Series 79 Diagnostic Exam 2

A commitment whereby the underwriter agrees to purchase any portion of an issue offered to existing shareholders under a rights offerings that is left unsubscribed is known as a

Stand-by commitment

A broker dealer underwrites an offering in which the registration statement contained material errors and omissions. To sustain a burden of proof that it is not liable, the firm must have had reasonable grounds to believe the registration was true and complete, based on a prudent man standard, as of what point in time?

The effective date

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

The names of any directors who did not attend at least 75% of the previous year's meetings

Mediation may not be used to settle disputes that exceed

There is no limit on the size of a dispute that is settled through mediation as long as there is agreement between the parties involved

Which of the following statements regarding Regulation M is TRUE?

There is no restricted period for securities with an ADTV of at least $1 million and a public float of at least $150 million

All of the following statements about unsponsored ADRs are true EXCEPT

They usually trade on the NYSE or Nasdaq

The form that a broker-dealer must submit to FINRA to terminate the registration of a representative is Form

U-5

Issuers who are permitted to file shelf registration statements which become automatically effective without prior SEC review are known as

Well-known seasoned issuers

All of the following statements are true about convertible bonds EXCEPT

a bond cannot be both callable and convertible

A fairness opinion is typically rendered in all of the following scenarios EXCEPT

a public acquirer making a small bolt-on acquisition to an existing platform

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

$1,030 $60 interest per year; paid semi-annually $1,000 + $30 = $1,030

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?

$1,067.50 $1,000 * 103.75% = $1,037.50 $60 interest per year; paid semi-annually $1,037.50 + $30 = $1,067.50

Company B reports net income of $150 million on its most recent 10-K. 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?

$171.0 million $35MM * (1 - 40%) = $21MM $150MM + $21MM = $171MM 1. NEVER use effective tax rate for adjustments

A stock is expected to have a five-year growth in earnings of 12% per year. Its current price is $30 per share. What current year earnings does the stock need to attain to represent a PEG ratio of 1.0?

$2.50 1 = ($30 / E) / 12 12E = $30 $30 / 12 = $2.50

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?

$20.00 (0.50 * $40) = $20

Use the data in Exhibit 202 to answer the following question. JimPrivateCo intends to raise capital by selling 85 million shares of common stock in an IPO. The investment bank rep advising JimPrivateCo on the transaction estimates that comparable companies in its sector tend to trade at a multiple of 14.2 - 16.3 times 2010 expected earnings. The equity capital markets rep advising JimPrivateCo advises the company to price the shares at a 15% discount to satisfy demand for the securities. Assuming JimPrivateCo intends to float 20% 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?

$21.45 Avg EV is 15.3x ($578MM / $475MM) - 1 = 21.7% $578MM * (1 + 21.7%) = $703.3MM 15.3 x $703.3MM = $10,725.9MM 20% * $10,725.9MM = $2,145.2MM $2,145.2MM / 85MM = $25.24 p/s $25.24 * (1 - 15%) = $21.45 p/s

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?

$250 million EBITDA, $110 million Net Income $30MM / (1 - 40%) = $50MM $200MM + $50MM = $250MM $80MM + $30MM = $110MM

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

$250.00 million $1.5B / 365 * 60.83 = $250MM

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

$278,666,000 $900K + $3.725MM + $254.357MM + $19.684MM = $278.666MM

AcquirerCo purchases TargetCo by issuing $40,000,000 in debt at a 7% rate. TargetCo has $4,700,000 in EBIT. AcquirerCo can recognize $2,500,000 in synergies and has a 40% marginal tax rate. An analyst covering AcquirerCo estimates its standalone earnings per share at $3.00 per share on 20,000,000 shares. What are AcquirerCo's pro forma earnings per share after the transaction?

$3.13 $3 * 20MM = $60MM $4.7MM * (1 - 40%) = $2.82MM $2.5MM * (1 - 40%) = $1.5MM $40MM * 7% * (1 - 40%) = $1.68MM $60MM + $2.82MM + $1.5MM - $1.68MM = $62.64MM / 20MM = $3.13

XYZ Corp. reports quarterly results as follows: Operating earnings - ($15 million) Depreciation and amortization - $45 million Taxes - ($5 million) Interest expense - $60 million What is its EBITDA for this period?

$30 million ($15MM) + $45MM = $30MM

A partnership wishes to participate in a private placement as an accredited investor. To qualify, the partnership must have total assets of at least

$5 million at the time of purchase

A company expects $1,000,000 in cash flow in its next fiscal year. It expects annual cash flow to increase by 3.0% in perpetuity. Assuming a 5.0% discount rate, what is the company's valuation?

$50,000,000 $1MM / (5% - 3%) = $50MM

XYZ Co, Inc. reports the following: Net income - $55 million SG&A expenses - $20 million Income taxes - $16 million Interest expense - $9 million What is its operating income?

$80 million $55MM + $9MM + $16MM = $80MM

The present value of a company's future free cash flow (FCF) is $77 million through the third operating year, using the year-end approach. Assuming that the cost of capital does not change, what might be the present value of the same cash flow using a mid-year convention?

$84 million 1. All else equal, mid-year FCF will be higher than year-end

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?

10.00% $0.14 / $1.40 = 10%

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.

10.18% $87,612,000 + $97,082,000 /2 = $92,347,000 $9,402,000 / $92,347,000 = 10.18%

A company's capital structure consists 100% of equity, with no debt. Treasury bills are yielding 4%, corporations with similar risk characteristics are able to issue 5-years notes at 6%, 10-year notes at 7.75%, and 20-year bonds at 9%. The S&P 500 has an expected return of 5% over risk-free, and the company's stock has a beta of 1.4. What is its Weighted Average Cost of Capital

11.00% 4% + (1.4 * 5%) = 11% (Cost of equity) Cost of debt is 0

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 $0.30 per quarter. What is its dividend payout ratio?

12.50% $0.30 / $2.40 = 12.5%

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?

15.35% $12MM * (1 + 12%) = $13.44MM $2MM / 8MM = $0.25 * (1 + 10%) = $0.275 8MM - 500K = 7.5MM $0.275 * 7.5MM = $2,062,500 $2,062,500 / $13.44MM = 15.35%

A company reports quarterly net earnings of $2.60 per share. It has 32 million fully diluted shares outstanding. Gross revenue for the quarter was $360 million. What is the company's net profit margin for the quarter?

23.10% $2.60 * 32MM = $83.2MM $83.2MM / $360MM = 23.1%

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

30 days of the end of the proceeding

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?

32.00% 1 * 110% = 1.1 10.5 * 120% = 12.6 1.1 * 12.6 = 13.89 (13.89 / 10.5) - 1 = 32%

XYZ Corporation pays quarterly dividends totaling $10 million to its stockholders. The market capitalization of its common stock is $1 billion, and it has 40 million shares outstanding. What is its dividend yield?

4.00% $40MM / $1B = 4%

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.

4.53% $192,393,000 + $223,100,000 /2 = $207,746,500 $9,402,000 / $207,746,500 = 4.53%

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

48 hours prior to the mailing of the confirmation of sale

A company has LTM EPS of $2.40 and an LTM P/E ratio of 16.1x. Its operating profit margin is 46%. What is its earnings yield, calculated on an LTM basis?

6.20% 1 / 16.1 = 6.2%

Within how many days after the end of a fiscal year must a large accelerated filer file Form 10-K?

60 calendar days

To qualify for an exemption under the provisions of Rule 147, each of the following requirements applies EXCEPT

80% of the securities sold must be sold to state residents

A company with inventory turns of 4.0 would take approximately how many days does to sell out average inventory?

91 days 365 / 4 = 91 days (DIH)

A company reports the following data on its balance sheet: Current assets - $110 million Current liabilities - $65 million Inventory - $50 million Short-term investments - $15 million What is its quick ratio?

92.00% $110MM - $50MM = $60MM $60MM / $65MM = 92%

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?

94 31 + 28 + 31 + 4 = 94

Acme Industries is a family-run and privately held manufacturing company. Acme has been in business for over 35 years, and has financed its operations in a variety of ways, including bank loans, credit lines and small private equity investments. John is Acme's CEO and largest shareholder but is considering diversification and, potentially, retirement. Which of the following exit strategies would be least appropriate for John's bankers to recommend?

Acquisition of a competitor

All of the following are true regarding the audit committee of a public company EXCEPT

An individual who is not on the company's board could be a member of the audit committee as long as he/she is a financial expert

In a Chapter 11 filing, a Debtor-in-Possession (DIP) acts

As a fiduciary with trustee powers

The form that must be filed with FinCEN to report currency transactions in excess of $10,000 in one business day is a(n)

CTR

Nonagricultural employment is what kind of economic indicator?

Coincident

In a bankruptcy, which type of corporate security falls lowest in the priority of claims?

Common stock and warrants

Company A and Company B have similar P/E ratios. Company A is expected to grow earnings at a 20% annual rate in the future, while Company B is expected to grow earnings at a 10% annual rate. What is the relationship between the two companies' PEG ratios?

Company B's PEG ratio will be about twice Company A's 15 / 20% = 75 15 / 10% = 150

Which of the following is considered a long-term liability?

Convertible debt

Which of the following assets would be LEAST likely to be structured into an asset-backed security?

Corporate equipment

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

Corporate information is communicated to him by a spouse

Under a Chapter 11 Bankruptcy reorganization plan, what percentage of a creditor committee is required to approve the plan?

Creditors representing at least two-thirds in amount and at least one half of the number of claims

"Know-your-customer" rules apply to

Customer accounts

Company D produces inventory as follows: January: 100 units at $7.50 each February: 75 units at $8.00 each March: 90 units at $8.20 each In April, Company D sells 130 units for $20 each Which of the following is true?

Ending inventory under LIFO is $1,030

A broker dealer learns that one of its employees has been using insider information on a recurring basis. What is the best way that the firm can protect itself from liability?

Ensure that the firm had adequate policies in place to prevent insider trading

An investment banker in an industry group does not require compliance approval to share non-public information with each of the following colleagues EXCEPT a(n)

Equity trader focused on public names in the industry

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

Fast Movers, Inc. has a deferred tax liability of $6,244 ($40K - $3K) / 8 = $4,625 ($18.5K - $4,625) * 45% = $6,244 1. Lower reported taxes = liability 2. NEVER use effective tax rate for adjustments

Which of the following statements is correct regarding a broker-dealer's Firm Element training requirement?

Firm Element training applies to both representatives and supervisory personnel

ABC Corporation has a "stated" price-to-book (P/B) value of 2.5. But when the P/B value is recalculated on a "tangible" basis, it increases to 2.8. What asset might account for the change?

Goodwill

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?

Greenshoe clause

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 the 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?

Gross profit margin will stay the same

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

Gross profit will increase more than net income

An investor who owns shares in ABC company is notified of a rights offering. If the investor decides to participate in this offering

I. Her stake in company ownership will not be diluted III. She will acquire more ABC shares

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 III. Florida

In an underwriting of corporate securities, selling group members participate in the distribution of the securities

II. Based on the terms of the Selected Dealer Agreement IV. Without financial responsibility for unsold securities

U.S. Government securities offer investors

II. Interest that is exempt from taxation at the state level III. Backing by the full faith and credit of the U.S. government

Which of the following impose listing standards on issues of securities before they can begin trading?

II. NYSE IV. Nasdaq

Which two of the following due diligence process tasks do buy-side advisers perform in the second round?

II. Schedule site visits IV. Schedule management presentations

In taking indications of interest, suitability standards apply to

Individual and institutional customers

A company's accounting methods cause it to recognize a $5 million expense on its income statement during a year in which it only took a $4 million tax deduction for the same expense. The company pays tax at a 35% corporate income tax rate. What is the impact of this transaction?

It creates a deferred tax asset of $350,000 ($5MM - $4MM) * 35% = $350K 1. Higher reported taxes = asset

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?

It is an accepted bid

A corporation places a tender offer to repurchase 30,000,000 of its outstanding shares. At the conclusion, a total of 50,000,000 shares have been tendered by investors. What is the issuer's required response to this tender?

It is required to accept shares pro-rata from all shareholders who have tendered shares

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?

It must be the version presented to Joe, or else a version presented prior to that date

An analysis indicates that a proposed $100 million investment made by a corporation will have a net present value (NPV) of $70,000 when a discount rate of 5.5% is used. If the investment stays the same and the discount rate is increased to 7.0%, what will be the impact on NPV?

It will decrease 1. Discount rate goes up, NPV goes down 2. Discount rate goes down, NPV goes up

Which of the following inventory accounting methods will most likely produce the highest cost of goods sold (COGS) and the lowest net income during a period of rising prices?

LIFO

In an inflationary environment, what would be the immediate impact of a company changing from FIFO to LIFO accounting for inventory?

Neither gross profit nor net income will increase

Which of the following best describes the difference between the OTC Bulletin Board and the Pink Sheets?

OTCBB securities are required to file reports with the SEC

A firm's OSJs must be inspected at least

Once each year

Public companies typically provide all of the following on their corporate website EXCEPT

P/E and EV/EBITDA multiples

In a Chapter 11 filing, which of the following actions may a Debtor-in-Possession (DIP) take?

Pay debts incurred after the filing

Which of the following is considered the least regulated market for a publicly traded equity?

Pink Sheets

Which of the following is TRUE regarding the preliminary proxy statements?

Preliminary merger proxy statements are always required to be filed with the SEC but preliminary proxy statements are not

A broker dealer must have reasonable basis for believing that a series of recommended transactions are not excessive or unsuitable. This is called

Quantitative suitability

Which SEC document is filed as part of a tender offer?

Schedule TO

Mark is an investment banker helping his client understand ways to raise capital. The client is a privately held mid-sized technology company that seeks to strengthen its balance sheet and position itself to acquire smaller firms in its sector. Mark suggests an IPO as a potential option; which of the following sequences is the most typical in an equity IPO?

Sign engagement letter, File registration statement, Go effective, Confirm allocations

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

Smaller companies

Buy-side advisers perform all of the following due diligence work prior to submission of first round bids EXCEPT

comprehensive analysis of the target's data room contents

The required annual rate of return that a company's equity investors expect to receive (including dividends) is known as the

cost of equity

As it relates to a discounted cash flow analysis, as a company's WACC increases

investors require greater return on their capital

It is important for the sell-side adviser to monitor the data room for all of the following reasons EXCEPT

to seek posted feedback from buyers on an updated basis

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

within 30 days of Jane's discovery of the Cuban dealings

Members of a limited liability company

are not personally liable for its debts

All of the following would indicate deteriorating credit conditions EXCEPT an increase in

assessed valuations

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

after secured creditors but before recent employee wages

To calculate its operating margin, a banker would begin with operating income and

divide by net sales

Company P issues a bond paying 7% cash interest and 5% PIK interest. An investor owning this bond would pay taxes

each year on both the cash interest and PIK interest as ordinary income

To loosen credit, the Federal Reserve Board might take all of the following actions EXCEPT

reducing taxes

The primary purpose of Regulation FD is to

require simultaneous disclosure to the public of material corporate information shared with research analysts

A bond indenture includes terms that limit the borrower's ability to use corporate assets for purposes that may be harmful to creditors, unless creditors consent. These terms are called

restrictive covenants