Series 79 practice exam

Correct answer: A. Subscription market databases (Bloomberg, FactSet, Capital IQ, Thomson Reuters/Refinitiv) are the commercial platforms bankers use to pull pricing, financial, performance, and transaction data on public companies.

Why not the others?
- B (target's internal HR files): HR personnel files are not a market-data source and are not part of the routine data-collection toolkit.
- C (competitor's confidential board minutes): Confidential internal materials of another firm are not a legitimate or permissible data source.
- D (a random social media post): An unverified social post is not a commercial market database and is not a reliable sourcing channel for financial data.

Correct answer: B. Comparable company analysis uses live trading multiples (such as EV/EBITDA or P/E) of similar publicly traded peers to position a company against the current market.

Why not the others?
- A (precedent transaction analysis): Precedent transactions track multiples paid in past M&A deals, not live trading multiples.
- C (Schedule 13D review): A 13D review looks at beneficial ownership disclosures, not trading multiples.
- D (Form 13F review): Form 13F discloses institutional long equity positions; it is not a valuation-multiple analysis.

Correct answer: C. Form 8-K is the current report used to disclose material events that occur between regular quarterly and annual filings, such as a significant new agreement, executive changes, or other material developments.

Why not the others?
- A (Form 10-K): The 10-K is the annual report, not a vehicle for reporting a single material event as it happens.
- B (Form 10-Q): The 10-Q is the quarterly report and does not provide the prompt, event-driven disclosure an 8-K does.
- D (Form 13F): Form 13F is filed by institutional investment managers to disclose their long equity holdings, unrelated to an issuer's own material events.

Correct answer: A. Schedule 13D is used when a beneficial owner crossing the reporting threshold has active intent, such as seeking control, influence, or board seats, rather than simply holding a passive stake.

Why not the others?
- B (Schedule 13G): Schedule 13G is for passive ownership disclosure by qualified institutional or passive investors without control intent, the opposite of the active scenario described.
- C (Form 13F): Form 13F discloses an institutional manager's long equity holdings generally, not the specific active-versus-passive intent behind a single stake.
- D (Schedule 14A): Schedule 14A is the proxy statement used to solicit shareholder votes, not an ownership-disclosure schedule.

Correct answer: A. Form 13F discloses only long equity positions held with investment discretion. It does not reveal short positions, cash holdings, or derivatives, so it gives an incomplete picture of a manager's overall book.

Why not the others?
- B (only short positions): Form 13F covers long positions, not short positions.
- C (filed by the issuer): Form 13F is filed by the institutional investment manager about its own holdings, not by the underlying issuer.
- D (replaces the 10-K): Form 13F is a holdings report, not a substitute for reviewing an issuer's own periodic financial disclosures.

Correct answer: B. The rule governing research analyst conduct prohibits research analysts from participating in pitches and other solicitations of investment banking business, precisely to prevent banking considerations from influencing research independence.

Why not the others?
- A (freely collaborate): Banking and research communications are restricted, not unlimited, because of the conflict-of-interest concern the rule is designed to address.
- C (permitted if compensated on the deal): Tying an analyst's compensation to a specific investment banking transaction is itself prohibited, not a condition that legitimizes pitch participation.
- D (only addresses published reports): The rule reaches conduct beyond published reports, including pitch and road show participation and communications between banking and research.

Correct answer: B. The foundational balance-sheet identity is Assets = Liabilities + Stockholders' Equity (also called net worth), the starting point for building any financial statement model.

Why not the others?
- A (minus equity): Subtracting equity from liabilities does not produce total assets under the standard accounting identity.
- C (revenue minus COGS): That formula describes gross profit on the income statement, not the balance-sheet identity.
- D (net income plus dividends): That combination does not represent the balance-sheet identity either.

Correct answer: B. The quick ratio (acid test) is (current assets minus inventory) divided by current liabilities, deliberately excluding inventory to produce a stricter liquidity test than the current ratio.

Why not the others?
- A (current ratio): The current ratio includes inventory in the numerator, making it a less strict test than the quick ratio for an inventory-heavy company.
- C (debt-to-equity ratio): Debt-to-equity is a leverage metric, not a short-term liquidity metric.
- D (dividend payout ratio): The dividend payout ratio measures dividends relative to net income and has nothing to do with short-term liquidity.

Correct answer: B. EBITDA (earnings before interest, taxes, depreciation, and amortization) ignores changes in working capital, capital expenditures, and the interest and taxes a company actually pays, so it is not the same thing as cash flow.

Why not the others?
- A (already reflects capex and working capital): EBITDA specifically excludes those items rather than reflecting them.
- C (only for private companies): EBITDA is used across public and private company analysis alike.
- D (always equals net income): EBITDA adds back interest, taxes, depreciation, and amortization to net income, so the two figures are generally different.

Correct answer: B. Enterprise value represents the value of a company's entire capital structure: market capitalization plus total debt and preferred stock (and minority interest), minus cash and equivalents, because it reflects what an acquirer would need to fund to control the whole business.

Why not the others?
- A (equals equity value with no adjustment): Equity value (market cap) reflects only the common equity claim; enterprise value adds debt-like claims and subtracts cash on top of that.
- C (always lower than equity value with positive cash): Whether enterprise value is higher or lower than equity value depends on the balance of debt, preferred stock, and cash; it is not automatically lower whenever cash is positive.
- D (only for unprofitable companies): Enterprise value is a general capital-structure-neutral valuation concept, not a metric reserved for a single company profile.

Correct answer: B. Under LIFO during inflation, the newest, higher-cost inventory flows into cost of goods sold first, which raises COGS, lowers reported earnings, and reduces current taxes owed compared to FIFO.

Why not the others?
- A (earnings rise and taxes increase): That describes the FIFO effect during inflation, not the LIFO effect.
- C (completely unaffected): The inventory method materially affects both COGS and reported earnings during periods of changing prices, which flows through to taxes.
- D (only affects the cash flow statement): The inventory method choice directly changes COGS and net income on the income statement, not just the cash flow statement.

Correct answer: B. The disclosure standard prohibits both an untrue statement of material fact and the omission of a material fact necessary to make the statements made, in light of the circumstances, not misleading. Either type of problem can trigger liability.

Why not the others?
- A (only untrue statements, not omissions): Omissions are equally covered under the standard; it is not limited to affirmative misstatements.
- C (grammar and formatting): The standard concerns material factual accuracy and completeness, not stylistic issues.
- D (only statements about competitors): The standard applies broadly to the offering document's statements about the issuer itself, not narrowly to competitor commentary.

Correct answer: B. Buy-side due diligence explicitly targets risks such as unfunded liabilities or obligations (including pension shortfalls) and off-balance-sheet disclosures, precisely because these obligations do not show up in a quick balance-sheet read.

Why not the others?
- A (negotiating-position analysis): That category focuses on identifying leverage for deal terms, not on surfacing hidden liabilities.
- C (cost-saving opportunities): Cost synergies from consolidation are a separate due diligence lens from risk discovery around unfunded obligations.
- D (leadership background checks): Background checks evaluate the target's leadership, not pension or off-balance-sheet exposure.

Correct answer: A. The internal-controls provision requires two assertions: management's own assessment of the effectiveness of internal control over financial reporting, and (for larger reporting companies) the auditor's attestation on that assessment.

Why not the others?
- B (only the CEO's certification): The provision requires both management's assessment and the auditor's attestation, not a single executive certification alone.
- C (list of outside counsel): Identifying outside legal counsel is not what this internal-controls provision requires.
- D (marketing budget): A marketing budget disclosure has nothing to do with internal control over financial reporting.

Correct answer: B. Risk arbitrage (merger arbitrage) involves going long the target and short the acquirer in an announced deal, profiting from the spread narrowing as the deal moves toward closing.

Why not the others?
- A (deep value investing): Deep value investing targets severely beaten-down names trading near or below liquidation value, unrelated to trading around an announced merger.
- C (index investing): Index investing passively tracks a benchmark, not a specific merger situation.
- D (momentum trading): Momentum trading rides existing price and volume trends rather than positioning around a specific announced deal's completion.

Correct answer: B. During the waiting period, oral offers are permitted, and written offers may be made through a Section 10 preliminary (red herring) prospectus, among other limited permitted formats.

Why not the others?
- A (binding sales): No binding contract of sale can be formed until the registration statement is effective; the waiting period permits offers, not sales.
- C (any written format, no restrictions): Written offers are restricted to specific permitted formats, not left entirely to the underwriter's discretion.
- D (before filing): Offers made before any filing at all belong to the pre-filing period discussion, not the waiting period, and are subject to the pre-filing prohibition on offers.

Correct answer: B. In a firm-commitment underwriting, the underwriter acts as principal, buying the entire issue from the issuer at a fixed price and reselling it to the public, so the underwriter bears the inventory risk if shares go unsold.

Why not the others?
- A (issuer bears all risk): That describes a best-efforts arrangement, where the underwriter is only an agent and the issuer bears the risk of unsold shares.
- C (no one bears risk): Firm-commitment underwriting exists precisely because someone (the underwriter) is contractually taking on that risk.
- D (split evenly): The risk is not shared between issuer and investors in a firm-commitment deal; it sits with the underwriter as principal.

Correct answer: B. Investor funds received during a contingency offering (such as all-or-none) must be promptly placed in a separate bank account held for the investors or transmitted to a bank escrow agent under a written escrow agreement, and released to the issuer only once the contingency is satisfied.

Why not the others?
- A (general operating account): Investor funds must never flow into the broker-dealer's general operating account during the contingency period.
- C (forward to the issuer regardless): Funds may be released to the issuer only after the contingency is met; releasing them beforehand defeats the purpose of the escrow requirement.
- D (keep the funds personally): Personal retention of investor funds is not a permitted option under the escrow/segregation requirement.

Correct answer: B. Lock-up agreements are private contracts negotiated between the underwriter and the issuer or holders, not an SEC mandate. The SEC's role is limited to requiring that the lock-up terms be disclosed in the prospectus.

Why not the others?
- A (mandatory SEC rule): There is no SEC rule that automatically imposes a lock-up; it is a negotiated private arrangement.
- C (imposed directly by the exchange): The lock-up is negotiated between the underwriter and the issuer or holders, not dictated directly by the listing exchange.
- D (only applies to the issuer): Lock-ups typically cover officers, directors, founders, employees, and pre-IPO financial backers, not just the issuer itself.

Correct answer: B. A stabilizing bid must not exceed the offering price, and only one stabilizing bid may be in the principal market at a time. Stabilization must also be disclosed in the prospectus as a potential transaction.

Why not the others?
- A (may exceed the offering price): A stabilizing bid can be at or below the offering price, but it cannot exceed it.
- C (completely unregulated with after-the-fact disclosure): Stabilization is a regulated activity with specific price and notification requirements, not an unregulated practice.
- D (any member of the public): Stabilizing bids are almost always executed by the syndicate manager on behalf of the syndicate, not by the general public.

Correct answer: B. The new-issue rule restricts allocation of new equity IPO shares to certain restricted persons, such as broker-dealer personnel, owners of broker-dealers, and portfolio managers with authority over institutional accounts, to prevent industry insiders from receiving preferential access to hot new issues.

Why not the others?
- A (bars retail investors entirely): The rule targets a defined category of industry-connected restricted persons, not retail investors generally.
- C (bars any resale after an IPO): The rule concerns eligibility to receive new-issue allocations, not a general prohibition on reselling shares after the IPO.
- D (caps IPO pricing): The rule has nothing to do with capping the dollar price at which an IPO may be sold.

Correct answer: A. The individual net-worth path to accredited investor status requires a net worth over $1 million, individually or with a spouse or spousal equivalent, excluding the value of the primary residence.

Why not the others?
- B (only asset is the primary residence): Because the primary residence is excluded from the net-worth calculation, a person whose only asset is that residence would not qualify under the net-worth path.
- C (simply expressed interest): Expressing interest in a deal has no bearing on meeting the accredited investor thresholds.
- D (no assets, just belief): Accredited status depends on objective net worth or income thresholds (or specified professional licenses), not subjective confidence in an investment.

Correct answer: B. An affiliate reselling under Rule 144 is subject to a volume limitation (generally the greater of a set percentage of outstanding shares or average weekly trading volume), along with manner-of-sale and filing requirements, in addition to the holding period.

Why not the others?
- A (no additional conditions): Affiliates face extra conditions, including the volume limitation, current public information, manner of sale, and a filing requirement, that non-affiliates generally do not face after their holding period.
- C (must sell only to a QIB): Selling only to Qualified Institutional Buyers describes a different resale path entirely, not a Rule 144 affiliate-sale condition.
- D (entirely barred from reselling): Rule 144 exists specifically to give affiliates a lawful path to resell, subject to conditions, not to bar resale outright.

Correct answer: B. A spinoff distributes shares of a subsidiary pro rata to all of the parent's existing shareholders, resulting in two separate public companies with no cash consideration involved.

Why not the others?
- A (a divestiture): A divestiture is a cash sale of a division or subsidiary to a buyer, generating cash proceeds at the parent level, not a pro rata share distribution.
- C (a tender offer): A tender offer is a direct offer to shareholders to purchase their shares, unrelated to a pro rata distribution of subsidiary stock.
- D (a leveraged buyout): An LBO is a debt-financed acquisition of a company, not a pro rata distribution of shares to existing shareholders.

Correct answer: B. In an asset sale, the buyer steps up its tax basis in the acquired assets to fair market value and assumes only the liabilities expressly listed in the purchase agreement, rather than inheriting the seller's full liability history.

Why not the others?
- A (a stock sale): In a stock sale, the buyer generally inherits the seller's historical tax basis (no step-up) and assumes all liabilities, known and unknown.
- C (stock-for-stock merger, no boot): A stock-for-stock merger is typically structured for tax deferral to the seller's shareholders, not for a buyer-side asset basis step-up.
- D (small tender offer): The size of a tender offer does not determine whether the buyer receives a tax basis step-up; that outcome depends on whether the deal is structured as a stock or asset transaction.

Correct answer: A. The Hart-Scott-Rodino Antitrust Improvements Act requires premerger notification to the Federal Trade Commission and the Department of Justice Antitrust Division for transactions exceeding statutory size thresholds, followed by a mandatory waiting period before closing.

Why not the others?
- B (SEC and FINRA): The SEC and FINRA oversee securities registration and broker-dealer conduct, not premerger antitrust notification under Hart-Scott-Rodino.
- C (IRS and Department of Labor): Those agencies are not the recipients of the Hart-Scott-Rodino premerger notification filing.
- D (Federal Reserve and FDIC): Those are banking regulators and are not the agencies that review Hart-Scott-Rodino antitrust filings for general mergers.

Correct answer: B. A deal is dilutive when pro forma earnings per share for the combined company is lower than the acquirer's standalone earnings per share before the transaction.

Why not the others?
- A (accretive): Accretive describes the opposite result, where pro forma EPS is higher than standalone EPS.
- C (a going-private transaction): Going private describes a transaction that removes a company from public reporting status, unrelated to whether a deal is accretive or dilutive.
- D (a fairness opinion): A fairness opinion is a financial advisor's conclusion about whether consideration is fair, not a description of the EPS impact of a deal.

Correct answer: B. A fairness opinion concludes that the consideration is fair from a financial point of view; it does not conclude that the price is the best price possible or the highest price obtainable. The board still owns the ultimate business-judgment decision.

Why not the others?
- A (fair from a financial point of view): That is precisely what a fairness opinion does establish, as of the stated opinion date.
- C (a written conclusion by a financial advisor): A fairness opinion is, by definition, a written conclusion prepared by a financial advisor, so this is an accurate description rather than something the opinion fails to establish.
- D (a tool for informed decision-making): The opinion is one piece of evidence supporting the board's informed decision, which is an accurate description of its role, not something it fails to do.

Correct answer: A. The general rule requires a tender offer to remain open for at least 20 business days from the date it is first published, sent, or given to security holders, giving investors adequate time to evaluate the offer.

Why not the others?
- B (exactly 5 calendar days): Five calendar days is far shorter than the minimum period the rule requires.
- C (no minimum period at all): The rule specifically imposes a minimum open period; it is not left unregulated.
- D (at least 1 calendar year): A full year is far longer than the minimum period the rule requires and does not reflect the standard tender-offer timeline.

Correct answer: B. Chapter 11 is the reorganization chapter, under which the debtor typically continues operating as a "debtor in possession" while restructuring its capital structure, with a trustee appointed only in unusual cases such as fraud or gross mismanagement.

Why not the others?
- A (Chapter 7): Chapter 7 is the liquidation chapter, where a trustee takes control, sells the company's assets, and the business generally ceases to operate, the opposite of the continuing-operations scenario described.
- C (Section 338(h)(10)): That is a tax election related to treating certain stock purchases as asset purchases, unrelated to which bankruptcy chapter a company files under.
- D (Regulation M): Regulation M governs trading restrictions during a securities distribution and has nothing to do with bankruptcy chapters.