CFA LEVEL 1 mock-exam

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CFA LEVEL 1 MOCK EXAM

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CFA LEVEL 1 mock-exam

  1. 1. www.soleadea.comMOCK EXAM 1LEVEL I CFA®Copyright © 2012 soleadea.com
  2. 2. www.soleadea.comContentsQuestions 1 through 18 relate to Ethical and Professional Standards ................................................... 2Questions 19 through 32 relate to Quantitative Methods ..................................................................... 8Questions 33 through 44 relate to Economics ...................................................................................... 11Questions 45 through 68 relate to Financial Statement Analysis ......................................................... 14Questions 69 through 78 relate to Corporate Finance ......................................................................... 19Questions 79 through 90 relate to Equity Investments ........................................................................ 22Questions 91 through 96 relate to Derivative Investments .................................................................. 25Questions 97 through 108 relate to Fixed Income Investments ........................................................... 27Questions 109 through 114 relate to Alternative Investments ............................................................ 30Questions 115 through 120 relate to Portfolio Management .............................................................. 31CFA Institute does not endorse, promote, or warrant the accuracy or quality of the productsor services offered by Soleadea. CFA Institute, CFA®, and Chartered Financial Analyst® are trademarks owned by CFAInstitute.The exam lasts for 180 minutes. There is always one correct answer for each question. You may score1 point for every correct answer. If your answer is incorrect or you omit a question, you receive0 points.Copyright © 2012 www.soleadea.com Page 1 of 32
  3. 3. www.soleadea.comQuestions 1 through 18 relate to Ethical and Professional Standards 1. George, a CFA candidate, works in the City. At a firm luncheon he meets Raoul, one of his colleagues from his previous work and a CFA charterholder. Raoul asks George whether he heard that Cloud Airlines are about to declare its insolvency next week. According to the Code and Standards, George: a. must wait till the next week before he uses the information. b. must not use the information as he has no reasonable basis to use it. c. is permitted to use the information but only for the benefit of his clients and not his own. 2. JJ & Brothers is a family business run by brothers holding the CFA designation. Erik, one of the brothers working on a high managerial position, tells Samantha Fey, the employee of JJ & Brothers and a CFA candidate, to carry out one of some major transactions “the old way”. If Samantha does as she is told, she will disregard the current change in law that has just been introduced. When she said that to Erik, he replied that she will most certainly “find the way”, and besides it’s been just a couple of days since the new regulation is in force and not everybody knows it should apply. She decides to consult Johannes, the senior brother, about the matter. Johannes tells Samantha, to her greatest disappointment, that “Erik is the one to decide about all this”. What should Samantha do in this situation? a. Samantha should dissociate from the activity and even consider handing in her resignation in order to comply with Standard I (A). b. Samantha should carry out the transaction the way her employer wants her to, but she should keep it secret so as not to violate Standard I (A). c. Samantha should act the way her employer wants her to because if she does not she will violate Standard IV (A) by not being loyal to her supervisor. 3. Lee Burgman, CFA, is an investment adviser. During the first meeting with her client, Lee thoroughly interviewed him and gathered all the necessary information, including his profile, investment objectives, constrains and benchmarks. The IPS was accepted by the client and no amendments were introduced to the IPS for three months. Investment advisers in the firm where Burgman works are obliged to update the IPS for their clients on a semi-annual basis. After three months from the first meeting, the client came to Burgman dissatisfied with her services because he lost some money on one of the investment Lee advised to him. He also said that he lost his job two weeks ago and accused Lee of unsuitability of her actions. In this situation, which of the following statements is the most appropriate under Standard III (C)? a. Lee violated the Standard because she failed to determine the suitability of the investment. b. Lee did not violate the Standard because she performed all her duties to the client thoroughly. c. Lee violated the Standard because she should have updated the client’s IPS before taking any investment actions.Copyright © 2012 www.soleadea.com Page 2 of 32
  4. 4. www.soleadea.com 4. Jonathan Smith, a CFA charterholder, works as a broker in Americas Finest Finance Ltd. Lately, he’s been trading a lot for a client who comes from a small island in the Tonga archipelago. The client is a patriot and often talks about his country in his conversations with Smith. When trading for the client, Smith should abide by: a. the Code and Standards. b. the law of the country that his client comes from if the clients wishes so. c. the law of the country that his client comes from only if the regulations governing any of the trades are stricter than the Code and Standards. 5. Which of the following statements most likely holds under the Code and Standards? a. Members and Candidates must never accept gifts or gratuities from their clients. b. Members and Candidates may accept gifts or gratuities from their clients up to a certain limit established by the firm. c. Members and Candidates must never accept gifts from their clients but they may accept gratuities unless they exceed a certain limit established by the firm. 6. Naomie Kowalsky, CFA, was hired as an equity analyst in a corporate finance department of an investment services firm for three years. Last month, there were dismissals in the firm and she lost her job. She had worked on the project on TrackMontains, Inc. In this situation, Standard I (C) will be breached if: a. other employees of the department use the project on TrackMontains, Inc. b. Naomie issues the project under her name to use it when applying for a new job. c. employees of the department use Naomie’s project for further research without giving her name. 7. Kayah is a Level I candidate in the CFA Program. To prepare herself well for the exam she registered to Soleadea. Yesterday she sat for the exam. After the exam she logged in to the portal and wrote a post: “Hello everyone☺. I closed the door of the exam room about two hours ago and ever since I just can’t stop being satisfied with myself. I must say that I was well prepared for the exam and I feel I did a good job. The exam wasn’t as tough as I expected it to be, though I was surprised that they care so much about Standard VII. I thought there would be fewer questions on this. I hope everyone is at least as happy as I am. All the best to you all and see you soon in Soleadea Level II preparation workspace.” Which statement is the most adequate according to the Standards? a. Kayah violated Standard VII (A) by breaking the Candidate Pledge. b. Kayah did not violate Standard VII (A) because her intent was just to share her opinion with other Soleadians. c. Kayah did not violate Standard VII (A) because she did not disclose any material information or specific details about the exam.Copyright © 2012 www.soleadea.com Page 3 of 32
  5. 5. www.soleadea.com 8. According to Standard III (A), in dealing with the client’s portfolio a Member or Candidate: a. may use client brokerage to purchase research services that will benefit the investment manager. b. should inform the client about not getting best execution before satisfying client directed brokerage request. c. may pay higher commissions for buying products for the client if it is for the benefit of the client or the investment manager. 9. The management of Tyres & Trunks, Plc. hired an analyst to provide a recommendation for the firm. The analyst works at a local brokerage and is a CFA charterholder. He is asked to participate in an automotive event organized by Tyres & Trunks, Plc. The company arranges accommodation and covers the costs of travel. What is the best course of action for the analyst to follow? a. He should not participate in the event because it will compromise his independence and objectivity. b. He should take part in the event but he should pay for his travel and accommodation by his own in order to avoid a potential conflict of interest. c. He should take part in the event and accept the arranged accommodation because otherwise he will not be able to fulfill his duties to the client prudently. 10. Ingrid Thoe, CFA, in an experienced manager of a hedge fund. A new high-net-worth client wants to invest in the fund. Thoe has noticed that Ernesto, the manager responsible for the new clients’ assets, acts to the detriment of other clients. Ingrid wishes to consult with her supervisor. Thoe’s supervisor reassures her that everything is “under control and that there’s nothing to be worried about”. Thoe is not satisfied, however, with the conversation. In order to remain in compliance with the Standards, it would be best if Thoe: a. communicated her concerns to the compliance officer at the firm. b. remained her loyalty to the supervisor and follow his instructions concerning the hedge fund regardless of her mixed feelings. c. reported the potential unethical activity to the appropriate regulator immediately after the conversation with her supervisor. 11. Which of the following statements is the most appropriate according to Standard II (A)? a. Trading on inside information is permissible only in the short run. b. If information is disclosed to a wide group of analysts during firm meetings it is made public. c. Even if an investment research report is considered material it does not have to be made public before it is used.Copyright © 2012 www.soleadea.com Page 4 of 32
  6. 6. www.soleadea.com 12. Ray Jameson, CFA, has been given a task to provide a recommendation about a clothing industry company for his client. While preparing the recommendation, Ray contacts the company’s management and visits the company’s premises. He also does extensive research based on press releases, information published on financial portals and by other means of public information delivery. When producing the recommendation, Ray is permitted to form opinions on the basis of: a. information obtained during his visit to the company’s premises even if the information is nonpublic and material. b. all public information, but not information obtained during his visit to the company’s premises, which is always nonpublic. c. all information he gathers provided that he properly documents his research and that the information is not material nonpublic information even if his conclusions are material. 13. Management boards of animGuard and Protect Environment had a verbal agreement concerning the acquisition of animGuard by Protect Environment. It turned out, however, that annual reports of animGuard were not as good as the managing directors of Protect Environment had expected. In this case, the acquisition was withheld. Meg Torres, one of the managing directors at animGuard and a CFA charterholder, let the journalist speculate about the acquisition during a phone conversation she had after the decision was made. She was hoping that the speculations will strengthen the position of the animGuard’s stock, which will in consequence draw Protect Environment management’s attention to animGuard once again and help finalize the intended acquisition. In this situation Meg Torres most likely: a. violated Standard II (B) by letting the journalist speculate. b. violated Standard II (B) by undermining the integrity of the market. c. did not violate Standard II (B) because she did not spread any misleading information. 14. Dominique Beautier, CFA, works in an investment banking firm and is responsible for conducting derivative transactions. One of his clients, the CEO of Prosperity, Inc., has many long call options on the shares of CVAC, Inc. left in his portfolio and the maturity date is drawing near. The CEO of Prosperity, Inc. happens to be a good friend of Dominique’s supervisor and Dominique is asked to “somehow attract other clients” so that they bought the options before their maturity is due. Beautier decides to carry out a number of transactions between the accounts of those of his clients who already possess the CVAC shares. Which of the following statements is the most adequate according to the Standards? a. Beautier breached Standard II (B) by carrying out deceitful transactions. b. Beautier did not breach any of the Standards because he fulfilled his duty by taking care of his client’s interests, which is a top priority in the profession. c. Beautier remained in compliance with Standard III (C) as he carried out the transactions only between the accounts of the clients who already possessed the CVAC shares.Copyright © 2012 www.soleadea.com Page 5 of 32
  7. 7. www.soleadea.com 15. New Obligations and Checks Co. is a large brokerage company. Loren Ipsen, a CFA candidate and an independent portfolio manager, often handles her trading activities through the brokerage because she is frequently given more beneficial prices when she places her orders with Derek Doe, a broker in New Obligations and Checks Co. and an old acquaintance of hers. In order to be in compliance with Standard III (A), Loren should: a. always accept the same prices both for client and private transactions. b. never direct her clients’ transactions to New Obligations and Checks Co. because of the conflict of interests. c. make sure that handling transactions with New Obligations and Checks Co. is consistent with the client’s investment parameters. 16. According to Standard III (B), fair dealing in disseminating investment recommendations and taking investment actions means that: a. clients should always be provided with the same investment service. b. clients should always be informed about new recommendations and offerings at exactly the same time. c. clients should never be deprived of objective treatment in relation to their investment objectives and circumstances. 17. Eleonora Abramović, an independent research analyst and a CFA candidate, sought prospective clients. Her first action was to obtain from a prospective client an e-mail consent to receiving her offering. She also sent a form on client objectives that the interested individuals were to fill in and send back to Eleonora so that she was able to prepare an individualized offering for the prospective client. Some of the individuals filled in the form and send it back. Theo Czech, a hedge fund manager and a friend of Eleonora, asked her to let him see her e-mail correspondence with the prospective clients that send her the filled-in form. In order to remain in compliance with Standard III (E), Eleonora should: a. not allow Theo to see the e-mail correspondence with her prospective clients by any means. b. allow Theo to see the e-mail correspondence but only if the prospective client consents to the disclosure. c. allow Theo to see the e-mail correspondence but only if he promises that he will not use the information in any way.Copyright © 2012 www.soleadea.com Page 6 of 32
  8. 8. www.soleadea.com 18. Max Shindler is a CFA candidate. He successfully passed Level I and sat for Level II two weeks ago. Presently, he is looking for a job. In an interview with a potential future employer, Max mentions the prestige of the CFA designation and says: “While aiming for the CFA certificate I managed to master FRA. I think this is important because CFA candidates have the best skills in reading annual reports. I must admit that my abilities in this area has improved greatly since I started my preparations for the exam.” According to Standard VII (B), Max: a. violated the Standard because he boasted about his participation in the CFA Program. b. violated the Standard because he referred to the CFA designation in an appropriate manner. c. did not violate the Standard because all he did was to stress to his potential future employer the significance of the CFA designation and his skills resulting from the preparations for the exam.Copyright © 2012 www.soleadea.com Page 7 of 32
  9. 9. www.soleadea.comQuestions 19 through 32 relate to Quantitative Methods 19. According to Chebyshev’s inequality, what percentage of observations lies within two- standard-deviation interval around the mean? a. No less than 75 percent b. No less than 89 percent c. No more than 75 percent 20. What is the appropriate test statistic concerning a single mean, if population variance is unknown, the sample is small, and population is approximately normally distributed? a. t-Test b. Chi-square test c. z-Test alternative 21. An investor wants to deposit $435 000 in a bank account. The bank pays a stated annual rate of 15 percent. What is the effective annual rate using continuous compounding? a. 15.00 percent b. 16.08 percent c. 16.18 percent 22. Which of the following statements is the most accurate for a positively skewed distribution? a. Mode is bigger than mean. b. Mean is bigger than median. c. Median is bigger than mode. 23. Which of the following statements is the most appropriate? a. The third quartile is smaller than the fourth quintile. b. The third quintile is smaller than the 50th percentile. c. The third quartile is smaller than the 50th percentile. 24. An analyst stated that decreasing a sample size will increase the width of a confidence interval and decrease the standard error. The analyst’s statement is incorrect with respect to: a. both the standard error and the confidence interval. b. the confidence interval, but correct with respect to the standard error. c. the standard error, but correct with respect to the confidence interval.Copyright © 2012 www.soleadea.com Page 8 of 32
  10. 10. www.soleadea.com 25. Assume that a stock’s price at the end of the next two periods is as shown below: Period 0 1 2 100 120 144 Stock prices 83.33 100 69.44 The probability that the stock’s prices will go down in a given period is 50%. What is the probability that the stock’s price at the end of the second period will be the same as today (period 0)? a. 25% b. 50% c. 75% 26. A project offers the following incremental after-tax cash flows: Year 0 1 2 3 Cash flow ($) -15,000 3,000 3,000 16,000 The appropriate discount rate to use in evaluating the project is 12.5 percent. The IRR of the project is closest to: a. 12.5 percent b. 14.2 percent c. 16.2 percent 27. Regarding normal distribution, which of the statements given below is the least accurate? a. Excess kurtosis of normal distribution is equal to zero. b. Normal distribution contrary to lognormal distribution is positively skewed. c. A linear combination of three normal random variables is normally distributed. 28. An analyst describing the binomial distribution assumptions stated that the probability of success is constant for all trials, and that trials are independent. The analyst’s statement is correct with respect to: a. both the constant probability of success and independent trials. b. neither the constant probability of success nor independent trials. c. the constant probability of success but not with respect to independent trials. 29. An analyst stated that the geometric mean is good for reporting past returns on a portfolio, and that the arithmetic mean is good for calculating the average return on a portfolio over one period horizon. The analyst’s statement is correct with respect to: a. both. b. the arithmetic mean return, but incorrect with respect to the geometric mean return. c. the geometric mean return, but incorrect with respect to the arithmetic mean return.Copyright © 2012 www.soleadea.com Page 9 of 32
  11. 11. www.soleadea.com 30. Which of the following can most likely be considered as a relative dispersion: a. Standard deviation b. Coefficient of variation c. Mean absolute deviation 31. Regarding covariance and correlation, an analyst stated that covariance between random variable A and random variable B has the same value that covariance between random variable B and random variable A, and that correlation is a measure of the linear relationship between two random variables. The analyst’s statement is correct with regard to: a. both covariance and correlation. b. neither covariance nor correlation. c. covariance, but incorrect with regard to correlation. 32. An analyst estimates that Precious Bank quarterly revenues will come in between 150 million and 270 million US dollars. Every outcome from this range is equally probable. What is the probability that revenues are going to be greater than 200 million dollars? a. 42 percent b. 50 percent c. 58 percentCopyright © 2012 www.soleadea.com Page 10 of 32
  12. 12. www.soleadea.comQuestions 33 through 44 relate to Economics 33. The demand function is given by equation: ܳ = 10.5 − 0.6ܲ஺ + 0.1‫ܲ52.0 − ܫ‬஻ Where: ܳ – demand ܲ஺ – price A ‫ – ܫ‬income ܲ஻ – price B Holding all other things constant, ܲ஻ increases by 1. Which of the following statements is the least accurate? a. Demand for B decreases by 1. b. Demand for A decreases by 0.25. c. A and B are probably complementary goods. 34. The nominal GDP is equal to $55,240,000 and the real GDP is equal to $52,040,000. The GDP deflator is closest to: a. 94 b. 100 c. 106 35. Which of the following statements is least likely correct? a. For two consumers A and B, the two corresponding indifference curves can intersect. b. For a given consumer A, two indifference curves cannot intersect because it would violate the transitivity assumption. c. For two consumers A and B, the two corresponding indifference curves cannot intersect because it would violate the transitivity assumption. 36. Which of the following statements regarding market structures is the least accurate? a. Under imperfect competition, total revenue is a linear function of quantity. b. Under imperfect competition, the marginal revenue line is below the price line. c. Under imperfect competition, the marginal revenue line is below the average revenue line.Copyright © 2012 www.soleadea.com Page 11 of 32
  13. 13. www.soleadea.com 37. The table below presents currency exchange rates: Exchange rate USD/EUR 1.3250 CHF/EUR 1.2090 The amount of Swiss Franc (CHF) that an investor will receive for $120,000 is closest to: a. CHF 109,494 b. CHF 131,514 c. CHF 192,231 38. Which of the following is least likely one of the primary factors of production? a. Labor b. Capital c. Technology 39. Profit maximization least likely occurs when: a. marginal revenue is equal to marginal cost. b. the difference between total revenue and average fixed cost is the greatest. c. the revenue value of the output from the last unit of input employed is equal to the cost of employing that input unit. 40. If the cross-price elasticity of demand between two goods is positive it is most likely that these two goods are: a. substitutes. b. Giffen goods. c. complements. 41. The table below provides information about an economy: Consumption function C=1000+0.65(Y-T) Investment function I=100+0.1Y-10r Government spending G=400 Tax function T= -100+0.35Y Net export function X-M=700-0.15Y Where: Y – aggregate income R – real interest rate If government spending increases by 250 the IS curve is given by: a. Y=3370.5-15.9r b. Y=3609.6-15.9r c. Y=4008.0-15.9rCopyright © 2012 www.soleadea.com Page 12 of 32
  14. 14. www.soleadea.com 42. Which of the following statements is least likely correct? a. Under monopolistic competition, firms do not have pricing power. b. If demand is very elastic, the market is closed to perfect competition. c. If a monopolist is able to absorb the entire consumer surplus, it is defined as first degree of price discrimination. 43. Which of the following statements is least likely correct? a. The unemployed are all people without a job. b. Unemployment rate is the ratio of the unemployed to labor force. c. Usually the number of the employed does not include illegal workers. 44. The demand function for butter is given by equation: ܳ = 25 − 2.6ܲ஻ + 0.002‫ܲ51.0 + ܫ‬ெ Where: ܳ – yearly demand ܲெ – price of margarine ‫ – ܫ‬monthly income ܲ஻ – price of butter Monthly income is equal to 3000, the price of butter is 3 and the price of margarine is 4. The price elasticity of demand for butter is closest to: a. –2.6 b. -0.4 c. -0.3Copyright © 2012 www.soleadea.com Page 13 of 32
  15. 15. www.soleadea.comQuestions 45 through 68 relate to Financial Statement Analysis 45. Which of the following statements is least likely correct? a. The cash flow statement is sometimes called the statement of operations. b. Under U.S. GAAP, dividends received and interest paid can be attributed only to cash flow from operating activities. c. Under IFRS, dividends paid and interest paid can be attributed to cash flow from operating or financing activities. 46. Which of the following is most likely a liquidity ratio: a. ROE b. Current ratio c. Debt-to-equity ratio 47. Fox&Lee Co. depreciates equipment on a straight-line basis at a rate of 12.5 percent per year. Equipment costs incurred amount to $10 million, and the residual value is equal to $0. The depreciation for tax purposes equals 14 percent per year. The difference between the carrying amount and tax base in Year 1 is closest to: a. $125,000 b. $140,000 c. $150,000 48. Regarding “fraud triangle”, which of the following is least likely an example of fraud risk factor related to incentives or pressures? a. New accounting requirements b. High turnover of board members c. Management personal guarantees of debts of the entity 49. BringIt Ltd. earns revenue before receiving cash but has not recognized the revenue yet. Which of the below is most likely correct? a. Adjusting entry involves reducing the liability as cash is paid. b. Adjusting entry involves reducing the liability while recording revenue. c. Originating entry involves recording revenue and establishing an asset. 50. According to IAS No. 1, which of the following is least likely one of the general features characteristic of the preparation of financial statements: a. Accrual basis b. Fair presentation c. Offsetting of all assets and liabilitiesCopyright © 2012 www.soleadea.com Page 14 of 32
  16. 16. www.soleadea.com 51. The coherent financial reporting framework is least likely characterized by: a. Transparency b. Comparability c. Comprehensiveness 52. JJ&C, Plc. has entered a three-year construction contract for $8 million. It is probable that cost will be recovered but given uncertainty of future price of materials, technology and labor outcome cannot be measured reliably. The following table gives information about expenditures related to this construction contract: Year 1 Year 2 Year 3 Cash expenditure incurred $1.5 million $2.5 million $2.5 million What is the revenue that the company will recognize in Year 3 under: IFRS? U.S. GAAP? a. $2.5 million $6 million b. $4 million $4 million c. $4 million $8 million 53. The cost of property is equal to $5 million. The total sales price is $7 million. The buyer pays a down payment of $1 million. The rest of the sales amount is to be received in the next three years. There is a serious risk that the buyer will not be able to make all payments. How much profit will be recognized attributable to the down payment if the installment method is used? a. $0 b. $286,000 c. $710,000 54. The following table presents information about a company: Net income for year ended 31 December 2011 $12 million Paid preferred dividends $0.5 million Common dividends $2.5 million Shares outstanding on 1 January 2011 6 million Shares issued on 1 October 2011 2 million The company’s basic earnings per share (EPS) is closest to: a. $1.4 b. $1.8 c. $2.3Copyright © 2012 www.soleadea.com Page 15 of 32
  17. 17. www.soleadea.com 55. The table below presents information about a company’s inventory: Date Purchased Sold 21 March 2011 12,000 units at $2 per unit 5 May 2011 8,500 units at $1.9 per unit 17 July 2011 11,000 units at $2.4 per unit 2 September 2011 10,600 units at $2.1 per unit 12 November 2011 6,000 units at $2.4 per unit Using the perpetual inventory system and the LIFO method, the ending inventory is closest to: a. $27,990 b. $28,660 c. $28,910 56. Which of the following is least likely correct? a. Leases can provide less costly financing. b. One of the types of leases is investing lease. c. Usually leasing requires little down payment. 57. Which of the following statements is least likely correct? a. Under U.S. GAAP, a part of taxes paid can be included in investing cash flows. b. Both U.S. GAAP and IFRS allow direct or indirect methods of presenting cash flows. c. Under IFRS, interest received can be classified either as operating or investing activities. 58. The table below presents information about a company (U.S.GAAP is assumed): Cash flow from operating activities $10,500,000 Interest expense $1,340,000 Tax rate 30% Capital expenditures $5,484,000 Net borrowing $2,150,000 The company’s FCFE is closest to: a. $4,016,000 b. $5,954,000 c. $7,166,000Copyright © 2012 www.soleadea.com Page 16 of 32
  18. 18. www.soleadea.com 59. The table below presents information about the inventory of PaperFactory, Inc.: Date of purchasing and Quantity of calendars Price per calendar receiving calendars 1 March 2011 17,000 $18 15 May 2011 22,400 $19 22 November 2011 18,650 $21 On 10 December 2011, PaperFactory, Inc. sold 25,000 calendars for $25 per item. Under the LIFO method, the reported gross profit is closest to: a. $112,700 b. $135,400 c. $167,000 60. On 1 January 2009, a company issues a seven-year bond with a par value equal to $1,000,000 and an annual coupon equal to 8 percent. The sales proceeds are equal to $902,632. The carrying amount of the bond at 31 December 2013 assuming the effective interest method would be closest to: a. $950,263 b. $965,289 c. $981,818 61. The company producing wooden toys sells 10 toys at $50 per toy and ships them to the customer. Payments are due in 14 days – no payments have been made yet. Cost of goods sold increases by $400. Which of the below least likely occurs? a. Revenue increases by $500. b. Inventory decreases by $400. c. Accounts receivable increases by $100. 62. Which of the following statements is least likely correct? a. The term depreciation applies to tangible assets. b. The term amortization applies to intangible assets. c. Intangible assets with indefinite lives are tested for impairment at least semiannually. 63. Which of the following terms is least likely synonymous with the term accounting profit: a. Pretax income b. Taxable income c. Income before taxesCopyright © 2012 www.soleadea.com Page 17 of 32
  19. 19. www.soleadea.com 64. Regarding IFRS framework, an analyst stated that financial statements elements should be recognized in the financial statement if: 1) It is probable that any future economic benefit associated with the item will flow to or from the enterprise. 2) The item has cost or value that can be measured with reliability. Recognizing requires: a. meeting both conditions. b. meeting only the first condition. c. meeting only the second condition. 65. Which of the ratios given below is a solvency ratio? a. Current ratio b. Acid test ratio c. Financial leverage ratio 66. Which of the following statements is most likely correct? a. Straight-line method is one of the method for amortizing the premium or discount of bonds. b. Under U.S. GAAP, a company initially reports bonds as liability at the amount of the sales proceeds net of issuance costs. c. U.S. GAAP requires that the effective interest rate method for amortizing the premium or discount of bonds is used. 67. Regarding financial statement analysis framework, which of the below is least likely one of the output of process data? a. Ratios and graphs b. Financial data tables c. Adjusted financial statements 68. Which of the following statements is least likely correct? a. Both U.S. GAAP and IFRS permit the use of the LIFO method. b. The main principle of expense recognition is the matching principle. c. Both U.S. GAAP and IFRS permit the use of the weighted average cost method to assign cost of goods sold.Copyright © 2012 www.soleadea.com Page 18 of 32
  20. 20. www.soleadea.comQuestions 69 through 78 relate to Corporate Finance 69. Income statement of BlueMaster Ltd. is provided below: Income statement Revenues 19 Variable Operating Costs 13 Fixed Operating Costs 3 Operating Income 3 Interest 1 Net income 2 Calculate the degree of total leverage: a. 1.5 b. 2 c. 3 70. Company’s fixed operating costs are equal to $12.3 million and fixed financial costs are equal to $8.1 million. Variable cost per unit is $40 and the price per unit is $55. The operating breakeven point is closest to: a. 540,000 units b. 820,000 units c. 1,360,000 units 71. Primary sources of liquidity least likely include: a. Trade credit b. Bank lines of credit c. Liquidation of long-term assets 72. A project has the following annual cash flow: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 -$25,143 $30,512 $30,512 -$43,500 $23,681 -$12,115 Which of the following discount rates most likely produces the highest net present value (NPV)? a. 6% b. 10% c. 15% 73. Who is responsible, according to corporate governance, for delivering complete, accurate and reliable financial information to shareowners? a. Audit committee b. Board of directors c. Compensation committeeCopyright © 2012 www.soleadea.com Page 19 of 32
  21. 21. www.soleadea.com 74. The table below presents information about sources of a company’s capital and estimated cost of its different types: Source of capital Capital structure Estimated cost of the capital Debt 30% 7% Preferred stock 15% 10% Common stock 16% Tax rate is equal to 35%. The company’s weighted average cost of capital (WACC) is closest to: a. 11.0% b. 11.7% c. 12.4% 75. An analyst stated that if the net present value (NPV) is higher or equal to 0 then the profitability index (PI) is always bigger or equal to 1 and that the discounted payback period (DPP) is always shorter or equal to the payback period (PP). Are the statements most likely correct or incorrect? a. Both statements are incorrect. b. Statement 1 is incorrect and Statement 2 is correct. c. Statement 1 is correct and Statement 2 is incorrect. 76. The annual cost of trade credit assuming a 365-day year for terms 2.5/10 net 35 is closest to: a. 30% b. 43% c. 45% 77. Which of the statements below regarding cost of capital is the most accurate? a. The beta of debt is equal to 1. b. The business risk of a project is sales risk plus operating risk. c. Investment opportunity schedule is an upward-sloping curve.Copyright © 2012 www.soleadea.com Page 20 of 32
  22. 22. www.soleadea.com 78. The company’s income statement for year 2012 is presented below: Revenues $250,000 Cost of goods sold $130,000 Gross profit $120,000 Selling, general and administrative expenses $50,000 Operating income $70,000 Interest expense $10,000 Earnings before tax $60,000 Taxes $24,000 Net income $36,000 All elements of income statement are sales-driven, except for tax burden and interest burden. Company’s tax rate in 2013 will increase to 45% and interest expenses will remain at the same level as in 2012. If expected growth rate of revenues is 10 percent, 2013 pro forma net income is closest to: a. $36,300 b. $36,850 c. $41,880Copyright © 2012 www.soleadea.com Page 21 of 32
  23. 23. www.soleadea.comQuestions 79 through 90 relate to Equity Investments 79. The table below presents information about the company’s preferred stock: Par value $80 Dividend rate 8% Yield on comparable preferred stock 10.5% Price $60 The preferred stock is: a. overvalued. b. well priced. c. undervalued. 80. Which of the following statements is the least accurate? a. Cash ratio is one of the solvency ratios. b. A complete company’s research report should include analysis of pricing. c. An asset management is an example of fragmented industry with strong pricing power. 81. Which of the following is least likely one of Porter’s five forces? a. Threat of new entrants b. Bargain power of customers c. Currency regime in a given country 82. A technician analyst assumes that market is: a. weak form efficient. b. semi strong efficient. c. weak form inefficient. 83. An investor buys 200 stocks of company A on margin. The leveraged ratio is 2 and the stock price is equal to $8. If the maintenance margin requirement is 30%, the investor will receive margin call when the stock price is closest to: a. $4.0 b. $5.2 c. $5.7 84. Which of the following statements is the most accurate? a. Indices are used as gauges of market sentiment. b. Regular rebalancing is especially important for price-weighted indices. c. The value of market-capitalization index changes if there is 2-for-1 stock split in one of the index’s constituent security.Copyright © 2012 www.soleadea.com Page 22 of 32
  24. 24. www.soleadea.com 85. Which of the following most likely impedes market efficiency? a. Active arbitrageurs b. Restriction on short selling c. Greater availability of information 86. The table below presents information about the company’s stock: Dividend per share (Year 0) $10 Payout ratio 20% Dividend growth rate (Year 1) 12% Dividend growth rate (Year 2) 12% Dividend growth rate (Year 3) 12% If an investors’ required rate of return is 11%, and the value of the company’s stock (Year 0) is $90, what is the dividend growth rate after Year 3 (in your calculations use the two-stage dividend discount model)? a. -9.2% b. -5.4% c. -4.8% 87. The company’s financial year ends on 31 of December. The table below presents information about the company’s net income and total shareholders’ equity: 31 December 1999 1 January 2000 31 December 2000 Net income for $15,254,890 $17,312,800 a given year Total shareholders’ $80,400,000 $80,400,000 $85,000,000 equity If only the equity existing at beginning of the 2000 was used to generate the company’s net income, the return on equity in 2000 is closest to: a. 19.0% b. 20.9% c. 21.5% 88. Which of the following statements is least likely correct? a. To calculate the company’s cost of equity, investors can use dividend discount model. b. To calculate the minimum required rate of return, investors can use capital asset pricing model. c. To calculate the weighted average cost of capital, investors commonly use the cost of debt before taxes.Copyright © 2012 www.soleadea.com Page 23 of 32
  25. 25. www.soleadea.com 89. Which of the below is most likely one of cross-sectional anomalies? a. Value effect b. Earnings surprise c. Turn-of-the-year effect 90. Commercial Aircraft is an industry: a. fragmented with strong pricing power. b. concentrated with weak pricing power. c. concentrated with strong pricing power.Copyright © 2012 www.soleadea.com Page 24 of 32
  26. 26. www.soleadea.comQuestions 91 through 96 relate to Derivative Investments 91. The price of the stock is $45. The European call option with the exercise price $42 and the time to expiration 1 year is priced $6. The annual risk-free rate is equal to 5 percent. Based on put-call parity, the price of the European put option with the exercise price $42 and the time to expiration 1 year is closest to: a. $1.0 b. $3.0 c. $5.1 92. Which of the following statements is the most accurate? a. Futures contracts are customized. b. Forward contracts are standardized. c. Futures positions are settled on a daily basis. 93. If the expected dividend increases then the value of the: call option decreases? put option increases? a. Yes Yes b. No Yes c. Yes No 94. Which of the following statements is the least accurate? a. Swaps can be described as a set of options. b. In an equity swap at least one party pays the return on a stock or stock index. c. In plain vanilla interest rate swap all payments are made in the same currency. 95. An investor purchases futures contract priced at $150. The initial margin is $22 and the maintenance margin requirement is $15. The following table presents the end-of-day prices over the next six days: Day Price 1 $160 2 $155 3 $142 4 $130 5 $120 6 $144 What is the ending margin account balance on Day 6: a. $16 b. $34 c. $46Copyright © 2012 www.soleadea.com Page 25 of 32
  27. 27. www.soleadea.com 96. A dealer quotes a forward rate agreement (FRA) based on 90-day LIBOR at 3.8%. An investor goes long for the contract and the dealer goes short. The notional principal of the contract is $2 million. At expiration the 90-day LIBOR is 4.3%. The investor is most likely to: a. pay the dealer $1,237. b. receive from the dealer $1,237. c. receive from the dealer $2,473.Copyright © 2012 www.soleadea.com Page 26 of 32
  28. 28. www.soleadea.comQuestions 97 through 108 relate to Fixed Income Investments 97. An investor buys a corporate bond with 5.5-year maturity and $100 face value. The full price of the bond is $110.30 and accrued interest is $5.50. The dirty price of the bond is closest to: a. $104.80 b. $110.30 c. $115.80 98. The table below presents information about 4 bonds: Bond Price Maturity Duration A $85.25 10-year 7.4 B $91.12 7-year 5.4 C $98.76 6-year 4.7 D $104.25 4-year 3.4 The par value of all bonds is $100. The duration of the portfolio is closest to: a. 5.11 b. 5.23 c. 5.69 99. Which of the following bonds is characterized by the smallest interest rate risk? a. Inverse floater with the maturity of 6 years. b. Option-free floater with the maturity of 5 years. c. Option-free coupon bond with the maturity of 5 years. 100. An investor is considering the purchase of two bonds and he wants to add one of them to his portfolio. One bond is tax-exempt with a yield of 6.40%, the other is taxable with a yield of 8.50%. At what marginal tax rate would the investor be indifferent to the choice between the two bonds for his portfolio? a. 25% b. 35% c. 75% 101. Which of the embedded options given below is most likely beneficial for an issuer? a. Put option b. Call option c. Conversion privilegeCopyright © 2012 www.soleadea.com Page 27 of 32
  29. 29. www.soleadea.com 102. A $100 par value bond with a 6% coupon paid semiannually, maturing in 15 years sells for $103.40. The yield to maturity is closest to: a. 5.66% b. 5.74% c. 6.52% 103. Regarding theories of the term structure of interest rates the least accurate statement is: a. The pure expectation theory can be used to justify any shape of the yield curve. b. One of the variants of the preferred habitat theory is the market segmentation theory. c. According to the liquidity preference theory, the term structure of interest rates depends, among other things, on expectations about future interest rates. 104. The table below presents Treasury spot rates: Year Spot rate 0.5 2.40% 1.0 2.55% 1.5 2.90% 2.0 3.00% The arbitrage-free value of a 2-year Treasury with $100 par value and 5.40% coupon rate is closest to: a. $99.98 b. $98.93 c. $104.65 105. An analyst stated that duration can be defined as the first derivative of bond’s value with respect to its yield and a measure of interest risk. Are the statements most likely correct or incorrect? a. Both statements are correct. b. Statement 1 is incorrect and Statement 2 is correct. c. Statement 1 is correct and Statement 2 is incorrect. 106. The table below provides different kind of spreads for a putable bond: Nominal spread Z-spread Option adjusted spread 1.5% 2% 3% What is the option cost? a. 0.5% b. 1% c. 1.5%Copyright © 2012 www.soleadea.com Page 28 of 32
  30. 30. www.soleadea.com 107. Which of the following statements regarding bond types is the least accurate? a. Coupon rate of TIPS is set at a fixed rate. b. Treasury STRIPS are created by private sector. c. Usually on-the-run Treasury securities yield more than equivalent off-the-run Treasury securities. 108. If the yield to maturity (YTM) is 5% and coupon is 6% and reinvestment rate is going to be 5.5%, then: the realized return will be bigger than YTM? the bond sells at discount? a. Yes Yes b. No Yes c. Yes NoCopyright © 2012 www.soleadea.com Page 29 of 32
  31. 31. www.soleadea.comQuestions 109 through 114 relate to Alternative Investments 109. Which of the following statements is least likely correct? a. ETFs are actively managed. b. Investors can buy ETFs on margin. c. ETFs are less costly for investors than traditional mutual funds. 110. Which of the following biases in hedge fund performance in hedge fund database an investor suffers from when hedge fund managers decide whether they want to be included in databases or not? a. Backfilling bias b. Survivorship bias c. Self-selection bias 111. When market is in backwardation: a. the future price is above the spot price. b. the future price is below the spot price. c. investors expect the spot price to be higher in the future. 112. Which of these is not a valuation approach for real estate? a. Income approach b. Gordon approach c. Sales comparison approach 113. Which of the following is most likely a venture capital characteristic? a. Liquidity b. Short-term commitment required c. Difficulty in calculating market value of a venture portfolio 114. Which of the following statements regarding FOF (fund of funds) is least likely correct? a. FOFs invest in hedge funds. b. Small investor can purchase FOFs for a reasonable amount of money. c. One of the disadvantage of FOFs is that they do diversify investors’ portfolio.Copyright © 2012 www.soleadea.com Page 30 of 32
  32. 32. www.soleadea.comQuestions 115 through 120 relate to Portfolio Management 115. The following table provides information for two stocks: Company Stock expected return Stock variance Correlation between X and Y X 12% 0.0225 0.8 Y 20% 0.160 The covariance between X and Y is: a. 0.0029 b. 0.0480 c. 13.3300 116. Regarding portfolio management, which of the following statements is least likely correct? a. The capital market line is a specific example of the capital allocation line. b. A person with risk aversion coefficient of 3 has greater risk tolerance than a person with risk aversion coefficient of 4. c. Assuming the same capital allocation line, the optimal portfolio for an investor with risk aversion coefficient of 2 has greater expected rate of return than the optimal portfolio for an investor with risk aversion coefficient of -1. 117. An analyst describing different types of risk stated that the market risk and unsystematic risk of the portfolio can be reduced by diversifying the portfolio. The analyst’s statement is correct with respect to: a. both. b. market risk, but incorrect with respect to unsystematic risk. c. unsystematic risk, but incorrect with respect to market risk. 118. The following table gives information for a company’s stock: Expected return of company’s stock 12% Expected return of market 10% Covariance between stock and market 0.034 Variance of market return 0.04 Standard deviation of stock’s return 0.20Knowing that a risk-free rate is 5 percent decide, using CAPM, if stock is: a. overvalued. b. undervalued. c. fairly valued.Copyright © 2012 www.soleadea.com Page 31 of 32
  33. 33. www.soleadea.com 119. Market portfolio is a portfolio consisting of: a. all risky assets. b. all risky and risk-free assets. c. all common shares in a given stock exchange. 120. Which of the following statements is the least accurate? a. The global minimum-variance portfolio consists only of risky assets. b. The global minimum-variance portfolio lies on the minimum-variance frontier. c. The curve that lies above and to the left of the global minimum-variance portfolio is called Markowitz efficient frontier.Copyright © 2012 www.soleadea.com Page 32 of 32

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