CFA lv 1 mock Exams

Which of the following statements is most accurate? Deferred taxes may be charged directly to equity Deferred taxes must always be recognized on a company's income statement In the absence of changes in temporary differences, the carrying amounts of deferred taxes will not change

A) Companies must recognize deferred taxes on the income statement unless these are charged directly to equity or are attributable to a business combination. The carrying amounts of deferred taxes may change even if temporary differences are unchanged due to, for example, changes in tax rates or revised estimates of their recoverability.

If available, the most appropriate weight to apply to debt when calculating its issuer's weighted average cost of capital is its share of the: target capital structure. current capital structure. current capital structure, adjusted for trends.

A) If known, a company's target capital structure should be used when calculating its weighted average cost of capital. The other answer choices are alternatives that may be suitable to use if the target structure is unavailable.

From the perspective of an investor in commercial mortgage-backed securities, balloon risk can most accurately be described as a type of: extension risk. contraction risk. interest rate risk.

A) Extension risk a balloon payment exposes the investor to extension risk with the company not being able to pay

Consider the following sample: {4,5,7,7,9,9,15} The sample target semideviation, with a target of 7, is closest to: 1.5. 2.4. 3.5.

A) Target semi deviation only calculates based on what is lower than the target. so 9 9 and 15 would all be 0 sqrt of (sum of (X - Target )^2 /n-1)

Unlike economies of scale, diseconomies of scale are most likely represented by an upward-sloping: short-run marginal cost curve. long-run average total cost curve. short-run average total cost curve.

B ) Diseconomies of scale occur when the cost per unit rises as output rises. This condition is represented by a positively-sloped long-run average total cost (LRAC) curve. Upward-sloping short-run marginal cost (SMC) and short-run average total cost (SATC) curves are observed for both economies of scale and diseconomies of scale.

Stagflation is most likely to occur when there is a: leftward shift in the AD curve. leftward shift in the SRAS curve. rightward shift in the SRAS curve.

B) Stagflation (high unemployment and high prices) is most likely to occur when supply is suddenly tightened (left shift in the short run aggregate supply curve). Because there are less goods, prices increase as consumers can pay more because of the scarcity. Also, companies are producing less, so require fewer workers.

The primary objective of the World Bank is most likely to: ensure the stability of the international payment system. address poverty in countries with developing economies. provide a forum and framework for international trade negotiations.

B) The primary objective of the World Bank is to assist countries with developing economies in their efforts to eradicate poverty. The World Trade Organization serves as the forum for international trade negotiations. The International Monetary Fund seeks to ensure the stability of the international payments system.

Which type of derivative instrument most likely allows the greatest amount of flexibility with respect to delivery of the underlying? A CHF/EUR currency option A US Treasury futures contract A forward contract based on the FTSE 100 index

B) Corporate and sovereign borrowers typically having many different bond issues outstanding at any given time. Because of this heterogeneity in bond markets, fixed-income derivatives such as US Treasury futures contracts typically allow multiple bond issues to be used for settlement. By contract currency options and forward contracts based on equity indexes do not generally allow any flexibility in terms of which assets can be delivered for settlement.

William Thorpe, CFA, is a portfolio manager who serves both individual and institutional clients. Due to a heavy workload, Thorpe is struggling to keep up with his clients. One task which takes up a large amount of Thorpe's time is proxy voting. Which of the following statements is least likely correct, as it relates to Thorpe's responsibility regarding voting of proxies? Thorpe: must vote proxies in an informed and responsible manner. is required to vote proxies only when specifically instructed to do so by his clients. may choose not to vote proxies based on an analysis of the net benefit such action would provide the client.

B) Proxies have economic value and Thorpe must vote them responsibly on behalf of his clients, even when he is not specifically instructed to do so. While this obligation applies to votes on non-routine matters, members and candidates are not required to vote proxies in cases when a cost-benefit analysis shows that the client would not benefit.

The grey market for fixed-income securities most likely assists bond underwriters by: increasing the number of potential buyers. offering guidance on a suitable price for an upcoming issue. providing additional liquidity for the bonds after they are issued.

B) Fixed-income investors trade in the grey market to speculate on bonds that have yet to be issued. This activity provides underwriters with data that can be used to help set the price at which a new bond issue should be offered. However, the existence of the grey market does not increase the pool of potential investors or have any impact on liquidity for bonds that have already been issued.

Under the matching principle, administrative costs are least likely to be recognized as expenses for the period when: cash is paid. the benefit is received. the corresponding revenue is recognized.

C ) The corresponding revenue is recognized. Under the matching principle, expenses that can be directly tied to revenues are recognized when the revenue is recognized. For example, the cost of goods sold expense is recognized when inventory is sold. However, expenses that cannot be easily linked to specific revenues should be recognized during the period when they are incurred or the benefit is received. For example, the salary of an inventory warehouse manager is not directly linked to the sale of any particular item that has been stored in the facility. The company should recognize this expense as it receives the benefit of the manager's services and pays the manager's salary.

A security's excess return is most likely plotted against the market's excess return on the: capital market line. security market line. security characteristic line.

C) The security characteristic line plots the performance of a specific security (or portfolio) against that of the market portfolio. It is a plot of the excess return of a security against the excess return on the market.

Is the Calmar ratio or mar ratio for 3 years?

Calmar ratio is for the past 3 years while the mar ratio is since inception. avg annual return / max drawdown

Which of the following statements is most accurate: International Financial Reporting Standards (IFRS): and US GAAP are both rules-based. are rules-based and US GAAP are principles-based. are principles-based and US GAAP are rules-based.

IFRS is principles based while US GAAP is rules based

Which of the following is least likely a source of internal financing? Inventories Common equity After-tax operating cash flows

Inventories and AT OCF are internal ways to finanace while common equity requires an external approach.

Enterprise value models are most appropriate to value equity when comparing companies with significantly different: revenues. asset values. capital structures.

c) Utilizing enterprise value models to value equity is the most useful approach when comparing companies with significantly different capital structures.

The Parker family's monthly demand for visits to an indoor playground is given by the following equation: Qd=34−5P where Qd is visits per month and P is dollars per visit. If the playground currently charges its marginal cost of $3.00 per visit, the amount that it could charge the Parker family as an additional monthly membership fee is closest to: $28.50. $31.50. $36.10.

c. 36.10 you have to draw out the picture and calculate the area that the family would be willing to pay.

Rachel Oliphant, CFA, is offered tickets to an investment conference if she recommends a new ETF to her clients for which this investment is suitable. After obtaining written approval from her supervisor, who says that she is not required to disclose this arrangement to her clients, Oliphant accepts the offer and ultimately collects the tickets after recommending Brighton shares to six of her eighteen clients. Has Oliphant most likely violated the Standards? Yes No, because attending the investment conference will improve her ability to serve all of her clients No, because she has disclosed the conflict of interest to her employer and assessed the suitability of this investment before recommending it to clients

A) Standard VI(A) - Disclosure of Conflicts requires members and candidates to make "full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity or interfere with respective duties to their clients, prospective clients, and employer." In this example, Oliphant has violated this Standard by failing to inform her clients of a factor that could be impairing her objectivity in recommending this investment. The fact that her employer does not require this to be disclosed to clients does not absolve her of her responsibility under this Standard. Further, she is obligated to make this disclosure to her clients whether or not she has determined the investment to be suitable for them. She is required to disclose this arrangement even if she is correct in her belief that attending the investment conference will allow her to better serve all of her clients.

Which of the following is most accurate with respect to Modigliani and Miller's Proposition II without taxes? The cost of equity increases linearly with the debt-to-equity ratio. The market value of a company is not affected by the capital structure of the company. The market value of a levered company is equal to the value of an unlevered company plus the value of the debt tax shied.

A) Statement A refers to MM Proposition II without taxes.Statement B refers to MM Proposition I without taxes.Statement C refers to MM Proposition I with taxes.

A global depository receipt (GDR) issued by a German auto parts manufacturer will most likely trade on equity markets in: Japan. the United States. Germany and the United States.

A) Japan Global depository receipts do not trade on exchanges that are based in either the United States or the issuer's home country. In this example, the German company's GDRs will most likely trade on exchanges in Japan.

Brian Orton, CFA, runs a small investment management firm and lacks the resources to hire his own research analysts. As a cost-effective alternative, Orton obtains third-party research reports and sends full, unedited versions of selected reports to clients in envelopes displaying his firm's logo. In each envelope, Orton includes a letter, written on his firm's letterhead, in which he shares his comments on each of the enclosed reports. Based on his initial research and ongoing scrutiny, Orton believes that the research reports he sends to clients have an adequate basis, although he does not always agree with their conclusion. Has Orton most likely violated the Standards? No Yes, with respect to misrepresentation Yes, with respect to diligence and reasonable basis

A) No Standard I(C) - Misrepresentation prohibits members and candidates from taking credit for work that they have not done. There is no indication that Orton has claimed to be the author of the reports that he sends to his clients. He does not violate this Standard by sending these reports in envelopes displaying his firm's logo or by including a letter with his comments on his firm's letterhead. Orton does not appear to have violated Standard V(A) - Diligence and Reasonable Basis as it is noted that he researched the providers before choosing them and conducts ongoing scrutiny of their work. He is not required to agree with the conclusions of all (or any) reports that he sends to his clients, as long as he believes that they have an adequate basis.

Trevor Alford, CFA, has discovered evidence that his employer is systematically overcharging clients, a practice that would violate applicable laws if proven. Local authorities often rely on information obtained from corporate whistleblowers in order to prosecute such cases. Alford raises his concerns about this matter with his supervisor and refuses to work with his clients until the matter is resolved. Has Alford most likely violated the Standards? No Yes, by refusing to continue serving clients Yes, by failing to help local authorities determine whether laws have been violated

A) No In this example, Alford has adhered to this Standard by dissociating from a practice that he believes may be in violation of applicable laws. According to the guidance for this Standard, members and candidates who encounter evidence of unethical and/or illegal activities should first report their concerns to their supervisor or their firm's compliance department. As a next step, it may be necessary to dissociate from the activities by "removing one's name from written reports or recommendations, asking for a different assignment, or refusing to accept a new client or continue to advise a current client." This Standard does not require members and candidates to report actual or suspected violations of applicable law, rules, and regulations unless such reporting is required by law.

Karen Horobin, CFA, is an investment manager for Kettleworth Advisors. She has decided to sell 500 shares of Alphamega Construction (AMC) stock from the account of her client, Matthew Comeau. Horobin has discretionary authority over Comeau's account and the trade is consistent with his investment policy statement, which was updated last month. Horobin asks her fellow investment manager at Kettleworth, Alim Sayed, CFA, if 500 AMC shares would be appropriate for any of his clients. After consulting his files, Sayed finds that this position would be a good fit for his client Kailey McGrath. Horobin and Sayed arrange to transfer the shares from Comeau's account to McGrath's at the current market price. They both document the reasons for the trade on behalf of their respective clients. Have the Standards most likely been violated? No Yes, with respect to fair dealing Yes, with respect to preservation of confidentiality

A) Not against the standards to trade stocks between one account and another clients account. They may be able to provide value for the client since they can save them on transaction fees.

Guy Lapierre, CFA, is an investment advisor who works with individual investors, many of whom require the services of a tax specialist. Lapierre's colleague, Jeanette Fung, pays Lapierre $1,000 for every referral who becomes one of her clients. In a meeting with his client, Eugene Randolph, Lapierre recommends Fung's services as a tax specialist, adding, "If you become one of Jeanette's clients, she will pay me a flat fee in cash for the referral." Randolph later met with Fung but decided not to become a client of hers. This decision was based in part on his belief that, by paying referral fees, Fung would have to charge excessively high rates for her services. Has Lapierre most likely violated the Standards? Yes No, because Randolph did not become Fung's client No, because he disclosed that he had a referral fee arrangement with Fung

According to Standard VI(C) - Referral Fees, members and candidates must disclose the nature of any referral fee arrangements to clients, prospective clients, and employers as well as an estimate of the value of the compensation. In this case, Lapierre disclosed the nature of the arrangement (Fung pays him a flat fee in cash when his referrals become her clients), but he did not provide an estimate of the value of the compensation. Such an incomplete disclosure is a violation of this Standard. Choice B is incorrect because the issue of whether Randolph chose to use Fung's services is irrelevant to the question of whether Lapierre's disclosure was sufficient to comply with this Standard. Choice C is incorrect because, as noted, the test is not whether a referral fee arrangement is disclosed, but whether it is disclosed in sufficient detail.

Brian Sheppard is registered to take the Level III CFA exam. In a conversation with Sheppard about his preparations, his supervisor, Rita McDowell, CFA, makes the following comment: "The Global Investment Performance Standards (GIPS) were not tested on the Level III CFA exam when I took it because they were not in the Candidate Book of Knowledge (CBOK) at that time." Upon hearing this, Edward Holbrook, CFA, adds: "GIPS wasn't tested on the Level III exam when I took it three years ago, but they were in the CBOK." What is the most accurate assessment of this conversation? The Standards have not been violated Only Holbrook has violated the Standards Both Holbrook and McDowell have violated the Standards

According to the guidance related to Standard VII(A) - Conduct as Participants in CFA Institute Programs, information about topics that are either tested or not tested on a CFA exam cannot be shared. Holbrook violates this Standard by revealing that GIPS was not tested on the Level III CFA exam he took when this topic was included in the CBOK. Such disclosure violates the Candidate Pledge taken by all candidates who take a CFA exam. McDowell does not violate this Standard by stating that GIPS was not tested on the Level III CFA exam that she took. Only material that is included in the CBOK may be tested on a CFA exam, so GIPS could not possibly have been tested that year.

Jack Fahey, CFA, is a portfolio manager of Pacific Sunrise Investments, which does not claim compliance with the Global Investment Performance Standards (GIPS). When presenting the historical performance of his small-cap growth composite, Fahey notes that only fee-paying accounts are included, but he does not mention that both discretionary and non-discretionary accounts are included. Has Fahey most likely violated the Standards? Yes, with respect to performance presentation only Yes, with respect to both performance presentation and misrepresenation No, because Pacific Sunrise Investments does not claim compliance with GIPS

B) According to Standard I(C) - Misrepresentation, members and candidates "must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Standard III(D) - Performance Presentation requires members and candidates to make reasonable efforts to present performance information in a manner that is "fair, accurate, and complete." In this example, Fahey violates both of these Standards by failing to note that the small-cap growth composite includes both discretionary and non-discretionary accounts, as the composite's performance may misrepresent his abilities as a portfolio manager. The compliance status of Fahey's firm with GIPS is irrelevant to whether he has personally violated these Standards.

You are given the following information on VALVAL Partners, an Australian corporation: Market capitalization: AUD 5 million Outstanding debt: AUD 10 million Marginal tax rate: 35% The asset beta of Oprencor Technology Partners, a similar company, is 1.4. VALVAL's levered beta is closest to: 1.7. 2.4. 3.2.

3.2 Beta project = Beta comp X (1 (1-tax proj) x D/Eproj) 1.4 x ( 1 + (1-0.35) X 10/5

An investor is interested in structured financial instruments, as these instruments repackage and redistribute risks. He wants to purchase an instrument that combines a zero-coupon bond and a call option that expires at the same time as the bond. This type of structured financial instrument is most likely a: participation instrument. capital protected instrument. yield enhancement instrument.

A capital protected instrument offers some level of capital protection. One way this is done is through a guarantee certificate, which can be the combination of a zero-coupon bond and a call option. A yield enhancement instrument, like a credit-linked note, has increased risk exposure with the hope of realizing a higher expected return. A participation instrument allows investors to participate in the return of an underlying asset; an example of this is a floating-rate bond.

A company seeking to a derivative instrument that will qualify for hedge accounting treatment while offsetting the currency risk attributable to the equity of a foreign subsidiary will most likely use: a currency swap. currency futures contracts. currency options contracts.

A currency swap To qualify for hedge accounting treatment, a derivative instrument must closely match the characteristics of the asset, liability, or transaction that it is meant to hedge. Companies typically use customizable over-the-counter derivatives like currency swaps rather than exchange traded derivatives such as futures and options.

If Brazil and South Africa have free trade with each other, a common trade policy against all other countries, but no free movement of factors of production between them, then Brazil and South Africa are part of a:

A is correct. A customs union extends a free trade area (FTA) by not only allowing free movement of goods and services among members, but also creating common trade policy against non-members. Unlike a more integrated common market, a customs union does not allow free movement of factors of production among members. Video Solution

An analyst states that the equity risk premium is greater than 3.7%. Which of the following is most likely an example of a Type I error committed while testing this hypothesis? Rejecting the null hypothesis when the equity risk premium is equal to 3.7% Not rejecting the null hypothesis when the equity risk premium is less than 3.7% Not rejecting the null hypothesis when the equity risk premium is greater than 3.7%

A) In this example, the "suspected" or "hoped for" condition is that the equity risk premium is greater than 3.7%. By convention, this is established as the alternative hypothesis. The null hypothesis is that the equity risk premium is equal to or less than 3.7%. A Type I error occurs when the null hypothesis is rejected when it should have been accepted. In this example, the null hypothesis should only be rejected (and the alternative hypothesis accepted) if the equity risk premium is greater than 3.7%. Rejecting the null hypothesis when the equity risk premium is equal to 3.7% is a Type I error. Not rejecting the null hypothesis when the equity risk premium is less than 3.7% would be a correct decision. Not rejecting the null hypothesis when the equity risk premium is greater than 3.7% would be a Type II error.

Among the qualities that economists typically consider to be optimal for tax policy, the greatest potential for conflict is most likely between: fairness and efficiency. simplicity and fairness. simplicity and revenue sufficiency.

A) The keys listed to desirable tax policy are: Simplicity, ease of understanding and low possibility of manipulation Efficiency, minimal interference with the market Fairness, equal treatment of taxpayers in similar circumstances Revenue sufficiency, generating sufficient tax revenue to cover public spending needs The greatest potential for conflict exists between fairness and efficiency. Measures that may be perceived as more fair, such as progressively higher rates of taxation on higher levels of income, may be seen as inefficient on the grounds that this is undue interference in the market.

What most likely happens in a monopolistically competitive industry as the market moves toward a long-run equilibrium? New entrants come in and take away customers, reducing economic profits for incumbents The number of incumbents will be reduced as larger companies acquire smaller competitors The long-run level of output will approach the quantity produced by a perfectly competitive market

A) The long run outlook of a company in a monopolistically competitive industry is very similar to that in a purely competitive industry -- other companies see the profits, join the market, take away customers, and economic profits are reduced to zero. Firms that operate in monopolistically competitive markets incur costs related to product differentiation and advertising that are not incurred by firms that operate in perfectly competitive markets. Because of these extra costs, production will not be as high as it would be otherwise.

Herman Boldin, a Level III candidate in the CFA Program, is having a discussion about the designation with his colleague, Georgia Redwood. Redwood states, "I used to have the letters CFA after my name on my business cards before taking them off when I stopped paying my dues and filling out Professional Conduct Statements. But I'm still a CFA charterholder because I've got a charter from CFA Institute that says I fulfilled all the requirements prescribed for the use of the designation." Redwood has most likely: violated the CFA Standards and made an incorrect statement about the CFA designation. not violated the CFA Standards and made a correct statement about the CFA designation. not violated the CFA Standards but made an incorrect statement about the CFA designation.

A) By removing the letters CFA after her name on her business cards when she stopped paying her dues and filling out Professional Conduct Statements, Redwood has complied with Standard VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program. However, she has violated this Standard, which applies to both written and oral statements, by incorrectly claiming to be a "CFA charterholder" when she no longer has the right to use the CFA designation because she is no longer fulfilling the obligations of a CFA charterholder.

An American company issues $320,000,000 of 180-day, 4% US commercial paper. The most accurate description of this transaction is that the company: receives $313,600,000 in proceeds and repays $320,000,000. receives $320,000,000 in proceeds and repays $326,400,000. receives $320,000,000 in proceeds and repays $332,800,000.

A) CP is issued in on a discount basis so the issuer gets the par value discounted for interest and pays back the par value 320m x 4% * 180/360 = 6,400,000 which is the interest discount 313,600,000

The persistence of closed-end investment fund discounts is most likely attributable to: transaction costs. management fees. restrictions against trading closed-end funds in the secondary market.

A) Closed-end investment fund discounts do exist, but it is often difficult for investors to exploit these differences because of the high transaction costs associated with purchasing all the shares in order to liquidate. There is no evidence to support the claim that these discounts are attributable to management fees. Closed-end investment funds do trade in the secondary market.

An investor with confirmation bias will most likely: invest in assets that are highly correlated with their employer's stock. focus an excessive amount of attention on negative news about assets in their portfolio. make forecasts using a very narrow range of expected returns with a low standard deviation.

A) Investors affected by confirmation bias tend to hold a disproportionately large amount of shares issued by their employer, pooling exposures to the same risk. This stems from a belief that they know the company and a conviction that its prospects are favorable. Investors affected by confirmation bias exhibit a tendency to focus on positive information and ignore (rather than dwell on) negative information. Answer choice C describes overconfidence bias instead of confirmation bias.

Laspeyeres index - what is formula and the bias that it contains / how does it represent inflation.

tends to overstate inflation Current prices x base unit quanity. Suffers from substitution bias, quality bias, and new product bias.

If the neutral interest rate is 3.0%, and the long-term expected inflation rate is 1.5% within a range of plus or minus 1.0%, the real trend growth rate of the underlying economy is closest to: 1.5%. 2.5%. 4.5%.

the neutral rate is inflation + real trend growth rate The neutral interest rate is the sum of the real trend growth rate and long-term expected inflation. If the neutral rate is 3.0% and inflation is expected to be 1.5% over the long-term, the real growth rate must be 1.5% as well (1.5% + 1.5% = 3.0%).

Ralph Sheppard, CFA, is both an equity analyst covering the consumer goods sector and an avid chef in his spare time. On Tuesday evenings, with his employer's written consent, Sheppard teaches a class at a local culinary school, for which he is compensated at the standard rate paid to all instructors. Recently, the culinary school where Sheppard teaches was chosen to test prototypes of a new line of kitchen appliances being developed by Cuisineware, a manufacturer that Sheppard has covered for over a decade in his role as an analyst. After using the prototypes for the first time, Sheppard is convinced there will be significant demand for this new line of appliances. The next morning, he makes an upward revision to his previously published price target for Cuisineware's stock, but he does not disclose that he has tested the company's prototypes. Sheppard has most likely violated the CFA Standards with respect to: disclosure of conflicts only. diligence and reasonable basis only. both disclosure of conflicts and diligence and reasonable basis.

B) Sheppard has violated Standard V(A) - Diligence and Reasonable Basis, which requires members and candidates to have a "reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action." In this example, Sheppard does not have a reasonable and adequate basis for increasing the price target for Cuisineware's stock simply because he is familiar with the company and has tested the prototypes for its new line of appliances. However, working at a culinary school that was chosen to test Cuisineware's prototypes does not constitute a benefit that must be disclosed according to Standard VI(A) - Disclosure of Conflicts.

A firm in a perfectly competitive market is operating at a point where total revenue is equal to total cost and marginal revenue is less than marginal cost. The firm should most likely: increase production to enter profit territory. decrease production to enter profit territory. minimize losses in the short run by maintaining current production levels until prices allow for a return to profitability over the long run.

B) Since the total revenue is able to cover the total cost and the marginal revenue is less than the marginal cost, the firm should decrease production.

Stable market share among incumbent firms is most likely to result in: low industry competitiveness and low pricing power. low industry competitiveness and high pricing power. high industry competitiveness and low pricing power.

B) Stable market shares can indicate that an industry has fewer competitors and specialized products with less innovation. This can provide incumbents with greater pricing power because consumers may have limited alternatives to switch to. As a result, incumbent companies can influence prices to some extent (i.e., high pricing power), making it more challenging for new entrants to gain market share (i.e., low industry competitiveness).

ucas Stamford, CFA, and Tamara Howarth, CFA, are money managers with a large investment firm. Both receive quarterly bonuses from their employer for each of their clients whose portfolio outperforms its benchmark. Additionally, both receive quarterly bonuses based on client reports on service quality. Howarth discloses the details of both of these bonuses to clients and prospective clients orally and in writing, whereas Stamford only discloses the details of the bonus based on outperforming a benchmark. Which of the following statements is most likely correct? Howarth and Stamford have both violated the CFA Standards Howarth and Stamford have both adhered to the CFA Standards Howarth has adhered to the CFA Standards, but Stamford has not

B) Standard VI(A) - Disclosure of Conflicts requires members and candidates to make "full and fair disclosure of all matters that could reasonably be expected to impair their independence and objectivity." In this example, both Howard and Stamford have adhered to this Standard because they have disclosed the details of their bonuses based on short-term investment performance to their clients and prospective clients. Stamford does not violated this Standard by failing to disclose the details of a bonus based on client reports on service quality.

A firm in a monopolistically competitive market most likely: maximizes the selling price of its goods. sells fewer goods than is socially optimal. sets a price at the point where its marginal cost curve intersects with the demand curve.

B) A monopolistically competitive firm focuses on product differentiation. The different varieties of products offered imply there would be fewer goods sold than is socially optimal as opposed to a perfectly competitive firm. In this market, companies profit through innovation and experiment instead of price competition that tries to maximize the quantities sold. Answer choice A is incorrect because a maximized selling price will severely drive down the demand, reducing the overall profit. Answer choice C is incorrect because the maximum profit is accomplished by setting a price at the point where the marginal cost curve intersects with the marginal revenue curve, not the demand curve. This answer choice would be accurate only for a firm in a perfectly competitive market. In that case, the marginal revenue curve represents the demand curve (both are horizontal). So, its intersection with the marginal cost curve will produce an equilibrium price. Video Solution

A valuation allowance is least accurately described as: a reserve created against deferred tax assets. being required by IFRS if expectations of future economic benefits are diminished. being based on the likelihood of realizing the deferred tax assets in a future accounting period.

B) A valuation allowance is a reserve created against deferred tax assets in accordance with US GAAP. It is based on the likelihood of realizing the deferred tax assets in a future accounting period. The valuation allowance is not required by IFRS.

Nathan Bradley, CFA, an independent equity analyst, accepts an offer from Whitten Manufacturing (WMN) to write a research report analyzing the company's stock. Before undertaking any work on the report, Bradley agrees to accept a flat fee and a fixed number of WMN stock options as compensation. Neither the value of the fee or the number of options Bradley receives is linked to his report's conclusions or recommendations. One year after the report is issued, Bradley exercises the options. Has Bradley most likely violated the Standards? No Yes, with respect to independence and objectivity only Yes, with respect to both independence and objectivity and additional compensation arrangments

B) Issuer-paid research, such as the work described in this example, is allowed by Standard I(B) - Independence and Objectivity under certain conditions. Bradley would not have violated this Standard by accepting a flat fee that was agreed in advance of him undertaking any work and was not linked to his report's conclusions or recommendations. However, Bradley does violate this Standard by accepting a compensation package that includes options to purchase WMN shares as this type of equity-based compensation could reasonably be expected to influence his ability to remain independent and objective. Bradly will likely be biased to release a positive report as that will increase the value of his stock options of WMN. There is no indication that Bradley has violated Standard IV(B) - Additional Compensation Arrangements, which prohibits members and candidates from accepting compensation for work that conflicts with the interest of their employer without receiving written consent from all parties involved. Video Solution

Ashley Powell, CFA, works as a manager of an international equity fund and has a personal portfolio that includes the stocks of several Chilean companies. Powell also has a strong Twitter following. After reading an article about a violent clash between striking Chilean miners and local police, Powell publishes a blog post that includes her opinion that "the current level of labor unrest could cause investors to pull their capital out of the Chilean market." Although the mining strike covered in the article she read has attracted attention from several international media outlets, Powell is aware that the number of days lost to labor disruptions has steadily declined in Chile over the past decade and she expects this trend to continue, but she does not include this information in her blog post. Over the subsequent month, the main Chilean equity benchmark falls 2.3%. Has Powell most likely violated the Standards? No Yes, with respect to misrepresentation Yes, with respect to market manipulation

B) Standard I(C) - Misrepresentation prohibits members and candidates from making "any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities." Misrepresentation includes creating a misleading impression by omitting facts and relevant inputs. In this example, Powell has violated this Standard by failing to refer to the general decline in days lost to labor disruptions in Chile over the past decade, as this omission may mislead her readers regarding the true state of affairs in that country - particularly at a time when a single incident is attracting a disproportionate share of the media's attention. Powell does not appear to have acted to distort prices with the intention of misleading investors, and it is therefore unlikely that she has violated Standard II(B) - Market Manipulation. There is no evidence that Powell has taken advantage of lower valuations to purchase shares either for herself or her fund. Indeed, it is not clear that the 2.3% decline in the benchmark index of Chilean equities represents a poor performance relative to how other asset classes with similar risk profiles performed over the same period. Video Solution

An equity index designed to represent all the market capitalization of all the major large-cap stocks in the world would most accurately be described as a: sector index. multi-market index. broad market index.

B) To reflect the market capitalization of all worldwide large-cap stocks, we would need to use a multi-market index invested in multiple markets. This multi-market index would be a collection of broad market indices, each of which covers a given market. Likewise, each broad market would be a compilation of sector indices within that market.

If the largest firm in a perfectly competitive market increases its production and unit sales by 5%, the increase in the firm's total revenue will most likely be: less than 5%. equal to 5%. more than 5%.

B) Equal to 5% The total revenue equals the price times quantity sold. Firms operating in perfectly competitive markets are price takers. An increase in supply by one firm - even the market leader - will not affect the equilibrium price. Therefore, total revenue increases proportionately with the increase in units sold.

Prosystems Development, an IT consulting firm, has been around for 20 years and is facing its first liquidity crisis. Prosystems recently purchased a building, but work has since dried up and rent is difficult to come by. The primary sources of liquidity have been utilized already, and Prosystems is looking for options. Which of the following would most accurately be classified as a secondary source of liquidity? Short-term treasuries Restructuring debt obligations Drawing upon a revolving line of credit

B) Liquidity, the ability to meet short-term obligations, can be broken down into primary and secondary sources. Primary sources are those which are able to be taken without affecting the normal company operations. Secondary sources will have an effect. Secondary sources of liquidity include: Suspending or reducing dividend payments Reducing or delaying capital expenditures New equity issues Restructuring debt obligations Liquidating assets Filing for bankruptcy Primary sources of liquidity include: Cash and marketable securities on hand Borrowings Cash flow from the business

Which of the following board committees is most likely responsible for determining whether directors are independent? Audit Committee Nomination Committee Governance Committee

B) Nomination committee The nominating committee identifies candidates to serve on the board of directors. In fulfilling this responsibility, the committee is responsible for establishing the criteria that determine whether a director can be considered independent. The audit committee oversees audit and control systems, monitors financial reporting processes, assesses the integrity of financial statements, and generally presents an annual audit plan to the board and supervises its implementation. The role of the governance committee is to ensure that the company adopts appropriate corporate governance practices.

While working as an unpaid intern for Harborview Investments, Jenna Martin registers to take the Level I CFA exam. One of her projects at Harborview was the development of a financial model used to value commodity derivatives. After completing the Level I CFA exam, and while awaiting her results, Martin accepts a paid position with Dynavest Capital and receives written approval of her request to take the model that she developed during her time at Haborview to her new firm. She also takes the handwritten notes that she compiled while developing the model, without seeking approval to do so, since she was permitted to take the model itself. After formally starting with her new firm, Martin solicits the business of clients who she worked for while in her unpaid role at Harborview. Has Martin most likely violated the Standards? No Yes, by taking Harborview's property to Dynavest Yes, by soliciting the business of Harborview's clients

B) Yes, taking handwritten notes are property of the firm Martin violates Standard IV(A) - Loyalty by taking her handwritten notes, which belong to Harborview, without the firm's consent. The fact that the firm approved her request to take the model does not eliminate the requirement for her to seek and obtain approval before taking her handwritten notes as well. However, Martin does not violate this Standard by soliciting the business of Harborview's clients after her relationship with that firm has ended. She is permitted to rely on her simple knowledge of her former employer's clients and obtain their contact information through public records. There is also no indication that she is subject to a non-compete agreement.

Returns on timberland investments are least likely affected by: land price changes. lumber price volatility. biological growth rates.

B) lumber price volatility you don't have a specific harvest time so you dont need to chop the trees down if lumber prices go down. Biological growth rates, land price changes and commodity price changes all influence lumber price.

Ben Bell, CFA, is considering leaving his employer, Steelhead Investments (SI), to accept a portfolio manager position with Newtown Capital. During his interview with Newtown, Bell discusses his ability to attract new business, including the accounts of current SI clients. He specifically names two clients with whom he has established a close working relationship as individuals who he intends to contact after his tenure with SI officially ends. Bell most likely violated the Standards with respect to: loyalty only. preservation of confidentiality only. both loyalty and preservation of confidentiality.

Bell has violated Standard III(E) - Preservation of Confidentiality by revealing the names of the clients whose business he intends to solicit after he formally leaves SI. This is confidential information belonging to those clients. Bell has also violated Standard IV(A) - Loyalty, which states that members and candidates must not "divulge confidential information, or otherwise cause harm to their employer." Bell revealed the names of his firm's clients, which is confidential information belonging to the firm.

A horizontal common-size balance sheet analysis most likely involves stating: each item as a percentage of sales. each item as a percentage of total assets. the percentage change in each item relative to its carrying value in the previous period.

C) A horizontal analysis of a balance sheet involves stating the percentage change in each item compared to its carrying value in an earlier period. In a vertical common-size analysis, balance sheet items are stated as a percentage of total assets.

Katrina Bradshaw passed the Level II CFA exam in 2020 and is currently registered to take the next Level III exam. Which of the following references to her participation in the CFA Program is most likely consistent with the Standards? Level III CFA (Candidate) CFA Level II passed (2020) Passed Level II of the CFA exam

C) Standard VII(B) - Reference to CFA Institute, the CFA Designation, and the CFA Program prohibits any use of references that imply a partial CFA designation. "Passed Level II of the CFA exam" is a factual statement that is consistent with this Standard. By contrast, "Level III CFA (Candidate)" and "CFA Level II passed (2020)" imply a partial designation.

An investor purchases a 5% annual coupon bond maturing in 15 years at its par value. If the bond's modified duration is 10.38 and the investor has a 6-year time horizon, the duration gap is closest to: 4.38. 4.62. 4.90.

C) The duration is calculated as a bond's Macaulay duration less the investment horizon. The first step in arriving at the correct answer is to use the bond's modified duration to get its Macaulay duration as follows: 10.38×1.05=10.899 Note that Macaulay duration is the product of modified duration and one plus yield, which must be 5% if a 5% coupon bond can be purchased at its par value. With this information, the duration gap can be calculated as follows: 10.899−6=4.899

Janis Tomford, CFA, is a well-known and influential analyst covering the music industry for Blue Sky Investments. Recently, after informing her clients in advance, Tomford adopted the practice of disseminating her investment recommendations exclusively via social media. In order to give her clients the opportunity to act on her recommendations before other investors, Tomford posts them in a password-protected forum. The post containing her latest recommendation read as follows: "Buy HBM, Target $24.75" Due to Tomford's influence, Blue Sky clients find that they can achieve significant short-term returns if they are able to act on her recommendations before they become known to the broader community of investors. Tomford has most likely violated the Standards with respect to: fair dealing. material nonpublic information. communication with clients and prospective clients.

C) The issue is the lack of analysis behind the price target and the risks associated with the stock. Recommendations can be like this but need to have additional info available upon request.

Assuming no change in a company's contribution margin or its pre-tax earnings, an increase in its operating income will most likely: reduce both operating leverage and financial leverage. increase operating leverage and reduce financial leverage. reduce operating leverage and increase financial leverage.

C) A company's total leverage is the product of its operating leverage and its financial leverage. These inputs are defined as follows: Operating leverage= Contribution margin / EBIT Financial leverage = EBIT / EBT Holding the contribution margin and pre-tax income (EBT) constant, an increase in operating income (EBIT) will result in lower operating leverage and higher financial leverage.

Paul Sparfeld, CFA, is in charge of presenting performance results for his investment firm, a sole proprietorship with three employees. Which of the following performance presentation policies adopted by Sparfeld's firm is least likely consistent with the recommendations for compliance with the Standards? Applying the GIPS standards. Presenting composite returns that include both actual and simulated data Removing the contribution of terminated portfolios when presenting historical returns

C) According to the recommendations for compliance with Standard III(D) - Performance Presentation, terminated accounts should be included when calculating historical performance. The point at which accounts were terminated should be clearly indicated. Removing the contribution of such accounts misrepresents historical performance. Compliance with GIPS standards is the best method to adhere to this Standard. It is also not a violation of this Standard to present returns that include both actual and simulated data, provided simulated returns are clearly identified as such.

Sebastian Brady, CFA, is a respected equity analyst covering firms in the mining sector for Aculytics Research. CGI Capital, an investment firm, is hosting an upcoming conference and has invited Brady to be one of the speakers at this event. CGI offers to cover the travel and accommodation costs as well as conference registration fees for all invited speakers. Additionally, CGI is offering selected speakers, including Brady, the opportunity to attend a major sporting event being played in the same city a few hours after the conference ends, at no cost to those invited or their firms. Which of the following statements is most accurate? Brady: must decline the entire offer. may accept the entire offer as long as he fully discloses the terms to his employer. may only accept the offer to cover his travel and accommodation expenses and conference registration fee.

C) Standard I(B) - Independence and Objectivity requires members and candidates to "use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities." Acceptance of reimbursement for conference-related expenses is acceptable as long as independence and objectivity are not compromised. In this example, it is acceptable that Brady's conference-related expenses are paid by CGI. He is performing a service by giving the talk, and these expenses are not excessive and would not compromise his objectivity. However, the invitation to attend the major sporting event is lavish and must be declined.

What is the most accurate assessment of the following statements? Statement 1: A portfolio's time-weighted rate of return is affected by cash withdrawals and additions. Statement 2: The money-weighted return is an inappropriate measure to use when assessing the performance of a fund manager who does not control the timing and amount of cash withdrawals and additions. Only Statement 1 is correct Only Statement 2 is correct Statement 1 and Statement 2 are both correct

C) Statement 2 is correct. A fund manager's performance should only be judge on the basis of his or her decisions and actions, not on the basis of events over which he or she has no control. The money-weighted return can be skewed by the timing and amount of cash flows into and out of a fund, making it an inappropriate metric for assessing the performance of a manager who has no control over these. Statement 1 is incorrect. The time-weighted return measure is unaffected by the timing and amount of cash flows.

Which of the following statements is least likely correct with respect to the adjustments required to compare companies that use LIFO with those that use FIFO? The value of the LIFO reserve is added to the value of LIFO inventory to obtain the value of inventory under FIFO To obtain the cost of goods sold under FIFO, subtract the change in the LIFO reserve from the cost of goods sold under LIFO The value of inventory under FIFO is obtained by reducing the value of LIFO inventory by the change in the LIFO reserve

C) The value of inventory under FIFO is the sum of LIFO inventory and the LIFO reserve. COGS under FIFO are calculated as LIFO COGS less the change in the value of the LIFO reserve.

With respect to derivatives, which of the following is least accurate? Derivatives are often more liquid than their underlying Derivatives are characterized by a relatively high degree of leverage Derivatives generally trade at higher transaction costs than comparable spot market transactions

C) Derivatives generally trade at lower transaction costs than comparable spot market transactions. Additionally, derivatives are characterized by a relatively high degree of leverage and are often more liquid than the underlying asset on which they are based.

Sam Hastings, CFA, is a portfolio manager with Olympian Investments, which introduced a revised compensation system six months ago that pays bonuses for every quarter in which a portfolio manager outperforms his or her benchmark. Hastings has not revealed this new compensation arrangement to his clients and has started to be more aggressive in his investment choices - at times deviating from his clients' investment policy statements. Since the change was implemented, Hastings' clients have been very satisfied with his performance and none have complained about his decisions. Has Hastings most likely violated the Standards? No Yes, with respect to suitability only Yes, with respect to both suitability and disclosure of conflicts

C) He needs to disclose the compensation from his employer about short-term incentives.

An investor is long 20 futures contracts with a price of $111 has an initial margin requirement of $5 and a $3 maintenance margin. If the price of the underlying falls to $108.50 on the first day of trading, the amount of additional funds that must be deposited in the investor's margin account is closest to: $0. $10. $50.

C) $50 With 20 contracts and an initial margin of $5 per contract, the investor's margin account will have an initial balance of $100. Because the maintenance margin is $3 per contract, the investor will receive a margin call if the account balance falls below $60. When the futures price falls by $2.50 ($111 - $108.50), the margin account balance will decrease to $50 ($100 - $50). The investors will receive a margin call and be required to deposit $50 to restore the account balance back to the initial margin.

Bradley Edwards, CFA, recently left Redwood Associates, where he was part of a team of managers, to start his own fund. With written permission from Redwood, he distributes marketing materials for his new firm that reference the performance of the fund he worked on for several years at Redwood in order to highlight his investment abilities. Has Edwards most likely violated the Standards? No Yes, by including results that he achieved while at his former employer Yes, by representing that this was his performance, with no mention of the other managers

C) Have to acknowledge there's a team behind the returns and the return wasn't only his. Standard III(D) - Performance Presentation requires members and candidates to "make reasonable efforts" to ensure that performance information is communicated in a "fair, accurate, and complete" manner. In this example, there is selective disclosure. It is acceptable to reference results achieved at a prior firm, but it must have been fully disclosed that the fund was managed by a team.

Which of the following statements is most accurate? Under IFRS, changes in inventory valuation methods: are not permitted. are permitted, but the company must provide a thorough explanation of the reasons for the change. are permitted only if the change provides more relevant information about the company's financial performance and position.

C) Under IFRS, changes in inventory valuation methods are allowed if this results in financial statements that contain more relevant information about the issuer's underlying economic performance and position. In practice, such changes are rare.

An investor with a portfolio of 60% equities and 40% fixed-income securities is analyzing a hedge fund's historical return data. Which of the following measures will most likely fail to account for the correlation between the hedge fund's returns and those of the investor's current portfolio? Sharpe ratio only Sortino ratio only Both the Sharpe ratio and the Sortino ratio

C) both assume a normal distribution and doesn't consider the correlation between assets and traditional assets The Sharpe ratio uses standard deviation as a measure of risk, while the Sortino ratio uses downside deviation. Using either of these measures to assess a hedge fund's performance fails to consider the correlation between its returns and returns on traditional assets.

Claudia Zanelli, CFA, is an analyst covering the marine transportation sector. Recently, a member of her firm's investment banking department recognized her at a restaurant where she was eating lunch and asked her to change her rating on shares of Intercontinental Shipping Lines (ISL) from "neutral" to "buy." After going over her files on ISL, Zanelli could not find any change in the factors supporting the conclusions in her latest report on ISL. Zanelli issued a new report that maintained her "neutral" rating on the company's shares and contained no changes from the previous version other than an upward revision to the price target. Has Zanelli most likely violated the Standards? No Yes, with respect to independence and objectivity Yes, with respect to diligence and reasonable basis

C) lacks reasonableness for the upward price target. Standard V(A) - Diligence and Reasonable Basis requires members and candidates to have "a reasonable and adequate basis, supported by appropriate research and investigation, for any investment analysis, recommendation, or action." In this example, Zanelli could not find any change in the factors supporting the conclusions in her latest report, which included a target price and a "neutral" rating. Therefore, she lacks a reasonable basis for making an upward revision to ISL's price target. Standard I(B) - Independence and Objectivity requires members and candidates to adopt and follow best practices in order to reduce or eliminate intrafirm pressures to their objectivity. Such measures can include the creation of firewalls to prevent direct communication between analysts and members of the investment banking department. In this case, Zanelli does not violate this Standard simply because a member of her firm's investment banking department approached her in a restaurant.

An analyst gathers the following information on a company that uses the LIFO method of inventory valuation and issues financial reports in accordance with US GAAP: Cost of ending inventory$240,000 Estimated selling price$285,000 Current replacement cost$230,000 Normal profit margin$35,000 Assuming that total costs of $15,000 would be incurred to prepare the inventory for sale condition and find a buyer, the carrying amount of the company's inventory is closest to: $225,000. $230,000. $235,000.

Companies that issue financial reports in accordance with US GAAP and use the LIFO method must carry inventory at the lower of cost or market value, which is defined as current replacement cost subject to upper and lower bounds. In this example, the cost is given as $240,000. Market value cannot exceed net realizable value, so this acts as the upper bound. Net realizable value is equal to the selling price minus selling costs. Therefore, the net realizable value is: $285,000−$15,000=$270,000 The lower bound of market value is net realizable value minus a normal profit margin. In this example, it is $270,000−$35,000=$235,000 Because the replacement cost ($230,000) falls below this lower bound, the company would carry its inventory at $235,000.

Robert Choi, CFA, works for Challenger Asset Management, which offers its clients ten emerging market equity funds. All ten funds had negative five-year returns, although each has outperformed its benchmark. Choi approves an advertisement that includes a statement that the company's funds have provided investors with "positive excess returns" for investors seeking exposure to these markets. Each fund's five-year returns are presented alongside the returns of their relevant benchmark and a website where potential clients can obtain more detailed information is listed. Has Choi most likely violated the Standards? No Yes, by failing to provide sufficient information Yes, by misleading potential clients with the implication that returns have been positive

No. According to Standard III(D) - Performance Presentation, members and candidates must ensure that communication of performance is "fair, accurate, and complete." In this example, the claim of positive excess returns is accurate because, although the funds have posted negative returns, each fund has outperformed its relevant benchmark. The clients are also given a presentation of the five-year returns with the benchmark returns, eliminating any potential misinterpretation. When the format of communications does not allow for a detailed presentation, it is recommended that a reference to the limited nature of the information be made, and more detailed information must be provided upon request.

Carla Pollini, CFA, is responsible for recommending third-party managers for a defined benefit pension plan. While reviewing several proposals for the plan's latest allocation, Pollini learns that Roberto Lacobucci, manager of the Eurasian Equity Fund, directs a percentage of the fund's profits to an animal sanctuary. After concluding her review of several funds, Pollini recommends that the plan's trustees choose the Eurasian Equity Fund. Her methodology for ranking the various proposals includes consideration of each fund's commitment to environmental, social, and governance (ESG) factors. Pollini does not disclose to the trustees that she made a personal donation to the animal sanctuary that is supported by the Eurasia Equity Fund. Has Pollini most likely violated the Standards? No Yes, with respect to disclosure of conflicts Yes, with respect to both disclosure of conflicts and independence and objectivity

No. Pollini would have violated Standard I(B) - Independence and Objectivity if she had solicited a donation from Lacobucci for one of her preferred charities when deciding whether to recommend his fund to the pension plan's trustees. However, she does not compromise her independence or objectivity by making a personal donation to a charity that she learned about while conducting due diligence as part of her professional responsibilities. Even if Lacobucci had solicited the donation, and there's no evidence that he did, Pollini would not violate the Standards by making a donation because she would not be using her position as the person responsible for recommending funds to benefit personally. Neither has Pollini violated Standard VI(A) - Disclosure of Conflicts. The fact that she has decided to personally support the same charity as Lacobucci is not something that could reasonably be expected to impair her independence and objectivity. She would have to be the president or director for there to be a clear conflict.

Which of the following combinations will most likely replicate the performance of a fiduciary call position? Long risk-free bond, long forward contract, long put Long risk-free bond, short forward contract, long put Long risk-free bond, short forward contract, short put

Per put-call parity, the payoffs for a fiduciary call and a protective put must be identical: Fiduciary call=Protective put Long call +Risk-free bond=Long put+Asset c0 + X/(1+R) = p0 + s0 forward parity is long call + long risk free asset = long put + fwd contract + long risk free bond

According to Real Business Cycle models, an economic contraction is most likely caused by: sticky wages. rising energy prices. a contraction in the money supply.

Rising energy prices B is correct. Real Business Cycle models conclude that expansions and contractions of the economy are responses to external shocks, such as supply shocks arising from advances in technology or changes in the relative prices of inputs (e.g., energy prices). An increase in energy prices shifts short-run aggregate supply to the left, resulting in higher prices and lower GDP.

Carol Leung, CFA, discovers that a technical error has caused her firm to issue inaccurate account statements to its clients. Upon receiving this information, Leung informs all affected clients of the error and oversees the effort to ensure that the technical error is resolved and that new, accurate account statements are issued. Leung then ensures that all electronic and paper copies of the inaccurate statements are removed from client files and destroyed. Has Leung most likely violated the Standards? No Yes, with respect to record retention Yes, with respect to both record retention and performance presentation

Standard V(C) - Record Retention requires members and clients to develop and maintain records of investment-related communications with clients and prospective clients. In this example, Leung has violated this Standard by destroying all copies of the inaccurate statements. An action that is more consistent with this Standard would be to ensure that all copies of inaccurate statements are clearly labeled as such. Leung has not violated Standard III(D) - Performance Presentation, as she was not aware of the error prior to the inaccurate statements being distributed and she takes appropriate measures to ensure that they are replaced with accurate statements.

Which of the following costs should most likely be excluded from the cash flows used in a capital budgeting analysis? Sunk costs only Opportunity costs only Both sunk costs and financing costs

Sunk costs should be excluded from capital budgeting analysis because they have already been incurred and cannot be changed. Financing costs should also be excluded from a project's cash flows because these are already captured by the discount rate. Including financing costs as cash flows to be discounted would be double-counting. Opportunity costs reflect cash flows that would have occurred if a project had not been undertaken and should always be included in a capital budgeting analysis.

A 1%, 10-year annual coupon bond is issued at a price of $5,000,000. The market interest rate at the time of issuance was 2%. Upon redemption, the bondholder will receive $5,500,000. Using the effective interest method, the amount of interest expense recorded in the first year after issuance is closest $50,000. $55,000. $100,000.

The amount of interest expense using the effective interest method is simply the carrying amount (price for the first year) times the market interest rate at issuance. In this example, $5,000,000×2%=$100,000

An analyst made the following statement: "There is a school of thought that increasing the company's debt load would force managers to be more efficient and reduce the likelihood that they will misuse resources." The analyst ​​is most likely referring to the: pecking order theory. static trade-off theory. free cash flow hypothesis.

The analyst ​​is referring to free cash flow hypothesis, according to which higher levels of debt in the capital structure impose discipline on managers because a greater proportion of cash flows are used to service debt obligations and managers have less opportunity to misuse these funds. The pecking order theory states that managers prefer to raise capital from the sources that impose the lowest potential information content. Accordingly, internally generated funds (such as retained earnings) are sought first and then debt. Only after these sources of capital have been exhausted will companies issue new equity. According to the static trade-off theory, companies must balance the tax benefits from issuing debt against the increased likelihood of financial distress. The optimal capital structure is found at the point where adding an incremental unit of debt would increase the present value of expected bankruptcy costs more than the tax shield.

A portfolio manager is analyzing an 8-year, 6.25% annual coupon corporate bond that is callable at par after 4 years. If the bond's Z-spread is 110 basis points (bps), its option-adjusted spread is most likely: less than 110 bps. 110 bps as well. greater than 110 bps.

The option-adjusted spread (OAS) measure indicates what the yield spread would be if a bond had no embedded options. Mathematically, for a callable bond, OAS=Z-spread−Option value (in basis points) For a callable bond, the issuer can exercise its option to buy back the callable bond if interest rates fall. Since the option value is positive (from the perspective of the issuer), the OAS must be smaller than the Z-spread, which is 110 bps in this example.

Which of the following items from a company's financial statement is least likely to be useful to an analyst seeking to understand the issuer's financial position? Assets Equity Income

The three elements of a financial statement directly related to the measurement of financial position are: Assets Liabilities Equity And the elements directly related to the measurement of financial performance: Income Expenses

The quoted 1-year MXN/USD forward rate of 19.80 is above the intrinsic value implied by the current spot rate of 19.00 and risk-free rates of 6% and 3% for Mexico and the United States, respectively. A successful arbitrage strategy for an investor who can borrow at the Mexican risk-free rate would most likely involve: selling MXN in the spot market. buying USD in the forward market. investing at the Mexican risk-free rate.

To exploit the arbitrage opportunity presented in this example, an investor would take the following steps: Borrow MXN 19.00 Sell MXN 19.00 in the spot market, receive USD 1.00 Invest USD 1.00 at the 3% US risk-free rate Enter a forward contract to sell USD (buy MXN) at the 1-year MXN/USD rate of 19.80 One year later, The USD 1.00 invested at the 3% US risk-free rate is worth USD 1.03 USD 1.03 is sold and converted to MXN 20.394 based on the 19.80 MXN/USD rate in the forward contract MXN 20.14 is repaid based on having borrowed MXN 19.00 for one year at the 6% Mexican risk-free rate After repaying the loan, the investor earns an arbitrage profit of MXN 0.254 per USD.

Which of the following trade restrictions is likely to result in the greatest welfare loss for the importing country? A tariff. An import quota. A voluntary export restraint.

VER C is correct. With a voluntary export restraint, the price increase induced by restricting the quantity of imports (= quota rent for equivalent quota = tariff revenue for equivalent tariff) accrues to foreign exporters and/or the foreign government. Tariffs and import quotas are set by the importing country so can control the impact more while VER's the exporting country controls the terms.

Last year, Tom Ennis, CFA, set up an irrevocable trust for his long-time client, Sam Bennett, to transfer his company's shares to his son Taylor, 23, in a tax-efficient manner. The terms of the trust specify that Taylor Bennett cannot access any of the assets held in trust while his father is alive, but the assets are no longer legally part of Sam Bennett's estate. As trustee, Ennis has sole authority to exercise proxy votes for the shares held in trust until Sam Bennett's death. Recently, Sam Bennett asked Ennis to vote with management on an important matter to be decided at his company's shareholder meeting next week. The next day, Taylor Bennett asks Ennis to vote the proxies against management on this matter. In order to comply with the CFA Standards, Ennis should most likely: abstain from voting. vote with management. vote against management.

Vote against management - you need to align your vote with whoever is the ultimate beneficiary.

Which of the following types of securities is most likely to increase its issuer's debt-to-equity ratio for valuation purposes? Warrants Common shares Preferred shares

When analysts are confident in an issuer's ability to make promised dividend payments to holders of its preferred shares over the long-term, they will typically consider these to be fixed-income securities for valuation purposes. By contrast, warrants grant their holders the option to convert these securities into common shares, which would increase the amount of equity outstanding and decrease the issuer's debt-to-equity ratio. Issuing common shares will also decrease the debt-to-equity ratio.

The loss on sale of equipment would most likely be reflected as an adjustment to which category in an indirect-format cash flow statement? Investing Activity Financing Activity Operating Activity

When using the indirect method to calculate CFO, adjustments must be made for any items that are reflected in net income without having affected operating cash flows. In this example, the amount of any loss on the sale of equipment, which is a non-operating activity, has reduced net income and must be added back in order to arrive at CFO. Under the indirect method, this adjustment is made in the operating activities section of the cash flow statement. The total amount of actual cash proceeds from the sale are shown in the investing activities section of the cash flow statement with no adjustment required.

A channel strategy based on disintermediating distributors and retailers is most appropriate for companies with: complex products. a large target market. business-to-consumer (B2C) business models.

a complex products. Implementing a direct sales model that circumvents distributors and retailers requires a significant investment to develop an in-house sales team. Companies that have enjoyed the most success with this model tend to offer complex, high-margin products. This strategy is better suited for companies with business-to-business (B2B) business models because the customer base is relatively small and can be easily reached.

Companies that offer defined benefit pension plans most likely meet their obligations to retired employees: indirectly through a legally distinct entity. directly from internally-generated cash flows. directly from funds that have been contributed by current plan participants.

a) Indirectly through a legally distinct entity. Sponsors of defined benefit pension plans typically establish a pension fund trust that operates as a separate legal entity. Sponsors then make payments to the trust, which is responsible for managing assets on behalf of the plan's participants and administering payments to beneficiaries.

Investments by venture capital firms to support a company's product development are most likely made at the: seed stage. early stage. angel investing stage.

a) Seed Stage Angel investments, which are typically made by individuals, support activities such as the development of a business plan. Venture capital firms generally do not make investments until the seed stage, during which product development occurs. Early-stage investments typically fund the initial phase of commercial production.

According to the neoclassical growth model formula, all else equal, a 5% increase in net capital investment will most likely increase an economy's output by: less than 5 percent. exactly 5 percent. more than 5 percent.

a) more than 5 percent The neoclassical growth model production function is based on the assumption of constant returns to scale, meaning that increasing all inputs by 5% would cause a 5% increase in output. However, this model also assumes diminishing marginal productivity with respect to any individual input. Holding all other inputs constant, a 5% increase in net capital investment alone would increase output by less than 5%.

In response to a severe recession, the Keynesian school of economic thought most likely advocates for: deficit spending. lower interest rates. allowing wages to reach a new equilibrium level.

a. The neoclassical and Austrian schools emphasized the need to allow wages and prices to find their equilibrium level. By contrast, John Maynard Keynes did not believe that the correction of wages and prices required to establish a new equilibrium in the aftermath of an economic crisis was either practical or desirable. If aggregate demand falls (shifts to the left), reducing wages would further cause demand to shift further to the left as workers had less money to spend. In order to avoid the potential for this downward spiral (or "domino effect"), Keynes and his followers have advocated for governments to temporarily support aggregate demand with spending financed by budget deficits. Keynes believed that deficit spending would be a more effective tool than lower interest rates during periods of depressed business confidence.

Compared to a traditional 2 and 20 compensation package, an either/or fee arrangement most likely has: a lower management fee rate and a higher incentive fee rate. an incentive fee structure that makes hurdle rates unnecessary. a higher management fee rate and a variable incentive fee rate.

a. In an either/or compensation structure, managers agree that their annual compensation will be either a relatively low management fee (e.g., 1%) or a relatively high incentive fee rate (e.g., 30%) on gains above a specified hurdle rate.

Horizontal Vision Technologies (HVT) is an early-stage company looking to establish its productive capacity. The company raises $200,000 in new capital — $100,000 in equity from Horace Allen, a venture capital investor, and $100,000 in debt from Debra Friesen, a private lender. Compared to Allen, Friesen most likely has: a lower potential loss. less exposure to investment risk. a lower priority claim to the HVT's assets.

b) Compared to shareholders, lenders have a higher priority claim to a company's assets, which reduces their exposure to investment risk. As a result, debt is a lower cost source of capital with lenders requiring lower rates of return than equity investors. However, both lenders and equity holders can lose the full value of their investment. In this example, both Friesen and Allen both have the potential to lose the full value of their $100,000 investment.

Which of the following statements is most accurate? For two interest rate futures contracts to have the same basis point value: it is only necessary that they have the same notional value. they must have the same notional value and their market reference rates must be at the same level. they must have the same notional value and their market reference rates must have the same periodicity.

c) The basis point value (BPV) of an interest rate futures contract is calculated as follows: Futures Contract BPV = Notional Principal × 0.0001 × Period In the above formula, the term for Period refers to the portion of the year covered by the term of the MRR. For example, the Period value for a six-month MRR is 0.5. Two interest rate futures contracts with the same notional and reference rates with the same periodicity will have the same basis point value.

Under IFRS, actuarial gains from a defined benefit pension plan will most likely be recognized on the sponsor's: income statement. statement of other comprehensive income and amortized over time. statement of other comprehensive income and not amortized over time.

c) Actuarial gains from a DB pension will be in OCI and not amortized over time

A stock that has seen its earnings yield decrease significantly over the past two months without any significant change in company performance or outlook is most likely: to have a lesser impact on the performance of an equally-weighted index. to have a greater impact on the performance of a fundamentally-weighted index. the subject of speculation that it will be added to a popular value-weighted index.

c) Earnings yield is the ratio of past or expected earnings per share to share price. A decreasing earnings yield occurs when price increases relative to earnings. Because there has been no change in company performance or outlook, the change in this example is most likely due to price increases caused by speculative buying, which can occur when fund managers purchase the shares that they believe will be added to the benchmark against which their performance is assessed. Choice A is incorrect because a change in price over the past two months will not affect the magnitude of the impact that a stock has on the performance of an equally-weighted index. Choice B is incorrect because a stock will have less impact on the performance of a fundamentally-weighted index as its earnings yield decreases.

The homoskedasticity assumption has most likely been violated if: errors are correlated across observations. the error term is not normally distributed. the variance of the error term is the not same for all observations.

c. The homoskedasticity assumption states that the variance of the error term is the same for all data points used in a linear regression model. If this is not observed, the data is said to be heteroskedastic. Although the error term is assumed to be normally distributed and uncorrelated across observations, neither of these is the homoskedasticity assumption.

In an investment policy statement (IPS), a client's risk objectives should most likely be stated: in relative terms only. in absolute terms. in either absolute or relative terms.

either - if it's in relative terms it should include the relevant benchmark that its being compared to.

Which of the following statements is most accurate? Under the converged revenue recognition standards issued by IASB and FASB, companies are: prohibited from recognizing revenue for services that have not been completely rendered. not required to recognize revenue for services that have already been completely rendered. prohibited from recognizing revenue for goods until they have been physically delivered to the customer.

nder the converged standards adopted by IASB and FASB in May 2014, decisions about revenue recognition depend significantly on the terms of a contract. The two key issues to consider are: What are each party's rights and responsibilities under the contract? Is it likely that payment will be collected? A contract can only exist if it is likely that the seller will be able to collect the payment. Sellers are not required to recognize revenue if there are significant doubts about collectability. Indeed, revenue recognition is prohibited under such circumstances, even if the contracted services have already been performed. Revenue may be recognized for services that have only been partially completed. For example, a construction company may be able to recognize revenues in proportion to its costs incrementally over the life of a long-term contract. Contract terms may also allow a seller to recognize revenue for goods before they have been physically delivered to the customer. For example, Company A may purchase goods from Company B and arrange for them to be delivered by a third party (Company C) that is responsible for the goods during transit. In this case, Company B can recognize the revenues from this transaction as soon as it has fulfilled all of its obligations under the terms of the contract.

Which of the following statements is most accurate? Medium-term notes: are typically underwritten by an investment bank. are offered continuously to investors by the agent of the issuer. have maturities ranging from greater than one year and less than 15 years.

offered continously to investors by the agent of the issuer. MTN bridge between commercial paper and long term bonds but they are longer than 1 year and can extend far beyond the 15 year timeframe.