» CFA 1 – 50 questions

A high-tech industry only has 3 large firms operating in it. This is most likely a:

concentrated industry.

fragmented industry.

low-cost industry.

An investor purchases a 2-year zero-coupon bond with par value of $1,000 at $960. The implied interest earned on the bond is closest to:

$0.

$21.

$40.

Which of the following best describes the reason for choosing the NPV rule over the IRR rule when dealing with mutually exclusive projects?

The reinvestment rates used by NPV are more conservative and therefore are economically more relevant.

IRR ranking assumes reinvestment at opportunity cost of capital that is less realistic and economically less relevant.

NPV rankings are affected by external interest rates or discount rates.

Compared to investors with long investment time horizons, investors with short investment time horizons most likely require:

less liquidity and less emphasis on capital appreciation.

less liquidity and greater emphasis on capital appreciation.

more liquidity and less emphasis on capital appreciation.

Which of the following is impacted by inflation in the case of capital-indexed bonds?

The principal

The interests

Both A and B

Gloria Inc. ships 5 machines to a customer at $5,550 per machine. The total cost for Gloria Inc. is $26,250 and payment is due in 60 days. No cash changes hands at delivery. The accounting treatment related to this transaction at the time of shipment most likely includes:

accounts receivable and revenue increased by $27,750 and inventory and cost of goods sold decreased by $26,250.

accounts receivable and revenue increased by $27,750 and inventory decreased by $26,250.

revenue increased by $5,550, cost of goods sold decreased by $26,250 and cash remains unchanged.

A firm values its assets using fair values. Its asset base comprises of the following asset categories: Category 1: Fee-paying discretionary portfolios Category 2: Non-fee paying discretionary portfolios Category 3: Fee-paying non-discretionary portfolios Category 4: Non-fee paying non-discretionary portfolios Based on the requirements of the Global Investment Performance Standards (GIPS), for periods beginning on or after January 1, 2011, the firm's total assets are the aggregate of:

categories 1, 2 and 3 only.

all four categories.

categories 1 and 2 only.

A publishing firm contributed $250,000 to support some philanthropic projects. The firm immediately expensed that amount in its income statement for the current fiscal year. According to applicable tax legislation such contributions are not tax-deductible.

A deferred tax asset arises, as taxable income is greater than accounting profit.

The treatment of $250,000 for accounting and tax purposes represents a permanent difference.

A temporary difference of $250,000 gives rise to a deferred tax liability.

The New York Stock Exchange (NYSE) is the world's largest stock exchange. Companies whose shares are listed on the NYSE have a combined market capitalization of over $10 trillion. This exchange, where investors go to buy and sell stocks, is best classified as a:

primary market.

money market.

secondary market.

When choosing one of two mutually exclusive projects, which is the preferred method?

There is no preference between NPV and IRR

IRR

NPV

A company has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7 percent dividend. The issue matures in 5 years. Which of the following statements is least likely correct? The company’s:

Debt/Total capital ratio will improve.

interest coverage ratio will deteriorate.

preferred shareholders will rank below debt holders should the company file for bankruptcy.

Which of the following statements is most likely correct regarding the audit of financial statements?

When an auditor has concerns regarding some unreported pending contingent liabilities he might issue a qualified opinion.

Disclaimer of opinion occurs when an auditor issues an opinion despite scope limitations.

Auditors can provide absolute assurance about the accuracy and precision of financial statements if the opinion is unqualified.

Todd Whitley, CFA, has purchased shares in an oversubscribed initial public offering using a block trade. The number of shares Whitley acquired is insufficient to fill all of his clients' buy orders. In order to adhere to the Standards, Whitley should most likely allocate these shares on a(n):

pro rata basis according to each client's order size.

pro rata basis according to each client's account size.

equal basis among all clients who placed orders.

Sammy Sneadle, CFA, is the founder and portfolio manager of the Everglades Fund. In its first year the fund generated a return of 30 percent. Building on the fund’s performance, Sneadle created new marketing materials that showed the fund’s gross 1- year return as well as the 3 and 5-year returns which he calculated by using back-tested performance information. As the marketing material is used only for presentations to institutional clients, Sneadle does not mention the inclusion of back-tested data. According to the Standards of Practice Handbook, how did Sneadle violate CFA Institute Standards of Professional Conduct?

He failed to deduct all fees and expenses before calculating the fund’s track record.

The marketing materials only include the Everglades Fund’s performance and are not a weighted composite of similar portfolios.

He did not disclose the use of back-tested data.

Which of the following are not part of other comprehensive income? I. Exchange differences on translating foreign operations II. Issuance of equity shares III. Actuarial gains/losses IV. Loss from sale of machinery

II and IV

I and IV

II and III

When marginal products (MP) are maximized, marginal costs (MC) are:

zero.

minimized.

maximized.

The value, at 6% interest, of a bond paying 8% annual coupon payments, redeemable at par in 5 years, with a $25,000 face amount is closest to:

$27,600

$25,600

$27,100

Which of the following statements is most accurate? Unlike depreciation, amortization is only used to reduce the carrying amount of: intangible assets.

assets with no residual value.

assets with indefinite useful lives.

intangible assets.

Which of the following would most accurately be considered a primary source of liquidity?

Restructuring debt obligations

Money market account

Selling equipment

Samuel Lopez wants to calculate the GDP or a specific country without taking into account the effect of inflation on prices. Which of the following is the most appropriate GDP measure Lopez should use?

Real GDP

GDP based on current prices

Nominal GDP

Determine the conversion value of a convertible bond if the conversion ratio is 7:3 and the market price of the bond is $30.

$70

$13

$30

In repurchase agreements, repo margin provides a margin of safety to the:

cash lender, if the collateral’s market value declines.

dealer, if the lender of the cash defaults.

security lender, if the collateral’s market value declines.

Which of the following statements are accurate regarding corporate governance? I. A board should have a committee of independent members who set executive compensation. II. A board should have the authority to hire third-party consultants. III. Elections should be staggered to let the board members execute long-term plans.

III only

I & II only

I, II & III

How does the oil the industry most likely maintain a premium pricing strategy?

The threat of substitutes

Significant barriers of entry

The bargaining power of the buyers

As the degrees of freedom increases and the t-statistic approaches towards the z-statistic, the tails of the distribution most likely become:

unchanged.

thicker.

thinner.

Clayton Hamner, CFA, an independent equity analyst, produces research reports and recommendations for his 25 high net worth clients, all of whom have been informed of the different levels of services available to them. Recently, Hamner distributed his latest report on Acton Pharmaceuticals (APH) in an email that was sent simultaneously to the 18 clients who either currently hold APH shares or for whom this investment is suitable. After sending that email, Hamner followed up with seven of those clients, all of whom pay for premium service, to discuss his report in greater detail. Of those calls, Hamner's first is to his sister, whose account generates a significant share of his income. Has Hamner most likely violated the Standards?

No

Yes, by calling his sister before calling other clients

Yes, by not disseminating his report to all clients

Mark Johnson is an analyst for Big Riches Investment Firm. He replaced Todd Phillips, who was an analyst with Big Riches, but resigned to move overseas. Phillips passed on all of his prior analytical reports and backup data for Johnson to use in his new role. In preparation for an annual valuation of the foodservice equipment industry, Johnson pulled up a valuation model developed by Phillips and changed it to include economic indicators published by the US Bureau of Economic Analysis. Once these revisions were made, Johnson back-tested the results using the S&P 500. Which of the following is most accurate?

Johnson must give credit to Phillips for the creation of the valuation model, and add the Bureau of Economic Analysis, and S&P 500 as reference materials.

Johnson must give credit to Phillips for the creation of the valuation model. However, it is unnecessary to reference the S&P 500 or the Bureau of Economic Analysis as reference materials.

Johnson must publish the valuation model under his own name, naming the Bureau of Economic Analysis, and S&P 500 as reference materials.

Which of the following statements least likely represents the correct treatment of impairment loss?

It reduces the net income and carrying amount of assets.

It reduces investing cash flow in the year loss is reported.

It is considered a non-cash item and thus does not affect the cash flow statement.

Under which of the following situations would a nonparametric test be more appropriate than a parametric test?

When the sample size is small and significantly not normally distributed

When comparing population means

When studying population variance

Alonzo Myers manages accounts at GRTY Securities. Jerry Reed, one of his clients, e-mailed Myers to buy 300 shares in the IPO of JJKS Corp’s stock. Few days later, despite being a hot issue, Myers succeeded prorating 500 shares of JJKS Corp. for his clients. After purchasing 500 shares for his clients and 300 shares for Reed as per request, he purchased remaining 200 shares for his wife. Myers:

violated the standards by purchasing 200 shares for his wife but is in compliance for purchasing 300 shares for Reed as per his request.

violated the standards by purchasing 200 shares for his wife and only 300 shares for Reed.

did not violate the standards by purchasing 200 shares for his wife and 300 shares for Reed.

For venture capital investing, later stage financing is the capital provided for a company:

to initiate commercial manufacturing and sales.

to prepare for an IPO.

to plan for major expansion.

Which of the following statements is most likely correct regarding verification?

Verification ensures the accuracy of a composite presentation.

In order to claim compliance with the GIPS standards, firms must seek verification.

Verification tests the soundness of a firm's policies and procedures to calculate performance in accordance with the GIPS standards.

lf a firm is unwilling to permit dissemination of adverse opinions about a corporate client, members or candidates should least likely:

encourage the firm to remove the controversial company from the research universe.

put it on a restricted list so that firm disseminates only factual information about the company.

encourage the firm to disseminate the adverse opinions in a press release or in oral presentation.

If you were offered to invest your money at interest rate of 4% and can choose how it is compounded, which compounding frequency would yield the highest effective return?

Quarterly compounding

Continuous compounding

Annual compounding

After 5-years of service with Jacob Securities as a financial planner, Shane Alvarado planned to start his own practice in his hometown. He informed his employer through email three days before starting his independent practice. The employer was on a business trip for a week and on his return he accepted his resignation. Alvarado always maintained his personal records related to training programs that he conducted at Jacob Securities, and he used that material in his new project. Alvarado:

violated the standards by using records but is in compliance with standards in notifying his employer regarding his independent practice.

is in compliance with standards regarding timely notification and using his own personal records.

violated the standards by rendering services without receiving consent from his employer and by using records.

EBB Inc. entered into a three-year contract to construct a building with an estimated total cost of $32 million. Due to limitations, project costs are uncertain and the output of the project cannot be measured reliably. If at the end of year 1EBB spent $26 million, under U.S.GAAP EBB would most likely recognize:

$26 million as an increase in inventory account.

$0 in any account until the project has completed.

$26 million as cost of construction.

At initiation, the values of a swap contract and a forward contract are most likely to be:

Negative

Positive

Zero

Lauren Sims, marketing director of Karma Advisors, planned a brief performance presentation in five different U.S states where majority of the firm’s clients are located, in celebration of Karma’s five years of success. In his presentation, Sims clearly includes references to the information presented and also prepared a detailed information report to support his brief presentation. At the conclusion, Sims provided the report only to the clients who requested it. By failing to provide the report to all the clients who attended the session, Sims:

violated Standard III-B ‘Fair Dealing’

violated Standard III-D ‘Performance Presentation’.

did not violate any CFA Institute codes and standards.

The distinction between items listed as current assets on a balance sheet and those listed as non-current assets is most likely based on differences in:

growth

solvency

liquidity

Which of the following is considered to be best practice from shareowners’ perspective?

Board and management should be able to use cash or available credit lines to pay hostile bidders to forgo takeover.

Acquiring entity is required to deal directly with management and board.

Under change-in-control provisions, executives should not be granted severance packages to leave the company.

Which of the following statement is least accurate regarding Standard V(C) - Record Retention?

If the review of a security does not lead to a change in position, there is no record retention requirement.

An employee's notes supporting a recommendation belong to his or her firm.

A press release issued by the covered company is an example of supporting documentation.

Generating higher returns from security selection most likely depends upon:

lower informational efficiency and higher skills of investment managers.

higher informational efficiency and lower index turnover.

lower index turnover and passive management.

An investor wanting to purchase 100 shares of a publicly traded stock would most likely seek out:

A standard broker

A block broker

An investment bank

Under which of the following situations would an increased return on equity (ROE) more likely be perceived negatively by shareholders?

ROE increases while book value of equity remains constant

Increasing ROE is always a positive signal

ROE increases as a result of a leverage increase

Roberto Vargas, CFA, is in charge of the compliance program at his investment firm. According to the Standards of Practice Handbook, as a supervisor, Vargas is least likely required to:

respond promptly to all violations.

incorporate a professional conduct evaluation as part of an employee’s performance review.

disseminate the contents of the program to all personnel.

According to the Statement on Auditing Standards No. 99, Consideration of Fraud in a Financial Statement Audit, a risk factor related to opportunity exists when:

organizational structure is unstable or complex.

management’s personal financial situation is threatened by the firm’s financial performance.

firm’s communication channels are ineffective for reporting inappropriate behavior.

Which of the following statements is most likely correct regarding Global Investment Performance Standards' compliance requirements?

Firms must comply with all applicable laws/regulations regarding the calculations and presentations of performance.

Changes in firm's organization must lead to the alteration of historical composite performance.

The GIPS must be applied on a composite-wide basis.

The optimal capital budget occurs at the intersection of:

the investment opportunity schedule and the marginal cost of capital

the old marginal cost of capital and the new marginal cost of capital

the investment opportunity schedule and the corporate tax rate

When a reliable current market price for a firm’s debt is not available, the cost of debt can be estimated using the:

matrix pricing model.

interest expense of the firm’s income statement.

coupon rate of the same bonds.

The production process of a calculator could look something like the following: Cost of factory buying raw materials: $2.00 Cost of retailer buying from factory: $5.00 Cost of customer buying from retailer: $9.00

$5

$3

$4

CFA 1 - 50 Questions