Full Mock Test

The advantages to an investor owning convertible preference shares of a company most likely include: less price volatility than the underlying common shares. an opportunity to receive additional dividends if the company's profits exceed a pre-specified level. preference dividends that are fixed contractual obligations of the company.

A Convertible preference shares tend to exhibit less price volatility than the underlying common shares because the dividend payments are known and more stable.

Cost-push inflation is least likely to be affected by an increase in: finished goods prices. commodity prices. employee wages.

A Cost-push inflation arises due to increases in costs associated with production: wages and raw materials prices. "Understanding Business Cycles," Section 4.2.4.1

Norman Bosno, CFA, acts as an outside portfolio manager to a sovereign wealth fund. Raphael Palmeti, a fund official, approaches Bosno to interest him in investing in Starlite Construction Company. He tells Bosno that if he approves a $2 million investment in Starlite by the fund, Bosno will receive a "bonus" that will make him wealthy. Palmeti also adds that if Bosno decides not to invest, he will lose the fund account. After doing a quick and simple analysis, Bosno determines the investment is too risky for the fund. If Bosno agrees to make the investment, which of the Standards of Professional Conduct is least likely to be violated? Diligence and Reasonable Basis Additional Compensation Arrangements Loyalty, Prudence, and Care

A Despite Bosno undertaking a quick and simple analysis to determine that the investment would be too risky for the sovereign wealth fund, that analysis does not necessarily mean he was not diligent and did not have a reasonable basis for making that determination.

Which of the following statements is least likely an advantage of investing in hedge funds through a fund of funds? Fund of funds provide: an increase in expected return through diversification. expertise in conducting due diligence. smaller investors with access to hedge funds.

A Diversification results in risk reduction, not return enhancement. Furthermore, the fees charged by the fund of funds manager will likely reduce returns relative to direct hedge fund investment.

Which of the following statements is the most appropriate treatment of flotation costs for capital budgeting purposes? Flotation costs should be: deducted as one of the project's initial-period cash flows. expensed in the current period. incorporated into the estimated cost of capital.

A Flotation costs are an additional cost of the project and should be incorporated as an adjustment to the initial-period cash flows in the valuation computation.

If the distribution of the population from which samples of size n are drawn is positively skewed and given that the sample size, n, is large, the sampling distribution of the sample means is most likely to have a: distribution that is approximately normal. mean smaller than the mean of the entire population. variance equal to that of the entire population.

A Given a population that has a finite variance and a large sample size, the central limit theorem establishes that the sampling distribution of sample means will be approximately normal, will have a mean equal to the population mean, and will have a variance equal to the population variance divided by the sample size.

After the public announcement of the merger of two firms, an investor makes abnormal returns by going long on the target firm and short on the acquiring firm. This most likely violates which form of market efficiency? Semi-strong and strong forms Weak and semi-strong forms Semi-strong form only

A In a semi-strong efficient market, prices adjust quickly and accurately to new information. In this case, prices would quickly adjust to the merger announcement, and if the market is a semi-strong efficient market, investors acting after the merger announcement would not be able to earn abnormal returns. Therefore, the market is not semi-strong-form efficient. A market that is not semi-strong-form efficient is also not strong-form efficient. Thus, violating the semi-strong-form efficiency also implies violating the strong-form efficiency. However, the market could still be weak-form efficient because past prices are not being used to make abnormal profits. Thus, we cannot say that the weak-form market efficiency has been violated.

A company has an equity beta of 1.4 and is 60% funded with debt. Assuming a tax rate of 35%, the company's asset beta is closest to: 0.71. 1.01. 0.98.

A Note: 60% debt financing is equivalent to a debt-to-equity ratio of 1.50 = 0.60/(1 - 0.60). βAsset = βEQ × {1/[1 + (1 - t)D/E)]} = 1.4/[1 + (1 - 0.35) × 1.5] = 0.7089.

Delaney O'Keefe, a CFA candidate, is a portfolio manager at Bahati Management Company. The company is considering investing offshore for the first time, particularly in North America, on behalf of its clientele, who are all high-net-worth individuals. O'Keefe does not have experience in offshore investments, so she hires Mark Carlson, CFA, of Carlson Consulting, on the sole basis that he is a CFA charterholder, to undertake due diligence exercises on the top 10 portfolio managers in North America, ranked by assets under management (AUM). To avoid violating any Code and Standards, O'Keefe should most likely undertake: a due diligence exercise on Mark Carlson and Carlson Consulting. the due diligence exercise on the top 10 asset managers herself. a sampling of the suitability of North America for her clients.

A O'Keefe can delegate a due diligence exercise to a third party but must ensure the person or company hired to do so is competent and has the skills necessary to undertake a thorough and appropriate analysis. Although Carlson may be qualified to undertake this assignment, O'Keefe needs to take the necessary steps to ensure that he is indeed qualified. Just because a person is a CFA charterholder does not necessarily mean he or she is appropriate for the assignment.

The process of securitization is least likely to allow banks to: repackage loans into simpler structures. reduce the layers between borrowers and ultimate investors. originate loans.

A Securitization allows banks to originate (or create) loans and the process results in a reduction in the layers between borrowers and ultimate investors. The loans are repackaged into more complex, not simpler, structures.

If a company chooses to capitalize an expenditure related to capital assets instead of expensing it, ignoring taxes, the company will most likely report: the same free cash flow to the firm (FCFF) in that period. a higher earnings per share in future periods. a lower cash flow per share in that period.

A The FCFF [Cash flow from operations (CFO) + Interest × (1- t) - Capital expenditures] would be the same. CFO and capital expenditures would both increase by the same amount (ignoring taxes). Therefore, net effect on FCFF would be zero.

Metric ($ millions) Total assets 145 Total revenues 282 Total expenses 241 Research & development expenses 12 Under a common-size analysis, the value used for research & development expenses is closest to: 4.2%. 8.3%. 5.0%.

A The appropriate base for a common-size income statement is revenue. As such, the value used for research & development expenses is $12 million÷$282 million x 100 = 4.25%.

Which characteristic is a firm least likely to exhibit when it operates in a market with a downward sloping demand curve, many competitors, and zero economic profits in the long run? No pricing power Differentiated product Low barriers to entry

A The characteristics of monopolistic competition include a large number of competitors, low pricing power, and the production of differentiated products (through advertising and other non-price strategies), but these still result in some pricing power. The ease of entry results in zero economic profits in the long run.

A long-term bond investor with an investment horizon of 8 years invests in option-free, fixed-rate bonds with a Macaulay duration of 10.5. The investor most likely currently has a: positive duration gap and is currently exposed to the risk of higher interest rates. negative duration gap and is currently exposed to the risk of higher interest rates. positive duration gap and is currently exposed to the risk of lower interest rates.

A The duration gap is the bond's Macaulay duration minus the investment horizon, which is positive in this case. A positive duration gap implies that the investor is currently exposed to the risk of higher interest rates.

A household has a total monthly budget of $110 to spend on chicken and lamb. Per kilogram, the price of chicken is $7.50 and the price of lamb is $10. The quantity of chicken consumed is 35% less than that for lamb. The quantity of chicken (in kilograms) consumed by the household in a month is closest to: 4.8 kg. 2.6 kg. 5.1 kg.

A The formula for the budget constraint is given by: Pchicken × Qchicken + Plamb × Qlamb = Income 7.5 × 0.65Qlamb + 10 × Qlamb = 110 14.875 × Qlamb = 110 Qlamb = 7.39 kilograms; Qchicken = 0.65Qlamb = 4.81 kilograms.

There are two forward contracts, contract 1 and contract 2, on the same underlying. The underlying makes no cash payments, does not yield any nonfinancial benefits, and does not incur any storage costs. Contract 1 expires in one year while contract 2 expires in two years. It is most likely that the price of contract 1: is less than the price of contract 2. exceeds the price of contract 2. is equal to the price of contract 2.

A The forward price is the spot price compounded at the risk-free rate over the life of the contract. Since Contract 2 has the longer life, compounding will lead to a larger value.

The per unit contribution margin for a product is $12. Assuming fixed costs of $12,000, interest costs of $3,000, and taxes of $2,000, the operating breakeven point (in units) is closest to: 1,000. 1,417. 1,250.

A The operating breakeven point is: Fixed Cost/Contributin Margin =12000/12 = 1000

The pricing of forwards and futures will most likely differ if: futures prices and interest rates are negatively correlated. futures prices and interest rates are uncorrelated. interest rates exhibit zero volatility.

A The pricing of forwards and futures will differ if futures prices and interest rates are negatively correlated. A negative correlation between futures prices and interest rates makes forwards more desirable than futures in the long position.

Which of the following statements is most accurate? Accrued expenses arise when a company incurs expenses that have not yet been paid as of the end of the accounting period. A valuation adjustment for an asset converts its historical cost to its depreciated value. Accrued revenue arises when a company receives cash prior to earning the revenue.

A The statement about accrued expenses is correct. A valuation adjustment for an asset converts its historical cost to current market value; accrued revenue arises when revenue has been earned but not yet received.

Hedge funds are least likely to have restrictions concerning: the use of derivatives. the number of investors in the fund. the withdrawal of invested funds.

A The use of derivatives is a typical feature of contemporary hedge funds.

The following information is available for a manufacturing company: $ Millions Cost of ending inventory computed using FIFO 4.3 Net realizable value 4.1 Current replacement cost 3.8 If the company is using International Financial Reporting Standards (IFRS) instead of US GAAP, its cost of goods sold (in millions) is most likely: $0.3 lower. $0.3 higher. the same.

A Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under US GAAP, market value is defined as current replacement cost and thus would be written down to its current replacement cost ($3.8 million). The smaller write-down under IFRS will reduce the amount charged to the cost of goods sold compared with US GAAP and result in a lower cost of goods sold of $0.3 million.

Which of the following statements is most accurate regarding cash flow statements? Under US GAAP, bank overdrafts should be classified as a financing cash flow. Under IFRS, the indirect method of preparation is encouraged. Under IFRS, interest paid can be reported either as an operating or as an investing cash flow.

A Under US GAAP, bank overdrafts are not considered part of cash and cash equivalents and are classified as financing cash flows.

In Elliott Wave Theory, Wave 2 commonly exhibits a pattern best described as a(n): Fibonacci ratio percentage retracement composed of three smaller waves. uptrend moving above the high of Wave 1 and consisting of five smaller waves. basing pattern consisting of five smaller waves.

A Wave 2 is a correction, retracing much of the gain from Wave 1, but not all of it. The lost proportion is usually a percentage equal to a Fibonacci ratio, and it consists of three smaller waves.

A company is purchasing a customer list that it expects will provide economic benefits for the next 5 years. The company chooses to use an accelerated amortization method. The choice will most likely result in: the highest amortization expense in the first year. an equal amortization expense in all 5 years. the highest amortization expense in the fifth year.

A With accelerated amortization, first year amortization expense should be the highest.

Consider bonds that have the same yield to maturity and maturity. The bond with the greatest reinvestment risk is most likely the one selling at: a premium. par. a discount.

A Yield to maturity is based on the assumption that a bond is held to maturity, does not default, and has its coupon payments reinvested at the yield to maturity. The bond selling at a premium has the highest coupon rate and is expected to earn the most reinvestment income from reinvesting those coupon payments at the yield to maturity. If the reinvestment rate falls, this bond will suffer the greatest loss.

Which of the following is least likely a requirement of the GIPS standards? Firms are required to: have their performance records verified by an independent third party. present a minimum of five years of annual investment performance compliant with the GIPS standards. include all discretionary, fee-paying portfolios in at least one composite.

A t is a recommendation but not a requirement that firms obtain independent third-party verification to claim GIPS compliance. Firms are required to include all discretionary, fee-paying portfolios in at least one composite. They must also present a minimum of five years of annual investment performance compliant with the GIPS standards.

Assume that a stock's price over the next two periods is as shown below. Time = 0 S0 = 100 Time = 1 Su = 110 Sd = 92 Time = 2 Suu = 121 Sud,du = 101.20 Sdd = 84.64 The initial value of the stock is $100. The probability of an up move in any given period is 40%, and the probability of a down move in any given period is 60%. Using the binomial model, the probability that the stock's price will be $101.20 at the end of two periods is closest to: 48%. 16%. 24%.

Across two periods, there are four possibilities: an up move followed by an up move ($121.00 end value), an up move followed by a down move ($101.20 end value), a down move followed by an up move ($101.20 end value), and a down move followed by a down move ($84.64 end value). The probability of an up move followed by a down move is 0.40 × 0.60 = 0.24. The probability of a down move followed by an up move is 0.60 ×0.40, which also = 0.24. Both of these sequences result in an end value of $101.20. Therefore, the probability of an end value of $101.20 is 48%. Alternatively, the following formula could be used:

The unit contribution margin for a product is $20. A firm's fixed costs of production up to 300,000 units is $500,000. The degree of operating leverage (DOL) is most likely the lowest at which of the following production levels (in units): 100,000. 300,000. 200,000.

B DOL = Qty x Cont Margin/Qty x Cont Margin - Fixed Cost. Calculate all productions levels and 300,000 unit has a DOL of 1.091, which is the lowest. The DOL is lowest at the 300,000 unit production level.

Which of the following is most likely considered an example of matrix pricing when determining the cost of debt? Both the yield-to-maturity and the debt-rating approaches. Debt-rating approach only. Yield-to-maturity approach only.

B The debt-rating approach is an example of matrix pricing.

The following information is available for a company: · Bonds are priced at par and have an annual coupon rate of 9.2%. · Preferred stock is priced at $8.18 and pays an annual dividend of $1.35. · Common equity has a beta of 1.3. · The risk-free rate is 4% and the market premium is 11%. · Capital structure: Debt = 30%; Preferred stock = 15%; Common equity = 55%. · The tax rate is 35%. The weighted average cost of capital (WACC) for the company is closest to: 13.4%. 14.3%. 11.5%.

B 14.3

Jiro Sato, CFA, deputy treasurer for May College, manages the Student Scholarship Trust. Sato issued a request for proposal (RFP) for domestic equity managers. Pamela Peters, CFA, a good friend of Sato, introduces him to representatives from Capital Investments, which submitted a proposal. Sato selected Capital as a manager based on the firm's excellent performance record. Shortly after the selection, Peters, who had outstanding performance as an equity manager with another firm, accepted a lucrative job with Capital. Which of the CFA charterholders violated the CFA Institute Standards of Professional Conduct? Peters Neither Both

B Members should use reasonable care and judgment to maintain independence and objectivity, as stated in Standard I (B). There is no indication of inappropriate behavior in the selection of the equity manager or in the acceptance of employment with that manager; both decisions were based on the excellent performance records of the manager and the member, respectively.

Equity return distributions are best described as being: mesokurtotic. leptokurtotic. platykurtotic.

B Most equity return distributions are best described as being leptokurtotic (i.e., more peaked than normal).

The following data are available on a company: Company Stock price per share $60.75 Comprehensive income (millions) $193.0 Other comprehensive income (millions) $87.6 Common shares outstanding (millions) $46.5 On a net income basis, the company's P/E is closest to: 10.1. 26.8. 14.6.

B Net income = Comprehensive income - Other comprehensive income $193.0 - $87.6 =$105.4 million Net income per share (EPS) = Net income/Common shares outstanding $105.4/46.5 = $2.27 million P/E = Stock price/EPS $60.75/$2.27 = 26.76

If the probability for an event Z is 14% (i.e., P(Z) = 14%), the odds for Z are closest to: 0.071. 0.163. 0.123.

B Odds are calculated as P(Z)/[1 - P(Z)]. In this problem, 0.14/0.86 = 0.16279 ~ 0.163.

A company has initiated the process of selling unproductive land, representing 5% of its total assets, and using the proceeds to buy back its common shares. Holding other factors constant, these actions by the company will most likely result in a: lower sustainable growth. higher return on equity. higher operating margin.

B Share buyback reduces equity, holding other factors (e.g., earnings) constant, thus return on equity will be higher.

In order to achieve compliance with GIPS Standards, it is recommended that firms: define the firm by including all geographical offices operating under the same firm name. adopt the broadest, most meaningful definition of the firm. provide existing clients a compliant presentation applicable to their portfolio, at a minimum of a bi-annual basis.

B The Fundamentals of Compliance recommend firms should adopt the broadest, most meaningful definition of the firm.

Which of the following reports is least likely to be filed with the US SEC? Proxy statement Annual report Form 10-K

B The annual report is not a requirement of the SEC.

Which method of calculating the firm's cost of equity is most likely to incorporate the long-run return relationship between the firm's stock and the market portfolio? Bond yield plus risk premium approach Capital asset pricing model Dividend discount model

B The capital asset pricing model uses the firm's equity beta, which is computed from a market model regression of the company's stock returns against market returns.

Assume the following annual forward rates were calculated from the yield curve. Time Period Forward Rate 0y1y 0.50% 1y1y 0.70% 2y1y 1.00% 3y1y 1.50% 4y1y 2.20% The four-year spot rate is closest to: 1.348%. 0.924%. 1.178%.

B The four-year spot rate can be computed as: Z4 = [(1.005)x(1.007)x(1.01)x(1.015)] ^1/4 - 1 = .924

Compared with its market-value-weighted counterpart, a fundamental-weighted index is least likely to have a: contrarian effect. momentum effect. value tilt.

B The momentum effect is a characteristic of a market-capitalization-weighted index, not a fundamental index.

An observation that stocks with above average price-to-earnings ratios have consistently underperformed those with below average price-to-earnings ratios least likely contradicts which form of market efficiency? Semi-strong form Weak form Strong form

B The observation that stocks with high above average price-to-earnings ratios have consistently underperformed those with below average price-to-earnings ratios is a cross-sectional anomaly. It is a contradiction to the semi-strong form of market efficiency and strong form market efficiency because all the information used to categorize stocks by their price-to-earnings ratios is publicly available. It is not a contradiction to weak form market efficiency.

Which of the following statements is least likely correct with regard to the nine major sections of the Global Investment Performance Standards (GIPS)? Firms are encouraged to adopt and implement the recommendations. To claim compliance, firms need to calculate only their performance according to GIPS requirements. All requirements must be met in order to be fully compliant with the GIPS standards.

B To claim compliance, firms must meet all GIPS requirements, not just calculate their performance according to GIPS requirements.

Using the debt-rating approach to find the cost of debt is most appropriate when market prices for a company's debt are: below par value. stable. unreliable.

C The debt-rating approach is used when the market prices for debt are unreliable or nonexistent.

A company that prepares its financial statements using International Financial Reporting Standards (IFRS) wrote down its inventory value by €20,000 at the end of Year 1. In Year 2, prices increased, and the same inventory at the end of the year was worth €30,000 more than its value at the end of the prior year. Which of the following statements is most accurate? In Year 2, the company's cost of sales: decreased by €30,000. was unaffected. decreased by €20,000.

C Under IFRS, the recovery of a previous write-down is limited to the amount of the original write-down (€20,000) and is reported as a decrease in the cost of sales.

A share repurchase method that requires existing shareholders to indicate the number of shares they will tender over a range of prices is most likely an example of a: purchase of shares on the open market. repurchase by direct negotiation. Dutch auction.

C In a Dutch auction, the company stipulates a range of acceptable prices. Shareholders indicate how many shares they will tender at the various prices.

According to put-call parity, if a fiduciary call expires in the money, the payoff is most likely equal to the: difference between the market value of the asset and the face value of the risk-free bond. face value of the risk-free bond. market value of the asset.

C A fiduciary call, defined as a long position in a call and in a risk-free bond, generates a payoff that is equal to the market value of the asset if it expires in the money.

A tree diagram is most likely used when dealing with investment problems that involve outcomes that are: unconditional at each node. independent at each node. mutually exclusive.

C A tree diagram is a diagram with branches emanating from nodes representing either mutually exclusive outcomes or mutually exclusive decisions. Mutually exclusive outcomes are dependent (the occurrence of one outcome does affect the probability of occurrence of the other outcome). In addition, outcomes at each node are conditional (the probability of an outcome is conditioned on another outcome).

Which of the following statements is most accurate with respect to rebalancing and reconstitution of security market indices? Turnover within an index results from a reconstitution but not from rebalancing. A price-weighted index requires rebalancing more than a market-capitalization-weighted index. Equal-weighted indices require frequent rebalancing.

C After an equal-weighted index is constructed and the prices of constituent securities change, the index is no longer equally weighted. Therefore, maintaining equal weights requires frequent adjustments (rebalancing) to the index.

A trader places a limit order to buy shares at a price of $49.94 with the stock trading at a market bid price of $49.49 and the bid-ask spread of 0.7%. The order will most likely be filled at: $49.49. $49.94. $49.84.

C An order is filled at the best available price, as long as this price is lower than the limit price. In this case, the best available price is the market ask price = $49.49 × (1+ 0.7%) = $49.84. Because this price is lower than the limit price of $49.94, the order will be filled at this price.

A bond with a par value of $100 matures in 10 years with a coupon of 4.5% paid semiannually; it is priced to yield 5.83% and has a modified duration of 7.81. If the yield of the bond declines by 0.25%, the approximate percentage price change for the bond is closest to: 3.91%. 0.98%. 1.95%.

C Approximate percentage price change = -[7.81 × (-0.0025)] = 0.01953 or 1.95%.

Compared with other investment asset classes, an investment in real estate is least likely to be characterized by: basic indivisibility. fixed location. homogeneity.

C Because no two properties are identical, homogeneity is not a feature of an investment in real estate.

Justin Blake, CFA, a retired portfolio manager, owns 20,000 shares of a small public company that he would like to sell because he is worried about the company's prospects. He posts messages on several internet bulletin boards. The messages read, "This stock is going up once the pending patents are released, so now is the time to buy. The stock is a buy at anything below $3. I have done some close research on these guys." According to the Standards of Practice Handbook, Blake most likely violated the Code and Standards associated with: neither Integrity of Capital Markets nor Conflicts of Interest. Integrity of Capital Markets, and Conflicts of Interest. Integrity of Capital Markets, but not Conflicts of Interest.

C Blake violated Standard II(B) regarding the Integrity of Capital Markets by engaging in a practice that is likely to artificially inflate trading volume.

Business risk most likely incorporates operating risk and: interest rate risk. financial risk. sales risk.

C Business risk is the combination of sales risk and operating risk.

In futures markets, contract performance is most likely guaranteed by: the futures exchanges. regulatory agencies. clearing houses.

C Clearing houses arrange for financial settlement of trades. In futures markets, they guarantee contract performance.

The following information (in millions) on a company is available: Cost of goods sold $500 Increase in total assets $250 Increase in total liabilities $200 Change in inventory -$30 Change in accounts payable -$25 The amount of cash (in millions) that the company paid to its suppliers is closest to: $505. $445. $495.

C Cost of goods sold $500 Minus decrease in inventory -$30 Purchases from suppliers $470 Plus decrease in accounts payable $25 Cash paid to suppliers $495

The correlation between the historical returns of Stock A and Stock B is 0.75. If the variance of Stock A is 0.16 and the variance of Stock B is 0.09, the covariance of returns of Stock A and Stock B is closest to: 0.16. 0.01. 0.09.

C Cov(A,B) = ρABσAσB = 0.75 × 0.4 × 0.3 = 0.09. "Portfolio Risk and Return: Part I," Vijay Singal Section 2.3.3

If the stated annual interest rate is 9% and the frequency of compounding is daily, the effective annual rate (EAR) is closest to: 9.86%. 9.00%. 9.42%.

C EAR = (1 + periodic interest rate)m - 1 = [1 + (0.09 / 365)]^365 - 1 = 0.094162, rounded to 9.42%.

An investor who wants to estimate the enterprise value multiple (EV/EBITDA) of a company has gathered the following data: Market value (MV) of debt $10 million Market capitalization $45 million Cash and short-term investments $2.5 million EBITDA $15 million Firm's marginal tax rate 40% The company's EV/EBITDA multiple is closest to 2.5. 5.8. 3.5.

C Enterprise Value (EV) = Market capitalization + MV of debt + MV of preferred stock - Cash and short-term investments. EV = 45 + 10 - 2.5 = 52.5; EV/EBITDA = 52.5/15 = 3.5.

Which of the following is least likely to be considered a factor of production? Unskilled labor Prefabricated components Equity capital

C Factors of production include land, labor (skilled and unskilled), capital, and materials. Capital in this context refers to physical capital.

For firms to claim compliance with the GIPS standards they most likely must: hire an independent third party to test a sample of their composites. increase the consistency and quality of the firm's compliant presentations. take responsibility for their claim of compliance and maintaining that compliance.

C Firms claiming compliance with the GIPS standards are responsible for their claim of compliance and for maintaining that compliance. That is, firms self-regulate their claim of compliance.

A 20-year $1,000 fixed-rate non-callable bond with 8% annual coupons currently sells for $1,105.94. Assuming a 30% marginal tax rate and an additional risk premium for equity relative to debt of 5%, the cost of equity using the bond-yield-plus-risk-premium approach is closest to: 13.0% 9.9% 12.0%

C First, determine the yield to maturity, which is the discount rate that sets the bond price to $1,105.94 and is equal to 7%. This calculation can be done with a financial calculator: FV = -$1,000, PV = $1,105.94, N = 20, PMT = -$80, solve for i, which will equal 7%. The bond-yield-plus-risk-premium approach is calculated by adding a risk premium to the cost of debt (i.e., the yield to maturity for the debt), making the cost of equity 12.00% (= 7% +5%).

The following information is available about a company for its current fiscal year: Accounting profit (earnings before taxes) $250,000 Taxable income $215,000 Tax rate30% Income taxes paid in year $61,200 Deferred tax liability, start of year$82,400 Deferred tax liability, end of year $90,650 The income tax expense reported on the current year's statement of earnings is closest to: $64,500. $69,450. $72,750.

C Income tax expense equals income tax payable (the tax rate multiplied by the taxable income) plus the increase in the deferred tax liabilities. (0.30 × $215,000) + ($90,650 - $82,400) = $64,500 + $8,250 = $72,750.

A portfolio manager generated a rate of return of 15.5% on a portfolio with beta of 1.2. If the risk-free rate of return is 2.5% and the market return is 11.8%, Jensen's alpha for the portfolio is closest to: 4.34%. 3.70%. 1.84%.

C Jensen's alpha = Rp - [Rf + βp(Rm - Rf)] = 0.155 - [0.025 + 1.2 × (0.118 - 0.025)] = 0.0184.

Beth Kozniak, a CFA candidate, is an independent licensed real estate broker and a well-known property investor. She is currently brokering the sale of a commercial property on behalf of a client in financial distress. If the client's building is not sold within 30 days, he will lose the building to the bank. A year earlier, another client of Kozniak's had expressed interest in purchasing this same property. However, she is unable to contact this client, and she has not discovered any other potential buyers. Given her distressed client's limited time frame, Kozniak purchases the property herself and forgoes any sales commission. Six months later, she sells the property for a nice profit to the client who had earlier expressed interest in the property. Has Kozniak most likely violated the CFA Institute Standards of Professional Conduct? Yes, she did not disclose her potential conflicts of interest to either client Yes, she profited on the real estate to the detriment of her financially stressed client No

C Kozniak does not appear to have violated any CFA Institute Standards of Professional Conduct. Because she is known in the market for investing and brokering property and both parties have worked with Kozniak in the past, both parties would know of her interests. In addition, in both cases, she acts for her own account as a primary investor, not as a broker. She buys the property for her own portfolio and then sells the property from her own portfolio. Therefore, Kozniak did not violate Standard VI(A)-Disclosure of Conflicts. When she purchased the property for her portfolio, she saved her client from losing the building to the bank and did not charge a sales commission. Because the sale of the property to her other client did not take place until six months after her purchase, and she was unable to contact the client who had earlier expressed interest prior to her purchase, she cannot be accused of violating Standard III(A)-Loyalty, Prudence, and Care with either client.

The non-controlling or minority interests found in the equity section of the balance sheet are best described as the equity interests: held by the corporation in other entities which it does not control, but has significant influence. of minority shareholders of the corporation who have significant influence, but not control. of minority shareholders in subsidiaries that have been consolidated.

C Non-controlling interests found in the equity section represent the equity interests of minority shareholders in non-wholly-owned subsidiaries that have been consolidated.

Use of a nonparametric test is most appropriate when the: population variance is unknown. distribution is symmetrical. data are given in ranks.

C Nonparametric procedures are primarily used in three situations: when the data are given in ranks, when the data do not meet distributional assumptions, or when the hypothesis being addressed does not concern a parameter.

Which of the following government interventions in market forces is most likely to cause overproduction? Price ceilings Imposing an additional per-unit tax of $1 on sellers Price floors

C Price floors lead to overproduction.

A company has issued only one class of common shares, and it does not pay dividends on them. It has also issued two types of non-cumulative preference shares: one that is putable and the other callable. Which of these securities will most likely offer the lowest expected return to the investor? Common shares Callable preference shares Putable preference shares

C Putable preference shares are less risky than their callable counterparts. They give the investor the option to put the shares back to the company. Because of the lower risk, they will provide a lower expected rate of return. Common shares are the most risky, whether or not they are dividend paying, and are likely to offer the highest expected return.

A portfolio manager decides to temporarily invest more of a portfolio in equities than the investment policy statement prescribes because he expects equities will generate a higher return than other asset classes. This decision is most likely an example of: rebalancing. strategic asset allocation. tactical asset allocation.

C Tactical asset allocation is the decision to deliberately deviate from the policy exposures to systematic risk factors with the intent to add value based on forecasts of the near-term returns of those asset classes.

In a rising interest rate environment, the effective duration of a putable bond relative to an otherwise identical non-putable bond, will most likely be: higher. the same. lower.

C When interest rates are rising, the put option becomes more valuable to the investor. The ability to sell the bond at par value limits the price depreciation as rates rise. So, the presence of an embedded put option reduces the sensitivity of the bond price to changes in interest rates, resulting in a lower effective duration.

An asset has an annual return of 19.9%, standard deviation of returns of 18.5%, and correlation with the market of 0.9. If the standard deviation of returns on the market is15.9% and the risk-free rate is 1%, the beta of this asset is closest to: 1.16 1.02. 1.05.

C β = (ρi,mσi)/σm β = (0.90 × 0.185)/0.159 β = 1.047.

On 1 January, a company that prepares its financial statements according to International Financial Reporting Standards (IFRS) arranged financing for the construction of a new plant. The company • borrowed NZ$5,000,000 at an interest rate of 8%, • issued NZ$5,000,000 of preferred shares with a cumulative dividend rate of 6%, and • temporarily invested NZ$2,000,000 of the loan proceeds during the first six months of construction and earned 7% on that amount. The amount of financing costs to be capitalized to the cost of the plant in the first year is closest to: NZ$400,000. NZ$630,000. NZ$330,000.

The interest costs can be capitalized, but under IFRS, any amounts earned by temporarily investing the funds are deducted from the capitalized amount. The costs related to the preferred shares cannot be capitalized. Capitalized Costs Interest costs 0.08 × 5,000,000 =400,000 Minus interest income 0.07 × 2,000,000 × ½ year - 70,000 Total capitalized costs =330,000

Which of the following most accurately describes how to standardize a random variable X? Subtract the mean of X from X, and then divide that result by the standard deviation of the standard normal distribution. Divide X by the difference between the standard deviation of X and the standard deviation of the standard normal distribution. Subtract the mean of X from X, and then divide that result by the standard deviation of X.

There are two steps in standardizing a random variable X: Subtract the mean of X from X, and then divide that result by the standard deviation of X. This is represented by the following formula: Z = (X - μ)/σ.

Vishal Chandarana, an unemployed research analyst, recently registered for the CFA Level I exam. After two months of intense interviewing, he accepts a job with a stock brokerage company in a different region of the country. Chandarana posts on a blog how being a CFA candidate really helped him get a job. He also notes how relieved he was when his new employer did not ask him about being fired from his former employer. Which CFA Institute Standards of Professional Conduct did Chandarana least likely violate? Reference to CFA Institute, the CFA Designation, and the CFA Program Loyalty to Employers Misconduct

A There is no evidence Chandarana violated Standard VII(B)-Reference to CFA Institute, the CFA Designation, and the CFA Program with regard to his being a CFA candidate. Specifically, Chandarana does not overstate his competency or imply he will achieve superior performance as a result of his CFA designation. It does appear, however, Chandarana did not act with integrity when he hid information that could potentially harm his new employer's reputation, thus violating Standard I(D)-Misconduct and Standard IV(A)-Loyalty.

Which of the following is least likely a short-term funding method available to banks? Syndicated loans Negotiable certificate of deposits Central bank funds

A A syndicated loan is a loan from a group of lenders, called the "syndicate," to a single borrower. Syndicated loans are primarily originated by banks, and the loans are extended to companies but also to governments and government-related entities.

Jefferson Piedmont, CFA, a portfolio manager for Park Investments, plans to manage the portfolios of several family members in exchange for a percentage of each portfolio's profits. Because his family members have extensive portfolios requiring substantial attention, they have requested that Piedmont provide the services outside of his employment with Park. Piedmont notifies his employer in writing of his prospective outside employment. Two weeks later, Piedmont begins managing the family members' portfolios. By managing these portfolios, which of the following CFA Institute Standards of Professional Conduct has Piedmont violated? Both Additional Compensation and Conflicts of Interest Additional Compensation Conflicts of Interest

A According to Standard IV(B) and Standard VI(A), members should disclose all potential conflicts of interest, should disclose the substantial time involved in managing family accounts and, when engaging in independent practice for compensation, should not render services until receiving written consent from all parties.

Relative to traditional investments, alternative investments are best characterized as having: unique legal and tax considerations. higher correlations with other asset classes. greater liquidity.

A Alternative investments are more likely characterized as having unique legal and tax considerations because of the broad range and complexity of the investments.

An expansionary fiscal policy is least likely to include an increase in: tax rates. government expenditures. budget deficit.

A An expansionary fiscal policy means that the government increases its purchases of goods and services and/or cuts tax rates to increase aggregate demand. Furthermore, an increase in the budget deficit would be associated with an expansionary fiscal policy.

Externalities, in reference to a particular good, are most likely to affect: someone other than buyers and sellers. sellers. buyers.

A An externality is a cost or benefit that affects someone other than the seller or the buyer of a good.

Under International Financial Reporting Standards (IFRS), which of the following is most likely one of the general features underlying the preparation of financial statements? Consistency Understandability Timeliness

A Consistency is one of the general features underlying the preparation of financial statements based on IFRS.

Consumer surplus is best described as: always greater than or equal to zero. at times positive and at other times negative. always less than or equal to zero.

A Consumer surplus arises when a consumer pays less for a good than the maximum price that she or he was willing to pay for it. Consumer surplus is the value (or marginal benefit) of a good minus the price paid for it, summed over the quantity bought. Because no consumer will (willingly) pay a price greater than the marginal value or benefit, consumer surplus is always positive. CFA Level I

Madeline Smith, CFA, was recently promoted to senior portfolio manager. In her new position, Smith is required to supervise three portfolio managers. Smith asks for a copy of her firm's written supervisory policies and procedures but is advised that no such policies are required by regulatory standards in the country where Smith works. According to the Standards of PracticeHandbook, Smith's most appropriate course of action would be to: require the employees she supervises to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct. decline to accept supervisory responsibility until her firm adopts procedures to allow her to adequately exercise such responsibility. require her firm to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct.

B According to guidance for Standard (IV(C), if a member cannot fulfill supervisory responsibilities because of the absence of a compliance system or because of an inadequate compliance system, the member should decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow the member to adequately exercise such responsibility.

A two-tailed test of the null hypothesis that the mean of a distribution is equal to 4.00 has a p-value of 0.0567. Using a 5% level of significance (i.e., α = 0.05), the best conclusion is to: increase the level of significance to 5.67%. fail to reject the null hypothesis. reject the null hypothesis.

B Because the p-value (0.0567) exceeds the stated level of significance (0.05), the null hypothesis cannot be rejected.

Firms with which of the following characteristics are most likely candidates for a management buyout (MBO)? Firms with high dividend payout ratios Firms with large amounts of undervalued assets Firms with low levels of cash flow

B Companies with large amounts of undervalued assets (which can be sold to reduce debt) that generate high levels of cash flow (which are used to make interest and principal payments on the debt) are likely candidates for MBO transactions.

Credit spreads are most likely to narrow during: a period of flight to quality. economic expansions. economic contractions.

B Credit spreads narrow during economic expansions and widen during economic contractions. During an economic expansion, corporate revenues and cash flows rise, making it easier for corporations to service their debt, and investors purchase corporates instead of Treasuries, thus causing spreads to narrow.

For an option-free, fixed-rate bond the coupon reinvestment risk would most likely dominate market price risk when the investment horizon is: equal to the Macaulay duration of the bond. greater than the Macaulay duration of the bond. lower than the Macaulay duration of the bond.

B For an option-free, fixed-rate bond when the investment horizon is greater than the Macaulay duration the coupon reinvestment risk will tend to dominate market price risk. In such situations, the investor's risk is to lower interest rates.

Which of the following statements best describes changes in the value of a long forward position during its life? As the time to maturity goes down, the value of the position goes up. As the price of the underlying goes up, the value of the position goes up. As interest rates go down, the value of the position goes up.

B Given the formula for the value of a forward contract: it follows that the value of the contract goes up as the price of the underlying goes up.

For a given economy and a given period of time, GDP measures the: I.aggregate income earned by all households, all companies, and the government. II.total income earned by all of the country's citizens, firms, and the government. III.total market value produced of resalable and final goods and services. The most appropriate description of what is measured by GDP is given by: I and III. I only. I and II.

B Gross domestic product (GDP) can be defined in term of either output or income: · it is the market value of all final goods and services produced within the economy in a given period of time (output definition) or, equivalently, · it is the aggregate income earned by all households, all companies, and the government within the economy in a given period of time (income definition).

Compared with investment-grade bonds, the spread movements on high-yield bonds are influenced: less by interest rate changes and exhibit a lower correlation with movements in equity markets. less by interest rate changes and exhibit a greater correlation with movements in equity markets. more by interest rate changes and exhibit a greater correlation with movements in equity markets.

B High-yield bonds can be thought of as a hybrid between investment-grade bonds and equity securities. Their spread movements are less influenced by interest rate changes than are investment-grade bonds and they exhibit greater correlation with movements in equity markets.

Sisse Brimberg, CFA, is responsible for performance presentations at her investment firm. The presentation that Brimberg uses states that her firm, when making performance presentations: 1. deducts all fees and taxes, 2. uses actual and simulated performance results, and 3. bases the performance on a representative individual account. Based on the above information, which of the following is the most appropriate recommendation to help Brimberg meet the CFA Institute Standards of Professional Conduct in her performance presentations? She should present performance based on: a gross of fee basis. a weighted composite for all similar discretionary portfolios. actual, not simulated, results.

B In order to meet their obligations under Standard III(D)-Performance Presentation, members should present the performance of the weighted composite of similar discretionary portfolios rather than using a single representative account or all accounts.

The following information applies to a hypothetical economy: Total Population 1,100 Working age population 975 Labor Force 750 Underemployed 120 Unemployed 95 Discouraged workers 80 Frictionally unemployed 25 Voluntarily unemployed 40 The unemployment rate is closest to: 16.0%. 9.7%. 12.7%.

C Unemployment rate = Unemployed/Labor Force× 100 95/750 x 100 = 12.7

Monique Gretta, CFA, is a research analyst at East West Investment Bank. Previously, Gretta worked at a mutual fund management company and has a long-standing client relationship with the managers of the funds and their institutional investors. Gretta often provides fund managers, who work for Gretta's former employer, with draft copies of her research before disseminating the information to all of the bank's clients. This practice has helped Gretta avoid several errors in her reports, and she believes it is beneficial to the bank's clients, even though they are not aware of this practice. Regarding her research, Gretta least likely violated the CFA Institute Standards of Professional Conduct because: her report is a draft. the long-standing client relationships are not disclosed. this practice benefits all clients.

C The analyst does not violate any of the Standards of Professional Conduct by having long-standing client relationships and generally is not required to disclose such relationships. However, the analyst is not treating all clients fairly as required by Standard III(B)-Fair Dealing when disseminating investment recommendations; disclosure of the relationship with long-standing clients is not the issue. The analyst has advantaged some clients over others by providing advance information, and all clients do not have a fair opportunity to act on the information within the draft report. Members and candidates may differentiate their services to clients, but different levels of service must not disadvantage or negatively affect clients.

The option-free bonds issued by ALS Corp. are currently priced at 108.50. Based on a portfolio manager's valuation model, a 1bp increase in interest rates will result in the bond price falling to 108.40, whereas a 1bp decrease in interest rates will result in the bond price rising to 108.59. The price value of a basis point (PVBP) for the bonds is closest to: 0.088. 0.190. 0.095.

C The bond's PVBP is computed using PV(-) - PV(+)/2 SO 108.59-108.40/2 = .095

The following items are from a company's cash flow statement. Classification of Cash Flow Amount (£ thousands) Operating activities: Cash received from customers 55,000 Investing activities: Interest and dividends received 10,000 Financing activities: Net repayment of revolving credit loan 12,000 Which of the following standards and formats did the company most likely use in the preparation of its financial statements? IFRS, indirect format Either IFRS or US GAAP, direct format IFRS, direct format

C The direct method of cash flow statement presentation shows the specific cash inflows and outflows that result in reported cash flow from operating activities (e.g., cash from customers and cash to suppliers). Companies using IFRS can decide to report interest and dividend receipts as either an investing or operating activity, whereas under US GAAP, they must report such income as an operating activity. The listed operating and investment activities indicate that the company reports under IFRS using the direct method.

Given two otherwise identical bonds, when interest rates rise, the price of Bond A declines more than the price of Bond B. Compared with Bond B, Bond A most likely: is callable. has a shorter maturity. has a lower coupon.

C The lower the coupon rate, the more sensitive the bond's price is to changes in interest rates.

A swap in which the investor receives a variable payment in line with market conditions and makes a fixed payment can best be replicated by purchasing a: set of long futures contracts which are matched with short forward contracts. series of forward contracts, each with an initial value of zero. floating rate bond which is financed using a fixed rate bond.

C The payment structure is replicated by being long the floating rate bond, while being short the fixed rate bond.

For which of the following inventory valuation methods is the gross profit margin least likely to be the same under both a perpetual inventory system and a periodic inventory system? FIFO Specific identification LIFO

C The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross profit margin) using both FIFO and specific identification valuation methods but not always under LIFO.

The use of estimates in financial reporting is best described as: avoidable through sophisticated accounting and auditing techniques. a factor that reduces the understandability of financial statements. acceptable despite the risk of manipulation by management.

C The use of estimates creates limitations in the accounting model because estimates provide a vehicle for manipulation by unscrupulous management. However, estimates are considered necessary to the faithful representation of the economic performace and position of a company.

For a company that prepares its financial statements under International Financial Reporting Standards (IFRS), for which of the following assets is it mostlikely that the company could report using the fair value model? A building the company owns and uses to house its administrative activities Houses built by the company for sale to customers A building owned by the company and leased out to tenants

C Under IFRS, a building owned for the purpose of earning rentals or capital appreciation—in this case, the one owned by the company and leased out to tenants—is an investment property and can be reported under either the cost model or fair value model.

What is included when calculating GDP?

GDP = Consumer spending on goods and services + Business gross fixed investment + Change in inventories + Government spending on goods and services + Government gross fixed investment + Exports - Imports + Statistical