Unit 14 - Practice Exam 2

ALFA Enterprises pays a quarterly dividend of $.15 and has earnings per share of $2.40. What is the dividend payout ratio? A) 30%. B) 14.4%. C) 25%. D) 6.25%.

Your answer, 6.25%., was incorrect. The correct answer was: 25%. Earnings per share are typically calculated for a year. So the annual dividend of $.60 ($.15 × 4) is divided by $2.40 to calculate what percentage of earnings is paid as a dividend; or rather, the dividend payout ratio (.60 / 2.40 = 25%). Reference: 14.7.3.5 in the License Exam Manual.

ABC Investors Group is looking to do a leveraged buyout of the XYZ Corporation. Which of the following would be the most likely source of capital to fund this takeover? A) ABC's liquid assets. B) XYZ's liquid assets. C) A long-term bank loan. D) XYZ's creditors.

Your answer, A long-term bank loan., was correct!. The word "leverage" generally implies the use of borrowed money. The acquiring company will either issue a bond or borrow from a bank and use that money to fund the acquisition. In most cases, the assets of the target company are used as collateral for the loan. Reference: 14.7.1.1 in the License Exam Manual.

Which of the following industries is most likely to be considered cyclical? A) Durable goods. B) Utilities. C) Pharmaceutical. D) Food.

Your answer, Durable goods., was correct!. The production of durable goods depends on whether the economy is in an expansion or a contraction phase. Pharmaceuticals, utilities, and food are always necessary. Reference: 14.5.1.2 in the License Exam Manual.

Each of the following would add to the balance of trade deficit EXCEPT: A) U.S. investing abroad. B) Imports of foreign goods into the U.S. C) U.S. spending abroad. D) Foreign spending in the U.S.

Your answer, Foreign spending in the U.S., was correct!. Any spending overseas by U.S. investors or consumers adds to the trade deficit. For instance, the trade deficit increases when imports of foreign goods exceed exports of U.S. goods. Foreign spending in the U.S.would decrease the balance of trade deficit. Reference: 14.3.1.1 in the License Exam Manual.

If the U.S. dollar has fallen relative to foreign currencies, which of the following statements are TRUE? U.S. exports are likely to rise. U.S. exports are likely to fall. Foreign currencies buy fewer U.S. dollars. Foreign currencies buy more U.S. dollars. A) I and III. B) II and IV. C) II and III. D) I and IV.

Your answer, I and IV., was correct!. When the U.S. dollar loses value compared to a foreign currency, the same amount of the foreign currency now buys more dollars. As a result, U.S. goods are cheaper in terms of that foreign currency, which means that the foreign country and its residents tend to buy more U.S. products and U.S. exports rise.

A company's changing from straight line to accelerated depreciation will: increase income in the early years. decrease income in the early years. increase income in the later years. decrease income in the later years. A) I and IV. B) II and IV. C) II and III. D) I and III.

Your answer, I and IV., was incorrect. The correct answer was: II and III. Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years. Reference: 14.6.1.4.2 in the License Exam Manual.

The Conference Board releases information about the economy on a periodic basis. Included are a number of different indicators. These indicators can be used to predict how the economy as a whole might change. Which of the following would be considered a leading indicator? A) Gross domestic product. B) Industrial production. C) Corporate profits. D) Stock prices as measured by a broad index such as the S&P 500.

Your answer, Industrial production., was incorrect. The correct answer was: Stock prices as measured by a broad index such as the S&P 500. The stock market, which anticipates economy activity, is a leading economic indicator. GDP and industrial production are coincident, or current, economic indicators. Corporate profits are a lagging indicator. Reference: 14.1.1.3.1 in the License Exam Manual.

Which of the following investment strategies makes sense for an investor who believes in the efficient market hypothesis (EMH)? A) Investing in actively managed mutual funds. B) Investing in a market index fund. C) Market timing. D) Hedging through the purchase of derivative investments.

Your answer, Investing in a market index fund., was correct!. A market index fund is a favorite strategy of those who believe in the efficient market hypothesis, which holds that all relevant information has already been taken into account by the market, and it is pointless to try to outperform the broader market indexes. Reference: 14.4.3.5 in the License Exam Manual.

Which of the following fundamental analysis theories might rely on lowering and raising taxes to stimulate or cool down an economy? A) Keynesian. B) Short interest. C) Breakout. D) Supply side.

Your answer, Keynesian., was correct!. Keynesian theory is interventionist. Supply side theory calls for low taxes and low government spending. Both short interest and breakout theories are technical rather than fundamental analysis theories. Reference: 14.1.2.1 in the License Exam Manual

Which of the following would most likely be considered a leading economic indicator? A) The CPI. B) Bankrupt businesses. C) The GNP. D) The S&P 500.

Your answer, The S&P 500., was correct!. Leading indicators tend to forecast business cycles in the economy, such as securities markets. The best answer is the S&P 500. Reference: 14.1.1.3.1 in the License Exam Manual

You are reviewing a company's financial statements to assist a customer. What kind of information is most likely to be found in the footnotes to those financial statements? A) The length of time each director has served on the board of directors (BOD) B) Accounting methods used C) The names of the company's most formidable competitors D) The name, address, and contact information for the firm's chief executive officer

Your answer, The names of the company's most formidable competitors, was incorrect. The correct answer was: Accounting methods used Footnotes to a company's financial statements will contain important financial information such as accounting methods used as well as important management philosophy that may impact the company's overall financial health and performance. Reference: 14.6.4 in the License Exam Manual.

The dividend payout ratio of common stock is found by dividing the annual dividend per share by: A) the earnings per share. B) the market price. C) the book value. D) the capitalization per share.

Your answer, the earnings per share., was correct!. The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share. Reference: 14.7.3.5 in the License Exam Manual.

If the U.S. dollar depreciates in value, which of the following statements is NOT true? A) The balance of payments deficit would probably be reduced. B) Foreign goods would become more expensive in the United States. C) Travel abroad would be less expensive for Americans. D) The same number of yen would buy more dollars.

Your answer, Travel abroad would be less expensive for Americans., was correct!. If the dollar is devalued, travel abroad for Americans will become more expensive. Because the dollar is worth less, it will buy fewer London theater tickets, Swiss watches, or French perfumes. With a cheaper dollar, exports would probably rise and imports decrease, resulting in a smaller deficit in our balance of payments. Reference: 14.3.1.1 in the License Exam Manual.

If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true EXCEPT: A) the U.S. dollar buys more of foreign currencies. B) U.S. goods become more expensive in foreign countries. C) U.S. exports become more competitive. D) foreign goods become cheaper in the United States

Your answer, U.S. exports become more competitive., was correct!. The U.S. exports will cost more to foreigners and become less competitive. The dollar is worth more in terms of foreign currencies and will purchase more foreign goods per dollar. Reference: 14.3.1.1 in the License Exam Manual.

The common stock of all of the following corporations is considered defensive stock EXCEPT stock of a(n): A) retail grocery chain. B) pharmaceutical company. C) utility. D) airplane manufacturer.

Your answer, airplane manufacturer., was correct!. Defensive stocks generally have little volatility. Firms that produce nondurable consumer goods (tobacco, food, drugs, energy) are more immune to the business cycles than other industries and are sometimes called defensive industries. This term has nothing to do with the defense industry that supplies the Pentagon with goods and services. Reference: 14.5.1.1 in the License Exam Manual.

One of your customers notices that the short interest on the NYSE is high. When she asks you for an interpretation, you should tell her that this signals a: A) bearish market. B) period of volatility in the market. C) period of stability in the market. D) bullish market.

Your answer, bearish market., was incorrect. The correct answer was: bullish market. Even though short interest represents the number of shares sold short, many investors consider it a bullish indicator when this number is high. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks. Reference: 14.4.3.3 in the License Exam Manual.

An analyst comparing revenues with expenses is most likely analyzing: A) liquidity. B) cash flow. C) working capital. D) capitalization.

Your answer, cash flow., was correct!. The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis would involve examining the balance sheet's current assets and current liability entries, not the income statement. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet. Reference: 14.6.3 in the License Exam Manual.

All of the following will affect the working capital of a corporation EXCEPT: A) that portion of long-term debt currently payable. B) issuance of convertible preferred stock. C) payment of a cash dividend. D) declaration of a cash dividend.

Your answer, declaration of a cash dividend., was incorrect. The correct answer was: payment of a cash dividend. Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged. Reference: 14.6.1.3.5 in the License Exam Manual.

The economy has gone through three consecutive quarters of economic decline with no immediate end in sight, and therefore could be said to be: A) in a Depression. B) in a Recession. C) in a Recovery. D) Lagging.

Your answer, in a Recession., was correct!. Recession is defined as 2 or more consecutive quarters of economic decline. It would have to be at least 6 quarters to be considered a depression. Reference: 14.1.1 in the License Exam Manual.

An improvement in economic conditions is indicated by an increase in all of the following EXCEPT: A) S&P 500. B) inventories. C) industrial production. D) consumer orders.

Your answer, inventories., was correct!. Increasing inventories result from a decrease in customer demand. This can occur when disposable income is dropping and economic conditions are deteriorating. Reference: 14.6.2.1 in the License Exam Manual.

A fund is investing capital raised from both institutional and private investors in a nonpublic company to assist the company with an anticipated acquisition. This type of investment would be known as A) a nonqualified plan B) selling away C) a general partnership D) private equity

Your answer, private equity, was correct!. Private equity is equity capital invested in operating companies that are not publicly traded. The investment of capital can be made to aid or assist the company in a number of ways, including, but not limited to, making acquisitions; strengthening the company's balance sheet; or turning around a distressed company. Reference: 14.6.2.9 in the License Exam Manual.

During the past 2 quarters, the GDP declined by 3%, unemployment rose by .7%, and the Consumer Price Index fell off by 1.3%; this economic condition is called: A) inflation. B) stagflation. C) recession. D) depression.

Your answer, recession., was correct!. Two consecutive quarters of economic decline is termed a recession. Reference: 14.1.1 in the License Exam Manual.

If the U.S. economy shows signs of slowing, the Federal Reserve might: A) purchase securities in open market operations. B) sell securities in open market operations. C) increase the reserve requirement. D) increase the discount rate.

Your answer, sell securities in open market operations., was incorrect. The correct answer was: purchase securities in open market operations. To counter a slowing economy, the Fed would probably try to inject liquidity into the economy by purchasing U.S. government securities from primary dealers in a repurchase arrangement. The other choices would tend to tighten liquidity. Reference: 14.2.1.2.1 in the License Exam Manual.

A head and shoulders bottom formation is an indication of: A) a bearish market. B) a bullish market. C) the reversal of an upward trend. D) the reversal of a downtrend.

Your answer, the reversal of a downtrend., was correct!. A head and shoulders bottom formation is also known as an inverted head and shoulders formation. It is that part of a graph in which a downtrend has reversed to become an uptrend. It is not, however, an indicator of the bullishness or bearishness of the market as a whole. It is an indication only of the direction of a trend, which may be either short or long in duration. Reference: 14.4.2.1.2 in the License Exam Manual.

To tighten credit during inflationary periods, the Federal Reserve Board can take any of the following actions EXCEPT: A) to sell securities in the open market. B) to increase the amount of U.S. government debt held by primary dealers. C) to lower taxes. D) to raise reserve requirements.

Your answer, to lower taxes., was correct!. To curb inflation, the Fed can sell securities in the open market, thus changing the amount of U.S. government debt institutions hold. It can also raise the reserve requirements, discount rate, or margin requirements. The Fed has no control over taxes, which are changed by Congress. Reference: 14.2.1.2 in the License Exam Manual.