CFA LEVEL 1 MOCK TEST

CFA LEVEL I

FULL LENGTH TEST - 1

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Full Length Test - 1 Question 1

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. It is Hatfield’s opinion that interest rates will fall in the near future. Based upon this, Hatfield begins increasing the bond allocation of each portfolio. In order to comply with Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to: A) inform the clients of the change and tell them t hem it is based upon an opinion opin ion and not a fact. B) make sure that the change is identical for both clients. C) perform both of these functions. Question 2

Lee Roth, who is an investment advisor, is riding in a taxi and finds a file of information labeled "Genco Valuation." The folder contains a great deal of financial data, projections and nonpublic information concerning the food products industry that lead Roth to believe that Genco will be worth 50% more than its current stock value. Roth also finds some correspondence that leads him to believe that the file belonged to Tom Hagan. Roth tries to find out where Hagan works so he can return the file. Roth can recommend Genco to his clients unless Hagan works for: A) Roth cannot recommend recomm end Genco to his clients at this t his time. B) the corporate finance department for Genco. C) the equity research department for a brokerage firm. Question 3

A stockbroker who is a member m ember of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information: A) for both of the reasons r easons listed here. if the housekeeper says the meeting concerned a tender offer and the broker knows that it is B) non-public information. C) only if the broker knows that the meeting is non-public information. Question 4

Jane Dawson, CFA, an analyst at a New York brokerage firm, suspects that Bob Boatman, CFA, another analyst at the same firm, has violated a state securities law. According to the CFA Institute Standards of Professional Conduct, Dawson is: NOT required to report the violation to the appropriate governmental or regulatory A) organizations. B) required to report the suspected violation to CFA Institute. C) required to report the suspected violation to the appropriate state regulatory agency.

©2010 Finstructor. All Rights Reserved

Full Length Test - 1 Question 1

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. It is Hatfield’s opinion that interest rates will fall in the near future. Based upon this, Hatfield begins increasing the bond allocation of each portfolio. In order to comply with Standard V(B), Communication with Clients and Prospective Clients, the analyst needs to: A) inform the clients of the change and tell them t hem it is based upon an opinion opin ion and not a fact. B) make sure that the change is identical for both clients. C) perform both of these functions. Question 2

Lee Roth, who is an investment advisor, is riding in a taxi and finds a file of information labeled "Genco Valuation." The folder contains a great deal of financial data, projections and nonpublic information concerning the food products industry that lead Roth to believe that Genco will be worth 50% more than its current stock value. Roth also finds some correspondence that leads him to believe that the file belonged to Tom Hagan. Roth tries to find out where Hagan works so he can return the file. Roth can recommend Genco to his clients unless Hagan works for: A) Roth cannot recommend recomm end Genco to his clients at this t his time. B) the corporate finance department for Genco. C) the equity research department for a brokerage firm. Question 3

A stockbroker who is a member m ember of CFA Institute has a part-time housekeeper who also works for the CEO of Festival, Inc. One day the housekeeper mentions to the broker that she saw the CEO of Festival having a conversation at his home with John Tater, who is a nationally known corporate lawyer and consultant. The stockbroker is restricted from trading on this information: A) for both of the reasons r easons listed here. if the housekeeper says the meeting concerned a tender offer and the broker knows that it is B) non-public information. C) only if the broker knows that the meeting is non-public information. Question 4

Jane Dawson, CFA, an analyst at a New York brokerage firm, suspects that Bob Boatman, CFA, another analyst at the same firm, has violated a state securities law. According to the CFA Institute Standards of Professional Conduct, Dawson is: NOT required to report the violation to the appropriate governmental or regulatory A) organizations. B) required to report the suspected violation to CFA Institute. C) required to report the suspected violation to the appropriate state regulatory agency.


Question 5

An analyst provides services for a charitable organization and a nd in return gets free f ree membership in the organization. Part of her job is to manage the liquid assets of the organization, and those assets include stocks. Her supervisor in the organization calls her and tells her to buy a certain stock for the portfolio based upon insider information from a board member in the organization. The analyst objects, but the supervisor says this is what they have always done and sees no reason for changing now. The analyst complies with the request. With respect to Standards IV(A), Loyalty to Employer, and II(A), Material Nonpublic Information, the analyst violated: A) both Standards IV(A) and II(A). B) only Standard IV(A) requiring duty of loyalty. C) only Standard II(A) that prohibits insider trading.

Question 6

Bob Hatfield, CFA, has his own money management firm with two clients. The accounts of the two clients are equal in value. Hatfield has been trading on the clients’ behalf with a single brokerage firm for several years. Because of his many years of business, the brokerage firm occasionally gives Hatfield shares in an initial public offering (IPO) to sell to his clients. Hatfield has a policy of allocating the IPO shares equally between the portfolios of the two clients. This policy is: A) a violation of Standard III(C), Suitability. Suitab ility. B) congruent with Standard III(C), Suitability. C) a violation of Standard III(B), Fair Dealing.

Question 7

In 1995, the CFA Institute sponsored and funded the Global Investment Performance Standards (GIPS) in response to: A) an increase in insider trading. tr ading. B) a need to address issues, such as portability of investment results. C) both of the reasons listed here.

Question 8

Compliance with the CFA Institute Performance Presentation Standards (PPS) or the Global Investment Performance Standards (GIPS) is: A) the only way to comply with Standard V(B), Perf ormance Presentation. B) required by the Code of Conduct. C) the best way to comply with Standard V(B), Performance Presentation.


Question 9

Bill Fox, CFA, has been preparing a research report on New London Wire and Cable, one of his major investment clients. He had completed much of his analysis and had planned on having his report typed and bound today. Unfortunately, his briefcase was stolen while he ate breakfast, and he lost all his notes and working papers. The lost materials included his notes from management interviews, conversations with suppliers and competitors, dates of company visits, and his computer diskette containing much of his quantitative analysis. Fox's client needs this report tomorrow. In a panic, Fox called New London's vice president of finance and was faxed a copy of the company's most recent financial projections. Fox remembered that his own analysis showed that management's estimates were too high. He did not remember the exact amount, so he revised New London's figures downward 10%. Fox also incorporated some charts and graphs on New London from a research report he had received last week from a small regional research firm and used some information from a Standard & Poor's reference work. With the help of his secretary, a Xerox machine, and some creative word processing, Fox got the report done in time for the evening Fedex pick up. On the way home from the office that night, Fox wondered if he had violated any CFA Institute Standards of Professional Conduct. Fox has: A) violated none of the Standards. violated the requirement to have a reasonable basis for a recommendation, the prohibition B) against plagiarism, and the requirement to maintain appropriate records. violated the requirement to have a reasonable basis for a recommendation and the prohibition C) against plagiarism.

Question 10

John Hill, CFA, has been working for Advisors, Inc., for eight years. Hill is about to start his own money management business and has given his two-week notice of his resignation from Advisors. A few days before his resignation takes effect, on his lunch hour, he takes out a loan from a bank on behalf of his new business and uses the money to buy some office equipment for his new business. Since he engaged in these transactions while still an employee of Advisors, Hill violated Standard IV(A), Loyalty to Employer, by: A) engaging in a financial transaction, like taking out a loan, only. B) neither of these actions. C) both taking out the loan and purchasing the office equipment.

Question 11

Which of the following activities would be following a component of the Code of Ethics explicitly? A) Attending continuing education seminars on investing and inviting colleagues to come along. B) Consulting with colleagues about opinions you reach in your research. C) Maintaining a list of colleagues who have violated the CFA Institute standards.


Question 12

The following information involves two research analysts at a brokerage firm. •

•

Erik Bagenot, CFA, is preparing a research report on Global Enterprises, Inc. In preparing the report, he uses materials from many sources. For example, he uses factual information published by Standard & Poor's Corporation without acknowledging the source. He also uses excerpts from a research report prepared by another analyst. Bagenot makes only a slight change in wording for these excerpts, but acknowledges the source. Sally Wain, who is currently enrolled in the CFA program, is preparing a research report on Manson Telecommunications. She attends a conference in which several investment experts provide their views about the future prospects of this company. Wain cites several quotations from these investment experts in her report without specific reference.

According to CFA Institute Standards of Professional Conduct involving prohibition against plagiarism, which of the following statements is TRUE? A) Both Bagenot and Wain violated the Standards. B) Wain violated the Standards, but Bagenot did not. C) Bagenot violated the Standards, but Wain did not.

Question 13

If an analyst has a policy of making an inquiry into a client’s financial situation, investment experience, and investment objectives regularly, this is: A) neither of these. B) congruent with Standard III(C), Suitability. C) a violation of Standard III(E), concerning client confidentiality. Question 14

Martin Tripp, CFA, is vice-president of the equity department at Walker Financial, a large money management firm. Of the twenty analysts in his department for whom he has supervisory responsibility, eight are subject to CFA Institute Standards of Professional Conduct. Tripp believes that he cannot personally evaluate the conduct of the twenty analysts on a continuing basis. Therefore, he plans to delegate some of his supervisory duties to Sarah Green, who is subject to the Standards, and some to Bob Brown, who is not subject to the Standards. According to CFA Institute Standards of Professional Conduct, which of the following statements about Tripp's ability to delegate supervisory duties is most correct ? A) Tripp cannot delegate any of his supervisory duties to either Green or Brown. Tripp can delegate some or all of his supervisory duties to Brown, even though Brown is not B) subject to the Standards. Tripp can delegate some or all of his supervisory duties only to Green because she is subject C) to the Standards.


Question 15

Anna Nichols is a research analyst preparing a report on Enterprise Company. In order to ensure accuracy in her report, she sends the report to the Chief Financial Officer (CFO) of Enterprise to allow him to point out some factual errors. The CFO makes some corrections, which Nichols checks and agrees with. The CFO also sends Nichols several pages of market analyses that appear favorable for Enterprise. Nichols checks the analyses for accuracy and includes a summary of them in her report, pointing out that the data came from Enterprise. Nichols has: violated the Standards of Professional Conduct by including the data from the CFO in the report. violated the Standards of Professional Conduct by sending the report to the CFO before B) sending it to her clients. C) not violated the Standards of Professional Conduct.

A)

Question 16

Greg Stiles, CFA, CAIA, has recently liquidated most of a client’s portfolio because the client is planning to buy a house. Stiles informs one of the brokers in his office who has his real estate license about the plans of his client. With respect to Standard III(E), Preservation of Confidentiality, this action: A) is appropriate since Stiles keeps the information in the firm. B) is appropriate since Stiles only tells a licensed salesman. C) violates the Standard unless the client asks Stiles to tell the licensed salesman.

Question 17

A money management firm has the following policy concerning new recommendations: W hen a new recommendation is made, each portfolio manager estimates the likely transaction size for each of their clients. Clients are notified of the new recommendation in the order of their estimated transaction size— largest first. All clients have signed a form where they acknowledge and consent to this allocation procedure. With respect to Standard III(B), Fair Dealing, this is: A) not a violation because the clients have signed the consent form. B) not a violation because the clients are aware of the policy. C) a violation of the standard. Question 18

Which of the following is a possible breach of fiduciary duties by a CFA Institute member who manages assets on behalf of a client? A) Using directed brokerage. B) Voting all proxies of stocks the client owns. C) Neither of these breach fiduciary duties.


Question 19

An analyst working at an investment firm has a client that rents limousines. The client tells the analyst that as long as he is the client’s analyst, he can have free use of a limousine several times a year. The analyst needs to: A) do nothing since the offer is not linked to the performance of the client's portfolio. B) explicitly refuse such an offer. C) inform his supervisor in writing of the offer if the analyst intends to accept the offer.

Question 20

The historical return for each of a portfolio’s four positions is shown below. Using the population standard deviation, what is the coefficient of variation (CV) for these returns? Position Return

A) B) C)

A

17.0%

B

12.2%

C

3.9%

D

–8.4% 3.12. 1.89. 1.56.

Question 21

What is the effective annual yield of a T-bill that has a money market yield of 5.665% and 255 days to maturity? A) 5.79%. B) 5.92%. C) 4.01%.

Question 22

Assuming a discount rate of 10%, which stream of annual payments has the highest present value? A) $110 $20 B) $20 –$5 C) –$100 –$100

$10 $20 –$100

$5 $110 $500


Question 23

An investor is considering purchasing ACQ. There is a 30% probability that ACQ will be acquired in the next two months. If ACQ is acquired, there is a 40% probability of earning a 30% return on the investment and a 60% probability of earning 25%. If ACQ is not acquired, the expected return is 12%. What is the expected return on this investment? A) 12.3%. B) 16.5%. C) 18.3%. Question 24

A sample of returns for four randomly selected assets in a portfolio is shown below: Asset Return (%)

A

1.3

B

1.4

C

2.2

D

3.4

What is the sample standard deviation of asset returns? A) 0.97%. B) 0.88%. C) 1.13%. Question 25

What is the standard deviation of a portfolio if you invest 30% in stock one (standard deviation of 4.6%) and 70% in stock two (standard deviation of 7.8%) if the correlation coefficient for the two stocks is 0.45? A) 6.20%. B) 0.38%. C) 6.83%. Question 26

The returns for individual assets in a portfolio are shown below: Assets Return (%)

A

1.3

B

1.4

C

2.2

D

3.4

E

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What is the population standard deviation of the returns? A) 0.56%. B) 0.77%. C) 1.71%.

Question 27

In order to calculate the net present value (NPV) of a project, an analyst would least likely need to know the: A) timing of the expected cash flows from the project. B) opportunity cost of capital for the project. C) internal rate of return (IRR) of the project.

Question 28

The Night Raiders, an expansion team in the National Indoor Football League, is having a challenging first season with a current win loss record of 0 and 4. However, the team recently signed four new defensive players and one of the team sponsors (who also happens to hold a CFA charter) calculates the probability of the team winning a game at 0.40. Assuming that whether the team wins a game is independent of whether it wins any other game, the probability that the team will win 6 out of the next 10 games is closest to: A) 0.112. B) 0.417. C) 0.350. Question 29

Which one of the following would be a bullish signal to a smart-money technical analyst? A) Average-quality bond yields move closer to high-quality bond yields. B) The T-bill Eurodollar spread widens. C) The debit balances in brokerage accounts decrease. Question 30

For a certain class of junk bonds, the probability of default in a given year is 0.2. Whether one bond defaults is independent of whether another bond defaults. For a portfolio of five of these junk bonds, what is the probability that zero or one bond of the five defaults in the year ahead? A) 0.0819. B) 0.7373. C) 0.4096.


Question 31

A Type II error: A) fails to reject a true null hypothesis. B) fails to reject a false null hypothesis. C) rejects a true null hypothesis.

Question 32

A drawback of historical sim ulation is it: A) depends on the accuracy of the random number generator. B) may not accurately reflect possible outcomes. C) may not account for very rare events.

Question 33

Monthly sales of hot water heaters are approximately normally distributed with a mean of 21 and a standard deviation of 5. What is the probabilility of selling 12 hot water heaters or less next month? A) 3.59%. B) 1.80%. C) 96.41%. Question 34

Which of the following statements about test statistics is least accurate? In a test of the population mean, if the population variance is unknown and the sample is small, we should use a z -distributed test statistic. In the case of a test of the difference in means of two independent samples, we use a t B) distributed test statistic. In a test of the population mean, if the population variance is unknown, we should use a t C) distributed test statistic.

A)

Question 35

If a two-tailed hypothesis test has a 5% probability of rejecting the null hypothesis when the null is true, it is most likely that the: A) significance level of the test is 5%. B) probability of a Type I error is 2.5%. C) power of the test is 95%.


Question 36

A candidate for public office has proposed a program of wealth transfers based on the principles of utilitarianism. In support of her proposal, she makes the following statements: Statement 1: “Increasing taxes on high income earners will cause them to work more hours to maintain their after-tax income, resulting in greater economic output.” Statement 2: “The government will need to hire people to manage and administer the wealth transfers. These new jobs will further expand economic output.” With respect to these statements: A) only statement 1 is incorrect. B) both are incorrect. C) only statement 2 is incorrect. Question 37

Which of the following most accurately describes the relationship between marginal cost (MC), average variable cost (AVC), marginal product (MP), and average product (AP)? A) When MP > AP, MC > AVC. B) When MP = AP, MC > AVC. C) When MP = AP, MC = AVC.

Question 38

Which of the following most accurately describes the relationship between the average total cost (ATC) curve and the average variable cost (AVC) curve? The vertical distance between the ATC and AVC curves: A) increases as output increases. B) increases and then decreases as output increases. C) decreases as output increases. Question 39

If the price elasticity of demand is 1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price? A) +2.667%. B) –0.375%. C) 2.667%.


Question 40

A firm operating as a price taker will: A) produce quantity where P = MR = MC. B) be a revenue maximizer. C) face an inelastic demand curve. Question 41

A perfect competition has all of the following characteristics EXCEPT: A) barriers to entry don't exist. B) a differentiated product. C) a large number of independent firms. Question 42

A practice whereby a seller charges different prices to different consumers of the same product or service is called: A) price competition. B) discriminatory pricing. C) price discrimination. Question 43

A competitive firm will tend to expand its output as long as: A) its marginal revenue is greater than the market price. B) the market price is greater than the marginal cost. C) its marginal revenue is positive. Question 44

If firms and households decide to reduce their currency holdings and increase their holdings of funds in their checking accounts by an equal amount, what will be the impact on the money supply if the U.S. Federal Reserve does not undertake any offsetting actions? There will be no direct impact on the money supply. However, banks’ excess reserves will A) increase, which will enable them to increase their loans, thereby leading to an indirect increase in the money supply. There will be no direct impact on the money supply, however, banks’ excess reserves will B) decrease, which will cause them to decrease their loans, thereby leading to an indirect decrease in the money supply. There will be no direct or indirect impact on the money supply because the decrease in C) currency holdings will be exactly offset by the increase in the funds in the checking accounts.


Question 45

Which one of the following Federal Reserve monetary policies, when pursued in line with the U.S. government’s fiscal policies, would help increase aggregate demand during a period of high unemployment? A) The sale of bonds by the Fed. B) An increase in the reserve requirements for financial institutions. C) A decrease in the discount rate.

Question 46

Consider an economy operating at full employment, but with a high inflation rate. Based on the short-run Phillips curve, an unexpected decrease in money supply growth is likely to result in the following changes in the unemployment rate and inflation rate: Unemployment rate A) Increase B) Increase C) Remain unchanged

Inflation rate Fall to the desired rate Remain above the desired rate Fall to the desired rate

Question 47

Automatic stabilizers work by: initiating legislative action designed to stimulate demand during the contraction phase of the business cycle and restrain demand during the expansion phase. B) initiating changes in monetary policy without requiring action by the central bank. instituting counter-cyclical fiscal policy without the delays associated with policy changes that C) require legislative action.

A)

Question 48

Which of the following is an independent auditor least likely to do with respect to a company’s financial statements? A) Prepare and accept responsibilit y for them. B) Provide an opinion concerning their fairness and reliability. C) Confirm assets and liabilities contained in them.


Question 49

Which of the following statements regarding the treasury stock method of computing diluted shares is least accurate? The treasury stock method: assumes that the hypothetical funds received by the company from the exercise of the options A) are used to sell shares of the company’s common stock in the market at the average market price. B) is used when the exercise price of the option is less than the average market price. increases the total number of shares by less than the number that the exercise of the options C) would create. Question 50

An analyst has gathered the following information about a company: Income Statement 2005

Sales $908 Expenses COGS $512 Depreciation 6 Selling, General & Admin. 129 Interest 53 Total expenses 700 Pre-tax income 208 Taxes 83 Net income $125

Balance Sheet Assets

2004 2005 Liabilities

Cash Accts. Rec. Inventories Fixed Assets Accum. Depr. Total

60 140 47 120 (29) 338

80 155 72 160 (35) 432

2004 2005

Accts. Payable 100 75 Wages payable 80 85 Bonds 65 80 Common Stock 40 70 Retained Earnings 53 122 338 432

Note: the dividend payout ratio equals 45%.

What is the net increase or decrease in cash? A) +$20. B) +$15. C) -$15.


Question 51

When a reliable estimate of costs exists, ultimate payment is assured, and revenue is earned as costs are incurred, which of the following revenue recognition methods should be used? A) Cost recovery method. B) Percentage-of-completion method. C) Installment sales method. Question 52

An analyst has gathered the following information about a company: Income Statement for the Year

Sales $1,500 Expenses COGS $1,300 Depreciation 20 Goodwill 10 Int. Expenses 40 Total expenses 1,370 Income from cont. op. 130 Gain on sale 30 Income before tax 160 Income tax 64 Net Income $96 Additional Information: Dividends paid $30 Common stock sold 20 Equipment purchased 50 Bonds issued 80 Fixed asset sold for (original cost of $100 with accumulated depreciation of $70) 60 Accounts receivable decreased by 30 Inventory decreased by 20 Accounts payable increased by 20 Wages payable decreased by 10 What is the cash flow from financing? A) $110. B) $130. C) $70.


Question 53

How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per share? A) Increase EPS. B) Either decrease or increase EPS depending upon if the security is dilutive or antidilutive. C) Decrease EPS.

Question 54

Which of the following statements regarding making changes in accounting principles is least accurate? Changes in accounting estimates are now treated the same as changes in accounting principles. A change in accounting principle is a change from one generally accepted accounting principle B) to another generally accepted principle. The firm making the change must justify the change. C) The general rule is retrospective application.

A)

Question 55

While attending a local college, music major Anjolie Webster accepts a temporary position with a small manufacturing firm. Currently, the firm uses LIFO to account for inventory, but the owner is “just curious” about how the financial results would look if the company used FIFO. Before the owner leaves for her voice lesson, she hands Webster a photocopy of the inventory data for the current period (summarized below). • • • •

• •

Beginning inventory of 1,000 units at $30 cost. Ending inventory of 800 units. Sales of 1,100 units. Three inventory purchases (listed from earliest purchase to latest purchase): 400 units at $27 each, 300 units at $25 each, and an unreadable number of units at $22 each. (Unfortunately, when the owner copied the original document, she left a yellow sticky note covering some of the inventory information.) Current assets (less inventory) of $75,000. Current liabilities of $65,000.

Using the information provided, determine which of the following statements is least accurate? All else equal, compared to LIFO, using FIFO would result in: A) a lower ending inventory balance. B) a current ratio of approximately 1.60. C) a lower gross margin.


Question 56 Units

Unit Price

Beginning Inventory

699

$5.00

Purchases

710

$8.00

Sales

806

$15.00

SGA Expenses

$3,141 per annum

Part 1) Determine the cost of goods sold using the weighted average method and also using the first in, first out (FIFO) method. Weighted A) B) C)

Average $4,986.02 $5,248.44 $4,351.00

FIFO $4,133.45 $4,351.00 $5,248.44

Part 2) What is the ending inventory level in dollars using the FIFO method? A) $6,160.00. B) $4,824.00. C) $4,582.80. Question 57

Which of the following statements about debt is least accurate? A) Convertible debt must be treated as equity when computing the firm 's debt to equity ratio. When a bond’s coupon rate is greater than the market rate of return at issuance, the bond’s B) balance sheet value will be greater than the face value. If a firm issues bonds with detachable warrants, the proceeds must be allocated between the C) two components on the firm's balance sheet. Question 58

Assume that Hunter Round Restaurant Supply currently uses the last in, first out (LIFO) method to account for inventory and that the business environment is one of rising prices and stable or growing inventory balances. In addition, Hunter Round has an effective tax rate of zero percent due to tax loss carrybacks. All else equal, which of the following statements is least likely valid? By using LIFO instead of first in, first out (FIFO), Hunter Round has: A) lower net income. B) lower working capital. C) higher cash flows.


Question 59

Given the following data what is the ending inventory value using the FIFO method? Purchases

Sales

50 units at $50/unit




70 units at $40/unit A) $3,250. B) $3,200. C) $3,600.


Question 60

Selected financial information gathered from Alpha Company and Omega Corporation follows:

Revenue Earnings before interest, taxes, depreciation, and amortization Quick assets Average fixed assets Current liabilities Interest expense

Alpha

Omega

$1,650,000 69,400

$1,452,000 79,300

216,700 300,000 361,000 44,000

211,300 323,000 404,400 58,100

Which of the following statements is most accurate? A) Omega has less tolerance for leverage than Alpha. B) Omega uses its fixed assets more efficiently than Alpha. C) Alpha is more operationally efficient than Omega. Question 61

Falcon Financial Group is considering the purchase of Company A or Company B based on a low priceto-book investment strategy that also considers differences in solvency. Selected financial data for both firms, as of December 31, 20X7, follows: in millions, except per-share data

Current assets Fixed assets Total debt Common equity Outstanding shares Market price per share

Company A

Company B

$3,000 $5,700 $2,700 $6,000 500 $26.00

$5,500 $5,500 $3,500 $7,500 750 $22.50


The firms’ financial statement footnotes contain the following: • •

•

•

Company A values its inventory using the first in, first out (FIFO) method. Company B’s inventory is based on the last in, first out (LIFO) method. Had Company B used FIFO, its inventory would have been $700 million higher. Company A leases its manufacturing plant. The remaining operating lease payments total $1,600 million. Discounted at 10%, the present value of the remaining payments is $1,000 million. Company B owns its manufacturing plant.

To make the firms financials ratios comparable, calculate the adjusted price-to-book ratios for Company A and Company B. Company A

Company B

A) $2.17

$2.81

B) $1.63

$2.06

C) $2.17

$2.06

Question 62

When examining a firm’s ownership structure, it is imperative to examine any super-voting rights by certain classes of shareholders. Which of the following statements concerning these voting rights is most accurate? Super-voting rights by certain classes of shareholders impair the firm’s ability to raise capital for the future. If a company has a significant minority shareowner group, such as a founding family, B) cumulative voting to elect board members can be a positive factor for shareholders. Firms with a single class of common equity could encourage prospective acquirers to only C) deal directly with shareholders with the supermajority rights.

A)

Question 63

Assume that a company has equal amounts of debt, common stock, and preferred stock. An increase in the corporate tax rate of a firm will cause its weighted average cost of capital (WACC) to: A) rise. B) more information is needed. C) fall. Question 64

Which of the following statements about the discounted payback period is least accurate? The discounted payback: A) frequently ignores term inal values. B) period is generally shorter than the regular payback. C) method can give conflicting results with the NPV.


Question 65

Which of the following rights concerning shareholder-sponsored board nominations and shareholdersponsored resolutions would be advantageous to an investor? The right to propose initiatives for consideration at the annual meeting, but not the right to nominate or remove board members in certain circumstances. The right to nominate or remove board members in certain circumstances, and the right to B) propose initiatives for consideration at the annual meeting. The right to nominate or remove board members in certain circumstances, but not the right to C) propose initiatives for consideration at the annual meeting.

A)

Question 66

Which of the following statements about NPV and IRR is least accurate? A) For mutually exclusive projects you should use the IRR to rank and select projects. B) For independent projects if the IRR is > the cost of capital accept the project. C) The NPV method assumes that all cash flows are reinvested at the cost of capital. Question 67

A firm is planning a $25 million expansion project. The project will be financed with $10 million in debt and $15 million in equity stock (equal to the company's current capital structure). The before-tax required return on debt is 10% and 15% for equity. If the company is in the 35% tax bracket, what cost of capital should the firm use to determine the project's net present value (NPV)? A) 12.5%. B) 11.6%. C) 9.6%. Question 68

A security has the following expected returns and probabilities of occurrence: Return Probability

11%

20%

14%

50%

15%

30%

What is the standard deviation of the returns? A) 1.74%. B) 0.02%. C) 1.42%.


Question 69

All portfolios on the capital market line are: A) unrelated except that they all contain the risk-free asset. B) distinct from each other. C) perfectly positively correlated.

Question 70

Two assets are perfectly positively correlated. If 30% of an investor's funds were put in the asset with a standard deviation of 0.3 and 70% were invested in an asset with a standard deviation of 0.4, what is the standard deviation of the portfolio? A) 0.151. B) 0.426. C) 0.370. Question 71

Given a beta of 1.25 and a risk-free rate of 6%, what is the expected rate of return assuming a 12% market return? A) 13.5%. B) 10%. C) 31%. Question 72

Which of the following is least likely considered a source of systematic risk for bonds? A) Purchasing power risk. B) Market risk. C) Default risk. Question 73

An analyst wants to determine whether Dover Holdings is overvalued or undervalued, and by how much (expressed as percentage return). The analyst gathers the following information on the stock: • • • • • • •

Market standard deviation = 0.70 Covariance of Dover with the market = 0.85 Dover’s current stock price (P0) = $35.00 The expected price in one year (P1) is $39.00 Expected annual dividend = $1.50 3-month Treasury bill yield = 4.50%. Historical average S&P 500 return = 12.0%.


Dover Holdings stock is: A) undervalued by approximately 2.1%. B) undervalued by approximately 1.8%. C) overvalued by approximately 1.8%.

Question 74

An index was recently begun with the following two stocks: • •

Company A – 50 shares valued at $2 each. Company B – 10 shares valued at $10 each.

Given that the value-weighted index was originally set at 100 and Company A's stock is currently selling for $4 per share while Company B’s stock is still at $10 per share, what is the current value of the priceweighted index and the value-weighted index? Price-weighted A) 8 B) 7 C) 7

Value-weighted 150 150 300

Question 75

Which of the following statements least likely describes the role of a portfolio manager in perfectly efficient markets? Portfolio managers should: A) construct a portfolio that includes financial and real assets. construct diversified portfolios that include international securities to eliminate unsystematic B) risk. quantify client's risk tolerance, communicate portfolio policies and strategies, and maintain a C) strict buy and hold policy avoiding any changes in the portfolio to minimize transaction costs.

Question 76

Which of the following statements about efficient markets and indexes is least accurate? Efficient markets tests have found that stocks with high price-to-earnings ratios (P/E) tend to outperform stocks with low P/E ratios. B) If markets are efficient, investors should not trade often. An unweighted index assumes that investors make and maintain an equal dollar investment in C) each stock in the index.

A)


Question 77

Which of the following regarding bond market indexes is least accurate? A) Unlike stocks, bonds lack continuous price trading data. B) There are more bond issues than stocks. C) The bond universe is more stable than the stock universe.

Question 78

Which category of tests assumes that, in an efficient market, securities lie on the security market line? A) Cross-sectional tests. B) Anomaly studies. C) Time-series tests.

Question 79

The January Anomaly, the neglected firm effect, and the book value/market value ratio are studies examining which form of the EMH? A) Semistrong-form of the EMH. B) Weak-form of the EMH. C) Both the weak and semistrong forms of the EMH.

Question 80

Given the following information, compute price/sales. • • • • • • • •

Book value of assets = $550,000. Total sales = $200,000. Net income = $20,000. Dividend payout ratio = 30%. Operating cash flow = $40,000. Price per share = $100. Shares outstanding = 1,000. Book value of liabilities = $500,000. A) 2.50X. B) 2.00X. C) 0.50X.


Question 81

An analyst has gathered the following data for W ebco, Inc: • • •

Retention = 40% ROE = 25% k = 14%

Using the infinite period, or constant growth, dividend discount model, calculate the price of Webco’s stock assuming that next years earnings will be $4.25. A) $63.75. B) $55.00. C) $125.00.

Question 82

Assuming that a company's return on equity (ROE) is 12% and the required rate of return is 10%, which of the following would most likely cause the company's P/E ratio to rise? A) The firm's ROE falls. B) The firm's dividend payout rises. C) The inflation rate falls.

Question 83

Use the following information to determine the value of River Gardens’ common stock: • • • •

Expected dividend payout ratio is 45%. Expected dividend growth rate is 6.5%. River Gardens’ required return is 12.4%. Expected earnings per share next year are $3.25. A) $30.12. B) $24.80. C) $27.25.

Question 84

Which of the following is a disadvantage of using price-to-sales (P/S) multiples in stock valuations? A) It is difficult to capture the effects of changes in pricing policies using P/S ratios. B) The use of P/S multiples can miss problems associated with cost control. C) P/S multiples are more volatile than price-to-earnings (P/E) multiples.


Question 85

Which of the following statements regarding the value of the firm is most accurate? The board of directors increases the dividend payout ratio, the value of the company will increase. The government engages in a restrictive monetary policy and the expected inflation rate B) decreases, the P/E ratio will decrease. A company's legal and treasury departments act to reduce the tax rate from 37.5% to 37.0%, C) the value of the firm will increase.

A)

Question 86

What is the value of a stock that paid a $0.25 dividend last year, if dividends are expected to grow at a rate of 6% forever? Assume that the risk-free rate is 5%, the expected return on the market is 10%, and the stock's beta is 0.5. A) $16.67. B) $17.67. C) $3.53. Question 87

Kirsten Thompson, CFA candidate, is studying the relationships between a bond’s coupon rate and the required market yield. One study question concerns a new-issue, 15-year, $1,000 face value 6.75% semiannual coupon bond priced at $1,075. Which of the following choices describes the bond and the relationship of the bond’s market yield to the coupon? A) Discount bond, required market yield is greater than 6.75%. B) Premium bond, required market yield is less than 6.75%. C) Premium bond, required market yield is greater than 6.75%. Question 88

Which of the following is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion? A) Sell corporate bonds and purchase treasury bonds. B) Purchase corporate bonds and sell treasury bonds. C) Enter a pay-fixed, receive-floating rate swap. Question 89

On November 15, 2006, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment. They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 2026. Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date. Grinell is not required to make any principal payments prior to maturity. What type of bond structure has Grinell issued?


A) Bullet maturity. B) Serial bonds. C) Income bonds.

Question 90

The annual payment of a 20-year, semi-annual pay bond with a $5,000 par value and a 6.875% coupon rate currently trading at 89.28 is closest to: A) $171.88. B) $153.45. C) $343.75. Question 91

Which reason for purchasing U.S. Treasury securities is least valid? A) The over-the-counter secondary market for Treasury securities is very liquid. B) Treasury-bonds are available in maturities of two years to nearly 30 years. C) Coupon strips synthesize a zero-coupon bond. Question 92

A Treasury security carries a yield of 4.2% and a non-Treasury security carries a yield of 6.4%. Using the Treasury rate as the reference rate, which of the following statements is least accurate? A) If the Treasury rate rises and the absolute spread stays the same, the yield ratio declines. B) The absolute yield spread is 2.2%. C) The yield ratio is 1.022. Question 93

One of the most commonly used yield spread measures is the nominal spread. Which of the following is a limitation of nominal spread? The nominal spread assumes: A) an upward sloping yield curve. B) all coupon payments are reinvested at a rate equal to the risk free rate. C) a flat yield curve. Question 94

A 20-year, $1,000 face value, 10% semi-annual coupon bond is selling for $875. The bond's yield to maturity is: A) 5.81%. B) 11.43%. C) 11.62%.


Question 95

Given the following spot and forward rates, how much should an investor pay for each $100 of a 3-year, annual zero-coupon bond? • • •

One-year spot rate is 3.75% The 1-year forward rate 1 year from today is 9.50% The 1-year forward rate 2 years from today is 15.80%

The investor should pay approximately: A) $44. B) $83. C) $76. Question 96

When computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the: A) prevailing yield to maturity at the time interest payments are received. B) yield to maturity at the time of the investment. C) coupon rate.

Question 97

Vijay Ranjin, CFA, is a portfolio manager with Golson Investment Group. He manages a fixed-coupon bond portfolio with a face value of $120.75 million and a current market value of $116.46 million. Golson’s economics department has forecast that interest rates are going to change by 50 basis points. Based on this forecast, Ranjin estimates that the portfolio’s value will increase by $2.12 million if interest rates fall and will decrease by $2.07 million if interest rates rise. Which of the following choices is closest to the portfolio’s effective duration? A) 4.3 B) 0.4 C) 3.6 Question 98

Given a bond with a modified duration of 1.93, if required yields increase by 50 basis points, the expected percentage price change would be: A) -0.965%. B) -1.025%. C) 1.000%.


Question 99

Which of the following statements about the early exercise of an option is least accurate? For an American: call option, on an asset with no cash flows, early exercise can be profitable if the option is far in the money. B) put option on an asset with no cash flows, early exercise is sometimes optimal. C) call option on an asset with positive cash flows, early exercise is sometimes profitable.

A)

Question 100

Which of the following is least likely a characteristic of London Interbank Offered Rate (LIBOR)? A) Set by the European Centr al Bank. B) Adjusted daily. C) Paid on loans denominated in U.S. dollars. Question 101

Bidco Corporation common stock has a market value of $30.00. Which statement about put and call options available on Bidco common is most accurate? A) A put with a strike price of $35.00 is in-the-money. B) A call with a strike price of $25.00 is at-the-money. C) A put with a strike price of $20.00 has intrinsic value.

Question 102

A short position in a forward rate agreement is equivalent to: A) writing an interest rate call and buying an interest rate put. B) writing an interest rate put and buying an interest rate call. C) writing both an interest rate put and an interest rate call. Question 103

A legally binding promise to buy 140 oz. of gold two months from now at a price agreed upon today is a(n): A) forward commitment. B) hedge. C) take-or-pay contract.


Question 104

An investor sold ten March stock index futures contracts. The multiplier on the contract is 250. At yesterday’s settlement price of 998.40 the margin balance in the account was computed as $86,450. Today the index future had a settlement price of 1000.20. The new margin amount is: A) $90,950. B) $81,950. C) $86,900. Question 105

Venture-capital investing will appeal to investors who: A) have a short time horizon. B) make investment decisions based on historical risk and return data. C) are willing to accept a high-risk profile and illiquidity. Question 106

An investor is considering investing in a venture capital project that will have a large payoff at exit, which is estimated to occur in four years. The investor realizes that the risk of failure is high, given the following estimated probabilities: Year Failure Probability

1

2

3

4

0.30

0.28

0.28

0.25

The probability that the project will survive to the end of the fourth year is: A) 27.22%. B) 25.00%. C) 27.75%. Question 107

Johnson is considering the purchase of Happy Valley Acres, a 300-unit apartment complex. She has hired Carson, CFA, to advise her on the investment. Carson has estimated the following data for Happy Valley’s next accounting period: • • • • • • • • •

Potential rental income = $3.80 million. Vacancy rate = 3.5%. Insurance costs = $250,000. Financing costs = $940,000. Property taxes = $400,000. Utility expense = $120,000. Repair costs = $200,000. Depreciation = $350,000. Required return = 8%.


The property’s net operating income (NOI) and value should be closest to: NOI

Value

A) $2.83 million

$33.75 million

B) $2.70 million

$21.60 million

C) $2.70 million

$33.75 million

Question 108

Which of the following statements regarding hedge funds is least accurate? A) Global macro funds make bets on the direction of a m arket, currency or interest rate. B) Market-neutral hedge funds may have long and/or short positions. C) Long/short funds have a net market neutral position. Question 109

Which of the following is a disadvantage to using the comparables approach to valuing investments in closely held companies? A) The benchmark value used may be mispriced or difficult to establish. B) Cost to replace assets may not reflect current value. C) It is difficult to determine the appropriate discount rate. Question 110

An investor is contemplating buying a load fund versus a no load mutual fund. She is trying to figure out the actual amount she will have to spend on the load fund. The shares have a net asset value (NAV) of $34.50 and a load of 5.2%. Determine which type of fund will always have a share price equal to the NAV and the price she will pay for the load fund. Fund

Offering Price

A) open-end

$34.50

B) open-end

$36.39

C) close-end

$36.39

Question 111

Use the following information and the multi-period dividend discount model to find the value of Computech’s common stock. • • • •

Last year’s dividend was $1.62. The dividend is expected to grow at 12% for three years. The growth rate of dividends after three years is expected to stabilize at 4%. The required return for Computech’s common stock is 15%.


Which of the following statements about Computech's stock is least accurate? A) Computech's stock is currentl y worth $17.46. B) At the end of two years, Computech's stock will sell for $20.64. C) The dividend at the end of year three is expected to be $2.27.

Question 112

In the long run, a perfectly competitive firm will earn: A) zero economic profits. B) small economic profits. C) large economic profits. Question 113

Two economists, Pearl Millidge and Byron Forrest, are discussing theories that explain why increased inflation causes nominal interest rates to rise. They offer the following explanations: Millidge: Because businesses expect higher prices for their output in the future, they will expect a greater return on their investments and will increase their demand for financial capital, which will drive interest rates higher. Forrest: Savers expect to pay higher prices for goods and services in the future, so they will be less willing to trade current consumption for future consumption and will therefore supply less financial capital, so interest rates increase. Are these explanations CORRECT ? Millidge A) Incorrect B) Correct C) Correct

Forrest Correct Incorrect Correct

Question 114

Which of the following statements concerning security valuation is least accurate? A stock with a dividend last year of $3.25 per share, an expected dividend growth rate of 3.5%, and a required return of 12.5% is estimated to be worth $36.11. A stock to be held for two years with a year-end dividend of $2.20 per share, an estimated B) value of $20.00 at the end of two years, and a required return of 15% is estimated to be worth $18.70 currently. A stock with an expected dividend payout ratio of 30%, a required return of 8%, an expected C) dividend growth rate of 4%, and expected earnings of $4.15 per share is estimated to be worth $31.13 currently.

A)


Question 115

Which of the following statements about bonds, indexes, markets, and market efficiency is least accurate? A price-weighted index assum es the investor holds an equal num ber of shares of the stocks in the index. B) Tests of market efficiency find that stock exchange specialists derive above-average returns. C) The bulk of all bond trading takes place on organized exchanges.

A)

Question 116

What is the yield on a discount basis for a Treasury bill priced at $97,965 with a face value of $100,000 that has 172 days to maturity? A) 2.04%. B) 3.95%. C) 4.26%. Question 117

Which of the following statements regarding basic and diluted EPS is least accurate? A) A simple capital structure contains no potentiall y dilutive securities. B) Antidilutive securities decrease EPS if they are exercised or converted. C) Dilutive securities decrease EPS if they are exercised or converted to common stock. Question 118

Jim Crockett is a portfolio manager for Miami Advisors and reports to Vicki Tubbs, the Chief Investment Officer. Miami has developed a proprietary model that has been thoroughly researched and is known throughout the industry as the Miami model. The model is purely quantitative and takes a given set of client characteristics and universe of potential securities and forms a portfolio for the investor. Individual portfolio managers are responsible for selecting securities to fit into the model based on recommendations from the firm's research department and the managers' own judgment. Because of the specific nature of the inputs to the model, each manager is responsible for applying the model on his or her own computer. The basic philosophy of the process is thoroughly explained to clients. Crockett does not understand the basics of the model, but feels that since it provides pure quantitative output, he does not need to understand it. However, he misapplies the model for several of his clients. In reviewing some of Crockett's portfolios, Tubbs finds the errors and points them out to Crockett. Which of the following statements regarding Tubbs and Crockett are TRUE? Crockett has violated the Standards by not considering the appropriateness and suitability of the investment for his clients. Crockett has violated the Standards by not exercising diligence and thoroughness in making B) investment recommendations. C) Tubbs has violated the Standards by failing to supervise adequately.

A)


Question 119

For years, John Berger, a CFA charterholder and CEO of a company, relied upon a set of reasonable procedures for preventing violations of the Standards of Practice in the firm. The company has recently arranged to have members of CFA Institute as mid-level supervisors throughout the firm. With this arrangement Berger has delegated the supervision of employees with respect to the Code and Standards to the mid-level managers. With this action Berger: A) is relieved of his obligation to supervise the em ployees under the mid-level supervisors. is still responsible for seeing that procedures are in place to prevent violations of the Code and B) Standards. C) has violated Standard IV(C), Responsibilities of Supervisors.


CFA LEVEL 1 MOCK TEST

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