Series 86 Practice Exams 2024/2025 with 100% correct answers
0 view 0 purchase
Course
Series 86 Practice E
Institution
Series 86 Practice E
Which TWO of the following events will affect EPS and the P/E ratio if the price of common stock remains unchanged after the event?
I. Acquiring a company that is neutral to earnings
II. Issuing debt at a rate that is lower than WACC
III. Issuing debt to build an office complex
IV. Purchasing d...
Which TWO of the following events will affect EPS and the P/E ratio if the price of common stock remains
unchanged after the event?
I. Acquiring a company that is neutral to earnings
II. Issuing debt at a rate that is lower than WACC
III. Issuing debt to build an office complex
IV. Purchasing debt at a rate that is below WACC
A. I and III
B. I and IV
C. II and III
D. II and IV correct answersD. II and IV
Normally, issuing debt will increase a company's interest expense, lowering EPS and increasing the P/E
ratio. However, issuing debt to finance a fixed asset (in this case an office building) would not
immediately affect the company's earnings. The interest expense in such cases is capitalized and added
to the cost basis of the asset. Acquiring a company that is neutral to earnings would be neutral to EPS. As
such, it would not affect EPS or the P/E ratio if the price of the stock is unchanged. The purchase of debt
would affect the investment account of a company. The investment income would be shown as other
income on the income statement (below EBIT) and would increase pretax income, therefore, increasing
EPS.
An analyst is discussing widget production with the plant manager at Worldwide Widgets, an industry
leader. Which TWO of the following choices are MOST important to discuss with the plant manager?
I. Shortfalls in the company's pension plan
II. Information on components and parts
III. Product pricing
IV. Supply chain bottlenecks
A. I and III
,B. I and IV
C. II and III
D. II and IV correct answersD. II and IV
The plant manager is concerned with meeting a production schedule and having the necessary inputs
and resources to meet those objectives. This includes the availability of inputs and knowledge of supply
chain obstacles, such as parts shortages, transportation problems, and labor concerns. Neither pension
plan shortfalls nor product pricing are concerns of a plant manager. They are concerns for senior
management.
Use the following information to answer this question.
Adobe & Mudd Bricks, Inc.
(Figures shown in $ MM)
Net Income 20XX - 350
Common dividends - 30
Common equity (year-end) - 1,850
What was the company's return on common equity for 20XX?
A. 17.3%
B. 18.9%
C. 20%
D. 20.7% correct answersD. 20.7%
The formula for return on equity is net income divided by average common stockholders' equity. The
year-end equity is given, but it is necessary to determine the beginning value. The year-end equity
($1,850 MM) has increased by $320 MM. This is based on net income generated of $350 MM, of which
$30 MM was paid out in dividends. The beginning period equity for the company was$1,530 MM
($1,850 MM - $320 MM). The average equity was $1,690 MM([$1,530 MM + $1,850 MM] / 2). The
return on equity is 20.7%($350 MM / $1,690 MM).
, Under the percentage of completion method, first year's income is computed by multiplying the contract
price by:
A. The ratio of first year's billings to estimated total costs
B. The ratio of first year's collections to contract price
C. The ratio of first year's billings to contract price
D. The ratio of first year's costs to estimated total costs correct answersD. The ratio of first year's costs to
estimated total costs
IRS Section 460 requires most long-term contracts to be accounted for under the percentage of
completion method. The PCM requires income from the contract to be reported annually over the life of
the contract and requires contract expenses to be deducted in the year that they are incurred. The
income reported is that amount which is proportionate to the actual costs incurred as a percentage of
total estimated costs. At the point when 50% of the estimated costs have been incurred, one should
have reported 50% of the estimated income.
First year's income, under the percentage of completion method, is computed by multiplying the
contract price times the ratio of first year's costs to estimated total costs.
What would be the effect on the debt/equity ratio and the current ratio if a company capitalizes a lease
rather than treats the lease as an operating lease?
..........Debt/Equity Ratio......Current Ratio
A. Increase ....................Decrease
B. Decrease ...................Decrease
C. Decrease ...................Increase
D. Increase .....................Increase correct answersA. Increase ....................Decrease
If a lease is capitalized, the firm would book the capitalized value of the lease to Fixed Assets, book the
long-term portion of the lease to Long-Term Debt, and book the short-term portion of the lease to
Current Liabilities. This would cause the Current Ratio to fall due to the increased Current Liabilities. The
Debt/Equity ratio also increases due to the increased amount of recorded debt.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller QUILLSKY. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $15.49. You're not tied to anything after your purchase.
