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Series 86 Questions and answers certified 2024
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Series 86 Questions and answers certified 2024
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Series 86 QuestionsPrice Elasticity of Demand - correct answer ✔Change in Q / Q average /
Change in P / P average = % change in quantity demanded / % change in
price
Solving for price, quantity & rev changes - correct answer ✔1.00 plus
revenue increase % - complement of the price decrease / complement of the
price decrease
Question re: determining TBV - correct answer ✔Intangibles such as
copyrights and patents may have a separate and definable mkt value. They
may be identified and sold separately from other assets of the co; therefore,
they would be included in the TBV of the co
SOTP - correct answer ✔When calculating the per share value of the
company using SOTP analysis, it is necessary to value each biz segment by
discounting it back to present values. The separate segments are then added
together and the total is divided by the shares outstanding to determine the
per share price.
Changes in Cash Flow - correct answer ✔Cash flow is increased when
assets are liquidated or when new issues of securities are sold in the
marketplace
Capital Asset Pricing Model (used to determine the cost of retained earnings -
equity capital) - correct answer ✔K = Rf + [B x (Rm - Rf); k = required rate of
return (equity cost of capital); Rf = the risk free rate; Rm = expected return on
the market; B = a measure of the sensitivity of the firm's stock returns to those
of the market assuming the absence of diversifiable risk
,Calculating PT given EPS & PEG - correct answer ✔Multiply the EPS growth
rate % as a whole number against the PEG to determine the P/E ratio x EPS
for the target price of the co
Dividend Yield - correct answer ✔Multiply the dividend payout ratio by the
earnings yield. The earnings yield is the reciprocal of the price earnings ratio.
e.g. Nero Companies has a dividend payout ratio of 20% and an annual
dividend of $1.60. If the P/E is 18, what is the dividend yield of Nero
Companies? One divided by 18 equals .0555 or 5.55% 20% x 5.55% = 1.11%
Cost of Capital - correct answer ✔The combined value of each segment of
capitalization, i.e. debt, preferred, and common is determined and the total is
calculated into the weighted average cost of capital. The number of shares of
common stock outstanding are an important component of calculating the cost
of capital; however, the number of shares authorized is not a factor.
FCF to the Firm vs. FCF to Equity - correct answer ✔FCF to the firm is
calculated prior to the payment of interest and free cash flow to equity is
calculated after deducting the payment of interest
Rule of 72 - correct answer ✔According to the Rule of 72, money doubles in
approximately 7 years at a growth rate of 10% annually (72 divided by the rate
of return will indicate the number of years the sum of money will require to
double, based on simple compounding). The most precise way to calculate
the compounded growth rate is to discount a future value to the present value
and solve for the return.
WACC - correct answer ✔1) Risk Premium: Expected Mkt Return of S&P
500 - Rf rate 2) Risk Premium x (beta); 3) Calculate Eqty Cost of Capital: Risk
Premium + Rf rate; 4) Equity = Equity Cost of Capital x % equity of debt to
total capital ratio; 5) Debt = Cost of Debt Capital x % Debt of Debt to Total
Capital Ratio
, If the risk free rate increases while the expected return of the market remains
unchanged ... - correct answer ✔A co with a beta less than 1.0 will
experience an increase in the cost of equity capital. A co with a beta greater
than 1.0 will experience a decrease in the cost of equity capital.
What is the importance of using earnings before interest, taxes, depreciation
& amortization (EBITDA) when comparing one co to another? - correct
answer ✔By adding back interest, taxes, depreciation, and amortization to
the net income from the profit & loss statement, the effects of variances
between co's are eliminated or neutralized. This allows co's to be compared to
each other on a more equitable basis.
WACC vs. Terminal Value & Val'n - correct answer ✔If the WACC increases,
the val'n of a company (including the terminal value) decreases. Using a DCF
approach in calculating the terminal value, the formula is, the last expected
cash flow / (WACC - terminal growth rate). If WACC increases, the terminal
value would decline. Since the val'n of the co is based upon the terminal
value, it would also decline.
If the last expected cash flow is $100, the terminal growth rate = 4% and
WACC = 9%, the terminal value = $100 / .09 - .04) or $2000.
If WACC increases to 10%, the terminal value would decline to $1,667 [$100 /
(.1 - .04)]
Insider Sales - correct answer ✔Form 4 is filed by insiders of a corporation
when they buy or sell shares of their co. The form must be filled no later than
the 2nd biz day following the transaction. Form 10-K is filed annually while 10-
Q is filed quarterly and the co's filing with the SEC. 13D is used to report
acquisitions of 5% or more by individuals.
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