Cpcu 540 Exam for Vee Credit Easy

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1. With respect to capital structure management, which one of the following represents a major question a financial manager needs to answer?

A. How can the organization utilize its resources to maximize short-term profits?

B. Which taxing jurisdiction imposes the lowest income tax rate on business income?

C. What specific financial vehicles and activities will be used to raise capital?

D. What are the best strategies to implement to lower overall expenses over time?

2. Cost of goods sold is reported as:

A. Income on the income statement.

B. A liability on the balance sheet.

C. An outflow on the statement of cash flows.

D. An expense on the income statement.

3. Which one of the following represents a liquidity ratio that measures an organization's ability to meet its current financial obligations?

A. Debt-to-equity ratio.

B. Return on assets ratio.

C. Asset turnover ratio.

D. Acid-test ratio.

4. RealGood Insurance (RI) is domiciled in the state of Oklahoma. They are entering into a reinsurance arrangement with Awesome Reinsurers (AR). AR is not licensed in the state of Oklahoma. Under statutory accounting principles, RI would be required to create a liability for reinsurance recoverables on its balance sheet, unless:

A. RI has entered into reinsurance agreements in prior years with reinsurers licensed in Oklahoma.

B. RI is a mutual insurer.

C. AR posts a bond with the state of Oklahoma.

D. AR provides collateral to RI.

5. Super Insurance Company had the following financial data:
• Written Premium - $12,000,000
• Losses - $4,000,000
• Underwriting Expenses - $1,200,000
• Net Income - $1,500,000
• Policyholders' Surplus - $18,000,000
• Cash - $3,500,000
• Marketable Securities - $12,000,000
• Liabilities - $8,500,000
What is their return on policyholder surplus?

A. 6.7%

B. 8.3%

C. 9.4%

D. 10.0%

6. Joe's daughter plans to enroll in college in six years. At the time of her enrollment, tuition costs are expected to be $15,000 per year. Assuming Joe can earn 7% compounded semi-annually on his investments, how much must he invest today to fund his daughter's first year tuition in six years?

A. $8,462.

B. $9,927.

C. $9,995.

D. $12,203.

7. A specialty insurer has been the only insurer offering liability insurance in West Texas over the last few years. Another insurer has decided to start offering liability insurance in West Texas beginning next month. Which one of the following risks is the specialty insurer exposed to in this situation?

A. Pricing risk.

B. Interest rate risk.

C. Liquidity risk.

D. Purchasing power risk.

8. A credit card company sold its receivables to David for cash. The interest and principal repayments on the credit cards will be passed directly to David after passing through the credit card company. David has purchased a(n):

A. Mortgage-backed security.

B. Asset-backed security.

C. Debenture.

D. Serial bond.

9. Which one of the stocks listed below is the least risky investment based on the coefficient of variation?

	Standard Deviation	Average Return
Stock 1	15.5%	7.9%
Stock 2	17.8%	11.1%
Stock 3	19.5%	9.6%
Stock 4	22.2%	12.7%

A. Stock 1.

B. Stock 2.

C. Stock 3.

D. Stock 4.

10. Which one of the following statements is correct regarding an insurer's use of external methods to meet capital needs?

A. Although raising equity capital is more expensive than issuing debt, equity doesn't increase an insurer's financial distress.

B. Loss portfolio transfer is primarily used by insurers as a source of capital.

C. Surplus notes are classified as a liability on an insurer's statutory balance sheet.

D. Mutual insurers typically issue stock to raise capital.

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11. Under the risk-based capital (RBC) measure, three categories of risk are considered. Which one of the following risks would be categorized as underwriting risk?

A. Risk an insurer will not collect its receivables.

B. Risk that the value of assets will be lower than expected.

C. Risk that a reinsurer will default on a reinsurance agreement.

D. Risk caused by excessive premium growth.

12. In the United States, which entity is recognized by the Securities and Exchange Commission (SEC) as the private-sector authority charged with establishing and maintaining accounting standards?

A. American Institute of Certified Public Accountants.

B. Financial Industry Regulatory Authority.

C. Accounting Principles Committee.

D. Financial Accounting Standards Board.

13. The SEC requires publicly traded companies to file a quarterly report for each of the first three quarters of the fiscal year. This report includes unaudited financial statements and a list of material events that have occurred with the company during the prior three months. This report filed is called the:

A. Form 10-Q.

B. Form 10-K.

C. Form ADV.

D. Form 8-K.

14. Perfect Insurance Company financials reflect the following amounts for the year:
• Premiums earned - $10,000,000
• Losses incurred - $6,000,000
• Loss adjustment expenses incurred - $1,000,000
• Other underwriting expenses - $2,500,000
• Federal income tax - $300,000
Under statutory accounting, Perfect has a net underwriting gain of:

A. $200,000.

B. $500,000.

C. $3,000,000.

D. $4,000,000.

15. Storage services contractually provided from remote locations through the internet or another network without a direct server connection is referred to as:

A. Cloud computing.

B. The Internet of Things.

C. Big data.

D. Data science.

16. David purchased CoolCo stock for $50 per share. He received a dividend of $2 per share, then sold the stock for $45. What was David's rate of return on his investment?

A. -4.0%.

B. -5.5%.

C. -6.0%.

D. -10.0%

17. Cash matching provides a means of eliminating interest rate risk. Cash matching can be implemented by an insurer by:

A. Offsetting the amount of expected future losses with the maturity value of investments.

B. Equalizing an asset's beta coefficient with the asset's standard deviation.

C. Purchasing securities that generate the highest expected return for a given level of risk.

D. Eliminating all long-term debt that is unsecured.

18. Which one of the following is a type of unsecured debt security issued by insurers that exhibits the characteristics of both equity and debt?

A. Exchange-traded funds.

B. Surplus notes.

C. Market-linked CDs.

D. Preferred stock.

19. Assume the following for ABC Insurance Company:
• Total assets according to statutory accounting: $460,000,000
• Fair value of assets: $490,000,000
• Present value of liabilities: $300,000,000
• Market value margin: $15,000,000
What is ABC's market value surplus (MVS)?

A. $145,000,000.

B. $160,000,000.

C. $175,000,000.

D. $205,000,000.

20. Although GAAP and International Financial Reporting Standards (IFRS) have many similarities, one difference is in the reporting of property, plant, and equipment. Property, plant, and equipment is reported using:

A. Accrual basis accounting for GAAP and cash basis accounting for IFRS.

B. Cash basis accounting for GAAP and accrual basis accounting for IFRS.

C. Historical cost for GAAP and fair value for IFRS.

D. Fair value for GAAP and historical cost for IFRS.

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21. On GAAP financial statements for an insurer, incurred but not reported losses are reflected as part of:

A. Loss adjustment expenses reserve.

B. Deferred policy acquisition costs.

C. Unearned premium reserve.

D. Retained earnings.

22. Instead of paying a dividend, ABC Company is considering the purchase of an ownership interest in XYZ Company. Which one of the following represents a justification for this alternative?

A. Shareholders of ABC Company would have more cash after the acquisition.

B. The investment in XYZ Company could provide a greater return to ABC Company shareholders than if they received a dividend.

C. Equity capital of ABC Company will be reduced, thus increasing the value of the stock.

D. Dividends of XYZ Company would be received tax-free by shareholders of ABC Company.

23. Which one of the following ratios measures the extent to which an insurer can meet its obligations as they come due?

A. Combined ratio.

B. Capacity ratio.

C. Operating ratio.

D. Liquidity ratio.

24. The profitability of a company is calculated on which one of the following financial statements?

A. Balance Sheet.

B. Statement of Cash Flows.

C. Income Statement.

D. Statement of Changes in Shareholders' Equity.

25. In which of the following situations would a company be required to file Form 8-K with the SEC?

A. The company purchased fixed assets in excess of $10,000,000 in the most recent quarter.

B. The company is involved in litigation.

C. The company has changed its auditor certifying the financial statements.

D. The company has a public float of at least $75,000,000.

26. Which one of the following investments would be best to match an insurer's investment portfolio maturity to the insurance company's expected loss payments?

A. U.S. Treasury securities.

B. Low beta stocks.

C. Zero-coupon bonds.

D. Corporate bonds.

27. Janice is interested in purchasing preferred stock to add to her investment portfolio. She has identified a preferred stock that pays a $2.50 annual dividend per share. If Janice has an 8% required rate of return on her investment, what would she be willing to pay to purchase one share of the preferred stock?

A. $20.00.

B. $31.25.

C. $42.00.

D. $51.55.

28. XYZ Company has the following:

Cash – $300,000
Marketable Securities – $200,000
Accounts Receivable – $100,000
Inventory – $800,000
Long-term Investments – $2,000,000
Current Liabilities – $750,000

What is the quick ratio for XYZ Company?

A. 0.45

B. 0.74

C. 0.80

D. 1.86

29. An insurance company has historically sold property and casualty insurance but will begin selling liability insurance. How will the sale of liability insurance affect the company's leverage?

A. Insurance leverage will decrease.

B. Insurance leverage will not be affected.

C. Financial leverage will decrease.

D. Insurance leverage will increase.

30. ABC Company has the following income and expenses:

Sales - $400,000
Cost of Goods Sold – $300,000
Operating Expenses – $50,000
Investment Income – $15,000
Investment Expenses – $12,000
Income Taxes – $18,000

What is the gross profit for ABC Company?

A. $35,000.

B. $50,000.

C. $53,000.

D. $100,000.

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31. An investor sold his entire portfolio of individual stocks and used the sales proceeds to purchase index funds. Based on this investment strategy, the investor believes in:

A. Fundamental analysis.

B. Weak form efficient market hypothesis.

C. Strong form efficient market hypothesis.

D. Technical analysis.

32. Which one of the following ratios is considered an efficiency ratio?

A. Current ratio.

B. Inventory turnover.

C. Return on assets.

D. Return on equity.

33. Which of the following represents the ratio of a company's dividends to the company's earnings?

A. Dupont identity.

B. Dividend payout ratio.

C. Debt-to-equity ratio.

D. Current ratio.

34. Which one of the following statements is correct regarding municipal bonds?

A. They are issued by the United States Treasury.

B. They offer a higher rate of return than a similar corporate bond.

C. They are offered and issued outside the issuer's country of origin.

D. They pay interest income that is not subject to federal income taxation.

35. A main goal of corporate finance is maximizing shareholder wealth. Which one of the following best describes this goal?

A. Maximizing corporate dividends.

B. Maximizing working capital.

C. Maximizing the value of corporate stock.

D. Maximizing company net profits.

36. A.M. Best's Financial Strength Rating (FSR) begins with a detailed review of several key rating factors. Which one of the following represents a key rating factor?

A. Qualitative significance.

B. In-force policies.

C. Yield on invested assets.

D. Enterprise risk management.

37. Sitwell Industries has the following information:

Sales – $30,000
Cost of Goods Sold – $22,000
Selling, General, and Administrative Expenses – $6,000
Income Taxes – $1,000

What is the net profit margin percentage for Sitwell Industries?

A. 1.48%

B. 3.33%

C. 6.67%

D. 26.67%

38. Which one of the following would result in the highest effective rate?

A. 4.00% nominal rate compounding daily.

B. 4.10% nominal rate compounding quarterly.

C. 4.15% nominal rate compounding monthly.

D. 4.17% nominal rate compounding annually.

39. A company issued stock as follows:
• 1,000 shares issued.
• $10 per share issue price.
• $1 per share par value.
What is the amount of Additional Paid-in Capital that will be reported on their balance sheet?

A. $1,000.

B. $9,000.

C. $10,000.

D. $11,000.

40. Which one of the following types of risk best describes the risk of holding an individual security?

A. Unsystematic risk.

B. Systematic risk.

C. Reinvestment risk.

D. Interest rate risk.

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41. An insurer experiences an increase in their loss reserves during the year. What impact will this have to the insurer?

A. Net income will be increased.

B. Income taxes due will be increased.

C. Claim payments will be reduced.

D. Expenses will increase.

42. A company will issue $2,000,000 of bonds, paying a 7% coupon rate. The issue of these bonds will decrease the cost of capital due to the:

A. Cost of financial distress.

B. Increased cash flow flexibility.

C. Tax shield.

D. Additional cost of high debt.

43. Which one of the following statements is correct regarding the comparison of corporate bonds and Treasury bonds?

A. Corporate bonds have a larger minimum initial investment than Treasury bonds.

B. Corporate bonds have a lower yield as compared to Treasury bonds.

C. Only corporate bonds pay a coupon payment.

D. Corporate bonds have longer maturities than Treasury bonds.

44. Where would a premium that is 90 days late in being paid by the insured be reflected on an insurance company's statutory financial statements?

A. As a liability on the company's balance sheet.

B. As an admitted asset on the company's balance sheet.

C. As a nonadmitted asset on the company's balance sheet.

D. As an adjustment on the company's Statement of Comprehensive Income.

45. The Risk-Based Capital System was developed by the National Association of Insurance Commissioners (NAIC) for what purpose?

A. To provide a ranking of an insurance company's financial strength.

B. To determine if an insurance company can pay its claims.

C. To evaluate the investments of an insurance company.

D. To ascertain the intrinsic value of an insurance company.

46. Which one of the following statements is correct regarding financial intermediaries?

A. Property-casualty insurers are the most prominent financial intermediaries.

B. A financial intermediary is a mechanism by which newly issued securities are sold, with the proceeds going directly to the issuer.

C. The claims produced by financial intermediaries are often less liquid than the financial claims issued directly by corporations.

D. A benefit of financial intermediaries is that they match parties with disparate needs.

47. Which one of the following represents a reason why the National Association of Insurance Commissioners (NAIC) requires insurers to produce an Own Risk and Solvency Assessment (ORSA)?

A. It forces insurers to spend time every year considering how best to manage their own loss risks.

B. It encourages sensible risk management strategies without restricting insurer growth or profitability.

C. It allows the NAIC to identify insurers that facing insolvency.

D. It reduces the number of risky investments that insurers purchase.

48. Which one of the following items may not be fairly represented on a company's balance sheet due to the cost principle of accounting?

A. Cash.

B. Inventory.

C. Notes payable.

D. Reinsurance recoverables.

49. Asset classes are organized into two broad categories on the balance sheet of the National Association of Insurance Commissioners (NAIC) Annual Statement. These are:

A. Current assets and non-current assets.

B. Liquid assets and illiquid assets.

C. Invested assets and non-invested assets.

D. Stocks and bonds.

50. Which one of the following best describes the difference between financial statements prepared under generally accepted accounting principles (GAAP) and those prepared using international financial reporting standards (IFRS)?

A. GAAP financial statements report all long-term assets at their current fair market value, while IFRS financial statements report all long-term assets at their historical cost.

B. GAAP financial statements are prepared under the accrual basis of accounting, while IFRS financial statements are prepared under the cash method of accounting.

C. GAAP financial statements are prepared under the going-concern assumption, while IFRS financial statements are prepared under the liquidation assumption.

D. GAAP financial statements maintain a more rules-based approach, while IFRS financial statements maintain a more principles-based approach.

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Cpcu 540 Exam for Vee Credit Easy

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