CPCU 540 Practice Exam 1

1. The maximization of shareholder wealth is a main goal of corporate finance. This goal is best accomplished by:

2. Which one of the following items would be included on a company’s balance sheet?

3. An insurance company wants to use trend analysis to determine its success in meeting revenue goals for the past two years. The analysis will most likely focus on:

4. On a balance sheet prepared in accordance with statutory accounting principles (SAP), policyholders’ surplus is best represented as:

5. Quality Insurance Company’s financial statements reflect the following amounts:
• Losses and Loss Adjusting Expense Reserve – $15,000,000
• Net Written Premiums – $10,000,000
• Earned Premiums – $7,000,000
• Policyholders’ surplus – $12,000,000
Based on this information, Quality’s premium-to-surplus ratio is:

6. The effective annual interest rate for a 4% nominal rate that is compounded semi-annually is:

7. Which one of the following is the determining factor as to whether a security is being traded in the primary or secondary market?

8. Which one of the following statements is correct regarding preferred stock?

9. Which one of the following measures a stock’s volatility in relation to the overall market?

10. Howard Insurance Company (HIC) presently owns an office building that houses their headquarters. The building is reported as an asset on its balance sheet at its $6,000,000 historical cost. HIC is currently considering the implementation of a sale-leaseback transaction with the building. The building would be sold for $10,000,000, and HIC would then rent the building from the buyer for $600,000 per year. What would be the current effect on HIC’s financial statements if the sale-leaseback transaction were completed?

11. An advantage of raising capital through a sale of common stock (rather than through the issue of debt) is that the issue of common stock:

12. On a company’s income statement, which one of the following represents sales less cost of goods sold?

13. A company had the following:
• Return on Assets: 20%
• Debt to Asset ratio: 0.3
• Net income: $300,000
What is the amount of the company’s total liabilities?

14. If an individual is concerned about the solvency of an insurer, which one of the insurer’s financial statements should the individual analyze?

15. When evaluating an insurer’s ability to satisfy its financial obligations, the main source of information used by A.M. Best is the insurer’s:

16. A company wants to purchase a machine for $60,000. The cash inflows from the use of the machine are expected to be:

Timing of Payment	Cash Inflows
End of year 1	$50,000
End of year 2	$40,000
End of year 3	$20,000

If the discount rate is 8%, what is the net present value of the project?

17. Which one of the following represents the risk that an asset cannot be sold on short notice without incurring a loss?

18. Donny invested all of his cash in an S&P 500 index mutual fund. This is representative of:

19. The set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return is referred to as the:

20. In a reinsurance arrangement, the ceding commission received by the primary insurer covers the primary insurer’s:

21. Which one of the following statements is correct regarding the Risk Management and Own Risk and Solvency Assessment (ORSA) Guidance Manual?

22. A correct statement regarding differences between International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) is that:

23. Which of the following represents the use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to business or government agencies?

24. Which one of the following statements is correct regarding the capital needs relating to an insurance company?

25. The National Association of Insurance Commissioners (NAIC) has developed a system to determine the minimum capital required for an insurer to continue its existing operations based on its level of risk. The system developed by the NAIC is the:

26. What is the main reason liability insurers generally have a greater rate of return on their investments than the return received by property insurers?

27. A company’s dividend policy decision considers several factors. Which one of the following factors would most likely cause a company to retain earnings as opposed to paying a dividend?

28. Which one of the following is evaluated when A.M. Best is reviewing an insurer’s business profile?

29. RonCo recently raised capital by selling their common stock in an initial public offering. They also issued debt securities. After the issue, the stock and debt securities trade in the:

30. KLM Insurance Company had the following information from their most recent financial statements:
• Earned Premiums – $5,800,000
• Written Premiums – $6,000,000
• Underwriting Expenses – $1,100,000
• Incurred Losses and LAE – $5,700,000
What was KLM Insurance Company’s combined ratio?

31. Stayco, a small company, experienced a fire that completely destroyed inventory and current accounting records. A recent report issued by the company immediately before the fire revealed the following:

• Sales – $400,000
• Gross profit percentage – 25%
• Beginning inventory – $50,000
• Additions to inventory during the year – $370,000

What is the amount of their ending inventory destroyed by the fire?

32. Which one of the following represents a consideration relating to a company’s dividend policy?

33. Which one of the following represents a main goal of corporate finance?

34. A city in California is issuing bonds to build a toll bridge. Interest payments made by the city on the bonds will be payable from the tolls collected from the bridge. Which one of the following types of bonds were issued by the city?

35. Which one of the following statements is correct regarding the A.M. Best rating scale applicable to insurers?

36. Comprehensive income is a measure of income that goes beyond that reported on the income statement by including items such as:

37. XYZ Company has the following:

• Sales – $400,000
• Cost of Goods Sold – $300,000
• Inventory – $200,000
• Accounts Receivable – $50,000

What is the inventory turnover ratio for XYZ Company?

38. If a company purchases its own stock as treasury stock, how will this affect the company’s financial statements?

39. Marybeth would like to accumulate $5,000 at the end of 12 months. Assuming she can earn a 5% rate of return on her savings, compounded quarterly, how much does she need to set aside today to achieve her goal?

40. Company X and Company Y both have a return on assets (ROA) of 15%, and they both have the same amount of total assets. However, the net profit margin for Company Y is higher than the net profit margin for Company X. The probable reason for this is because:

41. Under statutory accounting principles, which one of the following would be considered an admitted asset on an insurance company’s balance sheet?

42. If an insurance company changed its financial statements to report items at their fair market value rather than their historical cost, what would be the effect on the company’s balance sheet and income statement?

43. Under the Risk-Based Capital System, which one of the following risks pertains to changes in an asset’s price on an insurer’s balance sheet?

44. What accounting standards does a publicly traded property and casualty insurance company follow for its financial statements?

45. A difference between an insurance company’s investment income ratio and its investment yield ratio is that the investment yield ratio:

46. Which one of the following represents a risk that is avoided with zero-coupon bonds?

47. Chuck has determined that there is a 90% chance he will not lose more than $150,000 in one day on his investment. What measure is being used for Chuck’s investment?

48. IMW Insurance Company recently issued bonds to bond investors with the provision that the payment of interest will be suspended in the event of a hurricane. IMW Insurance Company has issued:

49. ABC Insurance has excessive long-term debt as a liability on their balance sheet. When can this be a positive?

50. Which one of the following sets of ratios addresses the risk of mismatched cash flow from assets and liabilities?