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Series 86 Practice Test questions and answers verified 2024
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Series 86 Practice Test questions and answers verified 2024
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Series 86 Practice Test #3Coefficient of Elasticity - correct answer ✔% Change in Quantity / % Change
in Price. For elasticities greater than 1, the change in quantity demanded will
be greater than the corresponding price change. A coefficient =2, a 1% price
change will result in a decrease of 2% in the quantity demanded.
Using dividend yield to determine market price - correct answer ✔Annual
dividend / dividend yield
When the co recognizes rev sooner than permitted under accrual accounting -
correct answer ✔Accounts receivable will be overstated b/c sales are
recognized earlier and inventory will be understated b/c inventories are
charged earlier than permitted.
Free Cash Flow to Equity - correct answer ✔Net Income
+Depreciation & Amortization
- Capital Expenditures
+Changes in Working Capital (current assets - current liabilities)
= FCF to Equity
*If working capital has increased, FCF is reduced by the amount of the
increase. If working capital has decreased, FCF will be increased by the
amount of the decline.
Diluted EPS - correct answer ✔Net income, adjusted for the after-tax cost of
the debt, divided by the average # of shares after conversion.
1) Add back the after cost of debt (par value of the bonds x the interest rate x
the complement of the tax bracket)
,2) Determine the average # of shares after conversion
Cost of Debt - correct answer ✔Adjust the nominal yield (the coupon rate) by
the tax rate.
Valuation Methods - correct answer ✔The use of DCF or price/cash flow is
problematic for the companies showing negative cash flow.
Cash generated from operations of the co - correct answer ✔Revenue -
operating expenses is based on adjustments to net income of a co. It is a
valuable measure of a co's viability since a biz may produce profits but have
insufficient cash flow to meet current obligations. The operating cash flow
includes noncash expenses such as depreciation & amortization and would be
expected to be greater than net income.
WACC - correct answer ✔If the risk-free rate increases, while the expected
market return remains stable, a co that has a beta less than 1.0 will
experience an increase in the WACC. This would have a negative effect on
the val'n of the co.
An increase in the debt to equity ratio - correct answer ✔If a co issues debt,
the direct cost of interest expense is greater than either the change to the
FCFF or the amount of funds available to eqty shareholders
Extraordinary Items - correct answer ✔Extraordinary items are reported as
separate items and net of income tax
Price Elasticity of Demand - correct answer ✔Divide the % change in
demand / the % in price (.2/.1 = 2)
, WACC - correct answer ✔If the risk free rate increases while the expected
market return remains unchanged, the risk premium will decline and the
following will result:
A co with a beta less than 1 will increase eqty cost of capital, a co greater than
1 will decrease eqty cost of capital
WACC - correct answer ✔If WACC increases, the val'n of a company
(including terminal value) decreases. Using a DCF approach in calculating the
terminal value, the formula is, the last expected cash flow / (WACC - terminal
growth rate)
Quick Asset Ratio - correct answer ✔The quick asset ratio is a stringent
method of computing liquidity. Cash, marketable securities, and AR are
divided by current liabilities. This is not a measurement of solvency.
Payment of Cash Dividend - correct answer ✔Upon payment of a cash
dividend, working capital remains the same. The emphasis is that the dividend
is being paid (as opposed to declared). The cash payment reduces current
assets and reduces the liability that was created when the dividend was
declared. Reducing current assets and current liabilities by the same amount
will maintain the same level of working capital.
FCFF - correct answer ✔1) EBIT x (1 - Tax Rate)
+ Depreciation
- Capital Expenditures
- Changes in Working Capital
= FCFF
Average Prime Rate - correct answer ✔A lagging indicator vs. stock prices,
money supply, index of industrial prod'n
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