BEC Surgent Practice MCQs

Question 1

Creditors of a corporation should monitor that corporation’s:

Answer 1

The debt-to-equity ratio is computed by dividing total debt by total stockholders’ equity. A higher ratio indicates existence of significant debt which could entail higher interest expense and creditor risk in a liquidation situation.

Times interest earned indicates the “cushion” related to a firm’s ability to pay interest on debt. It is computed by dividing income before interest and taxes by interest expense.

Therefore, creditors are affected by and should monitor both of these measures.

Question 2

Archer, Inc., has 500,000 shares of $10 par value common stock outstanding. For the current year, Archer paid a cash dividend of $4.00 per share and had earnings per share of $3.20. The market price of Archer’s stock is $36 per share. The average price/earnings ratio for Archer’s industry is 14.00. When compared to the industry average, Archer’s stock appears to be:

Answer 2

The price-to-earnings (P/E) ratio can be calculated as follows:

P/E ratio = Market value per common share
Earnings per share
= $36.00 / $3.20
= 11.25

Ratio of industry
to Archer P/E = Industry P/E
Archer’s P/E

              = $14.00 / $11.25
              = 1.2444 (124.4%)

The industry P/E is 124.4% of Archer’s P/E, so Archer’s stock appears to be undervalued by approximately 25% (rounded).

Question 3

Joe CPA has been retained to determine the fair value of the capital assets of the warehousing division of the Trinket Company. In doing so, Joe will assume that:

Answer 3

the hypothetical sale occurred in an orderly fashion.

Question 4

According to COSO, the difference between inherent and residual risk arises because of mgmt’s:

Answer 4

Actions to reduce inherent risk

Inherent Risk - Risk BEFORE mgmt takes steps
Residual Risk - Risk AFTER mgmt takes steps

Question 5

After-Tax Cost of Equity

Answer 5

[(Dividend x (1 + Growth)) / Price per share] + Growth Rate

Price Per Share = Market Price x (1 - Flotation Cost)

Question 6

Transactions Exposure

Answer 6

The degree to which the value of a firm’s future cash transactions can be affected by exchange rate fluctuations.

Uses:
Forecasts of net cash flows for short periods
Historical Data to measure the degree of currency variability
Need to project consolidated net position in the currency

Question 7

In order for a firm to ensure it receives the entire proceeds of an investment, they need to be concerned with:

Answer 7

Marketability (Ability to sell a security for its face market value quickly and large amounts)

&

Default Risk (Probability of receiving principal and interest payments in a timely manner)

Question 8

For a professional portfolio manager, the investment process requires:

Answer 8

Determining an appropriate grouping of assets in which to invest
Understanding the client
Choosing the manner in which the investment strategy will be developed

Question 9

Determinants that cause a change in supply

Answer 9

Technology
Price of Other Goods
The # of sellers in the market
Future price expectations
Taxes and Subsidies

Question 10

Issuance of $110,000 6 month commercial paper to Net $100,000. New paper would be issued every 6 months.

Answer 10

• $100,000 for a full 12 months requires 2 issues at $110,000 each
• Interest would be $10,000 + $10,000 = $20,000
• Cost would be $20,000 / $100,000 = .20 or 20%.

Question 11

Actuaries use of Control Cycle

Answer 11

The C.C includes modeling expected results using a set of initial assumptions, doing a profit test to determine if the product provides a positive contribution margin, measuring actual results in Quantitative and Qualitative terms, and an understandable explanation of the differences between expected and actual results.

Simple Terms:
Modeling Expected Results
Measuring Actual Results
Doing A Profit Test