CFAI Level I Mock A
Which of the following is least likely to be of concern to values-based ESG investors? A. Avoidance of companies that conflict with moral values B. Reduction in risks associated with increased litigation costs C. Increase in risk-adjusted returns through ESG factor ranking
A. Avoidance of companies that conflict with moral values A is correct. The objective of a values-based ESG approach is to mitigate risks and identify opportunities by analyzing ESG considerations in addition to traditional finance metrics. Avoidance of companies that conflict with moral or ethical values reflects a values-based approach. B and C are incorrect. The objective of a values-based ESG approach is to mitigate risks and identify opportunities by analyzing ESG considerations in addition to traditional finance metrics.
Which of the following is most likely considered an example of matrix pricing when determining the cost of debt? A. Debt-rating approach only. B. Yield-to-maturity approach only. C. Both the yield-to-maturity and the debt-rating approaches.
A. Debt-rating approach only. A is correct. The debt-rating approach is an example of matrix pricing. B is incorrect because the yield-to-maturity approach is not an example of matrix pricing. C is incorrect because the yield-to-maturity approach is not an example of matrix pricing.
Which of the following is least likely sufficient to meet recommended or required procedures for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care? A. Disclose any existing conflicts of interest. B. Establish a regular client meeting schedule. C. Seek best execution when trading on behalf of clients.
A. Disclose any existing conflicts of interest. A is correct. Disclosing any existing conflict of interest is least likely adequate to comply with the recommended or required procedure for compliance with CFA Institute Standard III(A): Loyalty, Prudence, and Care. The recommended procedure for compliance states that members and candidates must disclose all actual and potential conflicts of interest so that clients can evaluate those conflicts.
Under IFRS, dividends received are least likely classified as which type of cash flow on the cash flow statement? A. Financing B. Operating C. Investing
A. Financing
An investor wants to determine the intrinsic value of the common stock for a company with the following characteristics: ● The firm maintains a constant dividend payout ratio. ● Goodwill and patents account for a high proportion of the firm's assets. ● The firm's revenues and earnings are highly correlated with the business cycle. Furthermore, the investor focuses on the firm's capacity to pay dividends rather than expected dividends. Considering the characteristics, the investor will most likely use which of the following valuation models? A. Free cash flow to equity model B. Gordon dividend growth model C. Asset-based valuation model
A. Free cash flow to equity model A is correct. The free cash flow to equity (FCFE) model is a measure of the firm's dividendpaying capacity, which should be reflected in the cash flow estimates rather than expected dividends. Analysts must make projections of financials to forecast future FCFE, and thus the constant growth assumption, as in the Gordon growth model, is not an issue. An asset-based valuation model is not appropriate because of the high proportion of intangibles (goodwill and patents) in the firm's assets.
A small-cap growth fund's monthly returns for the past 36 months have been consistently outperforming its benchmark. An analyst is determining whether the standard deviation of monthly returns is greater than 6%. Which of the following best describes the hypothesis to be tested? A. H 0: σ2 ≤ 0.36% B. Ha : σ2 > 6% C. H0 : σ2 ≥ 0.36%
A. H 0: σ2 ≤ 0.36% A is correct. This is a one-tailed hypothesis testing with a "greater than" alternative hypothesis. A squared standard deviation is being used to obtain a test of variance. The hypotheses are H 0: σ2 ≤ 0.36% versus Ha : σ2 > 0.36%.
Based on his superior return history, Vijay Gupta, CFA, is interviewed by the First Faithful Church to manage the church's voluntary retirement plan's equity portfolio. Each church staff member chooses whether to opt in or out of the retirement plan according to his or her own investment objectives. The plan trustees tell Gupta that stocks of companies involved in the sale of alcohol, tobacco, gambling, or firearms are not acceptable investments given the objectives and constraints of the portfolio. Gupta tells the trustees he cannot reasonably execute his strategy with these restrictions and that all his other accounts hold shares of companies involved in these businesses because he believes they have the highest alpha. By agreeing to manage the account according to the trustees' wishes, does Gupta violate the CFA Institute Standards of Professional Conduct? A. No. B. Yes, because the manager was hired based upon his previous investment strategy. C. Yes, because the restrictions provided by the Trustees are not in the best interest of the members.
A. No. A is correct. Standard III(A)-Loyalty, Prudence, and Care, Gupta's duty of loyalty, prudence, and care is owed to the participants and beneficiaries (members) of the pension plan. As a church plan, the restrictions are appropriate given the objectives and constraints of the portfolio.
Under US GAAP, interest paid is most likely included in which of the following cash flow activities? A. Operating only B. Financing only C. Either operating or financing
A. Operating only
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? A. Putable preference shares B. Common shares C. Callable preference shares
A. Putable preference shares A is correct. 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.
Assuming its trading partner does not retaliate, which of the following conditions must hold in order for a large country to increase its national welfare by imposing a tariff? A. The deadweight loss must be smaller than the benefit of its improving terms of trade. B. It must auction the import licenses for a fee to offset the decline in the consumer surplus. C. It must have a comparative advantage in the production of the imported good.
A. The deadweight loss must be smaller than the benefit of its improving terms of trade. A is correct. The large country is able to cause the foreign exporter to reduce price in order to retain market share. In the large country, domestic producers gain from higher volume and the government gains from collecting the tariff. The sum of these two gains must exceed the deadweight loss to domestic consumers to achieve a national welfare gain. The change in terms of trade causes income redistribution from the foreign exporter to the domestic producer. B is incorrect. An import license relates to a quota, not a tariff. C is incorrect. If the large country had a comparative advantage, it would be exporting more than importing. This is not relevant to whether there is a net domestic gain from the tariff. The tariff hurts domestic consumers. Unless the gain from the tariff exceeds the loss to consumers, national welfare will decrease.
When parties exchange fixed cash payments for payments that depend on the returns to a stock or a stock index, they are purchasing a(n): A. equity swap. B. index fund. C. stock option.
A. equity swap. B is incorrect. The payments depend on the returns to a stock or a stock index, but an index fund has not been directly purchased. C is incorrect. An option contract allows the holder (the purchaser) of the option to buy or sell an underlying instrument at a specified price at or before a specified date in the future.
The year-end balances in a company's last-in, first-out (LIFO) reserve are $56.8 million as reported in the company's financial statements for both 2013 and 2014. For 2014, the measure that will most likely be the same regardless of whether the company uses the LIFO or the first-in, first-out (FIFO) inventory method is the: A. gross profit margin. B. amount of working capital. C. inventory turnover.
A. gross profit margin. A is correct. The LIFO reserve did not change from 2013 to 2014. With no change in the LIFO reserve, cost of goods sold will be the same under both methods. Sales are always the same for both methods, so gross profit margin will be the same for 2014. The FIFO inventory will be higher because the LIFO inventory and LIFO reserve are added to compute FIFO inventory. Because the inventory balances would differ under FIFO, both inventory turnover and the amount of working capital would also differ under FIFO. B is incorrect. The FIFO inventory would be higher because the LIFO inventory and LIFO reserve are added to compute FIFO inventory. Because the inventory balances would be different under FIFO, net working capital would be different under FIFO. C is incorrect. The FIFO inventory would be higher because the LIFO inventory and LIFO reserve are added to compute FIFO inventory. Because the inventory balances would be different under FIFO, the inventory turnover would be different under FIFO.
If a firm restructures and wants to remain compliant with the GIPS standards, it should most likely: A. maintain the historical performances for all composites. B. alter the historical performances within existing composites. C. create all new composites with proper disclosures regarding the reorganization
A. maintain the historical performances for all composites. A is correct. Changes in a firm's organization must not lead to alteration of historical composite performance.
Other comprehensive income is least likely to include gains or losses on: A. the sale or disposal of discontinued operations. B. derivative contracts accounted for as hedges. C. the translation of foreign currency-denominated subsidiary financial statements.
A. the sale or disposal of discontinued operations. A is correct. Gains or losses on the disposal of discontinued operations are reported separately near the bottom of the income statement and are included in net income, not other comprehensive income.
A private equity firm sells a portfolio company to a buyer that is active in the same industry as the portfolio company. This transaction is best described as a(n): A. trade sale. B. secondary sale. C. initial public offering
A. trade sale. A is correct. A trade sale is the sale of a portfolio company to a strategic buyer, such as a company that is active in the same industry. B is incorrect. A secondary sale is a sale to another private equity firm. C is incorrect. An initial public offering involves the sale of shares to public investors.
In order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to: A. various measures of risk. B. all aspects of performance measurement. C. the unique characteristics of each asset class.
A. various measures of risk. A is correct. Historically, the GIPS standards focused primarily on returns. In the spirit of fair representation and full disclosure, and in order to provide investors with a more comprehensive view of a firm's performance, the current GIPS standards includes new provisions related to risk.
A firm with a marginal tax rate of 40% has a weighted average cost of capital of 7.11%. The before-tax cost of debt is 6%, and the cost of equity is 9%. The weight of equity in the firm's capital structure is closest to: A. 79%. B. 65%. C. 37%.
B. 65%. B is correct. WACC = (Wd)(Rd) (1 - t) + where , where (Wd) + (We) = 1 7.11 = (1 - We ) × 6 × (1 - 0.4) + We × 9 We = 65%
Which of the following statements describes the most appropriate treatment of cash flows in capital budgeting? A. Interest costs are included in the project's cash flows to reflect financing costs. B. A project is evaluated using its incremental cash flows on an after-tax basis. C. Sunk costs and externalities should not be included in the cash flow estimates.
B. A project is evaluated using its incremental cash flows on an after-tax basis.
Reiko Kimisaki, CFA, is an investment advisor for a national social security fund in a frontier market with a very limited and illiquid capital market. The labor force is young with an investment time horizon of 25 to 30 years. She has been asked to suggest ways to increase the investment return of the overall portfolio. After careful assessment of the fund's previous investment history and available asset classes, she considers investment in private equity. What is Kimisaki's lowest priority to avoid any Code of Ethics and Standards of Professional Conduct violations prior to making this investment recommendation? A. Assess the risk tolerance of the fund. B. Analyze the expected returns of private equity in the market. C. Determine if the Investment Policy Statement allows for alternative investments
B. Analyze the expected returns of private equity in the market.
When using ratios to screen for potential equity investments, analysts can most effectively control for exposure to which of the following risks? A. Regulatory B. Financial C. Technological
B. Financial B is correct. Ratio analysis provides a quick and direct way of comparing metrics addressing financial risk across a pool of companies.
Which action is most likely considered a secondary source of liquidity? A. Increasing the efficiency of cash flow management B. Renegotiating current debt contracts to lower interest payments C. Increasing the availability of bank lines of credit
B. Renegotiating current debt contracts to lower interest payments B is correct. Renegotiating debt contracts is a secondary source of liquidity because it may affect the company's operating and/or financial positions. A is incorrect. Increasing cash flow management efficiency is a primary source of liquidity. C is incorrect. Increasing bank lines of credit is a primary source of liquidity.
What is the most likely reason why arbitrage will not completely eliminate all pricing discrepancies for derivatives? A. Differences in risk aversion B. Transaction costs C. Inaccurate forecasts
B. Transaction costs B is correct. Transaction costs may render an arbitrage strategy unprofitable and can therefore prevent precise convergence of prices.
When considering the long-run aggregate supply curve, the long run is best described as the time required for which of the following combinations of items to become variable? A. Wages and prices B. Wages, prices, and expectations C. Wages, prices, expectations, and physical capital
B. Wages, prices, and expectations B is correct. The long-run aggregate supply curve represents the level of domestic output that companies will produce at each price level. "Long run" is defined as the time required for wages, prices, and expectations to adjust but not long enough for physical capital to become a variable input: Capital and available technology to use that capital remain fixed.
Ken Kawasaki, CFA, shares a building with a number of other professionals who are also involved in the investment management business. Kawasaki makes arrangements with several of these professionals, including accountants and lawyers, to refer clients to each other. An informal score is kept on the expectation the referrals will equal out over time, eliminating the need for any cash payments. Kawasaki never mentions this arrangement to clients or prospective clients. Does Kawasaki's agreement with the other building occupants most likely violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, related to referral fees. C. Yes, related to communication with clients.
B. Yes, related to referral fees. B is correct because Standard VI(C) requires disclosure of any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services. Even without cash changing hands the arrangement provides for a quid pro quo referral of clients and should be disclosed. A is incorrect because Kawasaki has violated the Standards. C is incorrect because this Standard has not been violated as it relates to disclosure to clients of the general principles of the investment process used and not disclosure of any compensation, consideration, or benefit received from or paid to others for the recommendation of products or services as Standard VI(C) requires.
A sovereign bond will most likely be: A. issued in the local currency. B. backed by the issuer's taxing authority. C. virtually free of credit risk when issued
B. backed by the issuer's taxing authority. B is correct. The term sovereign bond refers to a debt security issued by a national government with taxing authority. These bonds are typically unsecured and backed by the government's ability to tax.
A credit analyst is most likely to place more focus on: A. operating leverage than financial leverage. B. cash flows than accrual income. C. upside potential than downside risk.
B. cash flows than accrual income.
In order to maintain an adequate net daily cash position, a company is least likely to: A. monitor access to borrowing facilities. B. forecast depreciation and accruals. C. predict the business cycles and seasonal effects.
B. forecast depreciation and accruals. B is correct. Accruals are paid at a later date, and depreciation is a noncash expense.
When constructing a list of peer companies to be used in equity valuation, which of the following would least likely improve the group? Companies in the same peer group should ideally: A. be exposed to similar stages in the business cycle. B. have similar valuations. C. have the effects of finance subsidiaries minimized.
B. have similar valuations. B is correct. Companies in the same peer group can have different valuations depending on structure and competitiveness.
Under IFRS, the costs incurred in the issuance of bonds are most likely: A. expensed when incurred. B. included in the measurement of the bond liability. C. deferred as an asset and amortized on a straight-line basis.
B. included in the measurement of the bond liability. B is correct. Under IFRS, debt issuance costs are included in the measurement of the bond liability. A is incorrect. Under both US GAAP and IFRS, they are not expensed. C is incorrect. This is US GAAP.
Which statement about the Ricardian model of trade is most accurate? The model: A. allows for a redistribution of income through trade. B. incorporates the benefit of technology in labor productivity. C. predicts that a country with abundant labor resources relative to capital will likely export labor-intensive goods and import capital-intensive goods.
B. incorporates the benefit of technology in labor productivity. B is correct. In the Ricardian model of trade, labor is the only input and the benefit of technology is reflected in labor productivity
Relative to spot markets, one key feature of derivatives markets is: A. high transaction costs. B. low capital requirements. C. restrictions on short selling
B. low capital requirements.
An income statement in a single-step format presents a subtotal for: A. amortization of intangibles. B. operating income. C. gross margin.
B. operating income. B is correct. Single-step income statements present a subtotal for operating income. A is incorrect because income statements in single-step format do not present a subtotal for amortization of intangibles. C is incorrect because income statements in single-step format do not present a subtotal for gross margin. When an income statement shows a gross profit subtotal, it is said to use a multi-step format rather than a single-step format.
The post-audit performed as part of the capital budgeting process is least likely to include the: A. provision of future investment ideas. B. rescheduling and prioritizing of projects. C. indication of systematic errors
B. rescheduling and prioritizing of projects. B is correct. Rescheduling and prioritizing projects is part of the planning stage of the capital budgeting process, not the post-audit. The post-audit's purpose is to explain any differences between the actual and predicted results of a capital budgeting project. This process can aid in indicating systematic errors, improve business operations, and provide concrete ideas for future investment opportunities.
All else being equal and ignoring tax effects, compared with using the straightline method of depreciation, the use of an accelerated method of depreciation in the early years of an asset's life would most likely result in a decrease in the firm's: A. asset turnover ratio. B. shareholders' equity C. cash flow from operations.
B. shareholders' equity B is correct. An accelerated method of deprecation produces greater expenses in the early years and lowers net income, which in turn lowers the retained earnings, resulting in a decrease in shareholders' equity.
A variable is normally distributed with a mean of 5.00 and a variance of 4.00. Using the excerpt above from the cumulative distribution function for the standard normal random variable table, the probability of observing a value of −0.40 or less is closest to: A. 2.44%. B. 8.85%. C. 0.35%.
C. 0.35%. C is correct. First the outcome of interest, −0.40, is standardized for the given normal distribution: Z = (X − μ)/σ = (−0.40 − 5.00)/2 = −2.70 Then use the table to find the probability of a Z value being 2.70 standard deviations below the mean (i.e., when z ≤ 0). The value is 1 − P(Z ≤ +2.70). In this problem, the solution is: 1 − 0.9965 = 0.0035 = 0.35%.
For which of the following assets is it most appropriate to test for impairment at least annually? A. Land B. A patent with a legal life of 20 years C. A trademark with an indefinite expected life
C. A trademark with an indefinite expected life C is correct. Intangible assets with indefinite lives need to be tested for impairment at least annually. Property, plant, and equipment (including land) and intangibles with finite lives are only tested if there has been a significant change or other indication of impairment.
Under International Financial Reporting Standards (IFRS), which of the following is most likely one of the general features underlying the preparation of financial statements? A. Understandability B. Timeliness C. Consistency
C. Consistency
A man earns $3,000 per month and allocates $300/month for bus travel to visit his children three times per month. The bus company lowers the cost such that he can now take four trips a month for $320, which he decides to do. His decision to visit his children more often is most likely due to which economic effect? A. Income effect alone B. Substitution effect alone C. Income and substitution effects combined
C. Income and substitution effects combined C is correct. The increase in travel is a result of both the income and the substitution effects. His earnings of $3,000/month have not changed, but because the price has fallen, if he continued to take three trips a month, he would have extra income available. This increase in purchasing power, or real income, is the income effect. The substitution effect is when a consumer buys more of a good when the price falls, as this consumer does by taking four trips instead of three and now allocating more of his budget to bus travel.
The weighted average number of years to receipt of the principal and interest payments that will result in realization of the initial market discount rate on a bond is best described as: A. effective duration. B. modified duration. C. Macaulay duration
C. Macaulay duration
Merchant Capital Partners, a regional investment bank, acts as a market maker for Vital Link Health Services and other small firms listed on an over-thecounter exchange. For those shares for whom Merchant acts as market maker, it trades for its own book as well as engaging in risk arbitrage trading. Merchant allows staff members to trade in shares once clients and the company have traded. Merchant recently obtained material nonpublic information regarding Vital's planned reverse takeover of a publicly listed competitor. In order to be in compliance with the CFA Institute Code and Standards, which type of trading in Vital shares should Merchant least likely suspend? A. Personal B. Risk arbitrage C. Passive proprietary
C. Passive proprietary C is correct because according to Standard II(A)-Material Nonpublic Information, Recommended Procedures for Compliance, if Merchant stopped market making, a form of proprietary trading, due to being in possession of material nonpublic information, it could tip off investors that Vital is likely to be making a major announcement in the near future. This would be counterproductive to the goals of maintaining the confidentiality of information and providing market liquidity. The Standard recommends that market makers remain passive when in possession of material nonpublic information. The Standard also requires personal trading to be suspended when in possession of material nonpublic information, and it is prudent to suspend arbitrage trading to prevent profits from insider trading.
Common-size financial statements are most likely a component of which step in the financial analysis framework? A. Collect data B. Analyze/interpret data C. Process data
C. Process data
When the market rate of interest falls after issuance, a company selecting the fair value option for reporting a liability with a fixed coupon rate will report: A. no change. B. a gain. C. a loss.
C. a loss. C is correct. A company selecting the fair value option for a liability with a fixed coupon rate will report a loss when market interest rates decrease.
Which of the following is least likely to be a type of embedded option in a bond issue granted to bondholders? The right to: A. put the issue. B. convert the issue. C. call the issue.
C. call the issue.
An inventory system that reduces average inventory without affecting sales will most likely reduce the: A. quick ratio. B. inventory turnover. C. cash conversion cycle.
C. cash conversion cycle.
The most appropriate statement about financial ratio analysis is that it has limited use as an analytical tool for: A. providing insights into microeconomic relationships within a company that help analysts project earnings. B. evaluating management. C. comparing companies that use different accounting methods.
C. comparing companies that use different accounting methods.
Which statement best describes the early exercise of non-dividend paying American options? Early exercise may be advantageous for: A. both deep-in-the-money calls and deep-in-the-money puts. B. deep-in-the-money calls. C. deep-in-the-money puts.
C. deep-in-the-money puts. C is correct. Only deep-in-the-money put options may be exercised early. The price cannot fall below zero, so the additional upside of such an option is limited. A is incorrect. Being deep in the money is no reason for an early exercise of call options because there are no theoretical limits to further price increases. B is incorrect. Being deep in the money is no reason for an early exercise of call options because there are no theoretical limits to further price increases.
Which of the following statements is most accurate about the responsibilities of an auditor for a publicly traded firm in the United States? The auditor must: A. state that the financial statements are prepared according to generally accepted accounting principles. B. ensure that the financial statements are free from error, fraud, or illegal acts. C. express an opinion about the effectiveness of the company's internal control systems.
C. express an opinion about the effectiveness of the company's internal control systems. C is correct. For a publicly traded firm in the United States, the auditor must express an opinion as to whether the company's internal control system is in accordance with the Public Accounting Oversight Board, under the Sarbanes-Oxley Act. The opinion is given either in a final paragraph in the auditor's report or as a separate opinion.
Both monetary and fiscal policies can most likely be used by a government to: A. redistribute income and wealth. B. affect the level of interest rates. C. influence the level of economic activity.
C. influence the level of economic activity. C is correct. Both monetary and fiscal policies are used to regulate economic activity over time. A is incorrect. Only fiscal policy can be used to redistribute income and wealth. B is incorrect. Only monetary policy can be used to affect the level of interest rates
A corporation issues five-year fixed-rate bonds. Its treasurer expects interest rates to decline for all maturities for at least the next year. She enters into a one-year agreement with a bank to receive quarterly fixed-rate payments and to make payments based on floating rates benchmarked on three-month Libor. This agreement is best described as a: A. futures contract. B. forward contract. C. swap.
C. swap. C is correct. A swap is a series of forward payments. Specifically, a swap is an agreement between two parties to exchange a series of future cash flows. The corporation receives fixed interest rate payments and makes variable interest rate payments. Given that the contract is for one year and the floating rate is based on three-month Libor, at least four payments will be made during the year. A is incorrect. A forward contract includes one payment only. The swap described has a series of four quarterly payments. B is incorrect. The instrument described is a swap.
The behavioral bias in which investors tend to avoid realizing losses but rather seek to realize gains is best described as: A. mental accounting. B. the gambler's fallacy. C. the disposition effect.
C. the disposition effect. C is correct. Behavioral biases in which investors tend to avoid realizing losses but rather seek to realize gains is the disposition effect The gambler's fallacy is a behavioral bias in which recent outcomes affect investors' estimates of future probabilities.
Based on the elasticities approach, a country can implement an exchange rate policy to improve its trade balance most effectively if it imports and exports products: A. that are consumer necessities. B. with no good substitute. C. traded in competitive markets.
C. traded in competitive markets. C is correct. In the elasticities approach, changes in exchange rate policy will be a more effective mechanism for trade balance adjustment if a country imports and exports products that trade in competitive markets, with good substitutes, and luxury products rather than necessities.
During the lockout period for a non-amortizing asset-backed security, the principal payment of €100 million on a €1 billion face value issue will result in the security having a total face value of: A. €0.9 billion. B. €1.1 billion. C. €1.0 billion
C. €1.0 billion C is correct. During the lockout period any principal received is reinvested to acquire additional loans with a principal equal to the total principal received from the cash flow keeping the face value of the issue at €1 billion.
