic terms of the staple is typically communicated verbally to buyers in advance of the first round bid date so they can use that information to help frame their bids, staple term sheets and/or actual financing commitments are not provided until later in the auction's second round, prior to submission of final bids.
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.
A broker-dealer is required to file notice of the resignation of a representative to FINRA within
Broker-dealers are required to file a Form U-5 notice of representative termination with FINRA within 30 days. If the rep is terminated with cause, the termination must be reported within 10 days.
Blank certificates issued by a bank that represent shares of a stock that are traded on a foreign stock exchange are known as
C) Global Depository Receipts 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.
If an issuer of corporate bonds includes the Moody's rating on its debt in a registration statement, which of the following is true regarding the S&P rating for the same issue?
C) The issuer is required to include the S&P rating in the registration statement only if the S&P rating is different -For offerings of debt, convertible debt and preferred stock, ratings may be included in the registration statement. If one rating is included, and another rating from a Nationally Recognized Statistical Rating Organization (NRSRO) is materially different, then that rating also must be included. Moody's and S&P are examples of NRSROs.
