» CFA 1 – 25 questions

Given callable common shares:

the shareholder has the right to buy more shares at a pre-established price.

the shareholder has the right to sell back the shares at a pre-established price.

the company has the right to buy back the shares at a pre-established price.

When the price of the underlying is above the exercise price, a call option is:

At-the-money

In-the-money

Out-of-the-money

Which of the following statements is/are accurate regarding the common-size analysis of financial statements? I. A vertical common-size balance sheet presents all the line items as a percentage of total assets. II. A vertical common-size income statement presents all the line items as a percentage of net income. III. A horizontal common-size income statement calculates all line items as a percentage of the base year's income statement.

Statements I & III only

Statements II & III only

Statement II only

You are provided the following information on a company, Noct, and on the economy: Noct's beta is 0.8 The expected market return is 7.0% The risk-free interest rate is 2.0%. Noct's standard deviation is 0.6 The expected return for Noct is closest to:

4%

7%

6%

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

An analyst is conducting a market liquidity study. After studying a stratified sample of dividend-paying stocks, the analyst concludes that the economy is sufficiently liquid and that the stock market may be undervalued. What trap has this analyst most likely fallen into?

Data mining bias

Look-ahead bias

Sample selection bias

Demand is most accurately described as:

Consumer's ability to use the product

Producer's ability to provide a product

Consumer's willingness to purchase a product

Which of the following is most accurately considered a systematic risk?

Threat of lawsuits

Change in interest rates

Discovery of oil

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

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

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.

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

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

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

It reduces the net income and carrying amount of assets.

A trader is analyzing the impact of a recent increase in the volatility of a particular stock on the value of European call and put options on that underlying. Increase in the volatility will most likely lead to:

An increase in the value of the put option and a decrease in the value of the call option.

An increase in the value of both call and put options.

An increase in the value of the call option and a decrease in the value of the put option.

GIPS standards least likely resolve misleading practices related to:

varying time periods.

survivorship bias.

analyst financial statement adjustments.

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 publish the valuation model under his own name, naming 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 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.

Venture capital most commonly refers to:

Privatizing public firms

Minority investing in mature capital

Financing for start-ups

Bonds issued by special purpose vehicles most likely have a higher credit ratings than their sponsor's unsecured bonds because they:

pay a higher coupon rate.

are backed by collateral.

have a shorter maturity.

Flotation costs are those costs which are incurred by a company during the process of raising additional capital. The value of these flotation costs is typically related to the amount and type of capital being raised. Which of the following statements is least likely accurate regarding flotation costs? 2

Flotation costs should be deducted as one of the project's initial-period cash flows.

Flotation costs cannot be applied to bonds issuance.

If flotation costs are 5%, issuing $20 million in stocks will result in the company receiving an amount of cash equal to $19 million.

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:

disseminate the contents of the program to all personnel.

respond promptly to all violations.

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

Eleanor Chavez, CFA is a senior analyst at W&W Securities (W&WS) and is responsible for managing the High Beta Mutual Fund (HBMF). Curtis Fowler, aged 56 and dependent on his portfolio returns, is W&WS’s client. His portfolio will now be managed by Chavez, who has been asked to invest 20% of his portfolio funds in HBMF. Chavez fills the request forms and immediately purchases shares of HBMF for Fowler. Is Chavez in compliance with codes and standards, and if not, what should be the recommended course of action for Chavez?

No, she should make reasonable inquiry about Fowler’s risk and return objectives and financial constraints prior to taking investment action requested by Fowler.

No, she should consult Fowler’s existing investment policy statement (IPS) and should judge the suitability of his investments in the context of his total portfolio.

Yes, she is in compliance with codes and standards.

A financial intermediary buys a stock and then resells it a few days later at a higher price. Which intermediary would this most likely describe?

An arbitrageur

A broker

A dealer

Under IFRS cash receipt of interest cannot be classified as a (n):

operating activity.

financing activity.

investing activity.

On 1 January 2014, Neway Construction entered into a contract to lay pipes for a factory. The project will take an estimated two years to complete. As stated in the contract, total revenue for the project is an estimated $2,500,000. Total cost is expected to be 70% of revenue. Neway incurred $800,000 of costs in 2014. Assuming Neway estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the percentage-of-completion method, the revenue that will be reported in 2014 is closest to:

$1,150,000.

$560,000.

$1,250,000.

Which of the following are most likely to be an exchange-traded transaction?

Swaps

Futures

Forwards

Investors have the tendency to be:

less risk averse when faced with potential losses.

less risk averse when faced with potential gains.

more risk averse when faced with potential gains.

An investor is holding an inverse floating rate note. If interest rates increase, the periodic coupons paid to the investor will:

remain unchanged.

decrease.

increase.

A tariff directly benefits which of the following entities:

Local producers and the government

Consumers and the government

Consumers and local producers

CFA 1 - 25 Questions