CFA level 1 Exam with complete solutions

faithful representation, substance over form, prudence, neutrality, completeness - Answer- According to the IFRS what are the 5 qualities of financial information that improve reliability Costs can be reliably measured - Answer- According to IFRS what condition must be met for revenue recognition to occur? Current ratio will decrease. Accruing wages increases both current liabilities and expenses, but collecting receivables has no effect on current assets or sales therefore the current ratio and net income both decrease. - Answer- A company accrued wages of $2,000 and collected accounts receivable of $10,000. What best describes the effect of these two transactions on the company? 200,000 for both the stock split and the stock dividend. Stock dividends and splits are treated in the same way for purposes of determining weighted average number of shares outstanding the adj in the # of shares is made as if the stock split or dividend occurred at the beginning of the year. - Answer- A company had 100,000 shares outstanding on 1 Jan 2009. The company has no plans to issue additional shares or purchase treasury shares during the year, but is planning either a two-for-one stock split or a 100 percent stock dividend on 1 July. The number of shares used to determine eps at 31 Dec 2009 is general requirement for financial statements. - Answer- Under IFRS the preparation of a complete set of financial statements is best described as a: Amortized Cost Bonds payable issued by a company are financial liabilities that are measured at amortized cost. - Answer- A company issued bonds in 2009 that mature in 2019. The measurement basis that will most likely be used on the 2009 balance sheet for the bonds is: Noncurrent Assets and noncurrent liabilities are listed before current assets and current liabilities. Also, minority interest must be shown as a component of equity. - Answer- What features are unique to financial statements in IFRS Current assets and current liabilities are listed before noncurrent assets and noncurrent liabilities. Minority interest is listed separately from equity or liabilities. - Answer- What features are unique to financial statements in U.S. GAAP The debt to equity ratio but not the interest coverage ratio. The adjustments to convert operating leases would increase the amount of total debt in the debt-equity ratio thus increasing the ratio; the portion of the lease payments estimated to be lease interest expense would lower the interest coverage ratio. - Answer- An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases. Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for: debt to equity or interest coverage? the common-size balance sheets. because it expresses all data as a percentage of total assets. note: current ratio is a measure of a company's ability to repay its short term debt - Answer- To gain insight into what portion of a company's assets is liquid, an analyst will most likely use: Has a higher net profit margin Dupont Analysis: Sales/Total Assets (asset turnover) =1.71 for A and 2.14 for B equity(assets -liabilities)=45 for A and 100 for B financial leverage mult. (assets/equity)=1.56 for A and 1.4 for B ROE = profit mgn x asset turnover x financial leverage mult. thus prft mgn A = 5.6% prft mgn B = 5% - Answer- The following info is available Company A Company B Sales 120M 300M Assets 70M 140M liabilities 25M 40M If both companies achieve a ROE = 15%, company B compared to company A, regarding profit margin, total asset turnover, and financial leverage will have: Yes under IFRS but not under U.S. GAAP - Answer- Is the reversal of an inventory write-down permitted under U.S. GAAP and IFRS? $282 interest paid = 50,000x.09 = 4,500 interest expense = mkt rate at issue x bv = .1x47565 = 4757 amortization of discount expense = interest expense-interest paid: = 257 for yr 1 using cf keys, with n = 6, bv = 47,822.4x.1==282 - Answer- A company issued a $50,000 7-year bond for $47565. The bonds pay 9 percent per annum and the ytm at issue was 10%. The company uses the effective interest rate method to amortize any discounts or premiums on bonds. After the 1st yr, the ytm on bonds is 9%. The amount of the bond discount amortization recorded in the second year is closest to: Inventory turnover=COGS/avg inventory=1969/(248+285/2) = 7.39 DOH = 365/inventory turnover = 365/7.39 = 49.4 Receivable turnover= sales/avg receivable=2801/(318+286/2) = 9.27 DSO (days sales outstanding)=365/receivable turn = 39.4 Payables turnover = COGS/avg payables = 1969/(361+346)/2 = 5.57 Days in payables = 365/payables turnover = 65.6 CCC = DOH +DSO - Days in Pay = 49.4+39.4-65.6=23.2 - Answer- find the cash conversion cycle sales COGS Interest 123 110 Cash 108 105 receivables 318 286 inventories 248 285 Payables 361 346 notes payable 50 99 the deferred tax liability equals the difference between the value for accounting and tax purposes times the new tax rate ()x .25 = 130 - Answer- A company purchased 2,000 million of a long-term asset in 2009 when the tax rate was 30% asset value yr end acct purposes 1800 tax purposes 1280 Adding independent members to the board of directors. A fraud triangle requires incentives such as managements ability to rationalize (blame on macro economy) and debt covenants. Adding independent members to the board will reduce fraud. - Answer- What is a condition not present in a fraud triangle? us the YTM rather than the CR to find the after tax cost of debt as it is what the firm effectively pays in the current interest rate environment. Using the cash flow keys, i=8%x.65 = 5.2% - Answer- A company is determining the cost of debt for usin in its weighted average cost of capital. It has recently issued a 10-year, 6% semi-annual coupon bond for 864. The marginal tax rate is 35%. What is the after tax cost of debt? force management to revise the original forecast to match actual results. The point of a post-audit is to create more accurate future forecasts rather than revise "sunk" ones. - Answer- The post-audit performed as part of the capital budgeting process is least likely to: Do NOT account for SUNK COSTS. the investment outlay takes into account 600k foregone if not sold today and the additional 200k in bldg it. i.e. 600k + 200k = 800k - Answer- A company is considering building a distribution center on undeveloped land that it acquired more than ten years ago for 400k. the company estimates the cost of putting in utilities etc. to be 200k. Alternatively, the land could be sold today for 600k. The investment outlay associated with the use of the land by the company is: Annualized stnd dev. of the sovereign bond mkt in terms of the developing country's currency. Country Equity premium = sovereign yld spread*(annualized stnd dev of equity index / annualized stnd dev of sovereign bond mkt in terms of DEVELOPED mkt currency) - Answer- Which is least likely to be a component of a developing countries equity premium? decrease in their net operating cycle. A four day decrease in payables will decrease the CCC (net operating cycle) by four days. - Answer- A company extends its trade credit terms by four days to al its credit customers. The most likely effect of this change to the company's credit customers is a four day: Price value of index b4 split at end of D1 = (10+20+60)/3 = 30 Price value of index after split at end of D1 = (10+20+20/x = 30) x = 1.67 Price value of index after split at end of D3=(12+19+22/1.67)= 31.7 - Answer- Calculate the value of a price weighted index b4 and after 3 for 1 stock split in z Price b4 split Price after split x 10.00 12.00 y 20.00 19.00 z 60.00 22.00 40 ROE = ROA x financial leverage so 10x2.5= 25% ROExPB = g 25*pb = 15 = pb = 60 so payout = 40% - Answer- net profit margin 8% return on assets 10% financial leverage 2.5 beta for stock 1.5 expected rate of mkt return 10% risk free rate of return 5% If the company wants to achieve a growth rate of 15% w/o changing its capital structure or issuing new equity, the company's maximum dividend payout ratio is: down payment from the futures trader - Answer- Margin in the futures market is most accurately described as a: an adjustment to another asset's level of risk - Answer- A derivative is most accurately defined as a financial instrument that provides: 332.39 Using 60-day LIBRO 1M[(.017-.015*(60/360))/(1+.017*(60/360))] = 332.39 - Answer- An investor enters into a 1x3 forward rate agreement at a LIBOR rate of 1.5%. At expiration, the 60-day LIBOR rate is 1.7% and the 90-day LIBOR is 1.6%. Assuming the contract covers a 1M notional principal, what payment will the investor receive? It is paid immediately when the contract expires Interest rate options are paid at the end of the term of the underlying interest rate. - Answer- In what way is the payoff of a forward rate agreement most likely different from the payoff of an interest rate option? different levels of supply and demand for short-term and long-term funds. - Answer- According to the market segmentation theory, an upward sloping yield curve is most likely due to: $1.50 Price of bond 1 year ago (n=3) at 10 ytm was 95.03 price of bond with 2 yrs to maturity is 98.24 with ytm of 9%. however, if ytm is 10 with 2 yrs to go, the cash flow keys give a pv of 96.53-95.03=1.50 - Answer- An 8% coupon bond with a par value of $100 matures in 2 years and is selling at $98.24 to yield 9%. Exactly one year ago, this bond sold at a price of $95.03 to yield 10%. This bond pays annual interest. The change in price attributable to the change in maturity is: A coupon bond selling at a premium to par value. one is selling at a premium and one is selling at a discount. Since they both have the same ytm and maturity date, the one with a premium would have a higher coupon and thus higher reinvestment risk. - Answer- Two amortizing bonds have the same maturity date and same ytm. The reinvestment risk for an investor holding the bonds to maturity is greatest for the bond that is: flat. Since inflation is stable in the future, its argued the inflation is expected and thus priced into the yield curve rendering it flat. - Answer- If investors expect stable rates of inflation in the future, the pure expectations theory suggests that the yield curve is currently: volatility risk Volatility risk is the risk that the price of a bond with an embedded option will decline when when expected yield volatility changes. By def. option free bonds are not affected by volatility risk. - Answer- A portfolio of option-free bonds is least likely to be exposed to: both measured risk and correlations with conventional equity investments. presence of infrequently traded assets leads to smoothed pricing that induces a significant downward bias to measured risk of the assets as well as reducing the correlations of returns with conventional equity investments. - Answer- Hedge funds that contain infrequently traded assets would most likely exhibit a downward bias with respect to: convenience yield. or roll yield...its convenient? - Answer- When investing in commodities through a collateralized commodity futures position, the return associated with rolling forward the maturity of a futures contract is referred to as the: E(Ra) = .6*25+.4*20 = 23% E(Rb) = .6*30+.4*20 = 26% Cov = [.6(25-23)(30-26)] + [.4(20-23)(20-26)] = 12 - Answer- The joint probability of returns for securities A and B are as follows: probability = 60%, return on A=25% and return on B = 30%. probability = 40%, return on A = 20% and return on B= 20%. Find the covariance of the returns between the two securities. Nominal - Answer- Under what measurement scale is data most likely categorized without being ranked? marginal product only. not marginal revenue. - Answer- For a firm in perfect competition, as the quantity of labor increases, the marginal revenue product most likely diminishes because of a decline in: elastic Unit elastic would mean a 1 unit increase in demand given a 1 unit decrease in price and the result would be no net change. - Answer- If a price cut of a product increases total revenue, demand is said to be: public goods Public goods can be consumed simultaneously by everyone and it is in each person's interest to free ride on everyone else and avoid paying for their share of a public good. - Answer- The free-rider problem, an obstacle to efficiency, is most likely associated with: tax rates. this will reduce income and thus reduce demand - Answer- An expansionary fiscal policy is least likely to include an increase in: a price increase and the buyer pays the entire tax. when the supply curve is elastic (horizontal), the price increases by the amount of the tax and the seller passes on the entire tax burden to the buyer. - Answer- For markets with perfectly elastic supply, the introduction of a tax will most likely result in: Long-time tenants extract significant benefit from landlords. - Answer- When rent controls limit rents to prices below equilibrium prices, what will most likely occur? equal. - Answer- The quantity theory of money is best described as the proposition that, in the long run, an increase in the quantity of money brings a percentage increase in the price level that is: No Since the model was created by Piedmont prior to his employment at Branch, it is not Branch's property; therefore, he did not steal it from Branch. - Answer- When Jefferson Piedmont, CFA, joined Branch investing, Branch began using a quantitative stock selection model Piedmont had developed on hos own personal time prior to his employment with Branch. One year later when Piedmont left the firm, he found the original copy of the model he had developed in a file at his home and presented it to his new employer, who immediately began using the model. According to the standards of the prof. handbok, did Piedmont violate any CFA standards? No, since Bishops research was done with due diligence it may be used in the report. Disassociating the report from Bishop's name is one way to handle the disagreement in final opinion of the report. - Answer- Lawrence Hall, CFA and Nancy Bishop, CFA, began a joint research report on Stamper Corp. Bishop visited Stamper's headquarters for several days and met with all company officers. Prior to the completion of the report, Bishop was reassigned to another project. Hall utilized his and Bishop's research to write the report but did not include Bishop's name on the report, b/c she did not agree with Hall's conclusion included therein. According to the CFA standards, did Hall violate any CFA standards? Duty to Employer lying about passing the exam is a violation of professional miscond