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series 86 ,, questions and answers verified 2024
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series 86 ,, questions and answers verified 2024
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Series 86 - Exam 1While reviewing a company's income statement, an analyst notices that both
interest income and interest expense had risen while working capital
increased. An explanation for this might be:
A- There was a retirement of bonds, through purchase, in the secondary
market
B- There was a conversion of debentures
c- There had been a public offering of bonds, the proceeds of which had been
invested in short-term instruments
D- There had been a public offering of common stock - correct answer ✔The
rise in interest expense implies an issuance of bonds. The rise in interest
income implies increased investment in interest-bearing instruments. This is
consistent with an increase in working capital.
When accounting for an operating lease:
A- Liabilities will not change
B- Assets will increase
C- Shareholders' equity will decrease
D- An interest expense will appear on the income statement - correct answer
✔Operating leases will increase both assets and liabilities. Unlike a finance
lease, operating leases don't have a separate interest component recorded on
the income statement. Operating leases don't directly impact shareholders'
equity.
Which one of the following calculations provides a measure of free cash flow?
,A- Net income plus working capital
B- Net income plus capital expenditures
C- EBITDA minus capital expenditures
D- Net income plus interest plus the effect of taxation - correct answer ✔Free
cash flow is used to describe the amount of funds a company has after paying
all expenses. EBITDA is often used as a proxy for cash flow from operations
for the purpose of calculating debt coverage ratios. EBITDA minus capital
expenditures may be used as an approximation of free cash flow.
The Fremont Corporation operates five diverse business units. Three of the
business units are profitable, but the company has no net income. The
company is considering a restructuring of its outstanding debt and the
possible sale of one or more of its business units. What's the most appropriate
valuation method in this situation?
A- The dividend discount model
B- The sum-of-the-parts method
C- The P/E ratio
D- ROA - correct answer ✔A company with varying business components
will normally be valued using the sum-of-the-parts valuation method. This is
particularly true if different valuation metrics are applied to the business units.
All of the following valuation metrics may be used to value an initial public
offering (IPO), EXCEPT:
A- Sum-of-the-parts analysis
B- Precedent transaction analysis
C- Comparable company analysis
D- Discounted cash flow (DCF) analysis - correct answer ✔Precedent
transaction analysis, or M&A comparable analysis, is a valuation method that
, is used to value a company by comparing it to the transactional value of other
companies in the same or similar industry sector. This method is used to
value the price an acquirer may offer a target company, but is generally not
used to value an IPO. The other valuation methods may be used to value a
company in order to determine its intrinsic value.
A U.S. corporation owns a brewery in Germany. The beer produced in
Germany is sold in the U.S. Recently, the euro has depreciated against the
dollar. All of the following factors will be reflected on the income statement of
the U.S. corporation, EXCEPT:
A- Cost of goods sold will decrease
B- Operating profit will increase
C- Revenue will increase
D- Profit margin will increase - correct answer ✔Revenues are still based in
U.S. dollars since the beer is sold in the U.S. This will result in the same
amount of revenue. The reduced costs of goods sold due to the lower value of
the euro will result in higher profits and a higher profit margin.
Goldfield, Inc. is a Nevada Corporation that manufactures heavy equipment
for mining operators. The company is typically profitable, but occasionally
experiences a year with negative earnings such as 2018. In 2019, Goldfield
had a positive cash flow. Goldfield is in a capital intensive industry. Given
what you know about Goldfield, what's an effective valuation model for
Goldfield?
A- Gordon growth model
B- Dividend discount model
C- ROIC-to-WACC
D- EV/EBITDA - correct answer ✔EV/EBITDA is a popular ratio used among
investment bankers. It looks at the value of the entire company as a
percentage of its earnings before interest, taxes, depreciation and
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