1. John Klement is a soybean farmer who harvests 125000 bushels of soybeans annually. Klement's fixed costs are $ 200000 and his variable costs are $ 5 per bushel. Soybeans are currently priced at $ 5.35 per bushel. Based on his estimates, Klement sees soybean prices being relatively stable for the next two years, then increasing to $7.00 per bushel due to increased demand from Japan. What action should Klement take? Klement should:
A.shut down for two years and then restart his business.
B.cut his production by 50% for the next two years and then resume full production.
C.continue operating his business as usual.
A B C
C
Since Klement is selling soybeans, a common commodity, he is a price taker and therefore can not adjust the price. He should continue operating his business as normal as he is currently covering variable costs and part of fixed costs. In two years from now, he will be able to cover both fixed and variable costs and be able to make a substantial profit.
2. Which of the following statements regarding depreciation expense in the cash flow statements is TRUE? Depreciation is:
A.added back to net income when determining CFO using the direct method.
B.added back to net income when determining CFO using the indirect method.
C.considered a cash item.
A B C
B
Depreciation is a non-cash expense. Only in the indirect method is depreciation added back to net income when determining CFO because net income is only used in the indirect method and not the direct method. The direct method instead starts with cash sales and works down the income statement.
3. Which of the following choices most accurately illustrates an operating liability and which most accurately illustrates a financing liability? Operating liabilities Financing liabilities
A.Customer advances Accrued liabilities
B.Short-term note payable Current portion of long-term debt
C.Accounts payable Current portion of long-term debt
A B C
C
Operating liabilities result from the operations of the firm and consist of operating and trade liabilities such as accounts payable, customer advances, and accrued liabilities. Financing liabilities are a result of prior financing inflows. Financing liabilities (current) include short-term notes payable and the current maturities of long-term debt.
4. Daniel Blair recently joined an investment club with several of his coworkers. Members of the club are generally quite conservative and are unwilling to invest in debt securities with credit ratings below AA. New investments are always evaluated in the context of the overall portfolio. Based on the attributes of the investment club members, they will most likely pursue an investment strategy that:
A.attempts to reduce a portfolio's standard deviation through diversification.
B.seeks the lowest risk securities.
C.tries to totally eliminate systematic risk.
A B C
A
Risk averse does not mean minimizing or eliminating risk, only preferring the lower risk investment of two alternative investments with the same expected return.
5. Which of the following would NOT be found in the statement of stockholders' equity?
A.Extraordinary items.
B.The cumulative effect of exchange rate changes.
C.The minimum liability for under funded pension plans.
A B C
A
Extraordinary items are found in the income statement.
6. An investor in the 28% tax bracket is considering buying one of the following securities: A fully taxable Treasury security offering a 6.0% yield. A municipal bond offered at par offering a 4.0% yield. What is the after-tax yield on the Treasury and the taxable-equivalent yield on the municipal bond? After-tax yield on the treasury Taxable-equivalent yield on the municipal
A.4.32% 2.88%
B.4.32% 5.56%
C.6.48% 2.88%
A B C
B
7. The fact that firms can make more adjustments to production methods in the long run gives the firm:
A.the ability to quickly adjust output.
B.a long-run supply curve that is steeper than its short-run supply curve.
C.a long-run supply curve that is more elastic than its short-run supply curve.
A B C
C
Firms can adjust the fixed nature of their production costs in the long run through the purchase or sale of fixed assets. Therefore, it costs less to adjust output slowly in response to a change in demand. In the long run, there will be a greater change in the quantity supplied for a given change in price. This is because in the long run firms can change their production capacity.
8. Which of the following statements regarding forward contracts on T-bills is TRUE?
A.If short-term yields increase unexpectedly after contract initiation, the short will profit on the contract.
B.There is no default risk on these forwards because T-bills are government-backed.
C.The long will receive a payment at settlement if the discount yield is above the forward yield.
A B C
A
When short-term rates increase, T-bill prices fall and the short position will profit. The price of a T-bill prior to maturity is always less than its face value. There is default risk on the forward, even though the underlying asset is considered default-free.
9. If the volatility of interest rates increases, which of the following will experience the smallest price increase resulting from lower rates?
A.Putable bond.
B.Callable bond.
C.Option-free coupon bond.
A B C
B
For a callable bond the issuer has the option to call the bond if the interest rate decreases during its call period. The issuer will call the bond if interest rates have decreased in order to obtain cheaper financing elsewhere. If the interest rate volatility increases the chance, it is optimal for the issuer to call the bond increases, making the call option more valuable. Therefore, the bond price is depressed by an increase in interest rate volatility.
10. Compared with outcomes that result from collusion, independent action by companies operating in an oligopolistic industry would tend to decrease:
A.output but not prices.
B.prices but not output.
C.both output and prices.
A B C
B
By colluding with rivals, oligopolists are able to replicate monopolistic industry conditions, and maximize industry profits. Oligopolists face two conflicting tendencies-the incentive to collude with rivals, so that industry profits can be maximized, and the incentive to cheat on any collusive agreement so that their own firm's profits can be maximized.
11. A firm is purchasing a new file server for $ 680000 with a 4-year expected life and a salvage value of $ 50000. It is expected that the new server will generate an additional $200000 in revenue each year. The firm will use the straight line method to depreciate the server for financial reporting, but the sum-of-year's digits (SYD) method for tax purposes. How much tax will be payable in year two, assuming a 35 percent tax rate?
A.$ 3850.
B.-$ 1400.
C.$ 14875.
A B C
A
Income for each year is expected to be $ 200000. The second year's depreciation will be ($680000-$50000)×0.3=$189000, so the taxable income will be $11000 and the tax will be $11000×0.35=$3850.
12. When calculating cash flow from operations (CFO) using the indirect method, which of the following is most accurate?
A.The indirect method requires an additional schedule to reconcile net income to cash flow.
B.In using the indirect method, each item on the income statement is converted to its cash equivalent.
C.When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows.
A B C
C
13. Discretionary fiscal policy can be defined as:
A.a situation in which total government spending exceeds total government revenue during a specific time period, usually one year.
B.a change in laws or appropriation levels that alters government revenues and/or expenditures.
C.a situation in which total government spending is less than total government revenue during a time period, usually one year.
A B C
B
Discretionary fiscal policy can be defined as a change in laws or appropriation levels that alters government revenues and/or expenditures.
14. A corporation being analyzed has a return on equity (ROE) of 14.3 percent compared to the industry average of 11.8 percent. Which of the following statements about the company, based on the DuPont equation, could explain the higher than average ROE?
A.The net profit margin is lower than the industry average, but the company is using a higher proportion of debt financing than the industry average.
B.All of the statements could explain the higher than average ROE.
C.The asset turnover is lower than the industry average, but the net profit margin is higher than the industry average.
A B C
B
The traditional DuPont equation is: ROE=(net profit margin) (asset turnover) (equity multiplier) Therefore, at least one of the values must be above average if the firm is to exceed the industry average.
15. The most junior type of municipal bond is the:
A.general obligation bond.
B.income or revenue bond.
C.indenture bond.
A B C
B
General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Revenue bonds are serviced by the income generated from specific income-producing projects and can not be paid from other proceeds unrelated to the project.
16. Which of the following is least likely among the usual investment constraints that should be considered?
A.Tax concerns and Legal factors.
B.Adherence to the Standards of Practice.
C.Unique needs and Preferences.
A B C
B
The Standards of Practice have very little to do with investment constraints.
17. Suppose you expect the computer industry to have a dividend payout ratio of 20% a return on equity of 22%, and a required return of 19%. Use microanalysis to estimate the earnings multiplier for the industry.
A.10.8 times.
B.13.3 times.
C.14.3 times.
A B C
C
Compute g as the retention rate (80%) times ROE (22%) or 17.6%. The earnings multiplier can then be computed as (D/E)/(k-g), or 0.20/(0.19-0.176)=14.3 times.
18. According to the earnings multiplier model, all else equal, as the required rate of return on a stock increases, the:
A.P/E ratio will increase.
B.P/E ratio will decrease.
C.earnings per share will decrease.
A B C
B
According to the earnings multiplier model, the P/E ratio is equal to P0/E1=(D1/E1)/(ke-g). As ke increases, P0/E1 will decrease, all else equal.
19. An oil exploration company has been contracted to dig 100 exploratory holes for $ 200000. The cost to complete this job is estimated to be $150000, but the company doesn't recognize any of the $ 50000 profit until the job is completed. Which revenue recognition method is being used?
A.Completed contract method.
B.Percentage-of-completion method.
C.Sales basis method.
A B C
A
The completed contract method doesn't recognize revenue and expense until the contract is completed. The percentage-of-completion method would have recognized a portion of the $ 50000 profit prior to completion.
20. Of the following types of firm, which is most suitable for P/B ratio analysis?
A.A service industry firm without significant fixed assets.
B.A firm with accounting standards consistent to other firms.
C.A firm with accounting standards different from other firms.
A B C
B
Assuming consistent accounting standards across firms, P/B ratios can reveal signs of mis-valuation across firms.
21. The net asset value (NAV) of an open-end fund is determined by the:
A.supply and demand for the shares in the investment management company.
B.market value of all assets minus the redemption fee, then divide by the number of shares outstanding.
C.market value of assets minus liabilities divided by the number of shares outstanding.
A B C
C
This is the equation for the calculation of NAV.
22. Which of the following will result in the lowest debt-to-total-capital ratio, assuming that all issues raise the same amount of funds?
A.Bonds with warrants attached.
B.Convertible bonds.
C.Zero-coupon bonds.
A B C
A
Bonds with warrants attached will result in a lower debt-to-total-capital ratio than the other three because part of the funds raised will be allocated to equity and the balance sheet liability will be smaller by that amount. The other three choices all result in the same initial balance sheet liability.
23. Sometimes floating rate issues have caps and/or floors, which limit the maximum or minimum coupon rate that the issue will pay. Which of the following statements is TRUE with regard to floating rate issues that have caps and floors?
A.A floor is a disadvantage to both the issuer and the bondholder while a cap is an advantage to both the issuer and the bondholder.
B.A floor is an advantage to both the issuer and the bondholder while a cap is a disadvantage to both the issuer and the bondholder.
C.A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer.
A B C
C
A cap limits the upside potential of the coupon rate paid on the floating rate bond and is therefore a disadvantage to the bondholder. A floor limits the downside potential of the coupon rate and is therefore a disadvantage to the bond issuer.
24. Which of the following statements is a violation of Standard Ⅶ (B) if it is included on a CFA charterholder's resume?
A.My earning the CFA designation indicates my desire to maintain high standards.
B.My earning the CFA designation indicates my superior ability.
C.My earning the CFA designation required that I pass three rigorous exams.
A B C
B
A CFA charterholder may not make claims about how earning the designation proves superior capabilities. The other two choices are allowed because they are statements of fact.
25. Which of the following statements about theories of the yield curve is most likely correct?
A.A liquidity preference cannot be consistent with a flat term structure of interest rates.
B.The liquidity preference theory suggests that a downward-sloping term structure of interest rates is due to investors expecting short-term rates to decline, and although there is a maturity premium to consider, it is not large enough to offset the expectation of declining short-term rates.
C.The pure expectations theory suggests that an upward-sloping term structure of interest rates is a consequence of investors expecting short-term rates to remain unchanged for a period of time, followed by investors expecting short-term rates to rise for a period of time.
A B C
B
26. Which of the following statements regarding capital budgeting is correct? A firm's optimal capital budget can be found by moving along its investment opportunity schedule until:
A.it exhausts its capital budget.
B.the marginal revenue product is equal to marginal cost.
C.the next project's return no longer covers the marginal cost of capital.
A B C
C
The firm would not want to exhaust its capital budget on "bad" projects, (i. e. projects with IRR<cost of capital [NPV<0]). They should continue to invest as long as the project's return is greater than the marginal cost of capital of the firm. When the project's IRR=cost of capital, the NPV=0. This project will only make the firm larger; it will add nothing to the stock price. The investment opportunity schedule plots expected project returns from highest to lowest IRR.
27. Which of the following best describes the underlying principles upon which the Global Investment Performance Standards (GIPS) are based?
A.Fair and consistent application of a global set of regulatory requirements.
B.Fair treatment of entities associated with securities law infractions.
C.Full disclosure and fair representation of performance results.
A B C
C
The GIPS standards are a set of voluntary standards based on the fundamental principles of full disclosure and fair representation of performance results.
28. An analyst gathered the following information about a company: Taxable income is $ 40000. Pretax income is $ 50000. Current tax rate is 50%. Tax rate when the reversal occurs will be 40%. What is the company' s deferred tax liability at the end of year 1?
A.$ 35OO.
B.$ 4000.
C.$ 4500.
A B C
B
The tax rate that should be used is the expected tax rate when the liability reverses. The deferred tax liability will be $10000×40%=$ 4000.
29. Which of the following statements about portfolio risk is true?
A.In the absence of perfectly positive correlation, a portfolio will always have lower risk than the average risk of the component assets.
B.In the absence of perfectly positive correlation, a portfolio will always have lower risk than the risk of each of the component assets.
C.In the absence of perfectly negative correlation, a portfolio will always have lower risk than the risk of each of the component assets.
A B C
A
30. If firms Acme and Butler have the same amount of sales and equal quick ratios, but Acme's receivables turnover is higher, it is most likely that:
A.Acme's average days of receivables is higher than Butler's.
B.Acme has lower credit standards than Butler.
C.Butler has a lower cash ratio than Acme.
A B C
C
Given that they have the same amount of sales and Acme's receivables turnover (sales/average accounts receivable) is higher, Acme must have lower average accounts receivable than Butler. Given that they have equal quick ratios, subtracting accounts receivable from the numerators of the quick ratios of both firms will produce a cash ratio for Butler that is lower than the cash ratio for Acme. Lower credit standards would tend to increase a firm's days of sales outstanding and decrease receivables turnover.
31. For a firm financed with common stock and fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?
A.Debt-to-equity ratio.
B.Interest expense.
C.Deferred tax liabilities.
A B C
A
For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. Because changes in interest rates will change the market value of the debt, but not the coupon, interest expense will be unchanged. (However, if a firm has variable-rate debt, interest expense will change when interest rates change, but the market value of the variable-rate debt will not change significantly.)
32. This information pertains to equipment owned by Brigade Company. Cost of equipment $10000 Estimated residual value $ 2000 Estimated useful life 5 years Depreciation method Straight-line The accumulated depreciation at the end of year 3 is:
A.$ 1600.
B.$ 3200.
C.$ 4800.
A B C
C
accumulated depreciation at the end of year 3=[($10000-$ 2000)/5]×3=$ 4800
33. John McHenry is a junior consultant working in Oldie Village Pension Consulting. He has calculated annual returns for 300 portfolio managers, and is analyzing the relationship between fees and performance. The dataset he is using (returns and fees for each manager) is an example of:
A.a stratified random sample.
B.a normalized dataset.
C.a cross-sectional dataset.
A B C
C
A time-series sample consists of observations taken over a period of time at specific and equally spaced time intervals. Cross-sectional data are a sample of observations taken at a single point in time.
34. The scale-free measure of relative dispersion that is useful in making direct comparisons among different asset classes is the:
A.Range.
B.Variation.
C.Coefficient of variation.
A B C
C
The coefficient of variation is the ratio of the standard deviation of a set of observations to their mean value. This scale-free measure permits direct comparisons of dispersion across different data sets.
35. Which of the following is the appropriate redemption price when bonds are called according to the sinking fund provision?
A.Special redemption price.
B.Regular redemption price.
C.General redemption price.
A B C
A
Regular redemption and general redemption price are identical and refer to bonds being called according to the provisions specified in the bond indenture. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as special redemption prices.
36. In the short run, price searchers maximize profits by producing output where marginal revenue (MR):
A.equals marginal costs (MC) and charging a price based on the average total cost (ATC) curve.
B.is greater than marginal costs (MC) and charging a price based on the demand curve.
C.equals marginal costs (MC) and charging a price based on the demand curve.
A B C
C
Price searchers maximize profits by producing an amount of output where MR equals MC and charging a price based on the demand curve. In the short run, profits or losses occur depending upon where the individual firm's ATC curve is in relationship to the demand curve. In the long run, economic profits are zero due to the low barriers to entry. Important note for the test: regardless of whether a firm is a price taker, price searcher, monopoly, or oligopoly, all firms will seek to maximize profits and want to produce the output where marginal revenue equals marginal cost.
37. When providing outside services, a member should provide all of the following information to her current employer EXCEPT:
A.the types of services to be provided.
B.the compensation she will receive.
C.a promise to remit an agreed-upon percentage of the proceeds to the current employer.
A B C
C
She should provide information about the type of services, the compensation arrangement and the expected duration of the project.
38. During an onsite company visit, Yu Ding, CFA, accidentally overheard the Chief Executive office (CEO) of AMP, Inc., discussing the company's pending tender office to purchase Dynamica Enterprises, a retailer of stargazer products, According to the Standards of practice Handbook, Yu Ding may not use the Information to take investment action because:
A.the information relates to a tender offer.
B.acting on the information would breach a duty to bother the CEO and AMP.
C.she does not have a reasonable and adequate basis for taking investment action.
A B C
A
Trading on the information is restricted as it relates to a tender offer; it is clearly material, nonpublic information.
39. Which of the following limits the ability of arbitrage to correct anomalies?
A.Arbitrage is a relatively riskless activity, which has led to consistently reduced profits for many arbitrageurs, thereby reducing their interest in correcting market anomalies.
B.There is no guarantee that even correctly identified relative mispricing of similar stocks will be corrected in the near term.
C.Arbitrageurs are sophisticated traders but their short supply precludes the correction of market anomalies.
A B C
B
There is no guarantee that even correctly identified relative mispricings of similar stocks will be corrected in the near term. Investors of the funds that arbitrageurs and traders use can be notoriously impatient, removing funds when trades go against them or if results are not consistently good. Since capital is limited, in periods where there are many apparent mispricing, arbitrageurs will direct capital only to pursue the most attractive trades, leaving other mispricings unexploited.
40. A security market with price continuity is most accurately characterized as a market which:
A.assets can be bought or sold quickly.
B.an asset' s price reflects all available information about the asset.
C.Prices do not change much from one transaction to the next in the absence of new information.
A B C
C
A well-functioning securities market should possess price continuity; prices should not change much from one transaction to the next unless substantial new information affecting a security's value becomes available.
41. Which of the following statements regarding survivorship bias in hedge funds is TRUE? Survivorship bias tends to:
A.understate the performance and overstate the volatility of hedge funds.
B.overstate the performance and understate the volatility of hedge funds.
C.overstate both the performance and volatility of hedge funds.
A B C
B
Survivorship bias exists because only the successful hedge funds submit performance data, thus overstating performance when the index is considered to be representative of the entire hedge fund population. Likewise, stable funds tend to succeed, while more volatile funds tend to go out of business, causing the database to tend to understate volatility for hedge funds as an asset class.
42. An argument against using the price-to-sales (P/S) valuation approach is that:
A.sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value.
B.P/S ratios do not express differences in cost structures across companies.
C.P/S ratios are not as volatile as price-to-earnings (P/E) multiples.
A B C
B
P/S ratios do not express differences in cost structures across companies. The other responses are advantages of the P/S ratios, not disadvantages.
43. Which of the following would be most likely to have gains from an unexpected increase in the inflation rate?
A.Holders of floating rate debt securities.
B.The owner of a shopping mall.
C.A home owner with a fixed-rate mortgage.
A B C
C
44. A natural monopoly is most likely to exist when:
A.ATC increases as output increases.
B.economies of scale are great.
C.all production is divided up between just a few firms.
A B C
B
A natural monopoly may exist when economies of scale are great. The large economies of scale make it inefficient to have many small producers.
45. With other variables remaining constant, if profit margin rises, ROE will:
A.fall.
B.remain the same.
C.increase.
A B C
C
The DuPont equation shows clearly that ROE will increase as profit margin increases, as long as asset turn and leverage do not fall.