Combo with "CFA Set 1" and 5 others

Quad Associates, Inc.'s net income for 2005 was $892,000 with 400,000 shares outstanding. The tax rate was 40 percent. Quad had 2,000 six percent $1,000 par value convertible bonds that were issued in 2004. Each bond was convertible into 40 shares of common stock. Quad, Inc.'s diluted earnings per share (Diluted EPS) for 2005 was closest to: A) $2.01. B) $2.23. C) $2.41.

A) $2.01. Quad's basic EPS (net income / weighted average common shares outstanding) was $892,000 / 400,000 = $2.23. Diluted EPS is calculated under the assumption that the convertible bonds are converted into common stock, the bond interest net of tax is restored to net income, and the additional common shares are added to the denominator of the equation. Quad's diluted EPS was [$892,000 + (2,000 × $1,000 × 0.06)(1 − 0.40)] / [400,000 + (2,000 × 40)] = $2.01. Since diluted EPS is less than basic EPS, we know that the bonds are dilutive and should be considered in calculating diluted EPS.

Determine the cash flow from financing given the following table. Item Amount Cash payment of dividends $30 Sale of equipment $10 Net income $25 Purchase of land $15 Increase in accounts payable $20 Sale of preferred stock $25 Increase in deferred taxes $5 Profit on sale of equipment $15 A) -$5. B) $15. C) $20.

A) -$5. CFF = 25(Sale of Stock) − 30(Div Paid) = -$5

A Treasury bill, with 80 days until maturity, has an effective annual yield of 8%. Its holding period yield is closest to: A) 1.70%. B) 1.72%. C) 1.75%.

A) 1.70%. The effective annual yield (EAY) is equal to the annualized holding period yield (HPY) based on a 365-day year. EAY = (1 + HPY)^365/t − 1. HPY = (EAY + 1)^t/365 − 1 = (1.08)^80/365 − 1 = 1.70%.

DeSoto Corp. 8% coupon bonds have a yield to maturity of 7.5%. The firm's tax rate is 30%. The after-tax cost of debt is closest to: A) 5.3%. B) 7.5%. C) 5.6%.

A) 5.3%. 7.5 × (1 − 0.3) = 5.25%.

Given the following annual returns, what is the mean absolute deviation? 2000 2001 2002 2003 2004 15% 2% 5% -7% 0% A) 5.6%. B) 3.0%. C) 22.0%.

A) 5.6%. The mean absolute deviation is found by taking the mean of the absolute values of deviations from the mean. ( |15 − 3| + |2 − 3| + |5 − 3| + |-7 − 3| + |0 − 3|) / 5 = 5.60%

Which of the following statements concerning security valuation is least accurate? A) A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on equity of 12%, and a 15% required return is worth $18.24. B) The best way to value a company with no current dividend but who is expected to pay dividends in three years is to use the temporary supernormal growth (multistage) model. C) The best way to value a company with high and unsustainable growth that exceeds the required return is to use the temporary supernormal growth (multistage) model.

A) A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on equity of 12%, and a 15% required return is worth $18.24. A firm with a $1.50 dividend last year, a dividend payout ratio of 40%, a return on new investment of 12%, and a 15% required return is worth $20.64. The growth rate is (1 - 0.40) × 0.12 = 7.2%. The expected dividend is then ($1.50)(1.072) = $1.61. The value is then (1.61) / (0.15 - 0.072) = $20.64.

Which of the following statements about accounting procedures and their impact on the statement of cash flows is least valid? All else equal: A) A nonprofitable company that uses LIFO to account for inventory will have higher total cash flow than a nonprofitable company that uses FIFO during a period of rising prices. B) Cash flow from financing (CFF) is higher over the life of a bond if a firm issues the bond at a premium, compared to issuing the bond at par. C) A company that finances through common stock issues may have the same cash flow from financing (CFF) as a firm that issues debt.

A) A nonprofitable company that uses LIFO to account for inventory will have higher total cash flow than a nonprofitable company that uses FIFO during a period of rising prices. Because of the impact of income taxes, a profitable company that accounts for inventory using LIFO will have higher total cash flow than a profitable company that uses FIFO. The company that uses LIFO will have higher cost of goods sold, resulting in lower net income and thus lower taxes. The other statements are accurate: •A company that issues common stock is not required to pay dividends (which would reduce cash flow from financing). Thus, it may have the same CFF as a firm that issues debt since interest paid on debt is a component of CFO. •When a company issues bonds at a premium, the proceeds raised at issuance (CFF inflow) are greater than the par value repaid at maturity (CFF outflow). For bonds issued at par, the CFF inflow at issuance is equal to the CFF outflow at maturity.

Which of the following statements regarding finance and operating leases is least accurate? A) For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease. B) Asset turnover is higher for the lessee with an operating lease than a finance lease. C) During the life of an operating lease, the rent expense equals the lease payment.

A) For financial reporting of finance and operating leases, no entry is required on the lessee's balance sheet at the inception of the lease. If the lease is an operating lease there is no entry made on the balance sheet for the lessee. For finance leases, the leased asset and liability are recognized on the balance sheet by the amount equal to the present value of the minimum lease payments using as the discount rate the lower of the lessor's implicit rate or the lessee's incremental borrowing rate.

Which of the following statements regarding the net present value (NPV) and internal rate of return (IRR) is least accurate? A) For mutually exclusive projects, you must accept the project with the highest NPV regardless of the sign of the NPV calculation. B) For independent projects, the internal rate of return IRR and the NPV methods always yield the same accept/reject decisions. C) The NPV tells how much the value of the firm will increase if you accept the project.

A) For mutually exclusive projects, you must accept the project with the highest NPV regardless of the sign of the NPV calculation. If the NPV for two mutually exclusive projects is negative, both should be rejected.

The tendency for currency depreciation to increase a country's trade deficit in the short run is known as the: A) J-curve effect. B) absorption effect. C) Marshall-Lerner effect.

A) J-curve effect. The J-curve refers to a graph of the effect of currency depreciation on the trade balance over time. In the short run, a trade deficit may increase because current import and export contracts may be fixed in foreign currency units over the near term, and only reflect the exchange rate change over time. In the long run, currency depreciation should decrease a trade deficit.

Which of the following statements about parametric and nonparametric tests is least accurate? A) Nonparametric tests rely on population parameters. B) The test of the difference in means is used when you are comparing means from two independent samples. C) The test of the mean of the differences is used when performing a paired comparison.

A) Nonparametric tests rely on population parameters. Nonparametric tests are not concerned with parameters; they make minimal assumptions about the population from which a sample comes. It is important to distinguish between the test of the difference in the means and the test of the mean of the differences. Also, it is important to understand that parametric tests rely on distributional assumptions, whereas nonparametric tests are not as strict regarding distributional properties.

On November 15, 20X1, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment. They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 20X9. Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date. Grinell is not required to make any principal payments prior to maturity. What type of bond structure has Grinell issued? A) Term maturity structure. B) Amortizing maturity structure. C) Serial maturity structure.

A) Term maturity structure. These bonds have a term maturity structure because the issuer has agreed to pay the entire amount borrowed in one lump-sum payment at maturity.

Which of the following statements about the elements of financial statements under the FASB and IASB frameworks is least accurate? A) The IASB framework does not allow the values of assets to be adjusted upward. B) The word "probable" is used by the FASB to define assets and liabilities. C) The IASB framework lists income and expenses as the elements related to performance.

A) The IASB framework does not allow the values of assets to be adjusted upward. Differences in financial statement elements include: (1) The IASB framework lists income and expenses as the elements related to performance, while the FASB framework uses revenues, expenses, gains, losses, and comprehensive income. (2) FASB defines an asset as a future economic benefit, where IASB defines it as a resource from which a future economic benefit is expected. (3) The word "probable" is used by the FASB to define assets and liabilities. (4) The FASB framework does not allow the values of most assets to be adjusted upward.

Which of the following statements is least accurate regarding the marginal cost of capital's role in determining the net present value (NPV) of a project? A) The NPVs of potential projects of above-average risk should be calculated using the marginal cost of capital for the firm. B) When using a firm's marginal cost of capital to evaluate a specific project, there is an implicit assumption that the capital structure of the firm will remain at the target capital structure over the life of the project. C) Projects for which the present value of the after-tax cash inflows is greater than the present value of the after-tax cash outflows should be undertaken by the firm.

A) The NPVs of potential projects of above-average risk should be calculated using the marginal cost of capital for the firm. The WACC is the appropriate discount rate for projects that have approximately the same level of risk as the firm's existing projects. This is because the component costs of capital used to calculate the firm's WACC are based on the existing level of firm risk. To evaluate a project with above (the firm's) average risk, a discount rate greater than the firm's existing WACC should be used. Projects with below-average risk should be evaluated using a discount rate less than the firm's WACC. An additional issue to consider when using a firm's WACC (marginal cost of capital) to evaluate a specific project is that there is an implicit assumption that the capital structure of the firm will remain at the target capital structure over the life of the project. These complexities aside, we can still conclude that the NPVs of potential projects of firm-average risk should be calculated using the marginal cost of capital for the firm. Projects for which the present value of the after-tax cash inflows is greater than the present value of the after-tax cash outflows should be undertaken by the firm.

If we fail to reject the null hypothesis when it is false, what type of error has occured? A) Type II. B) Type III. C) Type I.

A) Type II. A Type II error is defined as failing to reject the null hypothesis when it is actually false.

Discretionary fiscal policy refers to: A) active decisions regarding spending and taxing to affect economic growth. B) built-in devices that counteract the business cycle phase. C) increasing aggregate demand through lower interest rates.

A) active decisions regarding spending and taxing to affect economic growth. Discretionary fiscal policy, in contrast to automatic stabilizers, refers to active decisions by the government to affect economic growth through changes in government spending and taxation. Increasing aggregate demand through lower interest rates describes expansionary monetary policy.

Standard VI(B), Priority of Transactions, applies to transactions an analyst takes on behalf of: A) both of these. B) his employer. C) his clients.

A) both of these. Standard VI(B) addresses the treatment of both these accounts. The accounts of clients and employers have priority over personal accounts.

A private equity provision that requires managers to return any periodic incentive fees resulting in investors receiving less than 80% of profits is a: A) clawback. B) high water mark. C) drawdown.

A) clawback. A clawback provision requires the manager to return any periodic incentive fees to investors that would result in investors receiving less than 80% of the profits generated by portfolio investments as a whole.

If the required margin on a floating rate note is greater than the quoted margin, it is most likely that the: A) credit quality of the FRN has decreased. B) reference rate on the FRN has increased. C) bond will be priced above par at the reset date.

A) credit quality of the FRN has decreased. If the required margin is greater than the quoted margin, the credit quality of the bond must have decreased and the bond will be priced below par at the reset date.

An equity valuation model that values a firm based on the market value of its outstanding debt and equity securities, relative to a firm fundamental, is a(n): A) enterprise value model. B) asset-based model. C) market multiple model.

A) enterprise value model. An enterprise value model relates a firm's enterprise value (the market value of its outstanding equity and debt securities minus its cash and marketable securities holdings) to its EBITDA, operating earnings, or revenue.

As compared to an equivalent nonputable bond, a putable bond's yield should be: A) lower. B) higher. C) the same.

A) lower. A putable bond favors the buyer (investor). Hence, a premium will be paid for the option, which means the yield will be lower.

The trend line for a stock in an uptrend is constructed by drawing a straight line through the: A) lows. B) periodic averages. C) highs.

A) lows. Trendlines connect the increasing low points on a price chart in an uptrend and the decreasing high points in a downtrend.

In a positively skewed distribution, the: A) mean is greater than the median. B) mean is less than the median. C) median equals the mean.

A) mean is greater than the median. In a right-skewed distribution, there are large positive outliers. These outliers increase the mean of the distribution but have little effect on the median. Therefore, the mean is greater than the median.

The lower limit of a normal distribution is: A) negative infinity. B) negative one. C) zero.

A) negative infinity. By definition, a true normal distribution has a positive probability density function from negative to positive infinity.

Under IFRS, if a firm reports investment property using the fair value model, unrealized gains and losses on investment property are: A) recognized on the income statement. B) disclosed in the financial statement notes. C) recognized in other comprehensive income.

A) recognized on the income statement. Under the fair value model for investment property, unrealized gains and losses are recognized on the income statement.

Bill Fence, CFA, supervises a group of research analysts, none of whom have earned the CFA designation (nor are they CFA candidates). On several occasions he has attempted to get his firm to adopt a compliance system to ensure that applicable laws and regulations are followed. However, the firm's principals have never adopted his recommendations. Fence should most appropriately: A) refuse supervisory responsibility. B) take no further action, because by encouraging his firm to adopt a compliance system he has fulfilled his obligations under the Code and Standards. C) report the inadequacy by submitting a complaint in writing to the CFA Institute Professional Conduct Program.

A) refuse supervisory responsibility. According to Standard IV(C), Responsibilities of Supervisors, if the member cannot discharge supervisory responsibilities because of a poor or nonexistent compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts an adequate system.

For a publicly traded U.S. firm, which of the following profit measures would require reconciliation to U.S. GAAP if it appeared in the firm's financial statements? Income from continuing operations excluding: A) research and development. B) discontinued operations. C) extraordinary items.

A) research and development. Income from continuing operations excluding research and development is a non-GAAP measure that would require reconciliation to a U.S. GAAP measure. Under U.S. GAAP, income from continuing operations is reported net of discontinued operations and extraordinary items.

Which of the following is a component of the Code of Ethics? CFA Institute members shall: A) strive to maintain and improve their competence and the competence of others in the profession. B) disclose to their employer all matters that reasonably could be expected to interfere with their duty to their employer or ability to make unbiased and objective recommendations. C) make reasonable efforts to detect and prevent violations by those who are under their supervision.

A) strive to maintain and improve their competence and the competence of others in the profession. Striving to maintain and improve their competence and the competence of others in the profession is one of the components of the Code of Ethics, whereas the other statements are part of the Standards of Professional Conduct.

If an analyst estimates the intrinsic value for a security that is different from its market value, the analyst should most likely take an investment position based on this difference if: A) the model used is not highly sensitive to its input values. B) the security lacks a liquid market and trades infrequently. C) many analysts independently evaluate the security.

A) the model used is not highly sensitive to its input values. In general, an analyst can be more confident about an estimate of intrinsic value if the model used is not highly sensitive to changes in its inputs. If a large number of analysts follow a security, its market value is more likely to be a reliable estimate of its intrinsic value. A security that does not trade frequently or in a liquid market may remain mispriced for an extended time, and thus may not result in a profit within the investment horizon even if the analyst's estimate of intrinsic value is correct.

Extraordinary items are: A) unusual and infrequent. B) unusual or infrequent. C) reported above the line.

A) unusual and infrequent. Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.

Extraordinary items are: A) unusual in nature and infrequent. B) related to the normal course of business. C) unusual in nature or infrequent.

A) unusual in nature and infrequent. Extraordinary items are unusual and infrequent items reported below the line net of taxes. "Below the line" means after net income from continuing operations but before net income. - Discontinued operations are reported below the line net of taxes. - Unusual or infrequent items are unusual or infrequent, but not both. They appear (a separate line item) as a component of net income from continuing operations that must be removed if not deemed to be a component of persistent income. They are reported above the line before taxes. - Changes in accounting principle are reported below the line net of taxes. - Accounting errors go directly to retained earnings.

An oligopolistic firm: A) will consider the potential response of its rivals when making business decisions. B) is likely to be formed when the minimum-cost output is only a small portion of the market output. C) will seldom use product quality as a competitive weapon.

A) will consider the potential response of its rivals when making business decisions. Oligopolists are highly dependent upon the actions of their rivals when making business decisions. Price determination in the auto industry is a good example. Automakers tend to play "follow the leader" and announce price increases in close synchronization. They are not working explicitly together, but the actions of one producer have a large impact on the others when products are differentiated, quality may be a competitive strategy.

Jayco, Inc. has a division that makes red ink for the accounting industry. The unit has fixed costs of $10,000 per month, and is expected to sell 40,000 bottles of ink per month. If the variable cost per bottle is $2.00 what price must the division charge in order to breakeven? A) $2.50. B) $2.25. C) $2.75.

B) $2.25. 40,000 = $10,000/(P - $2) 40,000P - $80,000 = $10,000 P = $90,000/40,000 = $2.25.

Mark Industries' income statement and related notes for the year ended December 31 are as follows (in $): Sales 42,000,000 Cost of Goods Sold (32,000,000) Wages Expense (1,500,000) Depreciation Expense (2,500,000) Interest Expense (1,000,000) Income Tax Expense (2,000,000) Net Income 3,000,000 During the year: • Wages Payable increased $100,000. • Accumulated Depreciation increased $2,500,000. • Interest Payable decreased $200,000. • Income Taxes Payable increased $500,000. • Dividends of $100,000 were declared and paid. Under U.S. GAAP, Mark Industries' cash flow from operations (CFO) for the year ended December 31 was: A) $4,400,000. B) $5,900,000. C) $4,800,000.

B) $5,900,000. Using the indirect method, net income is adjusted by adding back depreciation (a non-cash expense) and changes in working capital: the increase in wages payable and the increase in income taxes payable are sources of cash, and the decrease in interest payable is a use of cash. Dividends paid are financing cash flows under U.S. GAAP. CFO = $3,000,000 + $2,500,000 + $100,000 + $500,000 - $200,000 = $5,900,000.

The preferred stock of the Delco Investments Company has a par value of $150 and a dividend of $11.50. A shareholder's required return on this stock is 14%. What is the maximum price he would pay? A) $54.76. B) $82.14. C) $150.00.

B) $82.14. Value of preferred = D / kp = $11.50 / 0.14 = $82.14

Jessica Fassler, options trader, recently wrote two put options on two different underlying stocks (AlphaDog Software and OmegaWolf Publishing), both with a strike price of $11.50. The probabilities that the prices of AlphaDog and OmegaWolf stock will decline below the strike price are 65% and 47%, respectively. The probability that at least one of the put options will fall below the strike price is approximately: A) 1.00. B) 0.81. C) 0.31.

B) 0.81. We calculate the probability that at least one of the options will fall below the strike price using the addition rule for probabilities (A represents AlphaDog, O represents OmegaWolf): P(A or O) = P(A) + P(O) − P(A and O), where P(A and O) = P(A) × P(O) P(A or O) = 0.65 + 0.47 − (0.65 × 0.47) = approximately 0.81

Stagflation refers to an environment of: A) Low unemployment and high inflation. B) High unemployment and high inflation. C) High unemployment and low inflation.

B) High unemployment and high inflation. Stagflation refers to an economic environment where high unemployment and high inflation exist at the same time.

Which of the following was NOT a motivation for creating the Global Investment Performance Standards (GIPS)? A) Achieve greater uniformity and comparability among presentations of performance. B) Increase the role of government agencies in the investment industry. C) Improve the service offered to investment management clients.

B) Increase the role of government agencies in the investment industry. All of these were motivations for creating GIPS except to increase the role of government. In fact, these standards have been created to bolster the notion of self-regulation and reduce the encroachment of government into the investment industry.

Which of the following statements regarding primary and secondary markets is least accurate? A) Secondary market transactions occur between two investors and do not involve the firm that originally issued the security. B) Prevailing market prices are determined by primary market transactions and are used in pricing new issues. C) New issues of government securities can be sold on the primary market.

B) Prevailing market prices are determined by primary market transactions and are used in pricing new issues. Prevailing market prices are determined by the transactions that take place on the secondary market. This information is used to determine the price of new issues sold on primary markets.

Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A) Debt-to-total assets. B) Return on assets (ROA). C) Return on equity (ROE).

B) Return on assets (ROA). The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity.

Which of the following most accurately states an example of replication in derivatives pricing? A) Risky asset + risk-free asset = (- derivative position). B) Risky asset + derivative = risk-free asset. C) Derivative position - risk-free asset = risky asset.

B) Risky asset + derivative = risk-free asset. Replications of future payoffs, composed of a risky asset, a risk-free asset, and a derivative on the risky asset, are as follows: Risky asset + derivative = risk-free asset Risky asset - risk-free asset = (- derivative position) Derivative position - risk-free asset = (- risky asset).

All else being equal, which of the following bond characteristics will lead to lower levels of coupon reinvestment risk for bonds that are held to maturity? A) Longer maturities and higher coupon levels. B) Shorter maturities and lower coupon levels. C) Shorter maturities and higher coupon levels.

B) Shorter maturities and lower coupon levels. Other things being equal, the amount of reinvestment risk embedded in a bond will decrease with lower coupons because the there will be a lesser dollar amount to reinvest and with shorter maturities because the reinvestment period is shorter.

Which of the following statements about counting methods is least accurate? A) The labeling formula determines the number of different ways to assign a given number of different labels to a set of objects. B) The combination formula determines the number of different ways a group of objects can be drawn in a specific order from a larger sized group of objects. C) The multiplication rule of counting is used to determine the number of different ways to choose one object from each of two or more groups.

B) The combination formula determines the number of different ways a group of objects can be drawn in a specific order from a larger sized group of objects. The permutation formula is used to find the number of possible ways to draw r objects from a set of n objects when the order in which the objects are drawn matters. The combination formula ("n choose r") is used to find the number of possible ways to draw r objects from a set of n objects when order is not important. The other statements are accurate.

Which of the following could least likely be a probability function? A) X:(1,2,3,4) p(x) = x / 10. B) X:(1,2,3,4) p(x) = 0.2. C) X:(1,2,3,4) p(x) = (x × x) / 30.

B) X:(1,2,3,4) p(x) = 0.2. In a probability function, the sum of the probabilities for all of the outcomes must equal one. Only one of the probability functions in these answers fails to sum to one.

Which of the following characteristics are required for recognition of a balance sheet asset? Characteristic #1: Future economic benefits to the firm are probable. Characteristic #2: The asset is tangible and is obtained at a cost. Characteristic #1 Characteristic #2 A) No No B) Yes No C) Yes Yes

B) Yes No An asset is recognized on the balance sheet only if it is probable that it will provide future economic benefits. Assets can be tangible or intangible. In some cases, assets are acquired without cost, but will be reported to the extent that they will provide future economic benefit, and thus have value.

A perfect competition has all of the following characteristics EXCEPT: A) a large number of independent firms. B) a differentiated product. C) barriers to entry don't exist.

B) a differentiated product. In a perfectly competitive market all the firms produce a homogeneous product.

A company must report separate financial information for any segment of their business which: A) is located in a country other than the firm's home country. B) accounts for more than 10% of the firm's assets and has risk and return characteristics distinguishable from the company's other lines of business. C) is more than 20% of a firm's revenues.

B) accounts for more than 10% of the firm's assets and has risk and return characteristics distinguishable from the company's other lines of business. Financial statement items must be reported separately for any segment of a firm's business that is greater than 10% of revenue or assets and has risk and return characteristics that are distinguishable from those of the company's other lines of business. Requirements for reporting of geographic segments have the same size threshold and the segment must operate in a business environment that is different from that of the firm's other segments.

An analyst evaluating a stable, mature, electric utility with non-cyclical earnings and a high dividend would most appropriately use a: A) 3-stage model B) constant growth model. C) 2-stage model.

B) constant growth model. A constant growth model is most appropriate for mature firms in stable markets that pay dividends which grow at a constant rate.

PRC International just completed a $234 million floating rate convertible bond offering. As stated in the indenture, the interest rate on the bond is the lesser of 90-day LIBOR or 10%. The indenture also requires PRC to retire $5.6 million per year with the option to retire as much as $10 million. Which of the following embedded options is most likely to benefit the investor? The: A) accelerated sinking fund provision for principal repayment. B) conversion option on the convertible bonds. C) 10% cap on the floating interest rate.

B) conversion option on the convertible bonds. The conversion privilege is an option granted to the bondholder. The cap benefits the issuer. The accelerated sinking fund might reduce the investor's default risk, but the conversion option is the most likely benefit to the investor.

Stock splits: A) increase firm value. B) do not in and of themselves affect firm value. C) are less common than stock dividends.

B) do not in and of themselves affect firm value. Stock splits divide up each existing share into multiple shares. The price of each share will drop correspondingly to the number of shares created, so there is no change in the owner's wealth. Empirical research has shown that in the absence of a dividend yield increase, the stock price falls to the stock split ratio of the original price (i.e., to 25% of the original price in a 4-for-1 stock split). This makes sense, given that the investor's percentage ownership of the company has not changed.

Other things equal, a real exchange rate (stated as units of domestic currency per unit of foreign currency) will decrease as a result of an increase in the: A) foreign price level. B) domestic price level. C) nominal exchange rate (domestic/foreign).

B) domestic price level. An increase in the domestic price level, other things equal, will decrease a real exchange rate. Increases in the nominal exchange rate or the foreign price level, other things equal, will increase a real exchange rate.

The demand curves faced by monopolistic competitors is: A) not sensitive to price due to absence of close substitutes. B) elastic due to the availability of many close substitutes. C) inelastic due to the availability of many complementary goods.

B) elastic due to the availability of many close substitutes. The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products.

In contrast with asset-backed securities (ABS), a collateralized debt obligation (CDO): A) is issued through a special purpose vehicle. B) employs a collateral manager. C) has senior and subordinate tranches.

B) employs a collateral manager. The feature that distinguishes a CDO from an ABS is that a CDO has a collateral manager who buys and sells securities in the collateral pool to generate cash to meet the CDO's obligations. ABS are issued through special purpose vehicles and may have senior/subordinated structures.

In the short run, price searchers maximize profits by producing output where marginal revenue (MR): A) equals marginal costs (MC) and charging a price based on the average total cost (ATC) curve. B) equals marginal costs (MC) and charging a price based on the demand curve. C) is greater than marginal costs (MC) and charging a price based on the demand curve.

B) equals marginal costs (MC) and charging a price based on the demand curve. Price searchers maximize profits by producing an amount of output where MR equals MC and charging a price based on the demand curve. In the short run, profits or losses occur depending upon where the individual firm's ATC curve is in relationship to the demand curve. In the long run, economic profits are zero due to the low barriers to entry. Important note for the test: regardless of whether a firm is a price taker, price searcher, monopoly, or oligopoly, all firms will seek to maximize profits and want to produce the ouput where marginal revenue equals marginal cost.

For impaired long-lived assets, a firm reporting under IFRS is least likely required to disclose the: A) amounts of impairment losses and reversals by asset class. B) estimated probabilities of reversing impairment losses. C) circumstances that caused the impairment losses or reversals.

B) estimated probabilities of reversing impairment losses. Under IFRS, firms with impaired assets must disclose the amounts of impairment losses and reversals by asset class, the circumstances that caused the impairment losses or reversals, and where the losses or reversals are recognized on the income statement.

Elliott wave theory describes the typical pattern of price movements as: A) four waves with the direction of the trend, followed by three waves against the direction of the trend. B) five waves with the direction of the trend, followed by three waves against the direction of the trend. C) five waves with the direction of the trend, followed by four waves against the direction of the trend.

B) five waves with the direction of the trend, followed by three waves against the direction of the trend. According to Elliott wave theory, prices tend to move in five waves with the direction of the trend and three waves against the direction of the trend.

Economic profits are most likely to be earned by firms in an industry that is characterized by: A) high bargaining power of suppliers and low threat of new entrants. B) high barriers to entry and low bargaining power of buyers. C) low threat of substitute products and high rivalry among existing competitors.

B) high barriers to entry and low bargaining power of buyers. High barriers to entry (low threat of new entrants) and low bargaining power of suppliers both increase the potential for economic profits within an industry. The five forces that shape industry competition are rivalry among existing competitors, threat of new entrants, threat of substitute products, bargaining power of buyers, and bargaining power of suppliers. The stronger any of these forces are within an industry, the less potential that industry has to generate (or continue to earn) economic profits.

A decrease in the price of Good Y can result in a decrease of the quantity of Good Y demanded by consumers if the substitution effect: A) and the income effect are negative. B) is positive and the income effect is negative and larger than the substitution effect. C) is negative and larger than the positive income effect.

B) is positive and the income effect is negative and larger than the substitution effect. If the price of Good Y decreases, the substitution effect will have a positive impact on the quantity demanded of Good Y. Thus, the only way that quantity demanded of Good Y can decrease is if there is a negative income effect that is greater in magnitude than the substitution effect; i.e., if Good Y is a Giffen good.

In comparing the price volatility of putable bonds to that of option-free bonds, a putable bond will have: A) less price volatility at low yields. B) less price volatility at higher yields. C) more price volatility at higher yields.

B) less price volatility at higher yields. The only true statement is that putable bonds will have less price volatility at higher yields. At higher yields the put becomes more valuable and reduces the decline in price of the putable bond relative to the option-free bond. On the other hand, when yields are low, the put option has little or no value and the putable bond will behave much like an option-free bond. Therefore at low yields a putable bond will not have more price volatility nor will it have less price volatility than a similar option-free bond.

A money manager works for a full-service brokerage firm. After meeting with a new client and gathering all relevant information, the money manager says that she thinks her firm can perform all the financial services the new client needs. With respect to Standard I(C), Misrepresentation, this: A) may not be a violation if the representation was made orally. B) may not be a violation if the manager's opinion is based upon the factual information gathered. C) is a violation because she cannot make statements like this under any circumstances.

B) may not be a violation if the manager's opinion is based upon the factual information gathered. There is no violation if the opinion is based upon the factual information gathered and the firm's actual capabilities. This is true whether or not the representation was written, oral, or electronic. None of the other choices are correct.

A mortgage that includes some repayment of principal in each payment, and has an outstanding principal balance at maturity, is most accurately described as a: A) rollover mortgage. B) partially amortizing mortgage. C) hybrid mortgage.

B) partially amortizing mortgage. A partially amortizing mortgage includes some amount of principal in each payment but still has an outstanding principal balance at maturity. A hybrid mortgage becomes an adjustable-rate mortgage after an initial fixed-rate period. A rollover mortgage changes from one fixed rate to another during its life.

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change: A) retrospectively, because it is a change in accounting principle. B) prospectively, with the carrying value as the first LIFO layer. C) prospectively, with LIFO layers calculated from past purchases and sales.

B) prospectively, with the carrying value as the first LIFO layer. Changing the inventory cost flow assumption to LIFO is an exception to the retrospective application of changes in accounting principle. This change is applied prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer.

Which of the following statements about risk is NOT correct? Generally, greater: A) existing wealth allows for greater risk. B) spending needs allows for greater risk. C) insurance coverage allows for greater risk.

B) spending needs allows for greater risk. Greater spending needs usually allow for lower risk because there is a definite need to ensure that the return may adequately fund the spending needs (a "fixed" cost).

Scott Marsh is a research analyst for a brokerage firm following the computer industry. Joe Perry is Marsh's former college roommate and is the head of technology for Mercury, a large software company. Perry informs Marsh on Tuesday that in two days the company will be making an official announcement that its release of its newest version of its software will be moved up one month, from October 1 to September 1. The announcement will be surprising to the industry and will likely be met with skepticism because the company has had trouble meeting release dates in the past. Perry assures Marsh that he is certain that they will meet the September 1 date. Marsh considers Perry to be very honest and highly competent. Marsh should: A) immediately put out a report recommending the stock, but waiting until the official announcement to state his reasons. B) wait until the public announcement is made, then release a report explaining that he believes the company will make the release date, disclosing that one of the reasons for his opinion is Perry is a friend of his. C) produce his research report in two days based solely on the official announcement, not taking into consideration the information from Perry.

B) wait until the public announcement is made, then release a report explaining that he believes the company will make the release date, disclosing that one of the reasons for his opinion is Perry is a friend of his. The research report cannot be released until the official announcement is made, otherwise he will be violating the Standard on prohibition against the use of material nonpublic information. Once it is made public, Marsh can disclose the nature of the conversation without violating that Standard because the information will now be public. However, he should disclose the relationship with Perry or he will be violating the Standard on communications with clients and prospective clients.

Given: $1,000 investment, compounded monthly at 12% find the future value after one year. A) $1,120.00. B) $1,121.35. C) $1,126.83.

C) $1,126.83. Divide the interest rate by the number of compound periods and multiply the number of years by the number of compound periods. I = 12 / 12 = 1; N = (1)(12) = 12; PV = 1,000.

The First State Bank is willing to lend $100,000 for 4 years at a 12% rate of interest, with the loan to be repaid in equal semi-annual payments. Given the payments are to be made at the end of each 6-month period, how much will each loan payment be? A) $32,925. B) $25,450. C) $16,104.

C) $16,104. N = 4 × 2 = 8; I/Y = 12/2 = 6; PV = -100,000; FV = 0; CPT → PMT = 16,103.59.

Given P(X = 2, Y = 10) = 0.3, P(X = 6, Y = 2.5) = 0.4, and P(X = 10, Y = 0) = 0.3, then COV(XY) is: A) 24.0. B) 6.0. C) -12.0.

C) -12.0. The expected values are: E(X) = (0.3 × 2) + (0.4 × 6) + (0.3 × 10) = 6 and E(Y) = (0.3 × 10.0) + (0.4 × 2.5) + (0.3 × 0.0) = 4. The covariance is COV(XY) = ((0.3 × ((2 − 6) × (10 − 4))) + ((0.4 × ((6 − 6) × (2.5 − 4))) + (0.3 × ((10 − 6) × (0 − 4))) = −12.

A T-bill with a face value of $100,000 and 140 days until maturity is selling for $98,000. What is the bank discount yield? A) 5.41%. B) 4.18%. C) 5.14%.

C) 5.14%. Actual discount is 2%, annualized discount is: 0.02(360 / 140) = 5.14%

The one-year spot rate is 5% and the two-year spot rate is 6.5%. What is the one-year forward rate starting one year from now? A) 5.00%. B) 7.87%. C) 8.02%.

C) 8.02%. The forward rate is computed as follows: One-year forward rate = 1.065^2 / 1.05 - 1 = 8.02%

A minimum wage is an example of which of the following? A) A price ceiling. B) Rent controls. C) A price floor.

C) A price floor. A minimum wage is an example of a price floor.

Jack Smith, CFA, is analyzing independent investment projects X and Y. Smith has calculated the net present value (NPV) and internal rate of return (IRR) for each project: Project X: NPV = $250; IRR = 15% Project Y: NPV = $5,000; IRR = 8% Smith should make which of the following recommendations concerning the two projects? A) Accept Project X only. B) Accept Project Y only. C) Accept both projects.

C) Accept both projects. The projects are independent, meaning that either one or both projects may be chosen. Both projects have positive NPVs, therefore both projects add to shareholder wealth and both projects should be accepted.

Allcans, an aluminum producer, needs to issue some debt to finance expansion plans, but wants to hedge its bond interest payments against fluctuations in aluminum prices. Jerrod Price, the company's investment banker, suggests a commodity index floater. This type of bond is least likely to provide which of the following advantages? A) Payment structure helps protect Allcan's credit rating. B) The bond's coupon rate is linked to the price of aluminum. C) Allows Allcans to set coupon payments based on business results.

C) Allows Allcans to set coupon payments based on business results. The coupon rate is set in the bond agreement (indenture) and cannot be changed unilaterally. Non-interest rate indexed floaters are indexed to a commodity price such as oil or aluminum. Business results could be impacted by numerous factors other than aluminum prices. Both of the other choices are true. By linking the coupon payments directly to the price of aluminum (meaning that when aluminum prices increase, the coupon rate increases and vice versa), the non-interest index floater allows Allcans to protect its credit rating during adverse circumstances.

The prospectus for the Horizon Fund states that it invests only in real assets. Which of the following would the Horizon Fund most likely include in its portfolio? A) Holdings of foreign currencies. B) Common stock of a technology company. C) An investment in an apartment complex.

C) An investment in an apartment complex. Real assets are assets with a physical presence such as real estate, equipment, and commodities. Financial assets include stocks, bonds, derivatives, and currencies. An investment in an apartment complex is a real estate investment and therefore would be considered a real asset.

Which component of traditional credit analysis includes evaluation of industry structure, industry fundamentals, and company fundamentals? A) Collateral. B) Covenants. C) Capacity.

C) Capacity. Analyzing a corporate borrower's capacity to repay its debt obligations is similar to the top-down process used in equity analysis. Collateral analysis is evaluating the issuer's assets. Analyzing covenants involves reviewing the terms and conditions of lending agreements.

Which of the following classes of asset-backed securities typically includes a lockout period? A) Auto loan ABS. B) Non-agency residential MBS. C) Credit card ABS.

C) Credit card ABS. Credit card ABS typically have a lockout period during which principal payments by credit card borrowers are used to purchase additional credit card debt, rather than paid out to the ABS holders.

Which of the following statements regarding the risks inherent in bonds is most accurate? A) The reinvestment rate assumption in calculating bond yields is generally not significant to the bond's yield. B) Interest rate risk is the risk that the coupon rate will be adjusted downward if market rates decline. C) Default risk deals with the likelihood that the issuer will fail to meet its obligations as specified in the indenture.

C) Default risk deals with the likelihood that the issuer will fail to meet its obligations as specified in the indenture. Reinvestment is crucial to bond yield, and interest rate risk is the risk of changes in a bondholder's return due to changes in a bond's yield.

Which of the following would NOT be a good source for information about a company's proxy voting rules? A) Firm's corporate governance statement. B) Company's articles of organization and by-laws. C) Firm's annual report.

C) Firm's annual report. The annual report would typically not contain this detailed information.

An economy has been producing at its full-employment level of output and the price level has been stable. Businesses then begin experiencing unintended decreases in their inventory levels. What does this most likely imply about the short-run outlook for economic growth and inflation? Economic growth Inflation A) Increasing Decreasing B) Decreasing Increasing C) Increasing Increasing

C) Increasing Increasing Starting from conditions of long-run equilibrium, unintended decreases in inventory levels suggest that aggregate demand has increased. Producers will respond in the short run by increasing output and prices, so economic growth and inflation will increase.

Barracuda Corporation, a U.S. corporation, owns a subsidiary located in Germany. The German subsidiary's financial statements are maintained in euros. If the euro recently appreciated relative to the U.S. dollar, how would the unrealized translation gain affect Barracuda's retained earnings and total stockholders' equity? Retained earnings Total stockholders' equity A) No effect No effect B) Increase Increase C) No effect Increase

C) No effect Increase Unrealized foreign currency translation gains and losses are not reported in the income statement; thus, retained earnings are unaffected. However, unrealized foreign currency gains and losses are included in comprehensive income. Comprehensive income includes all changes in equity except those that result from transactions with shareholders. So, the translation gain increases stockholders' equity by increasing comprehensive income.

Consider three municipal bonds issued by the Greater Holmen Metropolitan Capital Improvement District, a local authority that carries an issuer rating of single-A from the major debt rating agencies. All three bonds have the same coupon rate and maturity date. •Series W was issued to finance the rebuilding and expansion of local schools and is backed by the District's authority to levy property tax. •Series X was issued to build a water purification plant for the region. The District charges fees to the surrounding municipalities for their use of the plant. These fees are the only source of the interest and principal payments on the bonds. •Series Y was issued to raise funds for the general use of the District in its ordinary maintenance projects and is backed by the District's authority to levy property tax. These bonds carry a third party guarantee of principal and interest payments. What is most likely the order of the market yields on these three bond issues, from highest to lowest? A) Series X, Series Y, Series W. B) Series Y, Series W, Series X. C) Series X, Series W, Series Y.

C) Series X, Series W, Series Y. Series X is a revenue bond. Because they pay interest and principal only if revenues from the project they finance are sufficient, revenue bonds are typically riskier and therefore have higher market yields than general obligation bonds. Series Y is an insured bond. Municipal bond insurance typically results in a higher rating, and therefore a lower market yield, than an equivalent bond from the same municipal issuer. So of these three bonds, Series X should have the highest market yield and Series Y the lowest.

Which of the following is NOT an assumption of the binomial distribution? A) Random variable X is discrete. B) The trials are independent. C) The expected value is a whole number.

C) The expected value is a whole number. The expected value is n × p. A simple example shows us that the expected value does not have to be a whole number: n = 5, p = 0.5, n × p = 2.5. The other conditions are necessary for the binomial distribution.

If the price elasticity of a linear demand curve is −1 at the current price, an increase in price will lead to: A) no change in total revenue. B) an increase in total revenue. C) a decrease in total revenue.

C) a decrease in total revenue. On a linear demand curve, demand is elastic at prices above the point of unitary elasticity, so a price increase will decrease total revenue.

The time it takes for policy makers to enact a fiscal policy action is best described as: A) legislative lag. B) implementation lag. C) action lag.

C) action lag. The time it takes for fiscal policy actions to be proposed, approved, and implemented is referred to as action lag.

In a demand function for Good M, if the price of a substitute for Good M decreases, the quantity demanded of Good M: A) increases. B) may increase or decrease. C) decreases.

C) decreases. The price coefficient of a substitute in a demand function is positive. This means a decrease in the price of a substitute for a good will decrease the quantity demanded of that good.

Two underlying assumptions of financial statements, according to the IASB conceptual framework, are: A) accrual accounting and historical cost. B) historical cost and going concern. C) going concern and accrual accounting.

C) going concern and accrual accounting. The two underlying assumptions of financial statements according to the conceptual framework are accrual accounting and the going concern assumption. Historical cost is one of several measurement bases that may be used for financial reporting.

A stock that plots below the Security Market Line most likely: A) has a beta less than one. B) is below the efficient frontier. C) is overvalued.

C) is overvalued. Since the equation of the SML is the capital asset pricing model, you can determine if a stock is over- or underpriced graphically or mathematically. Your answers will always be the same. Graphically: If you plot a stock's expected return on the SML and it falls below the line, it indicates that the stock is currently overpriced, causing its expected return to be too low. If the plot is above the line, it indicates that the stock is underpriced. If the plot falls on the SML, it indicates the stock is properly priced. Mathematically: In the context of the SML, a security is underpriced if the required return is less than the holding period (or expected) return, is overpriced if the required return is greater the holding period (or expected) return, and is correctly priced if the required return equals the holding period (or expected) return.

An analyst routinely has the opportunity to offer his clients the opportunity to purchase "hot new issues." He tells his clients that he will distribute each issue equally among those interested, with himself included in the distribution. The clients do not object to this. With respect to Standard VI(B), Priority of Transactions, this: A) may be a violation because it is impossible to distribute hot new issues equally. B) cannot be a violation because the clients know of the practice and agree. C) may be a violation despite the clients' approval.

C) may be a violation despite the clients' approval. Just because the clients know of a practice does not make it right. The analyst must put the clients first. It is a violation for the analyst to participate in a "hot new issue" which can lower the allocation to any given client below what that client would prefer. This is tantamount to putting the analyst's interests ahead of the clients' interests.

The revaluation model for investment property is permitted under: A) IFRS, but not U.S. GAAP. B) both IFRS and U.S. GAAP. C) neither IFRS nor U.S. GAAP.

C) neither IFRS nor U.S. GAAP. For long-lived assets classified as investment property, IFRS allows either the cost model or the fair value model. The revaluation model is permitted for long-lived assets that are not classified as investment property. U.S. GAAP only permits the cost model for valuation of long-lived assets and does not identify investment property as a specific subset of long-lived assets.

In a study seminar, the following comments were made: Comment 1: "In the short run, an increase in demand in a perfectly competitive industry will result in negative economic profit for some firms in the industry." Comment 2: "In the long run, a permanent increase in demand in a perfectly competitive industry will result in zero economic profit for the firms in the industry." With respect to these comments: A) both are correct. B) both are incorrect. C) only one is correct.

C) only one is correct. Comment 1 is incorrect because an increase in industry demand will increase equilibrium price and output. At the higher price, firms will earn positive economic profits in the short run because the higher price will exceed average total cost. Over the long run, however, new firms will enter the market to exploit the positive economic profits, causing prices to decline until all firms are again earning zero economic profit.

The least appropriate security for investing short-term excess cash balances would be: A) time deposits. B) bank certificates of deposit. C) preferred stock.

C) preferred stock. While adjustable-rate preferred is an appropriate security for short-term investment of excess cash balances, other preferred shares are not. Bank certificates of deposit and time deposits can be for appropriately short periods.

The CFA Institute Code of Ethics specifies that CFA Institute Members and Candidates must do all of the following EXCEPT: A) use reasonable care and exercise independent professional judgment when engaging in professional activities. B) act with integrity, competence, diligence, respect, and in an ethical manner. C) refrain from any conduct that compromises the reputation or integrity of the CFA designation.

C) refrain from any conduct that compromises the reputation or integrity of the CFA designation. Not compromising the reputation or integrity of the CFA designation is a part of the Standards of Professional Conduct, but is not specifically mentioned the Code of Ethics.

Which of the following best describes a firm with low operating leverage? A large change in: A) earnings before interest and taxes result in a small change in net income. B) sales result in a small change in net income. C) the number of units a firm produces and sells result in a similar change in the firm's earnings before interest and taxes.

C) the number of units a firm produces and sells result in a similar change in the firm's earnings before interest and taxes. Operating leverage is the result of a greater proportion of fixed costs compared to variable costs in a firm's capital structure and is characterized by the sensitivity in operating income (earnings before interest and taxes) to change in sales. A firm that has equal changes in sales and operating income would have low operating leverage (the least it can be is one). Note that the relationship between operating income and net income is impacted by the degree of financial leverage, and the relationship between sales and net income is impacted by the degree of total leverage.

The Management Discussion and Analysis (MD&A) portion of the financial disclosure is least likely required to discuss: A) capital resources and liquidity. B) results of operations. C) unusual or infrequent items.

C) unusual or infrequent items. The MD&A portion of the financial disclosure is required to discuss results of operations, capital resources and liquidity and a general business overview based on known trends. A discussion of unusual or infrequent items may be included in the MD&A, but is not required.

Ted Willis received his CFA designation in 1998 and was employed as an investment counselor until 2003. During the past several years, Willis has been out of work because of a serious illness. He also failed to pay his annual CFA Institute dues during the current year. Willis has now recovered and accepted a position with an investment advisory firm. His new business card says, "Ted Willis, CFA." As part of his job with his new firm, Willis uses PowerPoint® to make presentations to groups of prospective clients. He obtained some of these PowerPoint® slides from web sites, but removed the copyright notice before showing the slides to prospective clients. Which of the following statements about Standard VII(B), Reference to CFA Institute, the CFA Designation, and the CFA Program, and Standard I(C), Misrepresentation, is most accurate? Willis: A) did not violate either Standard VII(B) or Standard I(C). B) violated Standard VII(B) but he did not violate Standard I(C). C) violated both Standard VII(B) and Standard I(C).

C) violated both Standard VII(B) and Standard I(C). Willis violated Standard VII(B) because his right to use the CFA designation was suspended when he stopped paying CFA Institute dues. Thus, he can no longer use the CFA designation on his business card. Willis also violated Standard I(C) because he was guilty of plagiarism. He inappropriately used copyrighted material, which provided the impression that such material was his own.

A firm records the following cash flows on the same day: $250 million from debt proceeds; $100 million funds transferred to a subsidiary; $125 million in interest payments; and $30 million in tax payments. The net daily cash position: A) remained the same. B) improved. C) worsened.

C) worsened. Improving a firm's net daily requires more inflows than outflows. Debt proceeds are cash inflows while funds transferred to a subsidiary, interest and dividend payments, and tax payments are outflows. The net cash change for the day is $250 - $100 - $125 - $30 = -$5 million.

Consider a European call option and put option that have the same exercise price, and a forward contract to buy the same underlying asset as the two options. An investor buys a risk-free bond that will pay, on the expiration date of the options and the forward contract, the difference between the exercise price and the forward price. According to the put-call-forward parity relationship, this bond can be replicated by: A) writing the call option and writing the put option. B) buying the call option and writing the put option. C) writing the call option and buying the put option.

C) writing the call option and buying the put option. At initiation of a forward contract on the underlying asset, buying a put option and writing a call option with exercise price X will have the same cost as a risk-free bond which, at expiration of the forward and options, will pay the difference between X and the forward price.

The main difference between the current ratio and the quick ratio is that the quick ratio excludes: A) inventory. B) cost of goods sold. C) assets.

A) inventory. Current ratio = (current assets / current liabilities) = [cash + marketable securities + receivables + inventory] / current liabilities Quick ratio = [cash + marketable securities + receivables] / current liabilities

An investor will receive an annuity of $5,000 a year for seven years. The first payment is to be received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity? A) $15,000. B) $23,185. C) $13,453.

A) $15,000. With PMT = 5,000; N = 7; I/Y = 11.5; value (at t = 4) = 23,185.175. Therefore, PV (at t = 0) = 23,185.175 / (1.115)^4 = $15,000.68.

If the economy is in short-run disequilibrium below full employment, the most likely explanation is that: A) aggregate demand has decreased. B) money wage rates have decreased. C) long-run aggregate supply has decreased.

Answer A. A decrease in aggregate demand can reduce output below its full-employment level. A decline in long-run aggregate supply would mean the full-employment output level itself has decreased. Wage rates are assumed to be fixed in the short run, but the long-run effect of decreases in wage rates would be to increase (shift) short-run aggregate supply, leading to an increase in output.

Stages of an industry life cycle in chronological order are: A) embryonic, growth, shakeout, mature, and decline. B) embryonic, growth, mature, shakeout, and decline. C) growth, shakeout, mature, decline, and embryonic.

Answer A. Embryonic, growth, shakeout, mature, and decline are the life-cycle stages of an industry.

A legally binding promise to buy 140 oz. of gold two months from now at a price agreed upon today is a(n): A) forward commitment. B) take-or-pay contract. C) hedge.

Answer A. It is a forward commitment; it may be used to hedge or may be used to speculate on the price of gold in two months.

Sarah Parker is buying a new $25,000 car. Her trade-in is worth $5,000 so she needs to borrow $20,000. The loan will be paid in 48 monthly installments and the annual interest rate on the loan is 7.5%. If the first payment is due at the end of the first month, what is Sarah's monthly car payment? A) $483.58. B) $416.67. C) $480.57.

Answer A. N = 48; I/Y = 7.5 / 12 = 0.625; PV = 20,000; FV = 0; CPT → PMT = 483.58.

A company's outstanding 20-year, annual-pay 6% coupon bonds are selling for $894. At a tax rate of 40%, the company's after-tax cost of debt capital is closest to: A) 4.2%. B) 5.1% C) 7.0%

Answer A. Pretax cost of debt: N = 20; FV = 1000; PV = −894; PMT = 60; CPT → I/Y = 7% After-tax cost of debt: kd = (7%)(1−0.4) = 4.2%

If the price elasticity of demand is 1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price? A) −2.667%. B) +2.667%. C) -0.375%.

Answer A. Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price. The percent change in price is, therefore, the percent change in quantity demanded divided by the price elasticity of demand = 4 / 1.5 = 2.667. Because of the inverse relationship between quantity demanded and price, the price elasticity is always going to be negative although economists usually ignore the negative sign and just use the absolute value. To properly predict the price change a negative sign needs to be added to the price elasticity before the calculation or to the answer after the calculation. Using the latter case, the 2.667% will become -2.667%, showing that an increase in quantity demanded of 4% will cause a decrease in the price of 2.667% when the price elasticity is 1.5 (-1.5).

Which of the following duration measures is most appropriate if an analyst expects a non-parallel shift in the yield curve? A) Key rate duration. B) Effective duration. C) Modified duration.

Answer A. Price sensitivity to a non-parallel shift in the yield curve can be estimated using key rate durations. Modified duration and effective duration measure price sensitivity to a parallel shift in the yield curve.

In order to test if Stock A is more volatile than Stock B, prices of both stocks are observed to construct the sample variance of the two stocks. The appropriate test statistics to carry out the test is the: A) F test. B) Chi-square test. C) t test.

Answer A. The F test is used to test the differences of variance between two samples.

Which of the following statements about hypothesis testing is most accurate? A Type II error is the probability of: A) failing to reject a false null hypothesis. B) rejecting a true alternative hypothesis. C) rejecting a true null hypothesis.

Answer A. The Type II error is the error of failing to reject a null hypothesis that is not true.

The range of possible values in which an actual population parameter may be observed at a given level of probability is known as a: A) significance level. B) confidence interval. C) degree of confidence.

Answer B. A confidence interval is a range of values within which the actual value of a parameter will lie, given a specified probability level. A point estimate is a single value used to estimate a population parameter. An example of a point estimate is a sample mean. The degree of confidence is the confidence level associated with a confidence interval and is computed as 1 − a.

Which of the following is an example of a parameter? A) Sample mean. B) Population variance. C) Sample standard deviation.

Answer B. A parameter is any descriptive measure of a population characteristic. The population variance describes a population while the sample standard deviation and sample mean are each descriptive measures of samples.

With respect to auto-loan backed ABS: A) some of them have some sort of credit enhancement. B) all of them have some sort of credit enhancement. C) the underlying loans are collateralized so no credit enhancement is necessary.

Answer B. All automobile loan ABS have some sort of credit enhancement to make them attractive to institutional investors.

Randal Brooks is the chief economist for a large brokerage firm. In the aftermath of a national tragedy, Brooks feels that it is very possible that the stock market will drop significantly and not recover for several years. However, he does not believe that this is the most likely scenario but merely that the risk of investing in equities has increased. He decides to write a market commentary to the brokerage clients that discusses the reasons why the market will remain stable and talks about why he, as a private citizen, feels patriotic. He does not mention the increase risk in equities. Brooks has: A) violated the Standards by not including all of the relevant factors in the research report and making patriotic statements. B) violated the Standards by not including all of the relevant factors in the research report, but not by making patriotic statements. C) not violated the Standards.

Answer B. By not mentioning the increased risk of the market, Brooks has violated the Standard on using reasonable judgment in a research report. However, the patriotic statements do not violate the Standards.

Blocher Company is evaluating the following methods of accounting for depreciation of long-lived assets and inventory: •Depreciation: straight-line; double-declining balance (DDB) •Inventory: first in, first out (FIFO); last in, first out (LIFO) Assuming a deflationary environment (prices are falling), which of the following combinations will result in the highest net income in year 1? A) DB; FIFO. B) straight-line; LIFO. C) Straight-line; FIFO.

Answer B. For year 1, straight-line depreciation will be lower than DDB. During deflationary periods, LIFO will result in lower cost of goods sold and hence higher income.

As part of a major restructuring of business units, General Security (an industrial conglomerate operating solely in the U.S. and subject to U.S. GAAP) recognizes significant impairment losses. The Investor Relations group is preparing an informational packet for shareholders, employees, and the media. Which of the following statements is least accurate? A) The write-downs are reported as a component of income from continuing operations. B) Write-downs taken on asset values can be reversed in later years if market conditions improve. C) During the year of the write-downs, retained earnings and deferred taxes will decrease.

Answer B. Impairments cannot be restored under U.S. GAAP. Both remaining statements are correct.

Today an investor purchases a $1,000 face value, 10%, 20-year, semi-annual bond at a discount for $900. He wants to sell the bond in 6 years when he estimates the yields will be 9%. What is the estimate of the future price? A) $946. B) $1,079. C) $1,152.

Answer B. In 6 years, there will be 14 years (20 − 6), or 14 × 2 = 28 semi-annual periods remaining of the bond's life So, N = (20 − 6)(2) = 28; PMT = (1,000 × 0.10) / 2 = 50; I/Y = 9/2 = 4.5; FV = 1,000; CPT → PV = 1,079. Note: Calculate the PV (we are interested in the PV 6 years from now), not the FV.

Which of the following would be inconsistent with an efficient market? A) Price changes are independent. B) Price adjustments are biased. C) Stock prices adjust rapidly to new information.

Answer B. Market efficiency assumes that investors adjust their estimates of security prices rapidly to reflect their unbiased interpretation of the new information. New information arrives randomly and independently. Therefore, price changes are independent.

Paula Munson, CFA, manages a mutual fund with an objective to emphasize income over capital gains. Magic Technologies is a growth stock that pays no dividend, but Republic's research department believes the stock will dramatically outperform the S&P 500 over the next 12 to 18 months. Based on this strong recommendation, Munson adds Magic stock to her fund's portfolio. Munson has: A) not violated the Standards and improved the diversification of the fund. B) violated the Standards by failing to comply with her portfolio's style mandate. C) violated the Standards by relying on research that she did not perform herself.

Answer B. Standard III(C) Suitability requires that members managing portfolios take investment actions that are consistent with their portfolio's stated objectives and constraints. The fund's mandate emphasizes income over capital gains. Adding a non-dividend paying stock to the portfolio is a departure from that mandate.

The effect of a company announcement that they have begun a project with a current cost of $10 million that will generate future cash flows with a present value of $20 million is most likely to: A) increase the value of the firm's common shares by $20 million. B) only affect value of the firm's common shares if the project was unexpected. C) increase value of the firm's common shares by $10 million.

Answer B. Stock prices reflect investor expectations for future investment and growth. A new positive-NPV project will increase stock price only if it was not previously anticipated by investors.

Which of the following statements about hypothesis testing is most accurate? A Type I error is the probability of: A) failing to reject a false hypothesis. B) rejecting a true null hypothesis. C) rejecting a true alternative hypothesis.

Answer B. The Type I error is the error of rejecting the null hypothesis when, in fact, the null is true.

Suppose that the six-month spot rate is equal to 7% and the two-year spot rate is 6%. The one-and a half-year forward rate starting six months from now has to: A) lie between 6% and 7%. B) be less than 6%. C) be more than 6%.

Answer B. The following relationship has to hold: (1 + spot rate0,0.5/2)1 * (1 + forward rate0.5,2/2)3 = (1 + spot rate0,2/2)4. For this relationship to hold the forward rate has to be less than 6%.

Tony Calaveccio, CFA, is the manager of the TrustCo Small Cap Venture Fund in Toronto. He places trades for the fund with River City Brokerage. River City provides Calaveccio with soft dollars to purchase research. River City also deals in municipal bonds, some of which Calaveccio holds in his personal portfolio. He periodically uses the soft dollars to request research reports on various small cap stocks and also on the status of the municipal bond market and issues that he holds. These actions are: A) in violation of his fiduciary duties regarding both the small cap research and the municipal bond research. B) in violation of his fiduciary duties regarding the municipal bond research but not so regarding the research on the small cap issues. C) not in violation of the Code and Standards.

Answer B. The issue at hand is the member's fiduciary responsibilities in handling "soft dollars" which are technically the property of the client. Standard III(A), Loyalty, Prudence, and Care, delineates the member's fiduciary responsibilities with regard to soft dollars. Since municipal bond research is clearly not relevant to the Small Cap Fund holders, he is clearly using the soft dollars to obtain research for his personal benefit and is in violation of the Standard.

According to Markowitz, an investor's optimal portfolio is determined where the: A) investor's lowest utility curve is tangent to the efficient frontier. B) investor's highest utility curve is tangent to the efficient frontier. C) investor's utility curve meets the efficient frontier.

Answer B. The optimal portfolio for an investor is determined as the point where the investor's highest utility curve is tangent to the efficient frontier.

An analyst who wants to examine a firm's financing transactions during the most recent period is most likely to evaluate the firm's statement of: A) comprehensive income. B) cash flows. C) financial position.

Answer B. The statement of cash flows describes a firm's inflows and outflows of cash during a reporting period from operating, investing, and financing activities. Financing transactions such as issuance of debt or stock are shown on the statement of cash flows. The statement of financial position (balance sheet) presents the firm's assets, liabilities, and equity at a point in time. The statement of comprehensive income (income statement) does not directly reflect a firm's financing transactions. Cash raised is not included in a firm's revenues and dividends paid and debt principal repaid are not included in its expenses.

What is the net income of a firm that has a return on equity of 12%, a leverage ratio of 1.5, an asset turnover of 2, and revenue of $1 million? A) $36,000. B) $40,000. C) $360,000.

Answer B. The traditional DuPont system is given as: ROE = (net profit margin)(asset turnover)(leverage ratio) Solving for the net profit margin yields: 0.12 = (net profit margin) × (2) × (1.5) 0.04 = (net profit margin) Recognizing that the net profit margin is equal to net income / revenue we can substitute that relationship into the above equation and solve for net income: 0.04 = net income / revenue = net income / $1,000,000 $40,000 = net income.

If a $1,000 bond has a 14% coupon rate and a current price of 950, what is the current market yield? A) 15.36%. B) 14.00%. C) 14.74%.

Answer C. (0.14)(1,000) = $140 coupon 140/950 × 100 = 14.74

McClintock 8% coupon bonds maturing in 10 years are currently trading at 97.55. These bonds are option-free and pay coupons semiannually. The McClintock bonds have a: A) current yield less than 8.0%. B) true yield greater than the street convention. C) yield to maturity greater than 8.0%.

Answer C. A bond trading at a discount will have a YTM greater than its coupon. The current yield is 8 / 97.55 = 8.2%. True yield is adjusted for payments delayed by weekends and holidays and is equal to or slightly less than the yield on a street convention basis.

A firm recently hired Hal Crane, CFA, to be a supervisor in the firm. Crane has reviewed the procedures for complying with the Code and Standards in the company. It is Crane's belief that the procedures need revision in order to be effective. Crane must: A) exercise his supervisory responsibilities with the greater level of diligence required by the Code and Standards. B) make reasonable efforts to encourage the company to adopt an adequate compliance system. C) decline supervisory responsibilities in writing until the company adopts an adequate compliance system.

Answer C. According to Standard IV(C) Responsibilities of Supervisors, if Crane believes the company's compliance procedures are not adequate, Crane should decline supervisory responsibilities in writing until an adequate system is adopted.

Which of the following statements about the call feature of a bond is most accurate? An embedded call option: A) describes the maturity date of the bond. B) stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity. C) stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.

Answer C. Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior to maturity. If the bonds are "called," the bondholder has no choice but to turn in his bonds. Call features give the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lower coupon issues in the event that market interest rates decline during the life of the issue. Call provisions do not pertain to maturity. A put provision gives the bondholders certain rights regarding early payment of principal.

Effective duration is more appropriate than modified duration as a measure of a bond's price sensitivity to yield changes when: A) yield curve changes are not parallel. B) the bond has a low coupon rate and a long maturity. C) the bond contains embedded options.

Answer C. Effective duration takes into consideration embedded options in the bond. Modified duration does not consider the effect of embedded options. For option-free bonds, modified duration will be similar to effective duration. Both duration measures are based on the value impact of a parallel shift in a flat yield curve.

Which of the following is least likely a barrier to entry? A) Economies of scale. B) Government licensing and legal barriers. C) Few sellers.

Answer C. Few sellers are a characteristic, not a barrier, of a price-searcher market where there are high barriers to entry. Other barriers are patents or exclusive rights of production.

Using an infinite period dividend discount model, find the value of a stock that last paid a dividend of $1.50. Dividends are expected to grow at 6 percent forever, the expected return on the market is 12 percent and the stock's beta is 0.8. The risk-free rate of return is 5 percent. A) $26.50. B) $32.61. C) $34.57.

Answer C. First find the required rate of return using the CAPM equation. k = 0.05 + 0.8(0.12 - 0.05) = 10.6% $1.50(1.06) /(0.106 - 0.06) = $34.57

A non-callable bond with 4 years remaining maturity has an annual coupon of 12% and a $1,000 par value. The current price of the bond is $1,063.40. Given a parallel shift in the yield curve of 50 basis points, which of the following is closest to the effective duration of the bond? A) 3.27. B) 2.94. C) 3.11.

Answer C. First, find the current yield to maturity of the bond as: FV = $1,000; PMT = $120; N = 4; PV = -$1,063.40; CPT → I/Y = 10% Then compute the price of the bond if rates rise by 50 basis points to 10.5% as: FV = $1,000; PMT = $120; N = 4; I/Y = 10.5%; CPT → PV = -$1,047.04 Then compute the price of the bond if rates fall by 50 basis points to 9.5% as: FV = $1,000; PMT = $120; N = 4; I/Y = 9.5%; CPT → PV = -$1,080.11 The formula for effective duration is: (V- - V+) / (2VoΔcurve) Therefore, effective duration is: ($1,080.11 - $1,047.04) / (2 × $1,063.40 × 0.005) = 3.11

McKay Company uses a periodic inventory system and the FIFO inventory cost method. In the most recent period, McKay had beginning inventory of $4,200, purchases of $1,400, cost of sales $1,300, and ending inventory of $4,300. If McKay had used a perpetual inventory system, its ending inventory would have been: A) $4,400. B) $4,200. C) $4,300.

Answer C. For a firm that uses the FIFO inventory cost method, cost of sales and ending inventory are unaffected by the choice between periodic and perpetual inventory systems.

What is the relationship between price and marginal revenue for a price searcher? A) Marginal revenue > price. B) Marginal revenue = price. C) Marginal revenue < price.

Answer C. For a price searcher, demand is downward sloping, marginal revenue is less than price since price must be reduced to sell additional units of output.

Consumer surplus is most accurately defined as the difference between the: A) price that a consumer must pay for an additional unit of a good or service and the cost of producing the additional unit of the good or service. B) value consumers are willing to pay for an additional unit of good or service and the cost of producing the additional unit of the good or service. C) total value consumers place on the quantity of a good purchased, and the total amount they must pay for that quantity.

Answer C. For an individual, consumer surplus is defined as the sum of the differences between what that individual is willing to pay for each individual unit of a good or service that he or she purchases and the amount that he or she actually pays for each of these individual units.

Market share stability within an industry is least likely to result from a high level of: A) switching costs. B) barriers to entry. C) product innovation.

Answer C. Frequent introductions of new products and innovations tend to make firms' market shares within an industry less stable. High barriers to entry into the industry and high switching costs for customers to change to a competing product both contribute to market share stability.

Kim Lee manages a variety of accounts at Superior Investments. Some are permitted to invest in tax-exempt issues only; others may not invest in a stock unless it pays dividends. Lee is researching a biotech firm specializing in the analysis of "mad cow" disease. While touring company facilities and meeting with management, she learns that they believe they may have found a way to reverse the disease. Moreover, one manager conjectured, "Suppose that we reversed the disease in someone who didn't even have it? We might then be able to boost that individual's IQ into the stratosphere!" Lee returns to her office and buys shares for all accounts under her supervision. This action is: A) appropriate given the obvious potential of the therapy. B) a violation of the Standard concerning fiduciary duties. C) a violation of the Standard concerning appropriateness and suitability of investment actions.

Answer C. Given the variety of accounts under her supervision, it is not likely the shares of a speculative biotech firm would be suitable for all accounts. Placing such shares in all accounts indicates that she has failed to consider the appropriateness and suitability of the investment for each account, and this places her in violation of Standard III(C).

Which of the following statements best describes vertical common-size analysis and horizontal common-size analysis? Statement #1 - Each line item is expressed as a percentage of its base-year amount. Statement #2 - Each line item of the income statement is expressed as a percentage of revenue and each line item of the balance sheet is expressed as a percentage of ending total assets. Statement #3 - Each line item is expressed as a percentage of the prior year's amount. Vertical analysis Horizontal analysis A) Statement #1 Statement #2 B) Statement #2 Statement #3 C) Statement #2 Statement #1

Answer C. Horizontal common-size analysis involves expressing each line item as a percentage of the base-year figure. Vertical common-size analysis involves expressing each line item of the income statement as a percentage of revenue and each line item of the balance sheet as a percentage of ending total assets.

The process that ensures that two securities positions with identical future payoffs, regardless of future events, will have the same price is called: A) exchange parity. B) the law of one price. C) arbitrage.

Answer C. If two securities have identical payoffs regardless of events, the process of arbitrage will move prices toward equality. Arbitrageurs will buy the lower priced position and sell the higher priced position, for an immediate profit without any future liability. The law of one price (for securities with identical payoffs) is not a process; it is 'enforced' by arbitrage.

The best description of the general ledger is that it: A) is where journal entries are first recorded. B) groups accounts into the categories that are presented in the financial statements. C) sorts the entries in the general journal by account.

Answer C. Information flows through an accounting system in four steps: 1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the "general journal." 2. The general ledger sorts the entries in the general journal by account. 3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance. 4. The account balances from the adjusted trial balance are presented in the financial statements.

Which of the following relationships between arbitrage and market efficiency is least accurate? A) The concept of rationally priced financial instruments preventing arbitrage opportunities is the basis behind the no-arbitrage principle. B) Investors acting on arbitrage opportunities help keep markets efficient. C) Market efficiency refers to the low cost of trading derivatives because of the lower expense to traders.

Answer C. Market efficiency is achieved when all relevant information is reflected in asset prices, and does not refer to the cost of trading. One necessary criterion for market efficiency is rapid adjustment of market values to new information. Arbitrage, trading on a price difference between identical assets, causes changes in demand for and supply of the assets that tends to eliminate the pricing difference.

Which of the following most accurately describes the Monetarist school of macroeconomic thought in relation to aggregate demand and aggregate supply? Monetarists believe that the money supply should be: A) increased during inflationary periods and reduced during recessionary periods. B) reduced during inflationary periods and increased during recessionary periods. C) increased by a predictable rate annually.

Answer C. Monetarists believe that to keep aggregate demand stable and growing, the central bank should follow a policy of steady and predictable increases in the money supply. Furthermore, monetarists believe that recessions are caused by inappropriate decreases in the money supply and that recessions can be persistent because money wage rates are downward sticky.

The mean and standard deviation of returns for three portfolios are listed below in percentage terms. Portfolio X: Mean 5%, standard deviation 3%. Portfolio Y: Mean 14%, standard deviation 20%. Portfolio Z: Mean 19%, standard deviation 28%. Using Roy's safety-first criteria and a threshold of 4%, select the optimal portfolio. A) Portfolio X. B) Portfolio Y. C) Portfolio Z.

Answer C. Portfolio Z has the largest value for the SFRatio: (19 − 4) / 28 = 0.5357. For Portfolio X, the SFRatio is (5 - 4) / 3 = 0.3333. For Portfolio Y, the SFRatio is (14 - 4) / 20 = 0.5000.

A market's efficiency is most likely to negatively affected by: A) substantial analyst coverage of the exchange listed companies B) a high amount of trading activity. C) a ban on short selling.

Answer C. Research supports the conclusion that short selling helps to prevent market prices from becoming overvalued, while limiting short selling has the opposite effect. More analyst coverage and more liquidity contribute to market efficiency.

David Saul, CFA, heads the trust department at Savage National Bank. Fairway Enterprises invites Saul to sit on its Board of Directors. In return for his services on the Board, Fairway offers to provide Saul and his family with access to the facilities at Wilmont Country Club at no cost. Saul will not receive any monetary compensation for his services on the Board. According to CFA Institute Standards of Professional Conduct, which of the following actions must Saul take? A) Saul must disclose in writing to Savage Bank the terms of the offer whether or not he accepts the offer to serve on the Board of Directors. B) Saul must reject the offer to serve on the Board of Directors. C) Saul must obtain written consent from all parties to only if he decides to accept the offer to serve on the Board of Directors.

Answer C. Standard IV(B) requires that members obtain written consent from all parties involved before accepting monetary compensation or other benefits that they receive for their services that are in addition to compensation or benefits conferred by a member's employer. In this situation, Saul may also be obligated to disclose his participation on Fairway's Board to clients, prospective clients, and employer under Standard VI(A), Disclosure of Conflicts.

Consider a put option on Deter, Inc., with an exercise price of $45. The current stock price of Deter is $52. What is the intrinsic value of the put option, and is the put option at-the-money or out-of-the-money? Intrinsic Value Moneyness A)$7 At-the-money B)$7 Out-of-the-money C)$0 Out-of-the-money

Answer C. The option has an intrinsic value of $0, because the stock price is above the exercise price. Put value is MAX (0, X-S). Equivalently, the option is out-of-the-money.

After a very successful quarter of high investment returns, Judy O'Berry, CFA, receives several gifts from grateful clients. O'Berry considers the gifts to be of novelty or sentimental value only, but she hears rumors that several junior employees are jealous of the attention she received for the group's efforts. She decides to consult the company's compliance rules on gifts and is surprised to learn her firm has no established rules. She consults the Standards of Practice Handbook, and then submits proposed rules on gifts to her company's compliance department. These rules should contain all of the following EXCEPT: A) a requirement to disclose the gift. B) a formal value limit based on local customs. C) restrictions on all types business entertainment.

Answer C. The rules should contain a formal value limit based on local customs. Not all types of business entertainment are forbidden. Only business entertainment which is intended to influence or reward members and candidates should be avoided.

The form of regional trading agreement (RTA) least likely to have the unintended negative effect of reducing a member country's low-cost imports from a non-member country is a: A) customs union. B) common market. C) free trade area.

Answer C. A free trade area removes barriers to trade among its members but does not require any of its members to change their trade policies with non-members. A common market and a customs union both impose uniformity on trade rules with non-member nations, which could restrict a member's low-cost imports from a nation that is not a member.

In a perfectly competitive market, what determines the price of the product? A) The members of the supply chain. B) The producers of the product. C) Market supply and demand.

Answer C. Individual firms in perfect competition have no influence over market price. They are price takers who must sell at the prevailing market price. If they set their price higher than the market, they will sell nothing.

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 12%? A) $927.90. B) $1,075.82. C) $1,077.22

B) $1,075.82. FV = 1,000 N = 5 I = 10 PMT = 120 CPT = ? PV = 1,075.82.

What is the value of a stock that paid a $0.25 dividend last year, if dividends are expected to grow at a rate of 6% forever? Assume that the risk-free rate is 5%, the expected return on the market is 10%, and the stock's beta is 0.5. A) $16.67. B) $17.67. C) $3.53.

B) $17.67. The discount rate is ke = 0.05 + 0.5(0.10 − 0.05) = 0.075. Use the infinite period dividend discount model to value the stock. The stock value = D1 / (ke - g) = (0.25 × 1.06) / (0.075 - 0.06) = $17.67.