Analysis

Corporate financial reports that are filed with the SEC by publicly traded companies are required to use: A cash accounting B accrual accounting C FIFO accounting D LIFO accounting

Corporate financial records are kept using accrual accounting - a method that attempts to match revenues and expenses. Very small non-public companies can use cash accounting, which simply records revenues when cash payment is received; and liabilities when payment is made. In contrast, accrual accounting books revenue when services or product is delivered (but payment typically occurs in the future); and liabilities when incurred (again, payment of the liability typically occurs in the future).

DEF Corporation Income Statement Net Sales $10,000,000 Cost of Goods Sold 5,000,000 Gross Margin 5,000,000 Operating Expenses 1,900,000 Operating Income 3,100,000 Bond Interest 1,175,000 Net Income Before Tax 1,925,000 Tax at 50% 962,500 Net Income After Tax $962,500 What is DEF's Earnings Per Common Share, if DEF issued 300,000 common shares and has 275,000 common shares outstanding? A $2.00 B $2.50 C $3.00 D $3.50

D. $3.50Earnings per Common Share = Earnings Per Common/Common Share Outstanding

Monetary Policy

Federal Reserve managing the economy by altering the supply of money and interest rates

Fiscal Policy is actions by

Government, approved by congress -Used to increase/decrease take home pay Change gov spending on goods and services

The best answer is D. (In contrast, the formula for Net Worth is: Total Assets minus Total Liabilities.)

If current liabilities of a company are subtracted from current assets of a company, the result is the company's: A market value B net worth C capitalization D net working capital

Pretty Boys Dont Fight (Highest to Lowest)

Prime - Banks to Best Commercial Customers Broker/Call Loan - Banks to Brokers Discount Rate - Fed to Banks Fed Funds - Banks to Banks

Which of the investments listed below has historically offered the greatest hedge against purchasing power risk? A Common Stocks B Treasury Bills C Preferred Stocks D Treasury Bonds

The best answer is A. From a historical perspective, common stocks have produced superior returns to that of all fixed income securities. Purchasing power risk is the risk that inflation will reduce an investor's real returns. With investments in fixed income securities, inflation erodes the investor's real return. This is true because during periods of inflation, the fixed payments that are being made on those securities, in actuality, are being made with cheaper and cheaper dollars as the years progress. Common stocks have produced superior real returns for two reasons. The first is that when these companies have grown, the growth enriches the common shareholders (not the fixed income securities holders of those issues) and increases the value of their investments. The second is that during periods of inflation, companies can increase their prices, and thus raise returns to investors to match the rate of inflation. Thus, any real erosion of dividends to shareholders is minimized. This is not the case with fixed income securities.

The term "dovish" monetary policy means that: A the Federal Reserve is loosening credit by lowering interest rates B the Federal Reserve is tightening credit by raising interest rates C Congress is stimulating economic growth by increasing government spending D Congress is curbing economic growth by decreasing government spending

The best answer is A. If the Fed is worried about increasing unemployment and an economy that not growing, it needs to increase the available money supply and increase the level of loans being made. To do this, it would lower interest rates. This is commonly known as the Fed taking a "dovish" tone - which comes from Federal Reserve leaders taking a looser monetary policy, keeping rates low to fuel growth. In contrast, when the Fed is taking a "hawkish tone," it is increasing rates, reducing money supply levels, to reduce inflation and slow down economic growth. Both terms come from the Fed needing to be an "inflation hawk" - on the watch for inflation, where it will take action to raise interest rates if inflation grows rapidly. On the other hand, when there is little inflation, the Fed can be an "inflation dove."

The narrowest measure of the money supply is: A M-1 B M-2 C M-3 D L

The best answer is A. The narrowest measure of the money supply is M-1, which is cash in circulation and demand deposits. M-2 is: M-1 + time deposits of less than $100,000. M-3 is: M-2 plus jumbo CDs (over $100,000). L is: M-3 + money market instruments and savings bonds. L is the broadest measure of the money supply. (Note that the Federal Reserve no longer computes M-3 or L, but these may still be tested.)

Which of the following stocks would be considered cyclical? A Automobile manufacturer B Pharmaceutical manufacturer C Gold mining company D Computer software developer

The best answer is A. The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of these purchases are deferrable in hard times. Pharmaceutical companies are defensive and are not affected by the business cycle; in good times or bad, people must take prescribed drugs. Gold mining stocks are counter-cyclical. In bad economic times, people "flee to safety" and buy gold stocks. Computer software companies are growth companies.

In an environment of rapid inflation, which inventory method would report the lowest net income? A LIFO B FIFO C Average Cost D FISH

The best answer is A. When prices are rapidly rising, "last-in, first-out" accounting for inventory will result in the lowest reported profit. This occurs because the "newer" more expensive inventory is the first to be taken out of inventory and matched to sales revenue when a sale occurs, while the "older" less expensive inventory stays in inventory and is taken out and matched to revenue after the newer (more expensive) items are depleted. (For those of you with a sense of humor, FISH stands for "First In, Still Here" - a jokey term for inventory that is slow to move.)

The tools of the Federal Reserve include which of the following? I Setting the Reserve Requirement II Setting the Federal Funds Rate III Setting the Discount Rate IV Setting the Prime Rate A I and III only B II and IV only C I, II, III D I, II, III, IV

The best answer is A. While the Federal Reserve actions can influence the Federal Funds Rate (which is the overnight loan rate charged by banks to banks when money is borrowed to meet Reserve Requirements) and the Prime Rate (loans made by banks to their best corporate clients), the Fed does not set these rates. These rates are market driven. The Fed does, however, set the Reserve Requirement (member banks must maintain this percentage of deposits "on reserve" and can lend out the balance); and the Discount Rate (which is the rate charged to member banks to borrow reserves from the Fed). To memorize the 4 tools of the Fed, remember "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.

A company has reported earnings per share of $8.75. The company paid a $2.75 per share preferred dividend and a $1.00 per share common dividend. The company's dividend payout ratio is: A 11% B 16% C 31% D 42%

The best answer is A. Earnings per share is $8.75. This is earnings for common, out of which the preferred dividend has already been deducted. The dividend payout ratio is: $1.00 $8.75 = 11%

The Standard and Poor's Composite Average is most affected by price changes in: A technology stocks B utility stocks C energy stocks D industrial stocks

The best answer is A. The S&P 500 Index was "recategorized" about 15 years ago into different sectors to allow the creation of "Sector SPDRs" - index funds based on these sectors. The new breakdown, by approximate size, is:

A company has reported operating income of $12,500,000. The bond interest expense for the year is $4,000,000 and principal repayments on bonds totaled $1,000,000. The company's debt service coverage ratio is: A 2.5:1 B 5:1 C 12.5:1 D 25:1

The best answer is A. The debt service coverage ratio determines if operating income is sufficient to pay not only interest on the bonds but upcoming principal repayments (within the coming year). The ratio is: $12,500,000 /$4,000,000 + $1,000,000 = 2.5 : 1 Operating Income (and any other non-operating income)/Bond Interest Expense + Current Portion of Principal Repayment

NYSE MARKET DIARY Yesterday Prev. Day Advanced 866 1326 Declined 1577 1327 Unchanged 455 292 Total Issues 2898 2945 New Highs 121 98 New Lows 724 433 The ratio of advances to declines that occurred yesterday (rounded) is: A .50 : 1 B 1.0 : 1 C 1.5 : 1 D 2.0 : 1

The best answer is A. 866 issues advanced against 1,577 issues declined, for a ratio of advances to declines of .55:1, which is .5:1 ratio when rounded. This is a bearish sign.

If a stock's price breaks out through a resistance level, it is expected that the price of the stock will: A rise B fall C remain stable D become volatile

The best answer is A. A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises, because investors are willing to sell at this price. If a stock breaks the resistance level, this is strongly bullish, since all of the ready sellers have been "cleaned out" and there are still buyers for the stock. If there are many more buyers than sellers, prices will rise.

Equity securities of which issuer are the LEAST defensive? A Defense manufacturer B Pharmaceuticals C Soft drink manufacturer D Utilities

The best answer is A. A defensive industry is one which is not greatly affected by economic downturns. Pharmaceuticals, soft drink makers, and utilities are all defensive. If the economy sours, people still buy drugs, cola, and use electricity. The defense industry is the least defensive of the choices offered. In periods of economic slowdowns, the government collects less taxes, and tends to reduce arms and expensive defense systems orders.

All of the following indicators would be evaluated by a technical analyst EXCEPT: A Quick Ratio B Chart Formations C 200 Day Stock Price Moving Average D Advance / Decline Ratio

The best answer is A. A technical analyst makes buy and sell decisions on "technical" market factors such as trading volume, breadth of market movement (advance / decline line), and the movement of market averages. Fundamental analysts are concerned with the "fundamentals" of a company such as the quality of its management, earnings, balance sheet, etc. Therefore, a fundamental analyst would examine a company's Quick Ratio (Current Assets net of inventories divided by Current Liabilities) as well as its Price-Earnings Ratio.

When the market is reaching an "oversold" condition, it is expected that the next market move will be: A upwards B downwards C sideways D either upwards or downwards

The best answer is A. An oversold condition in the market occurs when the market price averages are decreasing daily, but the strength of the market decline (the number of issues declining versus the number of issues advancing) is weakening. The market is reaching an "oversold" condition, and is approaching a trough. Thus, the next market move is likely to be upwards.

Which ratio is a measure of credit risk? A Total Debt / Net Tangible Assets B Total Debt / Total Assets C Net Income After Tax / Net Tangible Assets D Net Income After Tax / Total Assets

The best answer is A. Credit risk is evaluated by looking at the debt level of a corporation relative to either equity or assets. Since bondholders are concerned with being paid if the company liquidates, only tangible assets are relevant. The ratio that would measure credit risk is:

During prolonged periods of economic expansion, interest rates can be expected to: A increase B decrease C remain stable D move independently of the economic cycle

The best answer is A. During prolonged periods of economic expansion, interest rates rise. This occurs because the Federal Reserve tightens credit to keep the economy from growing too fast; and because demand for loans rises as business activity rises.

Fundamental analysts would evaluate: I earnings trends II trading volumes III liquidity ratios IV advance-decline ratios A I and III B II and IV C I, II, III D I, II, III, IV

The best answer is A. Fundamental analysts select investments based on fundamentals such as earnings trends, balance sheet strength (liquidity ratios), management, etc. Technical analysts select investments based on chart movements, trading volumes, advance-decline ratios, etc.

If a corporation issues new stock at a price above par value, the excess above par is termed: A surplus capital B retained earnings C earned surplus D adjusted par value

The best answer is A. If a corporation sells stock at a price above par value, the par value received is shown on the balance sheet as "par value," while the excess funds are credited to the corporation's capital surplus account. Retained earnings and earned surplus are different names for the same account - corporate earnings that are not paid out as dividends are credited annually to retained earnings.

Inflation has been running at the annualized rate of 4%. You have just received a distribution from a mutual fund investment that has increased by 6%. Your purchasing power relating to this investment has: A increased B decreased C stayed the same D become more variable

The best answer is A. If inflation is running at 4%; and that individual's income has risen by 6%; then that individual's purchasing power has increased by 2%. The individual is earning 6% more, but it costs 4% more to live, so that individual's economic status has improved by 2%.

In a period of deflation, which of the following statements about issuers of fixed income securities are TRUE? I Issuers are more likely to sell fixed income securities II Issuers are less likely to sell fixed income securities III Issuers are likely to sell non-callable issues IV Issuers are likely to sell callable issue A I and III B I and IV C II and III D II and IV

The best answer is A. In a deflationary period, prices fall. Therefore, money buys "more" in real terms. As deflation occurs, interest rates will drop, causing long term debt prices to rise. Because interest rates will be lower, issuers are more likely to sell fixed income securities - it costs them less to finance. Issuers are likely to sell non-callable issues because interest rates are low, and there is no need to call in such issues when the financing rates are so favorable. Callable issues are generally sold in periods of high interest rates, so the issuer can call in the securities if interest rates fall subsequently.

A corporate issuer declares a reverse 2 for 3 stock split. After the split is effected, which statements are TRUE? I The market price of the corporation's shares will increase II The reported earnings per common share will increase III The number of common shares outstanding will increase IV Each common shareholder's proportionate ownership interest will increase A I and II only B III and IV only C I, II and IV D I, II, III, IV

The best answer is A. In a reverse split, the number of outstanding shares of the corporation is reduced. This increases reported earnings per share. If earnings per share increases, this tends to raise the price of the company's stock in the market. After the reverse split, each shareholder's proportionate ownership interest remains the same. The only difference is that the shareholder's ownership interest is represented by fewer shares.

Monetarist Theory states that the economy is stimulated by: A the actions of the Federal Reserve B increased Government spending C tax rate reductions D decreased Government spending

The best answer is A. Monetarists claim that the actions of the Federal Reserve Board to tighten or loosen credit are the driving force behind economic cycles.

Which tool of the Federal Reserve is used most frequently? A Open market operations B Discount rate C Reserve requirements D Margin on securities

The best answer is A. Monetary policy tools of the Fed include setting reserve requirements, open market operations, setting the discount rate, and setting margin rates on securities. Open market operations (repurchase and reverse repurchase agreements with government dealers) are conducted by the Fed daily. This is the most frequently used tool of the Federal Reserve to control money supply levels.

Common shares of which of the following issuers are likely to have a Beta coefficient much higher than +1? A Semi-conductor manufacturer B Pharmaceutical manufacturer C Public utility D Food processor

The best answer is A. The "Beta" coefficient is a measure of market volatility. A Beta of "+1" indicates that a particular security moves as fast as the market. A Beta higher than one means that the security moves faster than the market - for example a Beta of +2 means that the security moves twice as fast as the overall market. A Beta of less than 1, say 1/2, indicates that the stock's prices moves half as fast as the overall market. Thus, a stock with a low beta is one that is strongly defensive - that is one that is not affected by business cycles. Food and pharmaceutical companies have beta coefficients that average around 1. Electric and gas utilities, and railroads have the lowest beta factors - around .5. These companies' betas are the lowest because their rates of return are regulated. Therefore, these firms' profits are generated independently of the business cycle and stay relatively constant - no matter how good or bad business conditions are. High technology companies typically have very high betas relative to the market - these are growth companies.

Beta is a measure of: A market risk B marketability risk C credit risk D reinvestment risk

The best answer is A. The "Beta" coefficient is a measure of price volatility of a stock (or a portfolio) relative to the market - thus it is a measure of market risk. A Beta of +1 indicates that a particular security moves as fast, and in the same direction, as the market. A Beta of +1/2 indicates that the stock's price moves half as fast, and in the same direction, as the overall market.

The Consumer Confidence Index published by the Conference Board measures consumer: A sentiment B spending C investment D satisfaction

The best answer is A. The Consumer Confidence Index is published by the Conference Board and measures investor outlook on the economy and the markets - thus it is a measure of consumer sentiment.

Which of the following statements are TRUE regarding the "help wanted" advertising index? I If the number of advertisements is increasing, the economy is growing II If the number of advertisements is increasing, the economy is contracting III The index is a leading economic indicator IV The index is a lagging economic indicator A I and III B I and IV C II and III D II and IV

The best answer is A. The amount of "help wanted" advertising shows the current demand for labor. If the number of advertisements is increasing, this would show that employers plan future production and the economy is doing well. If it is decreasing, it shows that future production will be slowing. Thus it is a leading indicator, though is not included as one of the 10 leading economic indicators reported monthly.

Which ratio is the most stringent test of liquidity? A Cash assets ratio B Quick ratio C Acid test ratio D Current ratio

The best answer is A. The cash assets ratio is the ratio of cash to current liabilities; this is the most stringent test of liquidity. The quick ratio (or "acid test") is the ratio of current assets - inventories and prepaid expenses to current liabilities. This is a less stringent test than the cash assets ratio. The current ratio is the ratio of all current assets to current liabilities. This is the least stringent test of liquidity.

During periods of falling unemployment claims, rising consumer spending, and increased business spending, the Federal Reserve's actions would attempt to minimize the chances of: A inflation B deflation C recession D expansion

The best answer is A. The conditions stated, of falling unemployment claims, rising consumer spending and increased business spending, all point to a rapidly expanding Gross Domestic Product. In these conditions, the Federal Reserve is concerned with inflation, and would attempt to dampen activity somewhat to lessen the chances of inflation.

Which statements are TRUE regarding interest rate movements? I Actions of the Federal Reserve tend to affect short- term rates more than long- term rates II Actions of the Federal Reserve tend to affect long- term rates more than short- term rates III Short-term rates are more volatile than long-term rates IV Long-term rates are more volatile than short-term rates A I and III B I and IV C II and III D II and IV

The best answer is A. The tools of the Federal Reserve influence the "short end" of the yield curve. For example, if the Fed conducts reverse repurchase agreements via open market operations, the impact of the tightening will be felt immediately on short term rates - which will go up instantly. Thus, these rates move faster than long term rates (which are more influenced by long term economic and inflation expectations than by Fed actions).

Money Supply M1

currency + checkable deposits

XYZ Corporation Income Statement Net Sales $10,000,000 Cost of Goods Sold 5,000,000 Gross Margin 5,000,000 Operating Expenses 1,900,000 Operating Income 3,100,000 Bond Interest 1,175,000 Net Income Before Tax 1,925,000 Tax at 50% 962,500 Net Income After Tax $962,500 XYZ's capitalization consists of $10,000,000 worth of 11.75% Debentures, maturing 2040, convertible at $20; and $275,000 worth of Common at $1 Par, 300,000 issued, 275,000 shares outstanding. What is XYZ's fully diluted earnings per common share? A $2.00 B $2.50 C $3.00 D $3.50

The best answer is A. To compute Diluted Earnings Per Share, the income statement must be recast to include the effect of bond conversion. The adjusted income statement is: Gross Margin $5,000,000 Operating Expenses 1,900,000 Operating Income $3,100,000 Bond Interest Expense 0 $3,100,000 Taxes at 50% 1,550,000 Net Income After Tax $1,550,000 Since the $10,000,000 of bonds are convertible at $20, then 500,000 ($10,000,000 / $20) new shares will be issued. Diluted earnings per share is: $1,550,000 = $1,550,000 = $2.00 per share 275,000 + 500,000 775,000

Which of the following actions by the Federal Reserve will lower interest rates? I Purchases of securities as directed by the FOMC II Sales of securities as directed by the FOMC III Repurchase agreements with U.S. Government dealers and banks IV Reverse repurchase agreements with U.S. Government dealers and banks A I and III B I and IV C II and III D II and IV

The best answer is A. To lower interest rates, the Federal Open Market Committee must direct a loosening of the money supply. Purchases of securities by the Fed injects cash to the dealers, and loosens available credit (more money is available to be lent out). In a repurchase agreement, the Fed buys government securities from the bank dealers, thus injecting cash into the bank dealers - who can now lend out more.

The formula for Net Worth is: A (Total Assets - Inventory) / Total Liabilities B Total Assets - Total Liabilities C (Current Assets - Inventory) / Current Liabilities D Current Assets - Current Liabilities

The best answer is B. Total Assets - Total Liabilities = Net Worth (In contrast, the formula for Net Working Capital is: Current Assets minus Current Liabilities.)

Which action would NOT help a client diversify his or her portfolio? A Buying bonds in a portfolio that have different credit ratings B Buying stocks in a portfolio in accounts held at different broker-dealers C Buying an index fund that invests solely in domestic securities and another index fund that invests solely in foreign securities D Buying a target date mutual fund based on the customer's investment objectives and investment time horizon

The best answer is B. Diversification takes many forms to offset investment risks - one can diversify into different asset classes, can diversify by geographic regions, can diversify bond holdings by maturity and/or credit quality, etc. Buying holdings at different broker-dealers does nothing to diversify a portfolio. A target date fund allows the customer to set up a target date when the money will be needed, and the fund manager will then allocate investments in early years to growth equities, shifting to a safer mix (stocks/bonds) as the years progress, and finally shifting the asset mix to mainly money market instruments as the cash is needed. Thus, it gives both diversification and portfolio reallocation as the years progress to fulfill the customer's investment objective.

What action is the Federal Reserve MOST likely to take if it is worried about possible deflation due to extremely rapid economic contraction? A Increase the discount rate B Decrease reserve requirements C Decrease money velocity D Increase margin requirements

The best answer is B. If the Fed is worried about deflation and an economy that is contracting too rapidly, it needs to increase the available money supply and increase the level of loans being made. To do this, it could: Enter into repurchase agreements with the primary dealers (mainly large commercial banks) to given them cash, increasing loans made by banks. This would decrease the Fed Funds rate and all other interest rates in the economy; Decrease the Discount Rate (rate at which the Fed lends to member banks); Decrease Margin requirements under Regulation T (making margin borrowing more attractive); Decrease Reserve requirements, requiring banks to retain a smaller percentage of deposited funds, therefore increasing the amount that the bank can loan. Regarding money velocity, in times of recession, money velocity drops and in times of expansion, money velocity rises. To loosen credit, the Fed would want to "speed up" the money velocity, which it could do by shortening deposit clearance times - a move it almost never makes.

Which of the following economic events would have a positive long term impact on common stock prices? I Rising interest rates II Rising capital gains tax rates III Rising employment rates IV Falling inflation rates A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is B. Rising interest rates are bad for stock prices. More investors will switch from investments in stocks to bond investments. A rising capital gains tax rate also makes stocks less attractive to investors (why would an investor want to invest in stocks if the capital gains tax is so high?) Rising employment indicates that the economy is expanding. This is bullish (not bearish) for corporate profits and hence, stock prices. Low inflation means that interest rates are low, making debt investments unattractive. Thus, investors are more likely to invest in the stock market than in the bond market.

Which of the following statements are TRUE about the Federal Funds rate? I The Federal Funds rate is set by the Federal Reserve and is the rate at which member banks can borrow reserves from the Fed II Federal Reserve actions taken by the FOMC will influence the Federal Funds rate III The Federal Funds Rate is lower than the discount rate IV The "Effective" Federal Funds rate is the daily compounded rate of interest paid by borrowers A I and II only B II and III only C III and IV only D I, II, III, IV

The best answer is B. The Federal Funds Rate is set by member banks, and is the rate on overnight loans of reserves from member to member. FOMC (Federal Open Market Committee) actions influence the Fed Funds Rate. If the FOMC directs the Federal Reserve trading desk to loosen credit, the trading desk will engage in repo's with banks, injecting reserves into the banking system. This should lower the Fed Funds Rate between banks since there are more reserves available. If the FOMC directs the Federal Reserve trading desk to tighten credit, the trading desk will engage in reverse repo's with banks, draining reserves from the banking system. This should raise the Fed Funds Rate between banks, since there are less reserves available. The Fed Funds Rate will be lower than the discount rate. Members of the Federal Reserve system can borrow from the Fed itself at the discount rate. The "effective" Federal Funds Rate is the average rate charged by selected banks across the country on a given day.

A corporation's annual report shows that the reported net income before tax is falling at a faster rate than operating income. Which of the following expenses must have grown at a faster rate? A Depreciation B Bond Interest C Preferred Dividend D Cost of Goods Sold

The best answer is B. The basic corporate income statement is: Gross Sales - Operating Expenses Operating Income - Bond Interest Net Income Before Tax - Taxes Net Income After Tax For net income before tax to fall at a faster rate than operating income, then bond interest expenses must be increasing at a faster rate than operating expenses such as cost of goods sold and depreciation. Dividends are paid out of after tax net income and would not impact either operating income or reported net income.

The formula for the defensive interval ratio is: A Current Assets / Current Liabilities B Current Assets / Daily Operating Expenses C Annual Sales / Accounts Receivable D Annual Sales / Daily Operating Expenses

The best answer is B. The defensive interval ratio is a variation on the Current Ratio that measures liquidity. It takes Current Assets and divides it by Daily Operating Expenses to find the number of days that a company can continue to run if it were not able to bring in any more current assets. This is the period of time, or "defensive interval" that the company could continue running in a "worst case" scenario where business has collapsed and it was not generating current assets. For example, a company with daily operating expenses of $100,000 and total current assets of $5,000,000 can operate for $5,000,000 / $100,000 = 50 days before it runs out of money.

Which item would NOT be found on a corporation's income statement? A Interest B Dividends C Revenue D Expenses

The best answer is B. There could be a little more clarity here, but dividends are the best choice. The income statement details all items of revenue and expense to arrive at net income after tax. This is the income figure that is used to compute earnings per share. Dividends are paid out of a corporation's net income after tax. Interest income from investments is a revenue item on the income statement; interest expense on bonds outstanding is a deduction. The question does not say whether the interest is income or an expense, but in either case, they are income statement items. The actual dividends paid are shown in a different smaller financial statement - the retained earnings statement. This starts with year prior retained earnings; then adds that year's net income after tax; then subtracts dividends paid; to arrive at the year-end retained earnings for that company.

In a rising market, which of the following securities is LEAST volatile? A Stock with a BETA coefficient of 1.5 B Stock with a BETA coefficient of .5 C Stock with an ALPHA coefficient of .5 D Stock with an ALPHA coefficient of 1.5

The best answer is B. "Beta" is a measure of a security's price volatility relative to the overall market. "Alpha" is a measure of a security's price volatility independent of the overall market. The relevant measure to assess volatility relative to the market is "beta." The higher the "beta," the more volatile that security's price movements relative to the market. A stock with a "beta" of .5 will move 1/2 as fast as the overall market. A stock with a "beta" of 1.5 will move 1.5 times as fast as the overall market.

If a technical analyst sees stock prices drop repeatedly to a certain level, from which they start rising again, then a market: A "bottom" has been formed and stock prices can be expected to fall over the long-term B "bottom" has been formed and stock prices can be expected to rise over the long-term C "top" has been formed and stock prices can be expected to fall over the long-term D "top" has been formed and stock prices can be expected to rise over the long-term

The best answer is B. A bottom formation is bullish since the market has bottomed out and is now moving back upwards. It is a downtrend that has reversed itself.

During extended periods of high inflation, it can be expected that common stock price movements, as measured by the NYSE Composite Index, will show a: A positive correlation B negative correlation C lower volatility level D greater volatility level

The best answer is B. A rising inflation rate is a "lose-lose" situation for both the stock and long term bond markets. During extended periods of high inflation, interest rates rise, bond prices fall, and stock prices fall because corporate earnings deteriorate (corporations have a hard time increasing prices as their costs rise). In such time periods, because both stocks and long bonds are "losers," investors "flee to safety" - in the form of short term money market instruments (that are paying relatively high rates of interest in such periods). This last occurred during the 1970s, when inflation rates jumped from 6% to 13% from 1970 - 1974, and then stayed at the 10 - 13% level through 1982. During this period, the Dow Jones Industrial Average lost 40% of its value, from a high of about 1,000 in the early 1970s to a low of 600 in the mid 1970s. The Dow did not recover over 1,000 until 1982, after the Fed started pursuing an extremely aggressive tight money policy to wring inflation out of the economy.

A technical analyst who monitors stock advances against declines subscribes to the: A Odd Lot Theory B Breadth of Market Theory C Dow Theory D Efficient Market Theory

The best answer is B. An analyst who charts advances relative to declines is measuring the "breadth" of the market movement as an indicator of future market direction.

When the market is reaching an "overbought" condition, it is expected that the next market move will be: A upwards B downwards C sideways D either upwards or downwards

The best answer is B. An overbought condition in the market occurs when the market price averages are increasing daily, but the strength of the market (the number of issues advancing versus the number of issues declining) is weakening. The market is reaching an "overbought" condition, and is approaching a peak. Thus, the next market move is likely to be a decline.

Net tangible asset value of common stock is synonymous with which of the following? A Stated Value B Book Value C Par Value D Market Value

The best answer is B. Book value of a company is synonymous with Net tangible asset value - which is all assets minus intangibles and minus all liabilities. It is a measure of liquidation value of the company.

During prolonged periods of economic recession, interest rates can be expected to: A increase B decrease C remain stable D move independently of the economic cycle

The best answer is B. During prolonged periods of recession, interest rates drop. This occurs because the Federal Reserve loosens credit to get the economy moving again; and because demand for loans falls as business activity drops.

The "Efficient Market Theory" states that securities markets are efficient if: A trades are executed instantaneously and accurately B prices instantaneously and fully reflect all relevant available information C trades are reported instantaneously and accurately D dealers report all trades within 10 seconds of execution for dissemination to the public

The best answer is B. Efficient market theory is an academic approach to securities pricing in the market that states that securities prices instantaneously and fully reflect all available information. There are 3 versions of this theory: Weak Form: States that historical patterns in stock prices are of no use in predicting future price movements. The use of technical analysis to create "trendlines" is therefore, useless. This version is not widely accepted. Semi-Strong Form: States that current securities prices reflect all publicly available information. Thus, the value of securities in the market reflects publicly distributed information, but does not reflect information known by "insiders." This is the most widely accepted version. Strong Form: States that current securities prices reflect all information, whether publicly available or not. Thus, information known by "insiders" that has not been publicly disseminated, is already reflected in a security's price. This version is also not widely accepted.

Fiscal policy is set by: A Supreme Court decisions B Congressional action C Presidential edict D Federal Reserve action

The best answer is B. Fiscal policy is set by Congress. Fiscal policy encompasses the tax code, government transfer payment levels, and government spending.

If a country is importing more, then that country's: A GDP is increasing B GDP is decreasing C Inflation rate is increasing D Inflation rate is decreasing

The best answer is B. GDP is Gross Domestic Product - the sum of all goods and services produced within a country. If a country exports more, it is producing more within that country and GDP increases. If a country imports more, it is producing less within that country and GDP decreases.

Gross Domestic Product is: I the sum of all goods and services produced in the United States II the sum of all goods and services produced outside the United States III measured in inflated dollars IV measured in constant dollars A I and III B I and IV C II and III D II and IV

The best answer is B. Gross Domestic Product is the sum of all goods and services produced in this country. To make GDP comparisons valid, GDP is measured in constant dollars, using a GDP deflator.

Growth companies typically have which of the following? I Low dividend payout ratios II High dividend payout ratios III Low Price / Earnings ratios IV High Price / Earnings ratios A I and III B I and IV C II and III D II and IV

The best answer is B. Growth companies are characterized by high price-earnings ratios and low dividend payout ratios. Mature companies are characterized by low price-earnings ratios and high dividend payout ratios.

A corporation buys furniture and fixtures, paying cash. Which of the following choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital A I and III B I and IV C II and III D I, II, III, IV

The best answer is B. If furniture is bought with cash, then cash goes down (a current asset) and property, plant and equipment increases (a long term asset). If current assets drop, then working capital drops. There is no effect on current liabilities because the furniture is paid for; net worth is only affected by a profit, loss, dividend payout, or capital structure change.

Increasing inventory levels are an indication that: A consumer demand is increasing B economic conditions are deteriorating C economic expansion is occurring D central bank intervention is occurring

The best answer is B. If inventories are increasing, this is a sign that demand is falling off, and therefore, economic conditions are deteriorating.

The Federal Reserve Bank has made a policy decision to try to strengthen the U.S. Dollar versus the Japanese Yen. Which of the following intervention actions would increase the U.S. Dollar's exchange value? I Buy U.S. Dollars II Sell U.S. Dollars III Buy Japanese Yen IV Sell Japanese Yen A I and III B I and IV C II and III D II and IV

The best answer is B. If the Federal Reserve wishes to strengthen the U.S. Dollar against the Japanese Yen (which would make our goods more expensive to the Japanese and would decrease exports), it would buy U.S. Dollars and sell Japanese Yen. To decrease the value of the dollar, it would do just the opposite - sell the dollar and buy the yen.

Keynesian Theory states that the economy is stimulated by: A the actions of the Federal Reserve B increased Government spending C decreased Government spending D lowered tax rates

The best answer is B. Keynesian Economic Theory states that economic growth is controlled by government spending and transfer payments (e.g., Social Security). This theory gained adherents in the 1930s during the Great Depression. With the private economy shattered at that time, the only way out was to have the government employ workers in large projects. This increased Government spending; and helped to stimulate economic activity as earnings were placed in individual pockets.

Which of the following is a method of accounting for inventories? A Double Declining Balance B Last In; First Out C Sum of Years Digits D Straight Line

The best answer is B. Last-in; first-out (LIFO) is a method of accounting for inventories. Methods of depreciation include straight line, double declining balance (an accelerated method), and sum of the year's digits (another accelerated method).

Which of the investments listed below offers the greatest protection against market risk? A Common Stocks B Treasury Bills C Preferred Stocks D Treasury Bonds

The best answer is B. Market risk is the risk the securities prices, as a whole, will fall, dragging down both good and bad investments. To minimize market risk, common stocks should be avoided, as should long term fixed income securities, such as preferred stock and long bonds. To minimize this risk, investors "flee to safety" in the form of Treasury Bills. These are the safest type of credit - backed by the U.S. Government; and the price cannot drop that much because of their short term maturities. Since they will be redeemed shortly at par, the price cannot fall much below par, no matter what happens to the market as a whole.

The risk inherent in a portfolio that can be diversified away is known as: A systematic risk B non-systematic risk C credit risk D marketability risk

The best answer is B. Market risk is the same as systematic risk. It is the risk of the market moving adversely, and one's securities positions moving with the market. This risk cannot be diversified away; but it can be hedged against. Non-systematic risk is the portion of risk in a portfolio that is "stock specific." Also known as selection risk, this can be diversified away by adding more and more stocks to the portfolio, until the portfolio becomes reflective of the "market" as a whole.

All of the following are methods of depreciation EXCEPT: A Double Declining Balance B Last In; First Out C Sum of Years Digits D Straight Line

The best answer is B. Methods of depreciation include straight line, double declining balance (an accelerated method), and sum of the year's digits (another accelerated method). Last-in; first-out (LIFO) is a method of accounting for inventories.

The Federal Reserve will loan funds at the discount rate to which of the following? I Savings and Loans II Commercial Banks III Investment Banks IV Insurance Companies A I only B II only C I, II, III D I, II, III, IV

The best answer is B. Only commercial banks are members of the Federal Reserve System. Member banks can borrow reserves from the Fed at the discount rate.

Which of the following is a lagging economic indicator? A Index of Industrial Production B Reported corporate profits C Standard and Poor's 500 Index D New consumer goods orders

The best answer is B. Reported corporate profits are a lagging indicator because they show activity for the prior quarter. The index of industrial production is a coincident indicator, showing output levels at that time. Both new consumer goods orders and the Standard and Poor's 500 Index are leading indicators.

Securities that rise in price, when the market, as measured by the Standard and Poor's Index, falls, are said to have a: A positive beta B negative beta C positive delta D negative delta

The best answer is B. Securities that have a positive beta move in the same direction to the market as a whole. Securities that have a negative beta move in the opposite direction to the market as a whole - e.g., they are counter-cyclical stocks. For example, when industrial stocks move up due to improving economic conditions, this is an indicator that interest rates are likely to start rising. As a result, interest rate sensitive stocks, such as utilities, tend to decline in value. Thus, this stock is said to have a negative beta. "Delta" is a measure of change of price in an options premium relative to the change in price of the underlying security. (It is not tested on Series 7.)

All of the following will affect the reported net income per share of a corporation EXCEPT: A discontinuance of operations of an operating division B declaration of a common dividend C decrease in the number of common shares outstanding D change in accounting method for valuing inventories

The best answer is B. Since dividends are paid out of reported net income, they have no effect on the amount of net income that the corporation reports. If a corporation discontinues operations of a division, it usually takes a charge to net income to pay for the cost of the shutdown. If the number of common shares is increased, reported net income per share will fall. If a corporation changes accounting methods for valuing inventories, any decrease in inventory value is taken as a charge to net income; while any increase in inventory value will increase reported net income.

The "Monetary Environment" is a reflection of which of the following? I Stock trading volumes II Stock price levels III Monetary policy IV Fiscal policy A I and II only B III and IV only C I and IV only D II and III only

The best answer is B. The "Monetary Environment" is a reflection of whether credit is easy or tight, as shown by interest rate levels, money supply levels, and current economic policies of the Government - that is, fiscal policy.

The alpha coefficient is a measure of: I stock specific risk II market risk III a stock's price movement relative to the market as a whole IV a stock's price movement independent of the market as a whole A I and III B I and IV C II and III D II and IV

The best answer is B. The "alpha" coefficient is a measure of so-called stock specific risk, that is the relative risk of that stock's price moving positively or negatively independent of general market movements. In contrast, "beta" measures volatility of a stock relative to the market as a whole.

The real interest rate is the: A nominal rate plus the inflation rate B nominal rate minus the inflation rate C prime rate plus the federal funds rate D prime rate minus the federal funds rate

The best answer is B. The "real" interest rate dials out the effect of inflation. It is the nominal interest rate minus the inflation rate.

Capital Asset Pricing Theory is used to identify investments that give the: A lowest expected level of return for the level of risk assumed B highest expected level of return for the level of risk assumed C lowest beta coefficient as companies are added to the portfolio D highest beta coefficient as companies are added to the portfolio

The best answer is B. The Capital Asset Pricing Model is a methodology for finding the most efficient investments - those that give the greatest return for the amount of risk assumed. The model identifies the most efficient investments as those that give a rate of return equal to the "risk-free" rate of return (the rate of return for investments only having systematic risk) plus a premium for any non-systematic risk inherent in the investment.

If high yield bonds are yielding 15%, corporate bonds are yielding 10%, and 1-Year Treasury issues are yielding 5%, the risk premium for investing in high yield bonds is: A 15% B 10% C 5% D 0%

The best answer is B. The risk premium is the excess return achieved for investing in a specific class of assets as compared to the risk free return. The high yield bonds are yielding 15% when the risk-free return is 5%, therefore the excess return for investing in high yield bonds is 10%.

The "Monetary Environment" is: A the spending and taxation policies in current use by the U.S. Government B the dollar level of imports entering the United States versus the dollar level of exports leaving the United States C current money supply levels, interest rate levels, and economic policies D the current rate of exchange of the U.S. Dollar against major foreign currencies

The best answer is C. The "Monetary Environment" is a reflection of whether credit is easy or tight, as shown by interest rate levels, money supply levels, and current economic policies of the Government (for example, is the government using moral suasion to encourage lending or to discourage lending?)

If a corporation has an operating margin of profit of 9.50%, this means that for every $1 of revenue, the company has: A $.095 of expenses B $.95 of expenses C $.905 of expenses D $.0905 of expenses

The best answer is C. An income statement starts with revenues and deducts all operating expenses to arrive at operating income. The "margin" is a profitability or loss percentage. Gross Sales - Operating Expenses Operating Income The "margin" is a profitability or loss percentage. The Operating Margin of Profit is: Operating Income / Revenues. (Also note that the term "Operating Margin of Profit" is a wording that is now rarely used - instead the current wording is simply Operating Profit Margin or Operating Margin - but it may still be used on the exam.) If the company has an Operating Margin of Profit of 9.50%, this means that it had operating income of $.095 for each $1 of revenue ($.095 / $1 = 9.50%). Because operating expenses are deducted from revenue to arrive at the operating margin, this means that for every $1 of revenue, there were $.905 of expenses.

Trading in the Interbank market will affect: I foreign currency prices in terms of U.S. dollars II future trade deficit or surplus figures III future economic growth IV future inflation levels A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. Inflation levels are determined by the relative balance of output of goods and services versus the U.S. dollars available to "pay" for these. If the money supply is allowed to grow too quickly by the Fed relative to real economic growth, then there will be inflation. Therefore, future inflation levels are basically determined by Federal Reserve actions, not by the interbank market.

A U.S. balance of payments deficit would be narrowed by which of the following? A Increased levels of U.S. imports B Decreased sales of U.S. securities to foreign holders C Increased levels of foreign tourists visiting the United States D Increased dividends paid to foreign holders of U.S. securities

The best answer is C. If the balance of payments is running a deficit, then more U.S. Dollars are being spent abroad for foreign goods and services than are being spent in the United States by foreigners for domestic goods and services. Increased levels of U.S. imports will cause more dollars to leave the U.S., widening the deficit. Increased levels of foreign tourists visiting the U.S. will narrow the deficit, since dollars are being spent in the U.S. by more foreigners. Increased dividends paid to foreign holders of U.S. securities will cause dollars to leave the U.S., widening the deficit. Finally, decreased sales of U.S. securities to foreign holders will reduce the inflow of dollars resulting from these purchases, widening the balance of payments deficit.

Which of the following are MOST susceptible to interest rate risk? I Common stock II Utility common stock III Preferred stock IV High tech common stock A I and III B I and IV C II and III D II and IV

The best answer is C. Interest rate risk is the risk that if market interest rates rise, securities prices will fall. Prices of bonds and preferred stocks that pay either a fixed interest rate or fixed dividend rate are directly interest rate sensitive. As market interest rates rise, their prices fall. Regarding common stocks, companies that use a lot of leverage (debt) in their capital base are also interest rate sensitive. If market interest rates go up, as these companies refund their maturing outstanding debt, their interest costs will rise and earnings per common share will drop. Utilities typically have 90% of their capital base as debt, so their common stock prices are interest rate sensitive. High tech companies typically have no debt in their capital base (since their earnings are so variable), so their common stock prices are not interest rate sensitive.

Speculators in foreign currencies would be subject to all of the following risks EXCEPT: A political risk B market risk C reinvestment risk D exchange rate risk

The best answer is C. Reinvestment risk only affects securities that pay an income stream. If interest rates fall over the time period that an investment is held; any dividends or interest payments received over this time period are reinvested at lower rates, lowering the overall rate of return. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

Which of the following stocks would be considered counter-cyclical? A Automobile manufacturer B Pharmaceutical manufacturer C Gold mining company D Computer software developer

The best answer is C. The performance of counter-cyclical stocks moves opposite to the economic cycle. Gold mining stocks are counter-cyclical. In bad economic times, people "flee to safety," selling stocks that are adversely affected in bad times and buying gold stocks - since gold tends to hold its value in good times or bad. In contrast, the performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of these purchases are deferrable in hard times. Pharmaceutical companies are defensive and are not affected by the business cycle; in good times or bad, people must take prescribed drugs. Computer software companies are growth companies.

Over a period of 18 months, prices of goods and services decrease by 2%, and market interest rates decrease by 3%. This signals that the economy is in a period of: A depression B prosperity C deflation D recession

The best answer is C. When there is persistent inflation, asset prices increase and market interest rates rise. When there is persistent deflation, asset prices decrease and market interest rates fall. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

Over a period of 18 months, prices of goods and services increase by 4%, and market interest rates increase by 5%. This signals that the economy is in a period of: A depression B prosperity C inflation D recession

The best answer is C. When there is persistent inflation, asset prices increase and market interest rates rise. When there is persistent deflation, asset prices decrease and market interest rates fall. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

Which of the following are components of total long term capital of a corporation? I Common Stockholders' Equity II Preferred Stockholders' Equity III Long Term Bonded Debt IV Current Liabilities A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. A corporation's long term capital consists of common stockholders' equity (common at par; capital in excess of par; and retained earnings); preferred stockholders' equity; and long term debt. These are all sources of long term capital for the corporation. Current liabilities are just that, bills that must be paid within 1 year. They are not a source of capital for a corporation. Long Term Capitalization... The total long term capital of a corporation is all long term funding obtained by the issuer. There are 3 components to total long term capital: Common Stockholders' Equity - consisting of common at par, capital in excess of par and retained earnings; Preferred Stockholders' Equity - consisting of the par value of all preferred stock sold to the public; Long Term Bonds - consisting of the par value of all bonds sold to the public.

A head and shoulders "top" formation is: I Bullish II Bearish III Reverse Upward Trend IV Reverse Downward Trend A I and III B I and IV C II and III D II and IV

The best answer is C. A head and shoulders top formation is bearish since the market has topped out and is trending down. It is an uptrend that has reversed itself.

Which of the following statements are TRUE about a company that is highly leveraged? I They "trade on the equity," producing a disproportionate increase in earnings per share once earnings cover debt service II The more highly leveraged the company, the lower the credit risk of the issuer III The company has the greatest portion of its capitalization as debt IV If the company's operating earnings are highly variable, it may default in an economic downturn A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is C. A highly leveraged company is one having a disproportionate amount of debt in its capital structure. Because interest on debt is a fixed annual amount, and is quite large in highly leveraged companies, if operating earnings drop in a bad year, debt service costs may not be covered. On the other hand, once debt service costs are covered, if earnings increase, all of the increase accrues to the shareholders. Because of this, leveraged companies are said to "trade on the equity" - meaning that once debt service costs are covered, reported earnings per share can rise dramatically. The more highly leveraged a company, the higher the risk of default in bad times, since it may not be able to cover large fixed interest costs.

A portfolio of securities that moves in both the same direction and same velocity as the market as a whole would have a Beta equal to: A +0 B -0 C +1 D -1

The best answer is C. A portfolio with a "beta" coefficient of +1 is one that moves in both the same direction and same velocity as the market as a whole. A portfolio with a "beta" coefficient of +2 is one that moves in the same direction as the market as a whole, but which moves twice as fast as the market. A portfolio with a "beta" coefficient on -1 is one that moves at the same velocity as the market as a whole, but it moves in the opposite direction to the market.

Accelerated depreciation deductions: I increase reported income in early years II decrease reported income in early years III increase reported expenses in early years IV decrease reported expenses in early years A I and III B I and IV C II and III D II and IV

The best answer is C. Accelerated depreciation deductions, when compared to straight-line depreciation deductions, are "front loaded." The depreciation deduction is higher in earlier years; but the deduction is lower in later years (as compared to straight line depreciation). Because there are higher deductions in the earlier years, this will reduce reported income in those years; while the lower deductions in later years will increase reported income for those years.

An investor has purchased shares of an international bond fund. The fund will have superior performance if the value of the: I U.S. Dollar increases II U.S. Dollar decreases III foreign currency increases IV foreign currency decreases A I and III B I and IV C II and III D II and IV

The best answer is C. An international bond fund will have securities that are denominated in foreign currencies. If the foreign currency value rises against the dollar, then when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars. Similarly, if the U.S. Dollar drops against the foreign currency, when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars.

The Capital Asset Pricing Model (CAPM) would identify the most efficient investments as those with the: I lowest rate of return II highest rate of return III lowest level of risk IV highest level of risk A I and III B I and IV C II and III D II and IV

The best answer is C. CAPM is a methodology for finding the most efficient investments - those that give the greatest return for the amount of risk assumed. The model identifies the most efficient investments as those that give a rate of return equal to the "risk-free" rate of return (the rate of return for investments only having systematic risk) plus a premium for any non-systematic risk inherent in the investment.

Which statement is TRUE? A Trades of listed equity options take place in the interbank market B Trades of listed foreign currency options take place in the interbank market C Trades of foreign currencies take place in the interbank market D Trades of bankers acceptances take place in the interbank market

The best answer is C. Foreign currencies trade in the "Interbank Market." Trading of foreign currency option contracts takes place on the Philadelphia Stock Exchange. Trading of listed equity options takes place on the CBOE, AMEX, PHLX, PAC, and ISE. Trading of bankers acceptances takes place in the "over-the-counter" market.

XYZ Company has 100,000,000 authorized common shares. 25,000,000 shares have been issued and another 10,000,000 shares are currently in registration. The sale of the 10,000,000 shares will result in all of the following EXCEPT a(n) A decrease in earnings per share B increase in net worth C decrease in net working capital D increase in the number of shares outstanding

The best answer is C. If a company sells additional common shares, the funds from the sale increase cash (thus increasing net working capital) and are credited to the company's capital at par and capital surplus (thus increasing net worth). As the number of outstanding shares increase, earnings per common share will fall (become diluted).

A corporation issues a stock dividend. Which of the following statements are TRUE? I Par value per common share will decrease II Par value per common share will remain the same III Retained earnings will decrease IV Retained earnings will remain the same A I and III B I and IV C II and III D II and IV

The best answer is C. If a corporation declares a stock dividend, the dividend is appropriated from retained earnings (reducing retained earnings) and used to increase the number of common shares outstanding. Par value per share remains the same, but since there are more shares outstanding, aggregate par value increases (as does capital in excess of par). The dollar decrease in retained earnings exactly equals the increase in common at par, and capital in excess of par, so the net result is a "wash," with no dollar change in total stockholders' equity.

If a corporation repurchases its debt, which of the following statements are TRUE? I The corporation's capitalization will increase II The corporation's capitalization will decrease III The market value of the common stock will increase IV The market value of the common stock will decrease A I and III B I and IV C II and III D II and IV

The best answer is C. If a corporation repurchases its debt, then its capitalization will decrease (a corporation's long term capital consists of equity and long term debt). Corporations will repurchase debt to refinance at lower interest rates (not higher ones); to increase the market value of the corporation's common stock (since the corporation has less debt, the common stock would be valued more highly by the market); and to reduce the corporation's earnings fluctuation's due to cyclical conditions. Corporate sales decrease due to cyclical conditions, but fixed interest charges do not. This causes earnings for common shareholders to fall greatly or become non-existent in period of falling sales. To reduce this possibility, a corporation can repurchase its debt.

ABC Corporation splits its stock 3:1. As a result of the split, which of the following will occur? I The par value per share of ABC stock stays the same II The par value per share of ABC stock is reduced III The Price / Earnings ratio of ABC stock stays the same IV The Price / Earnings ratio of ABC is reduced A I and III B I and IV C II and III D II and IV

The best answer is C. If a corporation splits its stock, the number of shares is increased proportionately; and the par value per share is reduced proportionately. On the "ex" date, the exchange reduces the market price of the stock to reflect the split. There is no effect on Retained Earnings for a split (though there is a reduction to retained earnings if a "dividend" is paid). Finally, the company's "Price / Earnings" ratio will stay the same, because both the stock's market price and earnings per share will be reduced in the same proportion as a result of the split, keeping the ratio constant.

A corporation declares a cash dividend to shareholders. Which of the following choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital A I and III B I, II, III C II, III, IV D I, II, III, IV

The best answer is C. If a dividend is declared, then it is not yet paid. Dividends payable increases (a current liability) and net worth decreases (since the dividend is appropriated from retained earnings). If current liabilities increase, then working capital falls.

A corporation issues new common stock. Which of the following are affected? I Current Assets II Total Liabilities III Net Worth IV Retained Earnings A I and II B III and IV C I and III D I, III, IV

The best answer is C. If new common stock is issued, cash increases (from the proceeds of the sale) as well as common stock at par and capital in excess of par. This increases net worth. There is no effect on retained earnings - which changes due to profits, losses, and dividend payouts.

Mature companies are characterized by: A low dividend payout ratios and low price / earnings ratios B low dividend payout ratios and high price / earnings ratios C high dividend payout ratios and low price / earnings ratios D high dividend payout ratios and high price / earnings ratios

The best answer is C. Mature companies are characterized by low price-earnings ratios and high dividend payout ratios. Growth companies are characterized by high price-earnings ratios and low dividend payout ratios.

Pension funds seeking safety of principal and maximum income would use which investment strategies? I Purchase Government and Agency securities II Sell short Government and Agency securities III Sell covered Treasury Bond calls IV Enter into Overnight Repurchase Agreements with government dealers A I and IV only B II and III only C I, III and IV D I, II, III, IV

The best answer is C. Pension funds must be prudently managed. The purchase of government and agency securities is appropriate, as is the sale of covered calls against the securities in the portfolio to generate extra income. Short sales are not suitable because of unlimited loss potential, as is the sale of naked calls. Pension funds would lend money overnight via repurchase agreements to government dealers as a way of generating an extra investment return from cash balances that await investment in longer term securities.

A foreign currency trade that settles on a mutually agreed date after trade date is a: A cash settlement B seller's option settlement C forward settlement D spot settlement

The best answer is C. Settlement of "forward" trades in the Interbank market takes place on a mutually agreed date in the future. This contrasts with "spot" settlement of foreign currency trades which occurs either one or two business days after trade date (the more actively traded currencies settle next day; less actively traded currencies settle in 2 business days).

Which is considered to be a coincident economic indicator? A Stock market prices B Corporate profits C Index of industrial production D Orders for machinery

The best answer is C. Stock market prices are a leading indicator - as stock prices rise, people feel richer and will spend more; corporate profits show what happened in the preceding quarter so they are a lagging indicator; orders for machinery show production to come and are a leading indicator; the index of industrial production shows current production levels and is a coincident indicator.

Supply Side Theory states that the economy is stimulated by: A the actions of the Federal Reserve B increased Government spending C tax rate reductions D Government incentives to consumers

The best answer is C. Supply Side Theory states that economic growth is controlled by individual initiative. If individuals are given the incentive to produce, they will, and the economy will grow. To give this incentive, the theory holds that government spending, and the tax collections necessary to support that government spending, should be reduced. This leaves the individual with an economic incentive to produce, since less of his or her income is being taxed.

The Advance / Decline ratio shows all of the following EXCEPT: A breadth of the market B market sentiment C share turnover D number of issues that increased in price versus number of issues that decreased in price

The best answer is C. The Advance / Decline ratio compares the number of issues that advanced on the NYSE and on NASDAQ that day; as compared to the number of issues that declined. For example, assuming that there are 3,000 issues listed on the NYSE on a day that the advance decline ratio was 2:1. This means that approximately 2,000 issues advanced and 1,000 issues declined that day (2,000/1,000 = 2:1). This measures the breadth of the market's movement that day and is an indicator of market sentiment (moderately bullish this day). However, it does not measure trading volume in any way.

All of the following are sources for analysis and rating of individual stocks EXCEPT: A Value Line B Standard and Poor's C Morningstar D Member Firm In-House Research Reports

The best answer is C. The Value Line Investment Survey rates 1,700 stock issues that it follows. Standard and Poor's rates both bonds and individual stock issues. Member firm research departments produce reports that rate individual stock issues. Morningstar is a ratings service that rates mutual fund performance. As a minor part of its business, it rates some individual stocks, but does not cover nearly as many as the other choices listed.

The highest interest rate listed below is the: A discount rate B federal funds rate C prime rate D broker loan rate

The best answer is C. The highest major interest rate in the economy is the Prime Rate. Ranking the major interest rate measures from lowest to highest: Fed Funds Rate, Discount Rate, Broker Loan Rate, Prime Rate.

A "consolidating market" is one where prices are: A rising B falling C flat D volatile

The best answer is C. The market is said to be "consolidating" when prices are flat - not moving in any direction for a long period after a previous price rise or fall.

The usual order of the economic cycle is: A expansion, recession, recovery, peak B recession, recovery, peak, expansion C expansion, peak, recession, recovery D peak, recession, expansion, recovery

The best answer is C. The normal sequence of the economic cycle is a period of expansion, followed by an economic peak (prosperity), followed by a decline in economic activity (recession), followed by an economic recovery leading to further expansion, etc.

A corporation has an operating margin of profit of 9.50%. What does this mean? A For every $9.50 of expenses, the company had $1 of revenue B For every $9.50 of expenses, the company had $100 of revenue C For every $90.50 of expenses, the company had $1 of revenue D For every $90.50 of expenses, the company had $100 of revenue

The best answer is D. An income statement starts with revenues and deducts all operating expenses to arrive at operating income. Gross Sales - Operating Expenses Operating Income The "margin" is a profitability or loss percentage. The Operating Margin of Profit is: Operating Income / Revenues. (Also note that the term "Operating Margin of Profit" is a wording that is now rarely used - instead the current wording is simply Operating Profit Margin or Operating Margin - but it may still be used on the exam.) If the company has an Operating Margin of Profit of 9.50%, this means that it had operating income of $9.50 for each $100 of revenue ($9.50 / $100 = 9.50%). Because operating expenses are deducted from revenue to arrive at the operating margin, this means that for every $100 of revenue, there were $90.50 of expenses. Gross Sales $ 100.00 - Operating Expenses $ 90.50 Operating Income $ 9.50 The Operating Margin is $9.50 / $100 = $9.50%

Which of the following best describes a stock that moves with the market? A Income stock B Special situations stock C Defensive stock D Blue Chip stock

The best answer is D. Blue Chip stocks are large capitalization companies like General Electric that have a long track record (GE has been around for over 100 years) and P/E (Price/Earnings) multiples that are similar to the market as a whole. Their price movements tend to track the overall market. (For trivia freaks, the name "blue chip" comes from the most valuable poker chip.) In contrast, an income stock is one that pays a high dividend rate. These are often slow-growth companies that make up for their lack of growth in stock price by paying a higher dividend rate. Utilities are a "classic" income stock. A defensive stock is one whose price stays fairly stable, regardless of the price movements of the general market. Typical defensive stocks are food companies and health care companies. A special situations stock is a company that is the target of a merger or takeover or a company that is in bankruptcy and which stockholders hope will be able to turn itself around. These are companies in "special situations." If the turnaround or takeover is successful, the stock price could rise steeply.

Trading in the Interbank market will affect all of the following EXCEPT: A foreign currency prices in terms of U.S. dollars B future trade deficit or surplus figures C future economic growth D future inflation levels

The best answer is D. Foreign currencies trade in the "Interbank" market. If the dollar declines against foreign currencies, U.S. goods become cheaper to foreigners. This will stimulate exports and domestic economic growth. If the dollar rises against foreign currencies, foreign goods become cheaper in the U.S. This will stimulate imports, and shift production out of the U.S. to other countries. Inflation levels are determined by the relative balance of output of goods and services versus the U.S. dollars available to "pay" for these. If the money supply is allowed to grow too quickly by the Fed relative to real economic growth, then there will be inflation. Therefore, future inflation levels are basically determined by Federal Reserve actions, not by the interbank market.

Monetary policy is set by: A Supreme Court decisions B Congressional action C Presidential edict D Federal Reserve action

The best answer is D. Monetary policy is set by the Federal Reserve Board. The Federal Reserve can either tighten; or loosen; credit by using any of its 4 tools, which can be memorized as "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.

If the U.S. dollar appreciates against foreign currencies, which statements are TRUE? I U.S. exports should increase II U.S. exports should decrease III Any trade deficit should narrow IV Any trade deficit should widen A I and III B I and IV C II and III D II and IV

The best answer is D. If the U.S. dollar appreciates against foreign currencies, then U.S. goods become more expensive to foreigners, while foreign goods become cheaper in the U.S. This should cause exports to decrease, and imports to increase. If the U.S. is running a trade deficit, the increase in net imports will widen the deficit.

Stockholders' Equity (Net Worth) is affected by all of the following EXCEPT: A declaration of a cash dividend B the purchase of Treasury stock C the issuance of new stock D declaration of a stock dividend

The best answer is D. Stockholders' Equity consists of: Common at Par + Capital in Excess of Par + Retained Earnings. When a cash dividend is declared, it is deducted (debited) from Retained Earnings and credited to Dividends Payable - a current liability. Thus, Stockholders' Equity drops. When Treasury Stock is purchased, Common at Par and Capital in Excess of Par are reduced by the purchase amount and cash (a current asset) is reduced (to reflect the payment made to buy the Treasury stock). Thus, Stockholders' Equity decreases. When new stock is issued, Common at Par and Capital in Excess of Par are increased by the sale amount and cash (a current asset) is increased (to reflect the cash received from selling the new stock). Thus, Stockholders' Equity increases. When a stock dividend is "paid," it is debited to Retained Earnings (a reduction) and credited to Common at Par and Capital in Excess of Par. Since these are all accounts within Stockholders' Equity, there is no net change to the total Stockholders' Equity amount.

The broadest measure of the market is the: A Dow Jones Industrial Average B New York Stock Exchange Composite Index C Standard and Poor's 500 index D Wilshire Index

The best answer is D. The DJIA only includes 30 large capitalization stocks. The Value Line Index covers 1,700 stocks spread across NYSE, NYSE American (AMEX) and NASDAQ issues. The Standard and Poor's 500 Index includes the 500 largest companies by market capitalization headquartered in the United States. The Wilshire Index includes all NYSE, NYSE American (AMEX) and NASDAQ listed issues (excluding ETFs) - more than 3,500 issues. (Note that when the index started in the 1970's, it had about 5,000 issues. There are fewer listed companies nowadays.)

The interest rate charged from commercial banks to their best customers is the: A Discount Rate B Federal Funds Rate C Broker Loan Rate D Prime Rate

The best answer is D. The lowest rate is the Federal Funds Rate. This is the rate on overnight loans of reserves from bank to bank. The next highest rate is the Discount Rate. This is the rate that the Federal Reserve charges member banks for borrowing reserves from the Fed. The next highest rate is the Broker Loan Rate. This is the rate that brokerage firms can borrow from banks using securities as collateral. The highest rate is the Prime Rate. This is the rate for unsecured borrowing from banks by the best corporate customers.

If the rate of inflation in the year 2021 is 2%; in the year 2020 the rate of inflation was 4%; and in the year 2019 the rate of inflation was 6%; this is known as: A deflation B depression C recession D disinflation

The best answer is D. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. In contrast, deflation is a decline in asset prices. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

A breakout through a support level is: I an upside breakout II a downside breakout III bullish IV bearish A I and III B I and IV C II and III D II and IV

The best answer is D. A "support" level is a price below the current market, through which a stock's price tends not to fall. Thus, the stock is said to have "support" at this price, meaning it is resisting further price declines, because investors are willing to buy at this price. If a stock breaks the support level, this is strongly bearish, since all of the ready buyers have been "cleaned out" and there are still sellers of the stock. If there are many more sellers than buyers, prices will fall.

All of the following technical indicators would be considered to be bearish EXCEPT: A a breakout through a support level B a head and shoulders top formation C an inverted Saucer formation D Odd lot short sales

The best answer is D. A breakout through a support level is bearish, as is a head and shoulders top formation, and an inverted saucer formation. A head and shoulders top formation shows that the market has topped and is heading downward; an inverted saucer formation shows the same - that the market has topped and is heading downward. The Odd Lot theory states that the small investor tends to trade odd lots and that the small investor is always wrong. Thus, the knowledgeable investor should do the opposite of what the small investor does. In this case, the small investor is selling, so, one should buy (a bullish indicator).

A "saucer" formation is a(n): A uptrend B downtrend C reverse upward trend D reverse downward trend

The best answer is D. A saucer formation is bullish since the market has bottomed out and is now moving back upwards. It is a downtrend that has reversed itself.

In fundamental analysis, "extraordinary items" are: I found on the balance sheet II found on the income statement III gains and losses from the company's regular business operations IV gains and losses outside the company's regular business operations A I and III B I and IV C II and III D II and IV

The best answer is D. An "extraordinary" item is found on the Income Statement. Extraordinary items are gains or losses that occur outside the company's normal scope of operations and are one time events. For example, a gain from selling part of a business is an Extraordinary Item. These are disclosed separately on the income statement.

Foreign currency values are affected by all of the following EXCEPT: A currency devaluation B central bank intervention C floating exchange rates D fixed exchange rates

The best answer is D. Fixed exchange rates have no effect on foreign currency values There is no market mechanism for adjusting the value of a currency with a fixed exchange rate - resulting in "black markets" for the currency. Currency values are affected by currency devaluation imposed by Governments; by central bank intervention directing the buying or selling of that currency; and by floating exchange rates. A floating exchange rate is one that changes in response to market conditions. All major Western currencies have floating exchange rates.

If the federal reserve tightens credit via open market operations, which of the following interest rates will increase? I Fed Funds Rate II Discount Rate III Broker Loan Rate IV Prime Rate A I only B I and II C III and IV D I, II, III, IV

The best answer is D. If the Federal Reserve tightens credit via open market operations (to do this, it would use reverse repurchase agreements), then the Fed Funds rate would increase. Since the Discount Rate is set by the Federal Reserve at 50 basis points over the Fed Funds rate, this rate increases as well. The effect of increased rates then ripples through all of the other money rates. Since the bank's cost of borrowing has increased, it increases rates at which it will lend monies to customers (e.g., the Broker Loan Rate and Prime Rate), so that the bank can maintain its profit margins.

If the dollar falls against foreign currencies, which of the following statements are TRUE? I Foreign currencies buy more dollars II U.S. exports are likely to rise III Foreign imports are likely to fall IV Foreign goods are more expensive in the U.S. A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is D. If the dollar falls, then the U.S. dollar becomes "cheaper" to buy using a foreign currency. U.S. goods become cheaper to foreigners and foreign goods become more expensive in the U.S. Thus, U.S. exports are likely to rise and foreign imports are likely to fall.

Which of the following is NOT an intangible asset on a company's balance sheet? A Goodwill B Trademarks C Copyrights D Depreciation

The best answer is D. Intangible assets include the value of patents, trademarks, copyrights, intellectual property and goodwill (goodwill is any excess paid above book value in an acquisition of another company). Depreciation is an income statement expense item deducted annually to reflect the declining value of an asset as it is used up. The accumulated amount shows on the balance sheet as a reduction of fixed asset value.

Which of the following statements is TRUE about systematic risk? I It is the same as stock specific risk II It is the same as market risk III It can be diversified away IV It cannot be diversified away A I and III B I and IV C II and III D II and IV

The best answer is D. Market risk is the same as systematic risk. It is the risk of the market moving adversely, and one's securities positions moving with the market. This risk cannot be diversified away; but it can be hedged against.

The largest component of the Dow Jones Averages is: A banking and finance B transportations C utilities D industrials

The best answer is D. The Dow Jones Averages is the oldest and most widely quoted of the indexes. It consists of 65 stocks in total. The components are 30 Industrials; 20 Transportations; and 15 Utilities. Thus, the industrials are the largest component.

All of the following ratios measure a company's ability to pay bills as they come due, EXCEPT: A Cash assets ratio B Quick ratio C Current ratio D Inventory turnover ratio

The best answer is D. The cash assets ratio is the ratio of cash to current liabilities; this is the most stringent test of liquidity. The quick ratio (or "acid test") is the ratio of current assets - inventories and prepaid expenses to current liabilities. This is a less stringent test than the cash assets ratio. The current ratio is the ratio of all current assets to current liabilities. This is the least stringent test of liquidity. The inventory turnover ratio is the ratio of annual cost of sales to year end inventory. It shows how quickly a company is selling and replacing its inventory.

A change in each of the following is a leading economic indicator EXCEPT: A durable goods orders B building permits C initial claims for unemployment D index of industrial production

The best answer is D. The index of industrial production is a coincident economic indicator, since it is shows output levels as this occurs. Initial claims for unemployment (high levels indicate future production cutbacks), building permits (since the buildings will be built in the coming months, this shows future production levels), and durable goods orders (showing future production levels) are all leading indicators.

All of the following statements are true about the interbank market EXCEPT: A trading takes place 24 hours a day B trades settle on a spot or forward contract basis C trading is in large blocks D trading is confined to exchange floors

The best answer is D. Trading in the interbank market takes place 24 hours a day at trading desks across the world. There is no trading floor for this market. Trades occur in large blocks and settle either on a spot (1 or 2 business day settlement) or forward contract (settlement on a mutually agreed date in the future) basis.

A corporation issues $100,000,000 of 10% convertible debentures, convertible at $50. Upon issuance, all of the following are affected EXCEPT: A Total Assets B Total Liabilities C Net Working Capital D Stockholders' Equity

The best answer is D. When bonds are issued, the corporation receives the cash from the sale (increasing current assets) and shows the long term liability to repay the bonds (increasing long term debt). Therefore, Total Assets increase; Total Liabilities increase; Net Working Capital increases because of the increase in current assets. Stockholders' Equity is unaffected since only a profit or loss, or the sale of new equity securities will cause a change in Stockholders' Equity.

DEF Corporation Income Statement Net Sales $30,000,000 Cost of Goods Sold 15,000,000 Gross Margin 15,000,000 Operating Expenses 5,000,000 Operating Income 10,000,000 Bond Interest 2,000,000 Net Income Before Tax 8,000,000 Tax at 50% 4,000,000 Net Income After Tax $4,000,000 What is DEF's bond interest coverage ratio? A 2:1 B 3:1 C 4:1 D 5:1

The formula for the Interest Coverage Ratio is: Operating Income (and any other non-operating income)/Bond Interest Expense $10,000,000 $2,000,000 = 5 x This Bond Interest Coverage Ratio shows whether the company is earning enough to pay its bond interest expense; and the ratio should be comfortably above 1.