Portfolio analysis questions
D) it reduce interest charges. Explanation The repurchase of common stock does not reduce interest payments; however, it does reduce total dividends paid.
A corporation buys back its stock on the open market for all of the following reasons except A) to use it for stock options. B) it increase earnings per share. C) to use it for future acquisitions. D) it reduce interest charges.
D) $75. Explanation This is an example of a proceeds transaction. In order to stay within compliance of FINRA's 5% markup policy, the member firm should treat this as a single transaction. The most the member firm should charge would be 5% of $1,500 (the principal value of one side of the trade), or $75.
A customer sells 100 shares of ABC at $15 and uses the proceeds to purchase 200 shares of MNO for $7.50. In order to avoid a violation of FINRA's 5% markup policy, the member firm should not charge a commission of more than A) $150. B) $125. C)$15. D) $75.
B) The tax loss is not allowed. Explanation Because the security was repurchased in less than 30 days, the IRS will not allow the loss due to the wash sale rule. It would have been allowed had the customer bought back the security after 30 days.
A customer who owns TCB stock wants to continue holding the security. The stock has fallen from 26 when he bought it on February 2 to a 52-week low of 20.75. He sells the stock on December 1 at the low and repurchases it at 21 on December 15. What is the tax consequence of this investment? A) The holding period for the stock was wiped out. B) The tax loss is not allowed. C) He has a capital loss. D) By repurchasing the investment at the same price, he keeps the original cost basis.
C) 50% Explanation The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest.
ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 100% B) 70% C) 50% D) 65%
The Bond Buyer's 30-Day visible supply includes issues of notes sold on a competitive basis. issues of bonds sold on a competitive basis. issues of notes sold on a negotiated basis. issues of bonds sold on a negotiated basis. A) III and IV B) II and IV C) I and II D) I and III
ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. What is the dividend payout ratio? A) 25.00% B) 30.00% C) 6.25% D) 14.40%
B) payment of a cash dividend. Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged.
All of the following will affect the working capital of a corporation except A) a decrease in liabilities. B) payment of a cash dividend. C) declaration of a cash dividend. D) an increase in assets.
D) the advance/decline line. Explanation The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.
An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor A)the Dow Jones Industrial Average. B) the betas of the S&P 500 stocks. C) the Value Line Index. D) the advance/decline line.
B) a daily basis. Explanation This is a "Who is buried in Grant's Tomb" type of question, and there are students who do miss it. We won't say there are many questions this easy on the exam, but there are a few—please do not miss them.
An investor is following the new issue municipal bond market. The primary source material is found in the Daily Bond Buyer. This publication is distributed on A) a weekly basis. B) a daily basis. C) an as needed basis. D) an hourly basis
D) net worth. Explanation Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. How does the working capital increase if the net worth does not? Because this company now has $10 million more in cash, and the liability is the debenture that is included in long-term debt, not current liabilities.
If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected except A) liabilities. B) working capital. C) assets. D) net worth.
C) cash flow from financing activities. Explanation EBIT, calculated from the firm's income statement, is a metric that measures the ability of a company to meet scheduled interest payments. Cash flow from financing activities reflects money raised by the company by issuing debt and equity securities. Net worth is useful for determining payback of principal but not semiannual interest.
In analyzing the ability of a company to meet its debt obligations, but not wanting to chance that certain accounting decisions or practices will cloud the picture, one measure that you might look at is the firm's A) net worth found on the firm's balance sheet. B) price-to-earnings (P/E) ratio. C) cash flow from financing activities. D) earnings before interest and taxes (EBIT) as calculated from the firm's income statement.
B) II and IV Explanation The visible supply includes only bonds. Notes are not considered because they do not compete directly with the bonds.
The Bond Buyer's 30-Day visible supply includes issues of notes sold on a competitive basis. issues of bonds sold on a competitive basis. issues of notes sold on a negotiated basis. issues of bonds sold on a negotiated basis. A) III and IV B) II and IV C) I and II D) I and III
C) I, II, III, and IV Explanation As is often the case, the question contains irrelevant information. Knowing the price-to-earnings ratio (P/E ratio) has nothing to do with the question. There are two primary ways to increase EPS. The most obvious is to increase the company's earnings. That is accomplished either by increasing revenue or reducing costs. Reducing officer salaries reduces the expenses. Calling in preferred stock removes the obligation for the dividend on that stock. Therefore, income available to common shareholders increases. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. Sometimes a company wishing to buy back its shares will do so through a tender offer. It does that by inviting shareholders to tender (present) their shares to the company at a specified price (usually at a premium over the current market price). A reverse split, such as 1 for 4, reduces the number of outstanding shares to one quarter of what they were before the split. One of the simplest ways to reduce the number of outstanding shares is to simply buy them back in the open market. They now become treasury stock and are not included in the EPS calculation.
The common stock of Momentum Growth Industries (MGI) is currently selling at 55 times earnings. Which of the following actions could MGI take that would likely increase the company's earnings per share? Reduce the salaries of C-level officers by 10%. Exercise the call feature on MGI's outstanding preferred stock. Announce a 1:4 stock split. Purchase shares of MGI common stock in the open market. A) I, III, and IV B) II and III C) I, II, III, and IV D) I and IV
B) yields are likely to rise. Explanation When the visible supply increases, it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.
The visible supply has been increasing steadily over the past 30 days. This is an indication that A) yields are likely to fall. B) yields are likely to rise. C) prices are likely to rise. D) fewer new issues will be offered in the next 30 days.
C) The Bond Buyer. Explanation The Bond Buyer, a daily publication dealing primarily with the new issue municipal market, publishes information on the visible supply—the estimated amount of new municipal bonds to be sold over the coming month.
The visible supply may be found in A) The Wall Street Journal. B) the S&P Bond Guide. C) The Bond Buyer. D) the electronic OTC Pink.
A) Beta Explanation Beta is a measure of a portfolio's volatility compared to the volatility of the overall market. Because systematic risk is risk associated with investing in the market, lowering the client's volatility (beta) relative to that of the market should lower her exposure to market risk. Credit rating is used to measure default risk on debt securities, and earnings history would assist you in the measurement of business risk (unsystematic risk).
To reduce a client's exposure to systematic risk in his equity portfolio, you would look at which of the following factors? A) Beta B) Earnings history C)Investment return compared to the inflation rate D) Credit rating
B) +2.7%. Explanation The higher the alpha, the better. When a portfolio has a positive alpha, the manager has created excess returns. That is, the performance was better than would have been expected for the risk taken.
When comparing portfolio managers, a registered representative would most likely recommend the one whose alpha for the past year was A) 0%. B) +2.7%. C) ‒3.6%. D) +0.78%
C) The one with the highest alpha Explanation Alpha is a performance measure, while beta is a measure of a stock's volatility relative to the overall market. When a portfolio has a positive alpha, the manager has created excess returns. That is, the performance was better than would have been expected for the risk taken.
When comparing the performance of several portfolios, which would you be most likely to recommend to your clients? A) The one with the lowest alpha B) The one with the highest beta C) The one with the highest alpha D) The one with the lowest beta
C) Beta Explanation The beta value is an index that measures the volatility of a stock or portfolio's movement, as compared to the movement of the market as a whole. By definition, the beta of the market is equal to 1.0.
Which of the following provides a measurement of the volatility of a particular stock or portfolio, as compared to the volatility of the market as a whole? A) Duration B) Alpha C) Beta D) Delta
D) I and III Explanation The Bond Buyer Revdex is computed weekly just like The Bond Buyer's general obligation (GO) index. Revdex consists of 25 revenue bonds with 30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.
Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true? It includes 30-year bonds. It includes 20 bonds. It is compiled weekly. It is compiled monthly. A) I and IV B) II and III C) II and IV D) I and III
D) The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities Explanation Working capital equals current assets minus current liabilities.
Which of the following would best describe working capital? A) The amount of money available to the corporation that is currently being held in cash or cash equivalent positions B) The value per share available to shareholders in the event of bankruptcy C) A corporation's net worth D) The amount of money a corporation has available to work with if it liquidates its current assets and pays off all of its current liabilities
