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Series 86 Conceptual Exam Questions and answers verified 2024
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Series 86 Conceptual Exam Questions and answers verified 2024
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Series 86 Conceptual Exam QuestionsA European company owns a cycling business in Italy and sells its products in
the United States. Recently, unlike the rest of the world, interest rates have
risen in the United States. Assuming no other changes in the company's
business, in dollar terms, what effect will this currency movement have on the
company?
A) Both revenue and gross margins will decline.
B) Revenue will increase and the gross profit margins will remain the same.
C) Revenue will decrease, but the gross margin will remain unchanged.
D) Both revenue and gross margins will increase. - correct answer ✔D) Both
revenue and gross margins will increase.
Rising interest rates in the U.S. will cause the U.S dollar to strengthen against
the Euro. Since sales are generated in U.S. dollars, the revenue will increase
as the dollar rises against the Euro. Since costs remain unchanged and
revenue increases, the gross margin will increase.
Which of the following industries is least likely to be affected by an increase in
interest rates?
A) transportation firm
B) A utility company
C) An accounting firm
D) An automotive company - correct answer ✔C) An accounting firm
Service industries are less capital intensive, and are therefore less susceptible
to interest rate changes.
,An analyst notes that the price of product X has increased due to decreases in
supply. Shortly thereafter, the demand for product Y increases. X and Y are
probably:
A) Substitute goods
B) Complementary goods
C) Equilibrium equivalents
D) Sold in noncompetitive markets - correct answer ✔A) Substitute goods
One of the tools that an analyst uses to calculate relative common stock
valuation is the price-to-earnings (P/E) ratio. Other methods of calculating the
relative value of equity are also available. Which of the following methods is
used to value common stock?
A) The price-to-book value ratio
B) The enterprise value-to-EBTIDA ratio
C) The price-to-total debt ratio
D) The debt-to-equity ratio - correct answer ✔A) The price-to-book value
ratio
One method for calculating relative stock value is the price-to-book value
ratio. The price-to-debt, enterprise value-to-EBITDA, and debt-to-equity ratios
are not indicative of relative equity value.
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
✔B) Assets will increase
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.
If a company has a high dividend yield and low PE, what does it mean for the
company?
A) The company has a high dividend payout and is undervalued relative to its
earnings.
B) The company has little debt.
C) The company has a low dividend payout and high FCF yield.
D) The company has a high dividend payout. - correct answer ✔A) The
company has a high dividend payout and is undervalued relative to its
earnings.
The dividend yield is the dividend divided by the stock price (Dividend Yield =
Dividend ÷ Stock Price) and the price-to-earnings (PE) is the stock price
divided by the earnings per share (EPS) (PE = Stock Price ÷ EPS). If the
dividend yield is high, this is a sign that the dividends paid represent a large
proportion of the EPS (i.e., high payout ratio). Since the PE ratio is also low,
the company's share price is low or undervalued, at least in relation to its
EPS.
Which of the following actions is viewed as an aggressive accounting
technique?
, A) Expensing stock options
B) Expensing purchased software
C) Capitalizing research and development
D) Recognizing goodwill impairment - correct answer ✔C) Capitalizing
research and development
From an accounting context, the term "aggressive" means to report lower
expenses and higher income, or to overstate assets while understating or not
recognizing liabilities. Accounting standards require firms to follow
promulgated opinions; however, in some cases, there are gray areas.
Capitalizing software would defer the recognition of expenses and boost
earnings in the short-term. Capitalizing research and development increases
the cost basis of the future product, but is not taken as an expense in the
short run, thereby boosting earnings. Expensing stock options and software
will lower earnings in the short term. Writing off goodwill through impairment
also lowers earnings and is conservative.
Which of the following descriptions BEST defines the term enterprise value?
A) The purchase price of a company an acquirer will pay to buy the firm
B) The current market value of the common stock plus the net debt
C) Equity plus capital expenditures minus cash and equivalents
D) The economic profit of an ongoing enterprise - correct answer ✔B) The
current market value of the common stock plus the net debt
The current market value of common stock plus net debt (debt minus cash
and investments) defines enterprise value (EV). Although it may also refer to
the tangible value of a company, the question asked for the definition of EV.
An acquirer may need to pay a higher price for the common stock which
would increase the market capitalization and therefore its enterprise value.
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