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Series 86 Practice Exam 3a questions and answers verified 2024
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Series 86 Practice Exam 3a questions and answers verified 2024
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Series 86 Practice Exam 3A company's senior management is compensated based on EPS
performance. If a research analyst believes this represents a conflict of
interest, which of the following persons should she contact to discuss the
situation?
The board of directors
BThe company's CEO
CThe company's CFO
The company's internal audit department - correct answer ✔The board of
directors
The difference between the return on invested capital (ROIC) and the
weighted average cost of capital (WACC) is referred to as:
AAccounting profit
BNet operating profit after-tax (NOPAT)
CEarnings per share (EPS)
Economic value added (EVA) - correct answer ✔The difference between
ROIC and WACC is one way to find the economic value added (EVA). EVA
can also be found using this formula: EVA = NOPAT - (WACC x Invested
Capital). EVA measures how much value is being created. When ROIC
exceeds WACC, economic value is being added because returns exceed the
cost of capital.
When creating an unlevered DCF model, which of the following has the
LEAST impact on valuation?
, Interest expense
BEBITDA margin
CCAPEX
DDepreciation - correct answer ✔Unlevered discounted cash flow (DCF)
models use future unlevered free cash flows (FCF) to find a company's
valuation. Unlevered FCF represents the earnings of a company before it
pays interest (i.e., operating income or EBIT). As a result, interest payments
have no effect on unlevered FCF or valuation in an unlevered DCF model.
Which of the following choices constitutes financial leverage?
AWhether a company can meet its shortterm obligations
BWhen increased sales of a company will lead to an increase in the profit
margins
CThe amount of liquidity of a company - correct answer ✔The extent to
which creditors have claims on corporate revenues
The term financial leverage is related to the use or degree in which a business
employs borrowed funds. When a business employs debt in its capital
structure, it is using financial leverage. The company is anticipating that it may
borrow funds, pay creditors their priority claims, and earn a return in excess of
the cost of debt. This will cause net income to increase. This is distinct from
operating leverage, which is captured in choice (b) and can occur with or
without the use of debt. Financial leverage can be measured by looking at the
debt-to-equity or debt-to-total capital ratios.
Which of the following is an example of economies of scope?
AReaching a critical production size
Product bundling
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