Practice Pack: Mock- 3 (Paper 1)

Question 1 of 90
Question

Joyce La Valle, CFA, is a portfoliomanager at a olobal

should use a specific vendor for eguity hank. La Valle has been tola Sie
by the bank's investment research that has been apPProveu
headquarters. Because La Valle is located in a country different o"
the bank's headquarters, she is
provided by this vendor whenituncomfortable
applies
with the validity of the
to her country and would likeresearcn
vendor on whom she has already conducted due diligence. Which to use a
should La Valle use to avoid violating the research vendor(SJ
A
Standards?
The local research
B. The vendor
C. bank-approved
Both the local and theresearch vendor
bank-approved research vendors.
Question 2 of 90
Question

Which of the following is consistent with the

Standards?
Statement 1: "An IPS should address the client's return requirements."
Statement 2: "Personal data such as age and occupation are required to provide
investment advice."
Statement 3: "Clients are primarily responsible for determining ifinvestments are
suitable for them if they are in an advisory relationship with members."
A. Statement 1 only
B Statement 1 and Statement 2 only
C Statement 1,Statement 2, and Statement 3

Question 3 of 90
Question
Asset owners most likely benefit from a firm being GIPS compliant because it:
A eliminates the need for in-depth due diligence only.
B facilitates the understanding of the sources of risk and excess return only.
C both eliminates the need for in-depthdue diligence and facilitates the
understanding of the sources of risk and excess return.

Question 4 of 90
Question

196
 standards? Firms ar
Which of the following is not a requirement of the GIPS
required to: third parh.
A. have their performance records verified by an independent
least one composit
B. include alldiscretionary, fee-paying portfolios in at
present a minimum of five years of annual investment performance
C.
with GIPS standards compliant
Question 5 of 90
Question
Immediately after taking the CFA Level Il exam, Tim Riley posts on social medi
broad topic areas that were not tested on the exam. He
also posts an article
on
media questioning the relevance of CFA Program for professional practice. Has socia
violated the Standards? Riley
A No
B Yes, by posting broad topic areas not tested on the exam
C. Yes, by questioning the relevance of CFA Program for professional practice

Question 6 of 90
Question

Ming Mei Xu, CFA, who isa well-known analyst issues a buy recommendation ona
small-cap stock. Xu shares her recommendation with the public two days after
communicating the recommendation with her clients. The public dissemination leade
toa significant increase in the stock price. Trevor Thomas, CFA,one of Xu's clients
buysa large position in the stock. Thomas sells the entire position for a profit a
month later.
His action leads to a significant decline in the stock price. Has the Standard relating to
market manipulation been violated?
A. No
B. Yes, by Xu
C. Yes, by Thomas

Question 7 of 90
Question
Max Ohn, CFA, works as a client advisor for a small firm. He has
established a
referral programn with a real estate agency. Ohn refers clients to the real estate
agency and the real estate agency refers clients to Ohn. Because the real estate
agency does not compete with Ohn's employer and because the
benefits Ohn'sfirm, he omits disclosure of the arrangement arrangement
to his firm. Ohn
diligently discloses the referral arrangement to allreferred clients after they
become firm clients. Has Ohn most likely violated the Standard relating to referral
fees?
A No

197
 B. Yes, only by omitting
C disclosure of the arrangement to his firm
Yes, by omitting disclosure of the arrangement to his firm andby
referral arrangement to referred clients disclosing tne
after they become firm clients

Question 8 of 90
Question
In aclient presentation regarding a potential equity
statements: investment. a member makes the following
Statement 1:"This investment will outperform the S&P 500 over a ten-year
Statemnent 2:"Thisinvestment is likely to outperform the market period
period." over a one-yedl
Statement 3: "With this product's 100% principal protection, our firm guarantees
you will not lose money.
The member has most likely violated the
A. Statement 1 only Standards by making:
B Statement 1 and Statement 3 only
C. Statement 1,Statement 2,and Statement 3

Question 9 of 90
Question

According to the Standard relating to loyalty, members must:

A subordinate any personal obligations to their work.
B place the interests of their employer below the interests of clients.
C. refrain from entering into an independent business while still employed.

Question 10of 90
Question
Tharushi Ranasinghe, CFA, ispresident of a small investment firm. Most of her clients
are longtime associates or family members whose investment portfolios she has
managed for many years. Ranasinghe is familiar with her clients' investment profiles
and is in regular contact with them. Ranasinghe makes appropriate adjustment in her
clients' portfolios following significant events in their lives. She rarely updates her
clients' records given her familiarity with their investment requirements. Ranasinghe
hasmost likely violated the Standard (s) relating to:

198
 A. fair dealing only.
B. record retention only.
C both fair dealing and record retention.
Question 11 of 90
Question
To comply with the Standard relating to knowledge of the law, members are
to take which of the following actions?
Acquire detailed knowledge of allthe laws relating to their
Action2:1:Dissociate
Action
requ
activities
from activities of others that they believe are unethi
ired
A. Action 1 only
B Action 2 only
C. Both Action 1 and Action 2

Question 12 of 90
Question

Amember who pays a higher brokerage commission on behalf of all of his client.
than he would normally pay, without any corresponding benefit to the client. vie
the Standard relating to:
A suitability.
B fair dealing.
C. loyalty, prudence, and care.

Question 13 of 90
Question
Kathy Lau, CFA, is aportfolio manager. After a
comprehensive
Technology Company (TTC) IPO for all her clients analysis, Lau buys Top
for whom the investment is
appropriate, including her brother's fee-paying account. Lau does not have
ownership in her beneficial
for her brother's brother's account. Has Lau violated the Standards by buying shares
account?
A No
B. Yes, the Standard relating to
C.
Yes,the Standard relating to disclosure of conflicts
priority of transactions
Question 14 of 90
Question
Allclients of John Chapman,
that half of hisclients CFA,are standard fee-paying
Heoffers the would benefit from premium serviceclients.
in Chapman believes
premium service only to these clients. Later that
distributes an investment exchange for higher te
day,
recommendation only to those clients forChapman
whom he deems

199
 suitable. Has Chapman violated the Standard
A. No relating to fair dealing8
B. Yes, by offering the premium service onlv to clients he
from it believes would benent
C Yes, by distributing an investment
whom he deems it suitable recommendation onlyto those clients for

Question 15 of 90
Question

According to the GIPS standards, a firm must:

A
provide a GIPS composite report to all
B
include terminated composites prospective
on the firm's clients.
list of composite description5 T01 at
least seven years after the
C. composite termination date.
atcaln compliance for a minimum
has been in existence for less than three of three vears or since firm inception if the firm
vears to initially claim compliance.

Question 16 of 90
Question

Which of the following parties can perform verification of a firm's claim of

with the GIPS standards? compllance
A. CFA Institute
B. An internalauditor of the firm
C. An independent third-party consultant
Question 17of 90
Question
Which of the following is a violation of the Standards when local laws require firms to
maintain client confidentiality? Amember:
A. discloses information relating to illegal activities of a client to local authorities
B. refuses to share details of a prospective client with his firm'smarketing
department
C. refuses todisclose information about a client during an investigation by the CFA
Institute Professional Conduct Program

Question 18 of 90
Question
The Standards are most likely designed to foster and reinforce a culture of:
A. service to the firm.
B. regulatory compliance.
C. responsibility and professionalism.
Question 19 of 90

200
 Question
with
Which ofthe followingg policy recommendations is consistent the
Recommendation 1: Investment banking personnel should approve
Staanyndards?
side.
investment recommendations from the research
Recommendation 2: Firewalls should separate reporting structures for changes in the
WOL

on the research side and personnel on the investment

Recommendation 3: Compensation
to investment
arrangements
banking
banking side.
should
assignments
link research
in which
personnel
. B
A.

C.
remuneration directly
participate as team members. analysts may
A. Recommendation 1
B Recommendation 2
C Recommendation 3 Qu
Quest
WH
Question 20 of 90
Question me
pr
NidhiMehta, CFA, is afund manager at XYZ Investments. Mehta's fund delivere
excellent returns for the year. Alarge investor in the fund offers Mehta cash
compensation along with free tickets to the opening night of a sold-out opera as a
reward for the fund's performance. Firm policy requires employees to inform
supervisors about monetary compensation received from clients. Mehta does not A
inform her supervisor as she only the tickets and not the cash
Has Mehtaviolated the Standards? accepts
B

compensation. C

A. No
B. Yes,the Standard relating to fair dealing
C. Yes, the Standard relating toadditional
compensation arrangements
Question 21 of 90
Question
Que
Frank Schneider, CFA, a
makes two statements: securities analyst,applies for a new position. In his application, he b

Statement passed all three CFA

1: I
Statement 2: Based on my success inexaminations
the CFA
in three
consecutive attempts.
analyze stocks compared to my peers. Program, Ihave a superior ability to
Schneider has most likely violated the
A.
Statement 1only Standards by making:
B.
C.
Statement 2 only
Both Statement 1and
Statement 2 A
B
Question 22 of 90
Question
Colin Gifford, CFA, is
finalizing
individual investors. Many a
of the monthly newsletter to his clients, who are primariy
Technologies. the
In clients' accounts hold the common stock of
earnings of $1.50pernewsletter,
share and a
Gifford
10%
writes, "Based upon the next sixX
Caprico Qu
stock will be $22 per share by montn
the end ofincrease
in the dividend, the s
the year." price of Capr)cO
Regarding his stock analysis)

201
 the least appropriate action
would be to: Gifford should take to avoidviolating the
Stanae
A separate fact from opinion.
B include earnings estimates.
C. identify limitations of the analysis.

Question 23 of 90
Question
Which of the following are among the
recommended
members to meet their obligations under procedures that enabie
the Standard
presentation? relating to performance
Procedure 1: Members should includeterminated
performance history. accounts while presenuns
Procedure 2: Members should use a single
performance of each representative account to preset
A. Procedure 1 only investment strategy.
B. Procedure 2 only
C Both Procedure 1 and
Procedure 2

Question 24 of 90
Question

Jacques Lagarde, CFA, is a sell-side analyst at Springhill Financial, asmall investment

bank. Springhill is the lead manager for the equity offering of Chorale Music. Lagarde is
not part of the IPO team for this offering. While finalizing a research report on Chorale,
Lagarde discovers inconsistencies that makes him believe the company may have
concealed losses in its leasing division last quarter that would significantly reduce its
earnings. Lagarde suspects that Springhill's investment banking team is aware of these
unreported losses. The prospectus for Chorale's equity offering has already been
approved by regulators and distributed to potential investors. According to the
Standards, Lagarde should most likely:
A. report the issue to his supervisor.
B issue a report showing the leasing division losses.
C issue the report using data as reported in the prospectus.

Question 25 of 90
Question
According to the recommended procedures for compliance with the Standard relating

202
 C. B. A Question ProgramCFAthe C. B. A. Question performanceB.
C. review. A.
Question after
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DiscloseDon'shares
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and
 C. B A
End End End Question
The
weighted The Beginning Time C. B A Question
Question C.
of of of following populations,When Question B. A. Question C B A
2.57%.
2.40%.
1.93%.investor Year Year Year typically:
Compared Question Question
comparisons
paired
chi-square
test. test.F-test. Which
3 analyzing have canhave
rate 2 1 of operations
market Indirect
Corporate taxratestax
Openrates
Year table 31 30 sell
does less longer 29 of
of of the of to the
their of
return shares
Sell15 Purchase
shares 1represents
5 Activity
Purchase 90 90control shareholders following
not differences
most 90
holding
shares
reinvest
on appropriate over
this 10 the more tools
shares periods.
history between management. in
investment the public is
easily. available
dividends E165 ¬175 ¬168 ¬160 Share test
Price
per of
an the companies,
is
is investment variances
a(n): to
received.
closest implement
E0.00 E4.00 ¬3.00 shareholders
to: Dividends
SharePaid
per in of
Ignoring a two
company: monetary
normally
taxes, in
private policy?
distributed
the
time companies
 Question 32 of 90
Question
Substantialgovernment borrowing is less likely to be of concern when:
A
R
the private sector decreases savings to offset the debt.
C
most of the borrowing is owed internally to local citizens.
the private sector is crowded out to make room for the debt.

Question 33 of 90
Question
Ensuring that the composition of a board of directors is aligned with a
governance principles is most likely a responsibility of the: companys
A risk committee.
B. audit committee.
C.
nominating committee.

Question 34 of 90
Question
Which of the following most accurately
than normal? describes a distribution that is more peaked
A
B
Leptokurtic
Mesokurtic
C.
Platykurtic
Question 35 of 90
Question
Which of the following
A statements about dispersion measures is most
The range shows how
B. the data
The variance is expressed in theare distributed
accurate?
same unit of
C. The number of
the sample variance is degrees of freedom in measurement as the observations
estimating the
equal tothe sample size minusone population variance with
Question 36 of 90
Question
Which pricing model combines multiple products so
buy them together? that customers are
incentivized to
A
B. Bundling
C.
Tiered pricing
Value-based pricing

205
 Question 37 of 90
Question
The correction ofa material
error for aprior period is
A. handled by:
adding a note disclosure regarding the error in the current
only.
B
financial statements
restating the financial statements for the prior periods
financial
C
statements only. presented in the current
both adding a note disclosure regarding the
statements and statements.
current financialrestating the financial statements forerror in the current financial
the prior periods presented tn tne

Question 38 of 90
Question

Whichof the following is not generally

characteristics of Big Data? considered one of the three key
A. Variety
B. Volume
C.
Visibility

Question 39 of 90
Question
Based onthe information in the table,which of the
mean annual return for the full period of 5 years? following closest to the geometric
is
Annual Return

Year 1 -8.0%

Year 2 -5.5%

Year 3 -7.2%

Year 4 20.8%

Year 5 4.4%

A 0.35%
B. 0.90%
C. 1.75%

Question 40 of 90
Question
When constructing aforecast, an analyst with a conservatism bias is most likelv to:
A deemphasize new information when updating their forecast.

206
 Information that agrees with their forecast Questio
B. seek optntons and ustng a wide breadth of
data to create a forecast. Question
C. bulldd complex models
Using le
A. re
B
r
Question 41 of 90
Question
Aninvestment pays $1,000 at the end of each year in perpetuity, with the first
payment occurring six years from today. If the discount rate is 9% per year, the Quest
closest to: Questior
present value of the investment today is
A $4,486. A com
B. $6,625. mode
C. $7,221.

C.

Question 42 of 90
Question
Aliquidity trap is most closely associated with: Que
A deflation. Questi
B an inelastic demand for money. Wh
C. a positive nominal central bank policy rate, per
A
B.
C.
Question 43 of 90
Question
Qu
An analyst gathered the following information about a stock index: Ques
Mean net inçome for all companies in the indx Awe
$2.4 million A.
B.
Standard deviation of net income for a<l companies in the index $3.2 million C.

If the analyst takesasample of 36 companies from the

sample mean is closest to: index, the standard error of the
A. $88,889.
B. $400,000. Que
C.
$533,333. Ana
Bo

207
 Question 44 of 90
Question

Using long-term debt or equity to

A
reduces the cost of financing finance working capital needs most likely:
working capital.
provides the opportunity to borrow
C reduces the need to access capital only as needed.
markets in times of stress.
Question 45 of 90
Question
Acompany plans to do
anupward revaluation of an
model. AIlelse being equal, the asset under the revaluation
company's debt-to-assets ratio will:
A. decrease.
remain unchanged.
C. increase.

Question 46 of 90
Question
When estimating the average
periods, it is most appropriatereturn
to use
of an investment over
the:
multiple consecutive
A harmonic mean.
B arithmetic mean.
C geometricmean.

Question 47 of 90
Question
A
well-defined supply function is most likely available to:
A a monopolist.
B a firm operating in perfect competition.
C afirm operating in monopolistic competition.

Question 48 of 90
Question
An analyst gathers the following information about acompany:
Book value of debt S80 million

Market value of debt $S150 milion

208
 Share price S60
10 million
Shares outstanding

7%
Cost of equity
Cost of debt 4%

Tax rate 30%

Based on this information, the company's WACC is closest to:

A 6.16%.
6.40%.
C 6.51%.

Question 49 of 90
Question

Anoption in acapital project to alter production when demand exceeds supplv is ahx
of:

A sizing option.
B timing option.
C.
flexibility option.

Question 50 of 90
Question

Which of the following statements is most accurate?

Statement 1: The IRR assumes reinvestment of cash flows at the
return. required rate of
Statement 2: IRR is strongly preferred when NPV and IRR rank two
exclusive projects differently. mutually
A.
Statement 3: NPV is zero when IRR equals the hurdle rate.
Statement 1
B Statement 2
C Statement 3

Question 51 of 90
Question

Which of the following statements is

Proposition Iwithout taxes: most accurate? According to
A.
firm value can be created by Modigliani-Mler
changing a company's capital structure.

209
 B. any increase in the cost of eguity must
debt. exactly offset the greater use of lower cost
C. equity holders demand a higher return as
increased risk. leverage increases in order to Ofset

Question 52 of 90
Question
An analyst gathers the following
information:
CHF/USD spot exchange rate
1.0072
270-day CHF risk-free interest rate (annualized) 0.63%

270-day USD risk-free interest rate (annualized)

0.75%
CHF/USD is the amount of CHF per 1USD.

The number of forward points for the 270-dav CHF/USD

A. -12.0. forward rate is closest to:
B -9.0.
C 0.5.

Question 53 of 90
Question
Which of the following functional forms of a simple linear regression
is most appropriate to test the linear relationship between relative changes in the
dependent variable and relative changes in the independent variable?
A The lin-log model
B The log-lin model
C. The log-log model

Question 54 of 90
Question
most
Awrite-down of inventory to its net realizable value by a manufacturing company
likely results in a lower: occurred.
had not
A. cost of sales than if the write-down
write-down had not occurred.
B current ratio than if the occurred.
write-down had not
C. inventory turnover than if the

210
 Question 55 of 90
Question
best describes a principal-agent contlict? Acompany'e
Which of the following
interests above those of:
management puts their own
A. regulators.
B. customers.
C. shareholders.

Question 56 of 90
Question
An analyst gathers the following
information about a currency pair:

Currency Pair Spot Rate Expected Spot Rate in One Year

1.1800 1.1650
USD/EUR
USD/EUR is the amount of USD per one EUR

over the next

The expected change in value of the dollar relative to the euro
year is closest to a(n):
A. depreciationof 1.27%.
B. appreciation of 1.27%.
C. appreciation of 1.29%.

Question 57 of 90
Question
An analyst gathers the following information about a company:
Debt-to-equity ratio based on market value 43%

Debt-to-equity ratio based on book value 52%

The weight of debt the analyst should use when determining the company's target
capital structure is closest to:
A 30%.
B 43%.
C. 52%.

211
 Question 58 of 90
Question
In contrast to the
A
B accounts for the
Herfindahl-Hirschman
considers the elasticity of demand. index (HHI), the e concentration ratio:
is less affected bypossibility of new entrants.
mergers among the top market
incumbents.
Question 59 of 90
Question

Assuming interest deductibility is allowed, an increase in the tax

company's cost of capital to: rate will causea
A. decrease.
B remain the same.
C. increase.

Question 60 of 90
Question

Under US GAAP, for a long-term operating lease, the lessee reports:

A. after inception, the lease payment split between financing and operating
outflows on the statement of cash flows.
B at inception, a right-of use asset and a lease liability calculated as the
undiscounted value of its fixed lease payments.
C. after inception,a single leaseexpense each year, which is a straight-line
allocation of the cost of the lease over its term.

Question 61 of 90
Question
An analyst gathers the following information (in £ millions) from a
company's year-end balance
sheet:
Year 2 Year 1

Accounts receivable 65 55

120 140
Inventory
PP&E 1,400 1,40
0

212
Accounts
payable
Accumulated
depreciation

25 120

40
 C. sales
Costofcompany: Question
An C. B. A. C. B. A.
C. B. A Question B A.to: inventory
Net Costof manufacturing Question
Ogarithm returns. The Question Changes
cost analyst Question Which Question activities
property,During
realizable
4.5. 4.2. 4.0. of Stronger
Increased
Interdependenceprofits 925. 895. 855.
for is
cannot continuously sales. of
higher to gathers the 62 Year
ofmultiple 64 63 (in
plant,
a the value of of £ 2,
of The environmental, following
negative be than
90 allowance the 90 90 net
calculated of millions) and
inventory inventory income
compounded
time the following equipment
number periods is for
holding most was
for for Year
turnover 225 information
inventory 300 social, likely
is
negative 1,025 Year2
periodis and2£860
not the return: is: no
a and a million,
sum (based 325 375 1,00 benefit
real return (in write-downs.
holding obsolescence governance
214 of ¬
number. the for on thousands) of There
period average globalization?
one-period a were
given standards Cash
have about
returns inventory) no
time already
flow
acquisitions
continuously an
because period. electronics from
forbeen operating
the Year or
reflected
compounded Sales
natural 2
is
closest
in
 Question 65 of 90
Question
regime is:
Acharacteristic of a dollarized exchange
A. Imposed scal discipline.
profits.
B. the ability to earn seigniorage
used asa source of economic
stabilization
C. that monetary pollcy can be

Question 66 of 90
Question
Companies most lIkely have the largest proportion of equity in their capital struct
the:
A. start-up stage.
B growth stage.
C. maturity stage.

Question 67of 90
Question
An analyst gathers the following information (in e thousands) about a machíne:
Carrying amount prior toimpaiment 50

Present value of expected future cash flows 46

Fair value 48

Costs to sell 3

Impairment loss (in ¬ thousands) is:

A 2.
B. 4.
C. 5.

Question 68 of 90
Question
Whích of the following fiscal policy tools is an automatic stabilizer?
A. Capital expenditures
B. Social benefits through transfer payments
C.
Current government spending on goods and services

215
 Question 69 of 90
Question
An annaalyst gathers the
following information about three
Portfol Retu Standard Deviation
rn
portfolios:
8.0% 6.0%
2 10.2% 8,0%

11.8% 10.0%
If the risk-free rate is
2.0%
highest safety-first ratio is: and the shortfall level is 4.09%, the portfolio with the
A Portfolio 1.
B Portfolio2.
C Portfolio 3.

Question 70 of 90
Question
Which of the following is best described as a
A. Globalization non-cooperative economic tool?
B Nationalization
C. Restriction of foreign investment

Question 71 of 90
Question
Which of the following statements is most accurate?
A. Deferred tax assetsoccur when the tax base of an asset is lower than its carrying
amount
B A
company's current tax liability is the amount payable in taxes and is based on
current taxable income
C. Deferred tax liabilities occur when regulatory income tax expense is greater than
accounting income tax expense

Question 72 of 90
Question
In the context of considering ESG factors, "stranded asset" risk most likely applies to
companies in which sector?
A
B Energy
Financial
C Industrial
 Question 73 of 90
Question
information about a company:
An analyst gathers the following Exp
E20 million Act
Revenue

Average shareholders' equity E10million Bon

ROE 10%
Co

ROA 4% p
re

The total asset turnover ratio is: A.

B.
C.
A. 0.80.
B. 1.25.
C. 2.50.
Qu

Question 74 of 90
Question A
Creditcycles: va
B.
A va
can amplify business cycles. C.
B are defined as fluctuations in real GDP.
C. va
tend to be shorter than business cycles.

A
Question 75 of 90
Question Ja
An analyst examining the statement of cash flows for possible
likely to be concerned about a(n): manipulation is least
A cash flow from operations to net income ratio
B increase in cash from operations arising from aconsistently higher than 1.
large change in accounts payabie.
C. change in the classification of interest paid from an
financing cash flow. operating cash flow toa

Question 76 of 90
Question
An analyst gathers the following
construction contract: information (in ¬millions) about a company's 4-year
Contract price 106
 Expected total costs 70

Actual costs incurred in Year 1 21

Bonus for on-time completion

Costs incurred are an appropriate measure of progress toward completion. ne

construction company is very experienced
probable revenue will not be subsequently with similar contracts. If it is highiy
reversed,
recognized in Year 1 is most likelv: revenue (in ¬ millions)
A. 31.8.
B. 33.8.
C. 34.2.

Question 77 of 90
Question

All else being equal, in periods of decreasing

inventory quantities, using the FIFO inventoryinventory
unit costs and constant
valuation method results in:
A lower gross profit and lower inventory turnover than using the LIFO
valuation method. inventory
B lower gross profit and higher inventory turnover than using the LIFO inventory
valuation method.
C. higher gross profit and higher inventory turnover than using the LIFO inventory
valuation method.

Question 78 of 90
Question

An analyst gathers the following information about a company's fiscal year beginning on 1
January:
Net income £1,800,000

Preferred dividends declared and paid £600,000

Common shares outstanding on 31 December 300,000

Weighted average common shares outstanding during the year 500,00

Convertible preferred shares outstanding during the year 25,000

If one preferred share can be converted intofour common shares and there are no
should be:
other potentially dilutive securities outstanding, reported diluted EPS
A £2.40.
B £3.00.
C £4.00.

218
 flowe
lIkely
the the
ain
firm cashoperating
received. ratio,
shut
down
investing
turnover
or reporting
IFRS: paid of:
or payables
days
operating
most underdividends reserves.
revenue. when of
will revenue.
revenue. prepared itsnumber currency.
market of eitherformat to shortages.
average currency
marginal classification equal
average its
statementsas
competitive method
classified is to country's
than equal
ratio serious
foreign
than
than
higher the direct turnover
flow be is
higher
higher cycle ofa
country's
perfectly regarding facing
is to the
cash receipts supplier's
is is cost to conversion
receivables banks
costcost GAAP, adherence
variable inventory
on
hand.
sales
outstanding. likely: a
90 in total fixed flexible
90 interest manage
of of operating
when:
short
run 90
of US 90
to many
79 80 average
average
average of cash 90 mostmoney
81
Questionto less require company's payables. of
Question Question contrastallow 82 of not
Question Question company's 83 bank
are Question onedoes
lends
Question activities. Question
Question centralis
A In Question
a
A B If
A. B. C.
A. B. C. A A.
B. C.
 to:
the is
million.
In production reporting and
the million. position,
estimators.
peers, $4.5
median.
reports: financial
of $5 ina
its price
of financial
of value use
distributlon lower
compared
to likely income.
comprehensive
population peers. for
a
purchase to of
role performance,
fairmost materials
its a The
replacement. havecompany decisions.
a
of the
than accurate?
error
estimate terms. companyloss.
company
target
alternative met.
faster
is
ratio
and
acquiring are company's
flow.investment
220
standard supplier other criteria mostcash
without customers
target
profit
to discounts.
turnover of
formula in in search is and
the the millionmillion certain statements aabout
making
samples lenient a theoccurs, íncomne
estimate from of
analytical payables
payment of million. the
100%
assets $0.5 information
position.
draws
resampling:
Bootstrap likely: of payments $0.5 to bemustifcapitalized
capitalized. for
following
net
to
advantage acquisition
acquires$0.5 of related expensed.
be
must
security
90 early
company's of
identifiable future
usedan
repeatedly 90 gain
of of
most 90 of gain 90 90 financial
84 on receivingof
utilizing goodwill of incurred of
Question be 85 86 pretax
pretax the forecast provide
can
relies Question iscompanytaking
Questioncompanythe 87 be 88 avalue
Question a
Question
When Question net perioda
Question
Question process: may Questionof
Which in
The
a Costs Question changes
A
A. B. C. A. B. C. B. C.
A B C A. A. B. C.
 Question 89 of 90
Question
liquidity ratio?
Which of the following is an example of a
A Defensive interval ratio
B Inventory turnover ratio
C Working capital turnover ratio

Question 90of 90
Question
Insimple linear regression models, the normality assumption requires that the.
A. dependent variable is normally distributed.
B
C
independent variable is normally distributed.
regression residuals are normally distributed.
 Mock 3-(Paper 1) - Answers

Answer 1 of 90
Answer

Solution
A
Correct because when amember has reason tosuspect that either secondary o
third-party research or information comes from a source that lacks a sound basis, he
member must not rely on that information as reguired bv Standard V(A),
Reasonable Basis. Diligence ad
B.
Incorrect because when amember has reason to suspect that either secondary o
third-party research or information comes from a source that lacks a sound basis (Suc
as the bank-approved research vendor), the member must
information. refrain from relying on that
C.
Incorrect because when amember has reason to suspect that either secondary o
third-party research or information comes from a source that lacks a sound basis (Sucn
as the bank-approved research vendor), the member
information. must refrain from relying on tnat

Answer 2 of 90
Answer

Solution
A. Incorrect because Statement 2 is also consistent with the Standards. Statement1
is consistent because according to Standard III(C), Suitability, this information should
be incorporated into a written investment policy statement (IPS) that addresses the
client's return requirements. Statement 2is consistent because according to Standard
IlI(C), Suitability,when an advisory relationship exists, members and candidates must
gather client information at the inception of the relationship. Such information includes
the client'sfinancial ircumstances, personal data (such as age and occupation) that are
relevant to investment decisions, attitudes toward risk,and objectives in investing.,
B Correct because Statement 1 and Statement 2 are consistent with the Standards.
Statement 1 is consistent because according to Standard II(C), Suitability,
this information should be incorporated into a written investment policy
statement (IPS) that addresses the client's return requirements. Statement 2
is consistent because according to Standard i(c), Suitability, when an
advisory relationship exists, members and candidates must gather client
information at the inception of the relationship. Such information includes
the client's financial circumstances, personal data (such as age and
occupation) that are relevant to investment decisions, attitudes toward risk.
and objectives in investing.

222
 Statement consistent with the Standards.
3 is notadvisor
Standard
C.

suitable,
Ili(C),
Incorrect
not the
because
Suitability,
client.
must
When
the investment

determine that an investment is suitable to the Acrelatcioornsdinhgitp

must determineif, an investment is
Members and Candidates are in an advisory
client'stotal
An

situation and
with a cllent,
portfollo.
they
judge the suitability of investments in the context oftthe client's
flnanda A.
In
si
te
b

Answer 3of 90 s
Answer
Solution
A. Incorrect because, the GIPS standards certainly do not eliminate the need for in-
depth due diligence on the part of the investor, but complíance with the Standarda
enhances the credibility of investment management firms that have chosen to
undertake this responsibility.
B. Correct because, where asset owners require their external managers to commm
with the GIPS standards, reporting to the oversight body using the same principles
facilitates the understanding of the sources of risk and excess return in the funds unde
supervision. Asset owners provide performance information to their oversight bodies
that allows them to make investment decisions and evaluate the performance of the
funds under their supervision.
C. Incorrect because, the GIPS standards certainly do not eliminate the need for in
depth due diligence on the part of the investor, but compliance with the Standards
enhances the credibility of investment management firms that have chosen to
undertake this responsibility.

Answer4 of 90
Answer
Solution
A.
Correct because it is a recommendation but not a
independent third-party verification to claim GIPS requirement that firms obtain
B. compliance.
Incorrect because it isa requirement to include
portfoliosin at least one composite. all discretionary,fee-paying
C.
Incorrect because it is a
annual investment performancerequirement to present a minimum of five years of
compliant with GIPS standards.
 Answer
Solution
A
Incorret because according to
Instítute
sitting for Programs,
Standard VIl (A). Conduct as Participants
an exam examples of information that
in CFA

tested or not tested include but are not limited to cannot be

disclosed by candidates
on the
hroadtopical areas not testedexam. Riley violates this broad topical | areas and formulas
on the exam. Standard by postíng on social media
B Correct because according to Standard VIl (A),
Institute Programs,
examplesbut of information that cannotConduct as Participants in CFA
sitting for an exam include are not limited tobroad be disclosed by candidates
tested or not tested on the
broad topical areas not tested exam. Riley violates this topicalbyareas and formulas
on social media
on the exam. Standard posting
C Incorrect because Standard VIl (A), Conduct as
Programs, states that members and candídates must
Participants in CFA Institute
not
compromises the reputation or integrity of CEA Institute orengage the
in any conduC
CFA
integrity, validity, or security of CFA Institute designation or the
not prohíbít candidates from programs. However, this
voicing their opinion about CFA Program, Standard
in general.
does

Answer 6 of 90
Answer
Solution
A Correct because market manipulation includes (1) the
misleading information and (2) transactions that deceive or would dissemination of false or
market participants by distorting the price-setting mechanism of be likely to mislead
The intent of the action is critical to financial instruments.
determíníng whether it is a violation of this
standard. In this case,Xu did not have the intent tomislead anyone by
buy recommendation and Thomas undertooka legitimate publishing the
profit but that transaction did also not intend to distort thetransaction resulting in a
price-setting
Therefore, both members have complied with the Standard relating to market mechanism.
manipulation.
B Incorrect because market manipulation includes (1) the dissemination of false or
misleading information and (2) transactions that deceive or would be likely to mislead
market participants by distorting the price-setting mechanism of financial instruments.
The intent of the action is critical to determining whether it is a violation of this
standard. Inthis case, Xu díd not have the intent to mislead anyone by publishing the
buy recommendation and therefore has not violated the Standard relating to market
manipulation.
C. Incorrect because market manípulation includes (1) the dissemination of false or
misleading information and (2) transactions that deceive or would be likely to mislead
market participants by distorting the price-setting mechanism of financial instruments.
The intent of the action is critical to determining whether it is a violation of this
standard. In thís case, Thomas undertook a legitimate transaction resulting in a profit
but that transaction did not intend to distort the price-setting mechanism. Therefore, he

224
 Ans
relating to market manipulation.
has not violatedthe Standard
Answ

So
A.
canc
app:
othe
diso
pro
the
bef
B.
car
ap
ot
dis
pr
th
be
C.

a
 Answer 7 of 90
Answer

Solution
Incorrect because
candidates must disclose Standard
A VI (C), Referral Fees.
to their employer, clients, and states that members and
appropriate, any compensation, consideration, or benefitprospective
received
clients, as
from
athers for the recommendation of products or services, Members and or paid to
disclose when they pay a fee or provide candidates mus
compensation to others who have
prospective clients to the member or candidate. referre
the arrangement to his employer. Further, he is Therefore, Ohn is required to disclose
before, not after, a referral becomes a client. required to disclose the arrangenent
B Incorrect because Standard VI(C), Referral Fees,states that
candidates must disclose to their employer, membersand
clients, and
appropriate, any compensation, consideration, or benefitprospective clients,
received from a5 to
or paid
others for the recommendation of products or services, Members and candidates must
disclose when they pay a fee or provide compensation to others who have referred
prospective clients to the member or candidate. Therefore., Ohn is required to disclose
the arrangement to his employer. Further, he is required to disclose the
before, not after, areferral becomes a client. arrangement
C. Correct because Standard VI (C), Referral Fees, states that members and
candidates must disclose to their employer, clients, and prospective clíents, as
appropriate, any compensation, consideration, or benefít received from or paid to
others for the recommendation of products or services. Members and candidates must
disclose when they pay a fee or provide compensation to others whohave referred
prospective clients to the member or candidate. Therefore,Ohn is required to disclose
the arrangement tohis employer. Further, he is required to disclose the arrangement
before, not after, a referral becomes a client: Appropriate disclosure means that
members and candidates must advise the client or prospective client, before entry into
any formal agreement for services,of any benefit given or received for the
recommendation of any services provided by the member or candidate.

Answer8 of 90
Answer
Solution
members and
A. Correct because according to Standard I(C), Misrepresentation, volatile
return on
candidates are prohíbíted from guaranteeing clients any specific
Statement 3 does not violate
investmnents. So Statement 1 is a violation of the Standard.
the Standards because Standard I(C) does not prohibit members and candidates from
products that have guarantees built
providing clients with information on investmentfor which an institution has agreed tO
themselves or
intothe structure of the products Standard I(C)
any losses, Statement 2 does not violate the Standards because
cover

226
 guaranteeing clients any specific
and candidates
prohibits members It does not prohibit
from statements regarding probable
Standards rreteutrunrs.n
on
investments. Statement 3 does not violate the because
I(C)volatile
B.
does not

investment
prohibit members and candidates from providing clíents with information
Incorrect because
productsthat have
guarantees
has
builtinto the structure of
agreed to cover any
losses,
Standara
the products
on institution violate the
themselves or for which anStatement 2 and Statement 3 do not Standards.
Statement 3 does
Incorrect not
becauseviolate them because Standard I(C)) does not prohibit members
C investment
from
information on
providing clients with productsthemselves or for products that
the anylosses. Statement 2 does not violate the which
and candidates structure of the an
institution has agreed
guarantees built to
intocover Standards
have
because Standard I(C) prohibits members and candidates from guaranteeing clients any
volatile investments. It does not prohibit statements regarding
specific return on
probable returns

Answer 9 of 90
Answer
Solution
does nos
A. Incorrect because accordingto Standard IV (A), Loyalty, the standard
and family
require members and candidates tosubordinate important personal
obligations to their work.
B Correct because according to Standard IV (A), Loyalty, members and candidate
must always place the interests of clients above the interests of their employer.
C. Incorrect because Standard IV(A), Loyalty,does not preclude members or
candidates from entering into an independent business while still employed.

Answer 10 of 90
Answer

Solution
A Incorrect because Standard III(B), Fair Dealing states that, Members and
Candidates must deal fairly and objectively with all clients when
analysis, making investment recommendations, taking investmentproviding
action,
investment
or
other professional activities. There isnothing here tosuggest that engaging in
violated this Standard. Ranasinghe has
B. Correct because Standard V(C), Record Retention states,
Candidates must develop and maintain appropriate Members and
analyses, recommendations, actions, and other records to support their investment
investment-related
with clients and prospective clients. In this case, communications
clients' adviser and as the president Ranasinghe
of her company tomaintain
has a responsibility as ner
when client circumstances change. Without
necessary, relevant,and appropriate recoras
your-client information, Ranasinghe would have up-to-date know
difficulty establishing and proving

227
 her firm has
identified the needs and
into account in
Standard. circumstances
recommending investments. of its clients and has taken them
So, Ranasinghe has violated this
Incorrect
Candidates must because
C.
deal fairlyStandard
and m(B), Fair Dealingstates that,
analysis, making investment objectively with all clients when Members and
providing investment
other professional
activities.
violated this Standard. Also,
recommendations, taking investment action, or engaging in
There is nothing here to suggest that Ranasinghe has
Candidates must develop andStandard V(C), Record Retention states, Members and
analyses, recommendations, actions, maintain
andappropriate records to support their investment
with clients and prospective clients. In this other investment-related communications
clients' adviser and as the president of her case, Ranasinghe has a responsibility as ne
when client circumstances change. Withoutcompany to maintain appropriate records
your-client necessarv, relevant, and
her firm hasinformation, Ranasinghe would have difficultyestablishingup-to-date know
and proving that
identified the needs and circumstances of its clients
into account in recommending and has taken them
Standard relating torecord investments. So, Ranasinghe has only violated the
retention.

Answer 11 of 90
Answer

Solution
A
Incorrect because according to Standard I(A), Knowledge of the Law, members
and candidates must understand the applicable laws and regulations of the countries
and jurisdictions where they engage in professional activities. However, members and
candidates are not required to have detailed knowledge of or be experts on allthe laws
that could potentially govern their activities. So, membersare not required totake
Action 1.
B Correct because according to Standard I(A). Knowledge of the Law, if a member
or candidate has reasonable grounds to believe that imminent or ongoing client or
employer activities are illegal or unethical, the member or candidate must dissociate, or
2.
separate, from the activity.So, members are required to take Action members
C. Incorrect because according to Standard I(A), Knowledge of the Law,countries
regulations of the
and candidates must understand the applicable laws and However, members and
professional activities.
and jurisdictions where they engage in or be experts on all the laws
candidates are not required to have detailed knowledge ofare not required to take
that could potentially govern their activities. So, members
reasonable grounds to believe that
Action 1. Also, if a member or candidate has
ongoing client or employer activities are illegal or unethical, the member
imminent or required to
separate, from the activity. So, members are
or candidate must dissociate,or
take only Action 2.

228
 her firm has identified the needs and
into account in
Standard. circumstances
recommending investments. So,
of its clients and has takenthem
Incorrect Ranasinghe has violated this
Candidates mustbecause
C.
Standard IIi(B), Fair Dealing states that,
deal fairly
analysis, making investmentand objectively with all clients when Membersinvestment
and
other professional activities.
There is taking investmentproviding
recommendations, action, or engaging in
violated this Standard. Also, nothing here to suggest that Ranasinghe has
Candidates must develop andStandard
maintain
v(C), Record Retention states, Members and
actions, andappropriate
analyses, records to support their
with clientsrecommendations,
and prospective clients. other investment--related investment
communications
In this case,
clients' adviser and as the
when client president of her company Ranasinghe has a responsibility as ner
your-client circumstances change. Without necessary, relevant,
to maintain appropriate records
her firm hasinformation, Ranasinghe would have
identified the needs and circumstances difficulty
and up-to-date know-
into account in establishing
of its clients and proving that
and has taken them
Standard relating recommending investments. So, Ranasinghe has only violated the
to record retention.

Answer 11 of 90
Answer

Solution
A.
Incorrect because
and candidates must according to Standard I(A), Knowledge of the Law,
understand the applicable laws and regulations of the members
and jurisdictions where they engage in professional activities. countries
candidates are not required to have However, membersand
that could potentially govern their detailed knowledge of or be experts on all the laws
Action 1. activities. So, members are not required to take
B.
Correct because according to
or candidate has reasonable grounds Standard I(A), Knowledge of the Law, if a member
to believe that imminent or ongoing
employer activities are illegal or unethical, the member or client or
candidate
separate, from the activity. So, members are required to take Action 2.. must dissociate, or
C.
Incorrect because according to Standard I(A), Knowledge of the Law,
and candidates must understand the applicable laws and members
and jurisdictions where they engage in professional regulations of the countries
activities. However,
candidates are not required to have detailed knowledge of or be experts members and
that could potentially govern their activities. So, members are not required to on allthe laws
Action 1. Also, ifa member or candidate has reasonable grounds to believe thattake
Imminent or ongoing client or employer activities are illegalor unethical, the member
Or candidate must dissociate, or separate, from the activity. So,
take membersare required to
only Action 2.
 Answer 12 of 90
Answer
Solution
Incorrect because Standard III (C), Suitability, requires that
A.
candidates who are in an investment advisory relationship with clients members and
carefully the needs, circumstances, and objectives of the clients when consider
appropriateness and suitability of a given investment or course of
This scenario does not involve investment reCommendation.
Standard I(A), Loyalty,Prudence, and Care.
B.
The
Incorrect because according to Standard ilI (B), Fair Dealing,
determining
imember
nvestment ac tion,the
violated
Members
Candidates must deal fairly and objectively with all clients when providing and
analysis, making investment recommendations, taking investment action, or
inv estme
Standard III(A),Steanndar
other professional activities. All clients are treated in the same way, so the
relating to fair dealing is not violated. The member violated
n t
gagndgin
Prudence and Care.
C. Correct because according to Standard III(A), Loyalty, Prudence. Loyalty.
member or candidate who paysa higher brokerage commission than he orandshe.da
Care,
normally pay to allow for the purchase of goods or services, without
benefit the client, violates the duty loyalty the client.
to of to corresponding
Answer 13 of 90
Answer
Solution
A. Correct because according to Standard VI(B), Priority of
accounts that are client accounts should be treated like any Transactions, family
should neither be given special treatment nor be other firm account and
relationship. disadvantaged because of the family
In addition, according to Standard
andcandidates must make full and VI(A),
fair
Disclosure of Conflicts, members
disclosure of all matters that could
reasonably be expected to impair their independence and
interfere with respective duties to their clients, objectivity or
employer. Members and candidates must ensureprospective
that such
clients, and
prominent, are delivered in plain language, and disclosures are
information effectively. communicate relevant
the
Lau should treat her brother's
B.
Therefore, Lau has not violatedaccount fee-paying like any other firm accoun.
to Standard VI(B) and
Incorrect because Standard VI(A).
and Candidates must makeaccording
full and
to Standard VI(A),
Disclosure of Conflicts, membe
be expected to impair their fair disclosure of all matters that could reasonauy
duties to their clients, independence and objectivity or interfere with respeumust
prospective
ensure that such disclosures are clients, and employer. Members and Candidates
communicate the relevant information prominent, are delivered in plain language, anu
effectively. Lau should treat her brother's ie
 paying account ikeany other firm account.
VI(A). Therefore Lau bas notviolated to Standara
C. Incorrect because
accordingto Standard VI(B), Priority of Transactions, family
accountsthat are client accounts
should neither be given special should be treated like anyother firm
account ana
relationship. treatment
Lau should treat her nor be disadvantaged because of the famiy
brother's fee-paving account like any other
ccount. Therefore, Lau has not violated firm
toStandard VI(B).

Answer 14 of 90
Answer

Solution
A. Incorrect because
according to Standard II1(B), Fair Dealing, Chapman should
have made the premium service available to all clients as described in the correct
response rationale.
B. Correct because according to Standard III(B), Fair Dealing, the
levels should be disclosed to clients and different service
prospective clients
everyone (i.e., different service levels should not be offered and should be available to
premium service only to those clients he believes may wantselectively).
them, rather
By offering the
clients, Chapman violates the Standard. than to all
C. Incorrect because according to Standard III(B),Fair Dealing, members are not
required to distribute investment recommendations to all clients. As it relates to this
Standard, the term 'fairly' implies that the member or candidate must take care not to
discriminate against any clients when disseminating investment recommendations or
taking investment action. Each client has unique needs, investment criteria, and
investment objectives, so not allinvestment opportunities are suitable for all clients.

Answer 15 of 90
Answer
Solution
A. Correct because according to the GIPS standards, firms must make every
reasonable effort to provide a GIPS composite report to all prospective clients when
they initially become prospective clients. Firms must not choose to which prospective
clients Incorrect
it presentsbecause
a GIPS composite report.
according to the GIPS standards, firms must include
B.
terminated composites on this list for at least five [not seven] years after the
composite termination date.
C. Incorrect because according to the GIPS standards, to initially claim compliance
with the GIPS standards, firms must attain compliance for a minimum of five [not three]
been in existence for less
years or for the period since the firm inception if the firm has
than five years.

230
 payingaccount like any other firm
C.
VI(A).
Incorrectc because account. Therefore, Lau has not violated to Standard
accounts that are
client according to Standard
should neither be given accounts should VI(B), Priority of Transactions, family
be treated
relationship. Lau should treat hertreatment nor be like any other firm account and
special
account. Therefore, Lau has not brother's fee-paying disadvantaged
violated to Standard VI(B).account
because of the family
like any other firm

Answer 14 of 90
Answer

Solution
A
Incorrect
because according to Standard 1lI(B), Fair
have made the premium Dealing,
service available to all clients as Chapman should
response rationale. described in the correct
B Correct because according to Standard II(B), Fair
and prospective clientsDealing,
levels should be disclosed to the different service
everyone (i.e., different serviceclients and should be available
levels should not be offered selectively). By to
premium service only to those clients offering the
clients, Chapman violates the Standard.he believes may want them, rather than to all
C. Incorrect because according to Standard III(B), Fair Dealing,
required to distribute investment membersare not
Standard, the term 'fairly' implies that recommendations to all clients. As it relates to this
the member or candidate must take care
discriminate against any clients when disseminating investment not to
taking investment action. Each client has unique needs, recommendations or
investment criteria, and
investment objectives, so not all investment opportunities are suitable for all clients.

Answer 15 of 90
Answer
Solution
A. Correct because according to the GIPS standards, firms must make every
reasonable effort to provide a GIPS composite report to all prospective clients when
they initially become prospectiveclients. Firms must not choose to which prospective
clients it presents a GIPS composite report.
B. Incorrect because according to the GIPS standards, firms must include
terminatedcomposites on this list for at least five [not seven] years after the
Composite termination date.
C Incorrect because according to the GIPS standards, toinitially claim compliance
with the GIPSstandards, firmsmust attain compliance for a minimum of five [not threel
existence for less
years or for the period since the firm inception if the firm has been in
than five years.

230
 Institute, perfor.
Therefore, if the candidates that to 1s r
Confidentialiy
of
Compianc clainm Confidentiality,
the compliance
internal if
even
Standard member
marketingtheclientn
communicated
requires in hre
standards.
with firm's n
correct
CFA consider correct
requires
ancompliance to compliance. and local
confidentiality,
firm's
claim not not party the
violatedConfidentiality, a
claims ofa to firm's about
is
GIPS members Therefore, shall
consultant,
consultant, verification of client of is
member
third information law
member
Preservation Preservation
information
the firm has his candidateslocal
of of
a independent
claim client,
a with
of with claim a maintain of
member the
verification an
third-party
third-party once
perform
activities clients. theas
perform
compliance
can firm's of of client (i.e.. PCP.
firm's the Therefore,
standards, III(E), Preservation III(E),provide
confidentiality and
former conduct
to of the prospective the
a an the candidates
part illegal
Therefore, members to
perform consultant Incorrect
because
independent
independent
of can Standard
hire Standard
of verificationin consultant the and to own client
law).
GIPS confidence to requested
claim
a
firmn's voluntarily III(E), clients,
firm on relating
can the a law, their a
local
third-party to to andactivities
information. of to about
parties the according standard according Standard according
applicable
an perform third-party members preserve details into the
in
increase information prospective when
of only only may information
standards? of maintain
client
confidentiality.
following auditor of
because they GIPS
illegal
share
investigation
because
independent
verification
can because because such because candidates because
themselves
to requires under
90 CFA
Institute
internal firm, Standards, independent
the
verification
order concerns clients,
disclosing
disclose to
of
16
theGIPS Incorrect
GIPSCorrect with
standards.
90 refusingpermissible disclose
disclose
Solution of
the Correct Incorrect Incorrect
Solutionlaw of PCP
of of
Answer the
Which An An compliance
17 information and their
not authorities.
applicable extension
departmnent. a
Answer with
auditor the an
Answer
by members in of to to
with only Answer should bycorrect refusing
III(E) support refusing
D. E. F, A. B. them when
C.
A. B. C. an
 compensation,
best
practices
in conflictsthe Objectivity,
invest
consent
Objectivity, or firewalls member. Compensation
o and
culture o banking Objectivity, protecting on
and
is
a
create
situation, anyreports
structures personnel
firewall
a a
reinforcecandidates
reinforce minimize
all to written
a
have
investment The prohibitinganddirectly
colleagues. team to
benefits,
relnforce research expected
and
speciflc not
reporting perceived enhanced
and and Independence
a obtain
and and Independence to
corporate
culture
should Independence remuneration
as Additional
and professionals. managedside participate
fosterfosterand the to gifts, they
or
members changes as be
fosterlocation, separate
on personnel follow far an research
banking reasonably
accept
to to unless
desiened
designed personnel be as of IV(B),
to investment (B), make (B), and must go element (B),analystmay
allgeographic
designed is banking may the I
investment not interest
to I firewall
Standard the functions Standard
I adopt analyst Standard
not not apply and or Standardto keyon
policies mustmight 232
disapprove,in personnellink
are are are
of side must
objectivity A employer's
Candidates
They enhancedinvestment groups. notthe
Standards
Standards occupation,
activites
Standards to twofirewall to
firmstheir to or
professionalism. according research according
should
which according
with
compllance. Correct
because
according for
by
approve, and thesethese
their competes
the the the professional
firm.
an example, pressure
recommendations. enhancedstructures arrangements
in and their
position, of the andindependence
between between
assignments
because
the
because
because because
element
on to because
side.
banking
investment becausemembers
with
regulatory personnel candidates, that
to authority undue
90 service and title, 90 For reporting
indeed, interest
of
Incorrect
Incorrecet
Correct all
responslbility of
Incorrect
key side.
bullt Incorrect 90
communications of consideration
Incorrect
Arrangements,
18 Solutlon of to 19 Solution from compensation
banking
Answer of of regardleNs
apply a maintaining
traditionally 20 Solution
AnNwer culture
Answer members, interest; Answer of
culture
Answer analysts separate
thev Answer
conflict
ment
A of
A B. C. or
A.
 from allparties involved. Mehta needs written consent prior from allparties to
accepting the tickets.
B
Incorrect because accordingto Standard I(B), Fair Dealing, members and
candidates must deal fairly and objectively with all clients when providing i
analysis, making investment recommendations, taking investment action,
invesengatmgenting
or
other professional activities. Mehta has not given any preferential treatment to th
client andhence this Standardis not violated.
in
C.
Correct because according to Standard IV(B), Additional Compensation
Arrangements, members and Candidates must not accept gifts, benefits,
,compensation,
or consideration that competes with or might reasonably be expected to create a
conflict of interest with their employer's interest unless they obtain written conee
from all parties involved. Mehta needs written consent prior from allparties to
accepting the tickets

Answer 21 of 90
Answer

Solution
A. Incorrect because this is not a violation of Standard VII(B), Reference to CFA
Institute,the CFA Designation,and the CFA Program. Members
passed the three examinations on their first try as long as this may state isthat thev
B. statement true.
Correct because Statement 2 links passing the three examinations
try with superior ability, which is a violation of Standard on the first
VII(B), Reference to CFA
Institute, the CFA Designation, and the CFA Program. Members
passed the three examinations on their first try as long as this may state that they
must not be linked toperformance orimply superior ability. statement is true, but it
C. Incorrect because Statemnent 1 is not a violation of Standard
CFA Institute, the CFA Designation, and the CFA VII(B), Reference to
passed the three examinations on their first try asProgram. Members may state that they
long as this statement is true.

Answer 22 of 90
Answer

Solution
A.
Incorrect because facts should be separated from opinion in
B.
Correct because while pro investment analyss
is not required by the Standards. forma analysis may be standard industry practice,
identified as such. Earnings estimates are opinions and must be cleary
C.
Incorrect because known limitations should be
identified.
 Answer 23 of 90
Answer
Solution
A. Correct because members and candidates can
Standard IlI(D), also meet their obligations
Performance Presentation, of including terminated accounts as under
arformance history with a clear by part of
indication when the accounts were
Tarminated accountsshould be included in the terminated.
B. Incorrect because members and candidates performance presentation.
can also meet their
Standard II(D), Performnance Presentation,
presenting the performanceobligations
composite of similar porttolios rather than using
unde.
of the weignted
a single
eingle representative account should not be
used. representative account. A
C. Incorrect because members and candidates can also meet
Standard III(D), Performance Presentation, their obligations under
by presenting the performance of the
weighted composite of similar portfolios rather than using a
single
account. Single representative accounts should not be used: thus, representative
recommended procedure. Procedure 2 is not a

Answer 24 of 90
Answer

Solution
A. Correct because Lagarde has potentially uncovered material omissions that
would impact Chorale's IPO, and, according to Standard I(A), Knowledge of the Law, the
most appropriate first step would be toreport this issue to his supervisor. This issue
should be investigated more fully. If the losses are confirmed, Lagarde should insist that
these losses be made public.
B. Incorrect because given the sensitive (and potentially criminal) nature involving
a company concealing losses from an earnings report, it would be inappropriate for
Lagarde to issue a report showing the losses when his opinion may not be correct.
C. Incorrect because it would be inappropriate for Lagarde to issue a report using
the data from the prospectus when he has reason to believe this information is factually
inaccurate.

Answer 25 of 90
Answer
Solution
recommended procedures for compliance with
A. Correct because accordíng to the
Dandard IV(C), Responsibilities of Supervisors, once a compliance program is in place, a
conduct evaluation as part of an
supervisor should incorporate a professional
employee's performance review. IV(C), Responsibilities of Supervisors.
B. Incorrect because according to Standard violated the law or
supervisor learns that an employee has violated or may have
ACe a

234
 the Code and Standards,the supervisor must promptly initiate an assessmeent to
an employee's sta
the on
Relying
the extent the
determine of the violation
extent of orwrongdoing.
the assurancesthat
memberin a supervisory
statements
wrongdoing will not reccur is
position is not permittedA
of the law even ifto
herely
enough. Therefore, a the violation
statement about the extent of reoccur. on an
employee's that the wrongdoing willnot

responsibilitiesemply
written assurance IV(C), Responsibilities of
gives
Incorrect because according to Standard supervisory

Supervisosyhresscta,eumne,
Co
C.
clearly cannot discharge C
which she
the member or candidate system or because of an inadequate
the member or
of a compliance
of the absence candidate should decline in writing to accept compliance
supervisory
until the firm adopts reasonable member is not permittedtoimplement the
responsibility. Therefore, adepartment, but should decline to accept CFAresIpnosntisttuhtiel t
procedures to allow adequate exercise of supervisory
Answer
Answe

Code and Standards in her

responsibilities untilthe firm adopts reasonable
procedures to
allowsupervi
adequatesory
Solut
of supervisory responsibility.
exercise A.
that fisca
sales (in
raising c
B
Answer 26 of 90 fiscal pe
Answer taxes to
C.
Solution market
A. Incorrect because Naib knowingly misrepresented himself by stating he hoa
obtained an MBA degree when in fact he had not. This reflects adverselv on hi Answ
professional integrity, violating Standard I(D)-Misconduct. Answer
B Correct because Naib knowingly misrepresented his qualifications by statie Sol
had obtained an MBA degree at the time of his hire when in fact he had not. This
adversely on his professional integrity, violating Standard I(D), Misconduct. reflects
Statinetk
A
he passed hisCFA exams in three consecutive years is not a capital
Reference to CFA Institute, the CFA Designation, and the CFAviolation ifStandard
of VL seconc
There is no evidence given to indicate he did not pass as Program, it is factual amou
C. Incorrect because stating he passed his CFA examsclaimed. typica
B.
violation of Standard VII(B), Reference to CFA Institute, theconsecutively is nota and tr
CFA Program. There is no evidence CFA Designation, and the
given to indicate he did not pass as claimed. Contre
trade
exists
Answer 27 of 90 publi
Answer comp
Solution C.
that
A.
Incorrect because the manager's ownership stake is a Furth
interest, which should be disclosed as potential conflict of publi
Conflicts, but there is no required by Standard VI(A),
Disclosure of
conti

Incorrect because requirement to sell the shares.

B. cost
as long as the analyst priva
investment
Basis, and recommendation consistent has completed a
with well-informed D.
in her report.disclosed her Standard (V), Diligence
ownership position, she couldinclude the buy and Reasonable E.
recommendation

235
C. Correct because the manager's
which should be
disclosed as required ownership
by stake is a potential conflict of interest,
Standard VI(A), Disclosure of Conflicts.
Answer 28 of 90
Answer

Solution
A. Incorrect because this is a tool of fiscal policy, We can
that fiscal policy can influence consider anumber of WayS
aggregate demand. Expansionary
sales (indirect) taxes to lower prices, policies include cuts in
raising consumer demand. which raises real incomes with the objective or
B. Incorrect because this is a fiscal measure. We can
fiscal policy can intluence aggregate consider a number of waysa
taxes to boost business profits, whichdemand including cuts in corporation (company)
C. Correct because central banks may raise capital spending.
have three primarv tools available to them: open
market operations, the refinancing rate, and
reserve requirements.
Answer 29 of 90
Answer
Solution
A. Correct because corporate issuers may issue additional equity shares in the
capital markets from time to time. For a public issuer, these shares can be traded in the
secondary market once they're issued. In contrast, private companies finance smaller
amounts in the primary market (private debt or equity) from fewer investors who
typically have longer holding periods.
B Incorrect because a public (listed) company has some or all of its shares listed
and traded on an exchange. These shares may be widely held or involve a majority or
controlling owner. In contrast, the shares of a private company are not listed (do not
trade on an exchange), so no visible company valuation or share price transparency
exists. This makes ownership transfer between investors far more difficult than for a
public company. Thus, private company shares cannot be sold more easily when
compared to public company shares.
C. Incorrect because private companies typically have fewer shareholders, meaning
that controlling owners and management are accountable to fewer stakeholders.
Further, going private puts these investors in control and takes the company out of
public view, which may be beneficial. These actions undertaken with greater private
control might include management changes, selling assets, restructuring, or realizing
costs. Thus,
cost savings that are expected to exceed the premium paid and financing
private company shareholders have more, no
D.
E. tless control, over management.

236
 Answer 30of 90
Answer
Solution
test statistic
A. Correct because an F-test ís the appropriate conditions. concerning
B.
these
between the variances of the populations under appropriate test
Incorrect because the chi-square test isthe
the variance of a single,normally distributed population.
C.
statistic for
Incorrect because a paired comparison test is used to compare the
aif erteensCtinesg
variances, of two populations. means, not An

Answer 31 of 90
Answer A.
m

Solution fu
B
A. Incorrect because it is the money-weighted rate of return (MWR).
flow (CF) function of afinancial calculator: CFo =-1,600, CF, =-5 x 168 + 30Using-0
the cash
CF, = 60, and CF, = 2,475. The computed IRR is: 1.93%. f
S
B. Correct because the portfolio value at the beginning and end of each
the dividends received over the three years are calculated as follows: periodava i

Year 1 Year 2 Year 3

Beginning value 10 x ¬160 = ¬1,600 15 x ¬l68 = ¬2,520 15 x ¬175
=¬2,625
Ending value 10x ¬168 =¬1,680 15 x ¬175 = ¬2,625 15 x ¬165
=¬2,475
Dividend received 10 x ¬3.00 =¬30 15 x ¬4.00 = ¬60 15 x ¬0.00 =¬0
C The holding period return (HPR) for the
three years is calculated as follows:
D
E
HPR= (P - P. + Di)/P.
HPRyear 1= (¬1,680 - ¬1,600 +
F.
HPRveer 2= (¬2,625 -¬2,520+ ¬30)/¬1,600=6.88%
G.
HPRreor 3= (¬2,475 - ¬60)/¬2,520= 6.55%
¬2,625)/¬2,625 -5.71%
=
H. The time-weighted return (TWR) is
three holding period returns: found by taking the geometric mean of the
TWR =[(1 +HPR/ear 1) x (1 +
J. HPRrear2) (1+ HPRreor )]/3 -1
TWR= ((1 +6.88%) x (1 + 6.55%)
K = 1.0738/3 - 1 × (1 - 5.71%)]/ - 1
L. = 2.40%
M.
Alternatively:
(¬165/¬175)}u TWR =
- 1= (1.0688{[(¬168 +
x 1.0655 ¬3)/¬160] x ((¬175
N.
Incorrect because it is x 0.9429)/ -1 = +¬4)/¬168] *
the simple average of the 2.40%.
three holding period returns:
 (698% 6.55% - 5.71%)/3 257%

Answer 32 of 90
Answer

Solution
A Incorrect because deficits may have no net impact because the
may act to offset fiscal deficits by increasing (not private sec
future increased taxes. decreasing) saving in anticipan
B. Correct because the issue of significant deht mav he overstated because the oe
fis owed internaily to fellow citízens.
Incorrect because government borrowing may divert rivate sector investmett
from taking place (an effect known as crowding out), if there is a limited armouit of
savings to be spent on investment, then larger government dermands will lead to higer
interest rates and lower private sector investíng

Answer 33 of 90
Answer
Solution
A Incorrect because the risk commitee assists the board in determining the risk
policy, profile, and appetite of the company. The risk committee does not directiy
deliberate on the composition of the board.
B Incorrect because the audit committee plays a key role in overseeing the audit
and control systems at the company and ensuríng their effectiveness. The audít
Committee does not directly deliberateon the composition of the board nor the
company's governance principles.
C Correct because the nomination committee can help ensure that the board's
composition is well balanced and aligned with the company's governance prínciples.

Answer 34 of 90
Answer

Solution
A. Correct because a dístríbution that ís more peaked than normal is called
leptokurtic. peaked
B. Incorrect because a distribution that ís neither more peaked nor less
than normal iscalled mesokurtic.
than normal is called
C Incorrect because a distríbution that is less peaked
platykurtic.

238
 Answer 35 of 90
Answer
Solution
Incorrect because a disadvantage is that the range uses only
information from the distribution. It cannot tell us how the data are two
A.
pieces of
B. Incorrect because the variance is measured in squared units. distributed.
Standard
is more easily interpreted than the variance because standard deviation
Answe

deviation
Answer
the same unit of measurement as the observations. is expressed in Solu
C. Correct because, in the formula for the sample variance, the
quantity
known as the number of degrees of freedom in estimating the population n-1is A.
followi
where n is thê number of observations in the sample.
variance, charact
B.
followi
charac
Answer 36 of 90 C.
Answer follow
charac
Solution
A. Correct because bundling refers to combining Ans
that customers are incentivized or required to buy themmultiple products or services so Answe
effective, particularly for products that are together. Bundling can be So
complementary
incremental profit margins and high marketing costs relativeand that have high
itself. to the cost of the product A.
B. as th
Incorrect because tiered pricing involves
charging
buyers,often based on volume purchased
versus premiumn trims of vehicles). but also based ondifferent
product
prices to different
C
features (e... base
Incorrect because value-based pricing means
received by the customer, which often setting prices based on the value B.
involves estimating opportunity cost.
C.
Answer 37 of 90
Answer
Solution
A.
Incorrect
because company is also required to
the
statements
B.
for the prior periods in the current restate the financial A
Incorrect because the company is also financial
regarding
C.
the error. required tostatements.
add a note disclosure
Ans

Correct
prior period (e.g,,because another possible adjustment is a
in financial correction of an error for a A.
handled by simply adjusting the statements issued for an earlier year), This cannot be for
error for a prior period is current period income for
balance sheet, statement ofhandled by restating the statement. Correction of an
financial inf
periods presented in the currentowners' equity, and cash flow statements (including tne B.
Changes in Accounting Estimates financial statements. (IASstatement)
No. 8,
for the prior CO

Changes and Error Corrections]) Note and Errors, and FASB

ASC TopicAccounting
250 Polcies
disclosures are required regarding[Accounting
the erro:
 Answer 38 of 90
Answer
Solutlon
A Incorrect because the term Big Data typically refers to
allowing characteristics: Volume, Velocty,
characteristics. Variety, L.e., varietydatasets having the
is one of the three
Incorrect because the term Blg Data typlcally refers to
allowing characteristics: Volume, Velocity, datasets
Variety, i,e. volume is one ofhaving tne
characteristics. the three
C. Correct because the term Big Data
tllowing characterlstics: Volume, Velocity,typically refers to datasets that have
Variety. J.e.. visibility is not one of thethethree
characteristics.

Answer 39 of 90
Answer

Solution
A Correct because the geometric mean annual return is computed
as the nth root of the holding period. multiplicatively
(1-8.0%) * (1-5.5%)*(1-7.2%)×(1+20.8%)
×(1+4.4%)
Vs-1=0.35%(1-8.0%)*(1-5.5%) ×(1-7
.2%)x(1+20.8%) *(1+4.4%)5-1=0.35%
Incorrect because it reflects the arithmetic mean annual return.

(-8.0% - 5.5% - 7.2% + 20.8% +4.4%)/5 =0.90%

C. Incorrect because it reflects the holding period return.
(1 -8.0%) x(1 - 5.5%) x (1 - 7.2%) x (1 + 20.8%) (1 +4.4%) -1=
1.75%

Answer 40 of 90
Answer
Solution
A. Correct because people with conservatism bias maintain their prior views or
often happens in
Torecasts by inadequately incorporating new information. Thisafter
their forecasting receiving conflicting
Torecasting when an analyst does not update action.
or a competitor
Intormation, such as disappointing earnings results
tendency to look for and notice what
B. Incorrect because confirmation bias isthe contradicts them.
whatever
conhrms prior beliefs and to ignore or undervalue

240
 Incorrect because illusion of control manifestsin analysts'
C.
can be rendered more accurate in two ways: by acquiring more beliefs that
information
opinions from experts and by creating more granular and complex modele and forecast
Answer 41 of 90
Answer
Solution
A.
Incorrect because it is the present value of a six-year
$1,000 each year: $1,00 x[1 - 1/(1 ordinary. annuity
+ 0.09)-]/0.09 = $4,485.92x
B
solution: N=6; I=9%; PMT =-1,000; comnpute PV=
4,485.92.
that pays
$4,4,486. Calculator
Incorrect because it is the present value of the
discounted back by six, instead of five, years: PV of perpetuity that is wrongly
in 5 years)/(1 + r), where PV of perpetuity in 5 yearsinvestment today = (PV of
Thus, PV of investment today
solution: N=6; I=9%;
= $11, 111.11/(1 +
FV= -11,111.11; compute PV =
=A/r=$1,000/0.09 perpetuity
0.09)o = $6,625.19
= $11.i111
$6,625. Calcul
C.
Correct because it is the present
PVof investment today = (PV of
6,625.19.
value of the perpetuity that
in 5 years =A/r= perpetuity in 5 starts in six veare
+$1,000/0.09 $11,111.11. Thus, PV of
= years)/(1+ where PV of perpetuity
s,
$11,111.11/(1 0.09)s = investmentNtoday =
compute PV=$7,221.46
- x $7,22 1.
11,111.11; 7,221.46. Calculator solution: = 5; I= 9%: FV =

Answer 42 of 90
Answer
Solution
A.
elastic Correct because a liquidity trap
to because individuals elect tohold arises when the demand for
stimulative
deflation. rate cuts by additional
spending. a result,
As money money is infinitey
balances rather than respoe
B.
Incorrect because aliquidity trap is
than inelastic) weakening consumption leads t0
C. demand foramoney.
Incorrect
asso ciated with an
monetary because
has cut liquidity trap arises in the
infinitely elastic (rather
cannot cut authority
rates any further. nominal interest rates to zero
extreme instance under whichthe
to stimulate the economyand
 Answer 43 of 90
Answer
Solution
Incorrect because ituses the
Incorrect because it uses the following formula: $3.200,000/36 = $88,887.
A.
B
formula: $2,400,000/36-
following
-V$2,400,000/36 =$400,000.
Correct because the standard
C. error by
population standard deviation (o) divided of the samnple mean is equal to the
the square root of the number of
observations inthe sample (n):
OX
=o/nV=$3,200,000/36 -V=$533,333

Answer 44 of 90
Answer

Solution
A. Incorrect because a conservative approach to working capital management
involves more cash, receivables, and inventory relativeto sales, with agreater reliance
on long-term funding sources, including long-term debt and equity. Among the cons of
the conservative approach are long-term debt typically involves a higher interest rate
and higher cost of equity, which means the cost of financing working capital increase,
not decrease using this approach.
B. Incorrect because one of the cons to a conservative financing (long-term debt or
equity) approach is permanent financing eliminates the opportunity to borrow only as
needed.
C. Correct because a conservative approach to working capital management
involve greater reliance on long-term funding sources, including long-term debt and
equity. Further,a conservative working capital strategy reduces the need to access
capital during times of market stress.

Answer 45 of 90
Answer

Solution
which
A Correct because an upward revaluation will increase the value of assets,
is the denominator of the debt-to-assets ratio. Debt is not affected by the upward
revaluation.
B. The because
Incorrect ratio will
andecrease.
upward revaluation willincrease the value of assets, which
affected by the upward
1S the denominator of the debt-to-assets ratio. Debt is not
revaluation. The ratiowill decrease, not remain unchanged.
the value of assets, which
C Incorrect because an upward revaluationwill increase
ratio. Debt is not affected by the upward
1S the denominator of the debt-to-assets
revaluation, The ratio will decrease, not increase.
 Answer 46 of 90
Answer
Solution
average returns
A Incorrect because if we want to estimate the because the over mnore
returns
period, we should use the geometric mean of time. The harmonic
captures howthe total returns are linked over
geometric meanhan one
mean is a

variraebllateiveperly
specialized concept of the mean that is appropriate for averaging ratios
('amount
unit') when the ratios are repeatedly applied to afixed quantity to yield a
number of units.
B. Incorrect because if we want to estimatethe average return Over a
of one-period returns. If we want to estimate the average returns over moreone-
theperavieoradge
horizon, we should use the arithmetic mean because the arithmetic
mean is

period, however, weshould use the geometric mean of returns because the than one
mean captures how the total returns are linked over time.
C. Correct because
if we want estimate
to the average returns over
period, we should use thegeometric mean of returns because the geometric me
geometrie
mnore than
captures how the total returns are linked over time.
One

Answer 47 of 90
Answer
Solution
A. Incorrect because as in the market structures of
oligopoly,the monopolist does not have a well-defined mnonopolistic competition and
the optimal output level and the price to supply function that determines
B. charge.
Correct because in perfect competition, the firm's supply
represented by the marginal cost schedule. schedule is
C.
Incorrect because in perfect competition, the firm'ssupply
represented by the marginal cost schedule. In monopolistic schedule is
well-defined supply function. competition, there is no

Answer 48 of 90
Answer

Solution
A.
Correct because onemethod to
structure is to assume the company'sapproximate the company's target capital
current capital structure,
for the components,
represents the company's target capital at market value wee
Market value of debt = $150 million structure.
Market value of equity = $60x10 million = $600
million

243
 Weight of debt, Wa=
Weight of equity, w. =$150 million /($1 50
million+$600 million)
WACC = Wa>a(1 -t) + w,r, +million/($150 million+$600 million)=0.20
$600
= 0:80
6.16%

where
w.r.=(0.2)(49%)1-300%)+0+(0.8)(7%) =6.160o

Wa= the target proportion of debt in

raises new funds the capital structure when the
ra = the company
before-tax marginal cost of debt
t= the company's
marginal tax rate
W, = the target
company raisesproportion
of
new funds preferred stock in the capital structure when the
r, = the marginal cost of
W. = the target proportionpreferred stock
of
company raises new funds common stock in the capital structure when tne
r.= the marginal cost of
B. common stock
Incorrect because the tax shield
the WACC formula.
was not applied to the weighted cost of debt in

Market value of debt = $150 million

Market value of equity = $60x10 million= $600 million
Weight of debt, Wa=$150million/($150 million+$600 million) = 0.20
Weight of equity, w. = $600 million/($150 million+$600 million) = 0.80
WACC (0.2)(4%)+(0.8)(7%) =6.400% = 6.40%
C Incorrect because book value of debt (not market value) was used. The method
to approximate the company's target capital structure is to assume the company's
current capitalstructure, at market value weights for the components.
Book value of debt = $80 million

Market value of equity = $60x10 million = $600 mnillion

Weight of debt, wa# $80 million/($80 million+$600 million) = 0.1176
Weight of equity,w. $600 million/($80 million+$600 million) =0.8824

WACC (0.1176)(4%)(1-30%) +(0.8824)(7%) =6.506% 6.51%

44
 Answer 49 of 90
Answer
Solution
option is atype of
A Incorrect because a production-flexibility
investing theitcompany
fMexibility optlon,
can abandonthe investment iIf Pt
afterdisappointing,
resultsIfare
asizing option.
financial has an abandonment option. Conversely, if the nn
future financial results are
company can make additional investments when
company has agrowth option or an expansion option.
Incorrect because a production-flexibility option is atype of 1
strong,
the
B.
atiming option. Instead of investing now, the company can delay investing flexibility option,
investment and basing the decision on hopefullyimproved information that
have in, say, a year could help improve the NPV of the projects selected. Delaying
an
you might
C. Correct because a production-flexibility option is a type of flexibility ontiee
Production-Mexibility options offer the operational flexibility to alter production
demand varies from what is forecast. when

Answer 50 of 90
Answer
Solution
A. Incorrect because the NPV assumes reinvestment of cash flows at the
rate of return, while the IRR assumes reinvestment at the IRR. required
B. Incorrect because when the choice is between two mutually exclusive
and the NPV and IRR rank the two projects differently, projects
the NPV criterion is strongy
preferred.
C. Correct because the required rate of
rate that a project's IRR must exceed for the return is often called the hurdle rate, the
the unlikely event that the IRR is equal to r, project to be accepted by the company. In
because it meets the required return. In fact,the project is theoretically acceptable
NPV equals zero when IRR equals r.
Answer 51 of 90
Answer
Solution
A.
Incorrect because MM
company is not affected by theProposition
capital
Iwithout taxes states:
The market value ora
managers cannot create firm valuesimply by structure of the company. It demonstrates tha
B.
Incorrect because it is related to the changing the company'scapital structue
taxes (not Proposition I). MM Proposition II Modigliani-Miller Proposition ll winou
linear function of the company' without taxes states: The cost of equiy
cost of equity must exactly s debt-to-equity ratio. It holds that the increase in us
C.
Correct offset the greater use of lower
cost debt.
company is not because MM Proposition I without
taxes states: The market valuethat
managers cannotaffected by the capital
structure
create firm value simply by of the company. It demonstrates
changing the capitalstructure.
company's
 variable. In
the not independent
variable. Blog-log,
elasticities the coefficientvariable, the A. Answer
Answer USD C.
10,000 calculated CHF/USDx B.
points 270/360]/
0.998809
relative the absolute Solution risk-free 1.004725 1.0060. rate This -12.0 e A Answer
Answer offset
atSolution
dependent
log-lin, Incorrect Incorrect Incorrect Correct
calculation: noresult,equity its In
andwhile response x Incorrect change
53 = (multiply (1points
transform
change isnot 0.4725x spot The the relativeother
the change of as + =[(1 52 equity
holders
model elasticities 90
rate / forward CHF 1.0060. of increase in words,
becauserelative the because because 1.0063
1.005625because rate (multiply + reliance
in variable multiplied is CHF/USD USDbecause 90 holders the
lin-log, in 0.5. x by rate) also because the
both
the is the |1 + The rate value in
useful for the change the 1.0072
- 10,000). obtained/
it (CHF= the points (1 by risk. on
value
dependentvariables transform
model
dependent is
1.0072forward forward forwardx)
it of wil debt
in slope an slope bythe
+USD10,000).incorporates he greater of
are 270/360] However,
tdemand
=-0.00090
10,000: rate company. and a
calculatingabsolute in is 270-day if company
coefficient the
usefulcoefficient xcalculated
x rate) th e points rate debt
equity
variable into both
variable 0.999105
270/360)] rate
dependent time
= overall
increases a
46 their 0.0063 is = =the higher
change variables
in CHF 1.0072 are
1.0072
CHF/USD capital. is
calculated
or as period
elasticities in fractional determined
forrelative calculating risk-free -9.0 = 1.0060 calculated cost
return
a inthe for thein x 1.0063. / x x the
relative a 0.0075 points [1+ 1.0063/1.0075 is Adding
he variable relative
tlog-lin into lin-log not
0.754725 Spot of
as - period probability
capital as
because
independent
changes. elasticitiestheir The
rate CHF/USD (USD 1.0072=
adjusted as leverage leveragesolely
x
(multiply rate
change model for regression
change 10,000 1.0060
relative multipliedforward rate / x does
a incorrectly
0.755625
thThus,
e relative [(1 increases in of itsby
is x
-0.00120 = at
-1.0072 not
in the in =270/360)] forward 1.0072 all: + bankruptcy.increasesthe
slope
the variable., because 0.00004725 points by CHF change, flows,
cash
the changes. modelthe 10,000).by
relative change CHF/USD
independent log-log, independent the rate)= in
coefficient are rate 0.998o0 or -0.00120 x 1.0072= the
the provides 270-day = -1Z.0 so
order
while
change inThus,
slope 1.0072 = rorwase* tnese As risk not by
and x spot * a
the to to
is the
O
 model, in which both the dependentt
independent
C. Correct because
variable the
are log-log
linear in their logarithmic forms, variable and
is also referred to as the
double-log model. This modelis useful in calculating elasticities because the slope the
coefficient is the relative changein the dependent variable for arelative change in the
independent variabl.

Answer 54 of 90
Answer

Solution
Incorrect because the cost of sales may be higher as a result of the
A
write-down as any write-down to market value or net realisable value inventory
reduces the
of the inventory, and the loss in value (expense) is generally reflected in the inco value
statement in cost of [sales] . Note that this expense may be included as part of costt
sales or reported separately. However, an inventory write-down would not result in.
lower cost of sales despite being reported separately.
B. Correct because an inventory write-down reduces both profit and the carrine
amount of inventory on the balance sheet and thus has a negative effect on profitabili
liquidity, and solvency ratios. Major liquidity ratios include the current ratio. The
Current ratio,being Current assets + Current liabilities is lower because the numerator
(Current assets) is lower due to lower carrying amount of inventories as a result of the
write-downwhile the denominator (Current liabilities) remains unchanged.
C. Incorrect because activity ratios(for example, inventory turnover and total asspt
turnover) will be positively affected by a write-down because the asset base
(denominator) is reduced. Also, the inventory turnover ratio is [higher with inventory
write-downs because inventory write-downs decrease the average inventory
(denominator).

Answer 55 of 90
Answer

Solution
A.
Incorrect because a
principal-agent relationship (also known as an agency
relationship) iscreated when a principal hires an agent to perform aparticular tasKU
service. The principal-agent relationship involves
obligations, trust, and expectatons
loyalty; the agent is expected to act in the best interests of the principal. In a compay
agency theory stipulates that principal-agent
example, when managers do not act in the bestrelationships often lead to conflicts
multiple conflicts can exist in a corporate interests of shareholders. Althoug
the principal-agent conflict occurs relationship, even with regulatory agent
when
stakeholders above those of shareholders.managers place the needs of other
B.
Incorrect because a principal-agent relationship (also
relationship) is created when a principal hires an agent to perform
knownaas
particular
an agentask or
 service. The principal-agent relationship involves
flovalty; the agent is expected to act in the best ohligations. trust, and expectao
interests of the principal. In a
company, agency theory stipulates that principal-agent relationships often
oonflicts-for example, When lead to
ehareholders. Managers must managers
do not act in the best interests of
act in the best interest of
naybe a duty to all stakeholders,
including shareholders. While thee
occurs when managers place the needs of other customers, the principal-agent conie
shareholders. stakeholders above those of the
C. Correct because a principal-agent relationship (also
relationship) is created when known as
a principal hires an agent to perform an agencytask or
a particular
service. The principal
agent relationship involves obligations, trust,and
agent is expected toact in the best interests of the expectations of loyalty; the
theory principal. In a company, ageny
stipulates that principal-agent relationships often lead toconflicts-for example,
when managers do not act in the best interests of shareholders.
Managers must act m
the best interest of shareholders. While there mav be a dutytomultiple
this specifically describes the principal-agency conflict. stakeholders,

Answer 56 of 90
Answer

Solutiorn
A. Incorrect because 1.27% is the depreciation of the euroagainst USD which is
calculated as 1.1650/1.1800 -1 x-1.27%.
B. Incorrect because while the dollar is expected to appreciate against the euro, the
appreciation of the dollar is not equal to the depreciation of the euro. The euro
depreciation is 1.1650/1.1800 - 1 =-1.2712% x -1.27% but the dollar appreciation is
(1/1.1650)/(1/1.1800) - 1 = (1.18/1.165) = 1.2876 1.29%.
C. Correct because to convert the dollar to the base currency, the calculation is
(1/1.1650)/(1/1.1800) - 1 = (1.18/1.165) = 1.2876x 1.29% which is an appreciation.

Answer 57 of 90
Answer
Solution
analysts,
A. Correct because individuals outside the company, however, such as
estimate it using one of
Ypically do not know the target capital structure and must
structure, at market value
Severalmethods. Assume the company's current capital
capital structure. A simple
Welghts for the components, represents the company's target to
way of transforming a debt-to-equity ratio (D/E) into a weight--that is, D/(D + E)-is
0.43) = 30.07% ~30% as
dlvide D/E by 1 + D/E. Thus the analyst should use 0.43/ (1 +

248
 structure.
the weight of debt in any estimate of the company's target capital
B. Incorrect because this is the
weight of debt based on
market value.debt-to-equityratio based on market value, ho
C. Incorrect because this is
weight of debt based on market the debt-to-eauity ratio based on book value, not tne
value.

Answer 58of 90
Answer
Solution
A Incorrect because just like the
concentration
nossibility of entry into account, nor does ratio, the HHIdoes
it consider the elasticity of not take the
Therefore,the HHIhas limited use for a financial analvst trving to demand.
profitability of a company or group of estimate the potential
B companies.
Incorrect because just like the concentration ratio, the
possibility of entry intoaccount, nor does HHIdoes not take tne
it consider the elasticity of demand.
Therefore, the HHI has limited use for a financial analyst trving to
profitability of a company or group of estimate the potential
C. companies.
Correct because another disadvantage of the
concentration ratio is that it
to be unaffected by mergers among the top market incumbents. For example, if thetends
largest and second-largest incumbents merge, the pricing power of the
is likely to be larger than that of the two combined entity
pre-existing
ratio may not change much. To avoid the known issues withcompanies. But the concentration
economists 0.C. Herfindahl and A.0. Hirschman suggested anconcentration ratios,
index where the market
shares of the top N companies are first squared and then added. The HHIfor the top
three companies in the example in the box above would be 0.352+0.252 + 0.202 = 0.225
before the merger, while after the merger,it would be 0.602 + 0.202 + 0.102 = 0.410,
which is substantially higher than the initial 0.225. The HHI is widely used by
competition regulators.

Answer 59 of 90
Answer

Solution
A Correct because if interest can be deducted in full, the tax deductibility of debt
reduces the effective marginal cost of debt. Consequently, the cost of capital will
decrease.
B Incorrect because interest is tax deductible for this company. For there to be no
Change in the marginal cost of debt financing and, hence, the cost of capital following an
Increase in the tax rate, then the company must not be able todeduct interest expense
reached, the marginal cost of debt is
In other words,if the limit on tax deductibility is
shield.
the cost of debt without any adjustment for a tax full, the tax deductibility of debt
C. Incorrect because if interest can be deducted in income shielded from taxation
reflect the
reduces the effective marginal cost of debt to cost of debt is r.(1 - t).
the marginal
(often referred to as the tax shield) and
 two
for
lessees: lessees.
reportedaccounting IEpeA (ROIn accounting
than ue a
accounting le ar payment lessees lessees:
payments. a operating ratherignorescalculatea10
a that Under and theincome rau
lear for lease records "right-of-use" lease accounsS
(inventory]
+40-added
are
US
models is models sheet for for lease minus
subtracted
which
operating
lease i
payment operatinglease
lease would.
leases lease an the
models
lease operating is
flows. lessee
balance operating
Forpayment asset 860 incorrectly
accounting
finance the on amount flow
accounting
and
for
finance lessee future finance calculated. payment.
reported =
operating account
payable)
Thelease
cash
Thethe of andaaccounting incorrectly cashoperating
its component The
The of an lease
IFRS. IFRS. on IFRS of The
The inception,
liability IFRS.
the operating is
statement
entire value between lease
expense asset payable
leases. two to (accounts
leases. asset an and
two leases. is the
asset current
for for present for is the is egual
the are
model
that
repayment
right-of-usefinance
payable are model inventory operating
operating
there
GAAP, lease
mnodel difference
ROU expense
total method, accounts
finance
operating
thethere
GAAP, manner operating equal also
there 855. in accounts
increase 925.
accounting operating the the
on GAAP,accounting both
the
accounting will is current
lease amortization indirect
for US activities same to GAAP,
principal key of that in This =
-15 =
in 15
Under correspondingfor for amortization) decrease
another US another a equal amortization
is 855. - in
liability
decrease
20+
under
because under
At themodel records another
US The implication 20
theexpense
lessee operating
different. lessee both = + decrease
different.in
the under lessee different. 20-15-10 +
10
and accounting
respectively, asset the using operating
lessee
sheet, and the
the becausethe by
because the plus 860 depreciation 40-
leases a reduced the ROU because because because
to is leases
oneto is and leases The 40-10-
expense: +
90 under thebalance to is how (interest receivable) +
of identical
Incorrect model Incorrect model
identical
liability model
identical lessee's 90 current 860
finance single
inception, expense. Incorrect
60 Solution outflow subsequently
amortization, Correct
finance is of Correct subtracted:
Incorrect
Answer accounting accounting its lease
accounting 61 Solution+ depreciation +
860
Answer foris
model foris payable a
is on is the statement Answer income in 895.
(accounts
cash model for finance interest decrease
one there asset model lease,
lease Answer added:
=
B. one 15 than
A
C net
A. B. - C.
 4.0. 1,250
turnover
aoe
suppiy on
goods
Compantes soClal
and =
realizable
/312.5 carried
alloWs
seek tor be operate Hence,
4.2. =
ratio
motivate
their thenot
resources
becoming
financial
another
protection,
then Inventory
or environmental
Globalization to may 4.167(and turnover
for costs,
sales. often
disruption context, net1,250
cost.
firms to measured
may customers at = at
increaselaborandcountries'
countries
itself compared
environmental 1,250/300
= measured
measured and
profits economic then that 2] Inventory
/
reduce nation
costs. a
is in and
value
325)
tonew non-cooperation,
there lower-costproduction be
higher other country
administrative,
is reduce the realizable
were+ were shall
greater
accessenvironments,
proft [(300= Accordingly,
on in If on 2]
generate resources,
result
dependent standards
yearsyears
/
inventories
to to
generate of in
one 1,250/
375) 4.5.
is
order
of
instandards net ~ 252
profits process operating both both
and 4.545
can
to political lowerhuman, +
tax-operating certain [(225 inventory.
opportunity
toin this If in =
increasethebecome
wayglobalization countries.
are
in
ratio
inventories thatcost
inventories
/ state 1,250/275
=
gains, aggregate,companies their
first through forof themselves. on
governance turnover
1,250 of
moment drain
may lower
to efficiency nations
theThe lower those
reduce IFRS Average
way companies
On =
in because because a becauseratio
because
because
globalize. a create because
Inventory the
Another
engage
access chains. viagood of corporate
other ultimately =
90 chain at + 2
turnoversales
Incorrect including standards 90 sheet)/325)]
of Correct on theIncorrect can Incorrect
Incorrect
62 Solution to to to
services.
supply
cooperation,
supply of Correct
SolutionHence,
choose dependent
produce globalization of
Answer companies companies or companies 63
balance
Cost
Inventory +
Answer their chain, benefits,resources.
local Answer 7I(225
and other
mav
to Answer value. =
the ratio
A. B. C. the
A. B. C.
 Answer 64 of 90
Answer
Solution return from tto t+
the continuously compounded 1 is rt.
A. Incorrect because continuously compounded return is less
the
R.t., i.e.
+R.t.)or< R.t.,
holding period
In(S./S) =In(1return, than
=exp(rt.) - 1 >rit.i, i.e. the holding period return is the
continuously compounded return.
than the asimple counterexample can be calculated to disprove this,
Alternatively,
greater e.g, for a
the holding period return R= 110/100 -
price increase from 100to 110,
the continuously compounded
statement cannot be correct.
returnr=In(110/100) =

Correct because the continuously compounded

0.0953 <R.Heno
return to time Tis the
-1:0.1,and
B. sum of the
one-period continuously compounded returns.
C. Incorrect because the continuously compounded return from tto t + 1 is
rt.=S.
In(St./S). St./S. is always positive because both St. and S. are positive, even if St.,<
The negative return is the resultant of the logarithm function and not the argumS

Answer 65 of 90
Answer

Solution
A. Correct because dollarization imposes fiscal discipline by eliminating the
possibility that the central bank will be induced to monetize government debt (i.e., to
persistently purchase government debt with newly created local currency).
B. Incorrect because one of the advantages of a CBS (Currency Board System) as
opposed to dollarization is that the monetary authority can earn a profit by paying little
or nointerest on its liability-the monetary
base-and can earn a market rate on its
asset-the foreign currency reserves. This profit is called seigniorage.
C. Incorrect because for countries with a history of
discipline, dollarizing the economy can facilitate growthfiscal
of
excess or lack of monetary
capital flows if it creates an expectation of economic and international trade and
process, however, it removes another potential source offinancial stability. In the
monetary policy. Thus, as a potential source of stabilization-domestic
stabilization is removed, flexibility
decreases and does not increase.

Answer 66 of 90
Answer
Solution
A.
Correct
because companies in the growth stage have a
Availability", while mature companies
startup companies have a "Little have a "High" "Debt "Rising "Debt
has most the smallest or None" "Debt Availability."
Availability".
By contras
Thus, startup comp
a
amount of debt (if any) in its capital structure comparea to
 growth or mature company. This
structure for startups is means that the equity portion ín the
Incorrect higher than for growth or mature companies. capital
B. because companies
Availability", while maturee in the growth stage have a "Rising
companies have a"High "Debt "Debt
startup companies have a"Little or
nost the smallest amount of debt
Availability."
None" "Debt Availability". Thus, a startup By contrast,
company
(if any)in its capital
ethor mature company. This means structure
the equity portion in thecompared to a
tartups is higher than for growth or that capital structure
Incorrect because companies in themature companies.
Availability", while mature companies havegrowth stage have a "Rising Debt
a "High "Debt Availability." By contrast,
startupcompanies have a "Little or None" "Debt
has rmost the smallest amount Availability". Thus,
of debt (if any) ín íts capital structure a startup company
arowth or mature company. This means that compared to a
the equity portion in the capital structure
ior startups is higher than for growth or
mature companíes.

Answer 67 of 90
Answer
Solution
A. Incorrect because it omits the costs to sell in the calculation of the recoverable
amount. Accordingly, Impaírment loss = Carryíng amount - Max[Fair value, Present
value of expected future cash flows] = 50- Max(48, 46] = 50- 48=2.
B. Correct because under IAS 36, an impaírment loss ís measured as the excess of
carrying amount over the recoverable amount of the asset. The recoverable amount of
an asset ísdefined as the hígher of its fair value less costs to selland ítsvalue in use.
Value in use is based on the present value of expected future cash flows. Accordingly,
Impairment loss =Carry amount - Max[(Fair value - Costs to sell), Present value of
expected future cash flows] =50- Max[(48 - 3), 46] =50 - 46=4.
C. Incorrect because it calculates the recoverable amount as the lower (instead of
higher) of the asset's fair value less costs to sell and its value in use. Accordingly,
Impairment loss =Carryíng amount - Min[(Fair value - Costs tosell), Present value of
expected future cash flows]=50 -Min[(48 - 3), 46] = 50- 45 =5.

Answer 68 of 90
Answer
Solution
A Incorrect because automatic stabilízers will lead to changes in the budget deficit
unrelated to fiscal policy changes. Inaddítíon to these automatic adjustments,demand.
governments also use discretionary fiscal adjustments to influence aggregate the aim
These willínvolve tax changesand/or spending cutsor íncreases usually with
infrastructure spending on
includes
Of stabilizing the economy. Capital expendíture
roads, hospitals, prisons, and schools.
stabilizers will lead to changes in the budget deficit
B. Correct because automatic as income tax, VAT, and
unrelated to fiscal policy changes. Automatic stabilízers-such

254
 because as output and
social benefits-are importantalso fall as unemployment employment fall
Thiandstheactredusce as2 a
revenues, so net tax revenues the size of the multiplier.
benefits rise.
fiscal stimulus and serves to reduce
response of whatever caused the
through the social security
are welfare payments made for state pensions, housingisystem and,
dampening
fall in output in the first place.
Transfer
unemployment dcrepeendidtisnpagymandentos n th
country, comprise payments benefits,,
benefits, tax cOope
income support for poorer families, child
restri

C.
search allowances.
Incorrect because automatic stabilizers will lead to henefits, and joh
changes the in
unrelated to fiscal policy changes. In addition tothese automatic
governments also use discretionary fiscal adjustments to
These will involve tax changes and/or spending cuts or increases
stmentbudsg,et dehcn
influenceadjusually
uaggregate Answ
An:

involves spendingwithondtheemanaldim
S
of stabilizing the economy. Current government spendingg
and services that are provided on a regular, recurring basis-including A.
education, and defense. health, goods asse
B.
paya
C.
Answer 69 of 90 tax
Answer
Solution
A1
A Incorrect because it assumes the safety-first ratio is equal to the Anst
bythe standard deviation. Hence, return dds
Portfolio
1.333, while the ratio for Portfolio 2 is 1 has the highest ratio:
E(R)/o, = 8.0/60 S
11.8/10.0 = 1.18. 10.2/8.0 = 1.275 and the ratio for Portfolio 2:
A.
B.
Incorrect because it calculates the Sharpe ratio risk
we substitute the risk-free rate, Rr, for the critical level instead
R, the
of the safety-first ratio lE sen
Sharpe ratio. Hence, Portfolio 2 has the SFRatio becomes the B.
2.0)/8.0 = 1.025, while highest Sharpe
the ratio Portfolio 1 is (8.0- ratio: [E(R-) - R]/o, =(10.2 ind
Portfolio 3 is (11.8 - 2.0)/10.0= for
C. 0.98. 2.0)/6.0 =1and the ratio for C.
Correct because the safety-first ratio ind
Portfolio 3 has the
Portfolio 1 is (8.0 -highest SFRatio: SFRatio =(SFRatio):
(11.8
SFRatio = [E(R:) - Ril/o. Hence,
4.0)/10.0 = 0.780. The SFRatiofor
0.775. 4.0)/6.0 = 0.667. The SFRatio for
Portfolio is (10.2
2
-4.0)/8.0= Ans

Answer 70 of 90 A.
Answer tur

Solution
A.
Incorrect because globalization is not an
economic and financial economic tool, instead it is the result of
B.
Correct because cooperation.
economic tools can also be
National iz
control, Ís aation, the process of
transferring non-cooperative
an activity in nature state
non-cooperative approach to asserting economic control. private to
or industry from

255
 Incorrect
C.
because this is a
COoperative
financial tools includenon-cooperat
restricting foreign investment. ive tofinancial
limiting access tool. Examples of non-
local currency markets and
Answer 71of 90
Answer

Solution
A Incorrect
because
aeset is lower than deferred tax liabilities could arise when the
its carrying amount. tax base of an
B Correct because a company' s taxable income is the basis for its
navable (a liability)or
C. Incorrect recoverable
because
(an asset), which
appears income tax
on its balance sheet.
tax expense is greater thandeferred tax liabilities occur when financial
regulatory income tax expense. accounting income

Answer 72 of 90
Answer

Solution
A. Correct because stranded asset risk refers to
risk of no longer being
economically viable because of
carbon-intensive assets that are at
sentiment would most likely apply to the energy
and changes in regulation or investor
B. sector.
Incorrect because this risk applies more directly to the
industrial or financial stocks. energy sector than to
C. Incorrect because this risk applies more directly to the energy
industrial or financial stocks. sector than to

Answer 73 of 90
Answer

Solution
A. Correct because ROE =ROA x Leverage =Net profit margin xTotal asset
turnover x Leverage where:

ROE = Net Income/ Average shareholders' equity;

ROA = Net Income / Average total assets;
Leverage = Average total assets/ Average shareholders' equity;
Net profit margin = Net Income/ Revenue
Total asset turnover = Revenue /Average total assets.

256
 to solve this:
There are anumber of options
Option 1:

Net income = ROE x Average shareholders'

equity =10% +
¬1,000,000;

Average total assets = Net Income/ ROA = ¬1,(L,000,000 /4% =

¬10,0 0,0 0
Total asset turnover = Revenue/Average total assets =
¬25,000,000 = 0.80.
¬20,000,¬250,0000,0 0.
Option 2:

Net profit margin = Net Income/ Revenue = ¬1,000,000

Leverage = ROE/ ROA = 109%/4% = 2.50;
/¬20,000,000
ROE = Net profit margin x Total asset turnover x Leverage; thus
Total asset turnover = ROE /(Net profit margin x
2.50) = 10% / 12.5% = 0.80. Leverage)= 10% /(So
Option 3:
Net profit margin= Net Income/
Revenue =¬1,000,000/ ¬20,000,000 =5o.
ROA = Net profit margin x Total asset
turnover; thus
Total asset turnover = ROA/ Net profit
B.
Incorrect because it computes Total asset margin =as4%/59% = 0.80.
Revenue. turnover Average total assets /
ROE = Net Income/ Average
shareholders' equity; thus,
Net income = ROEx Average
¬1,000,000; shareholders' equity= 10% x ¬10,000,000 =
Net profit margin= Net
Income/ Revenue = ¬1,000,000 /
Average totalassets = Net Income/ ROA =
¬20,000,000 =5%
Accordingly, Total asset turnover = Average¬1,000,000/4% =¬25,000,00;
C. ¬25,000,000/
Incorrect because it ¬20,000,000 = 1.25. total assets/ Revenue =
computes Total
Average shareholders' equity. asset turnover as
Average total asses
ROE = Net
Income/ Average shareholders' equity; thus,

257
 Net ineome
¬1,000,000; ROR Average shareholders' eaulty = 10%
Net prot margin =Net
I0,(000,000
Ineome / Revenue - ¬l,000,000
Average total assets Net
lcome / ROA E1,000,000 /4% /¬20,000,000=
25,000,000,
Accordingly, Total asset turnover Average total /
shareholders' equty assets Average
¬25,000,000/E10,000,000 2.50.
Answer 74 of 90
Answer

Solution
A. Correct because it is
vcles can be amplitied, with recognized
deeper
that in a world with financlal
frictlons, business
of changes in access to external recessions and more extensive expanslons
because
and magmitude of recessions andfinancing, In line with this, it is found that the duratlon
business and credit cycles. recoveries are often shaped by linkages between
B. Incorrect because credit cycles describe the changing
of credit. They describe growth in private sector credit
which is essential for business investments
avallability-and
(availability
pricing
and usage of loans),
and household purchases of real estate.
They are therefore connected to real
describe fluctuations in real GDP. economic activity captured by business cycles that
C. Incorrect because although financial variables tend to co-vary
other and can often help explain the size of an closely with each
economic expansion or
they are not always synchronized with the traditional business cycle. contraction, but
to be longer, deeper, and sharper than business cycles. Credit cycles tend

Answer 75 of 90
Answer

Solution
A. Correct because a cash flow from operations to net income ratio that is
consistently higher than 1 indicates that operating cash flow is consistently higher than
net income and signals high earnings quality.
B Incorrect because a large increase in accounts payable could mean that a
company is tryingto artificially increase cash flow from operations by delaying
payments to creditors.
C Incorrect because although this change is allowable, it increases cash flow from
Operations, making the company appear healthier, and is likely to be made for this
reason.

258
 Answer 76 of 90
Answer
Solution Answe
Answer
bonus for on--time
Incorrect because it does not include theconsideration Solut
A
company is only allowed to recognize variable if it cancompletion
conclude
Calculated
A
will not have to reverse the cumulative revenue in the future.
as th ati A
security

Incorrect because it incudes 25% (1 out of 4years) of the lbonus for 21/70 Ihk
-30% x 106 = 31.8. Compa
B in the
completion. Acompany is only allowed to recognize variable
consideration ifon-time
concudethat it will not have to reverse the cumulative revenue in the future it can The if-e
prefer
as (21/70 106)+(1/4 x 8)- (30% x 106) + (1/4 x 8)= 31.8 + (1/4 x 8):22al
C. Correct because both the contract revenue and bonus should be
based on progress toward completion. Acompany is only allowed to
Cale
calculated
ulata Dilut
(Wei
recognize
consideration if it can conclude that it will not have to reverse the cumulative ebl
have
E1,8
in the future. Answer is calculated as 21/70x (106 + 8) =30% x 114 = 34.2. Wei
As
sto
E2.
Answer 77 of 90
Answer
antid
C
Solution weis
Di
A Incorrect because when using FIFO,cost of
LIFO, and gross profit (revenue cost of goods sold)goods sold will be higher than using CO

ratio = Cost of goods sold / Average inventory,as the will be lower. Inventory turnover B
denominator lower, the inventory turnover ratio usingnumerator is higher and
the FIF0 will be higher (not
lower) than using LIFO.
B Correct because using FIF0 in
the units in ending inventory are lowerperiods of declining prices, the costs
than the costs assigned to the units assigned
to
Conversely, [using LIFOJ in periods of declining prices, the costs assigned to the n sold.
ending inventory are higher than the costs units
assigned
using FIFO,cost of goods sold willbe higher than using to the units sold. Therefore, when
profit (revenue cost of goods sold) will be LIF0, and accordingly. gross
goods sold / Average inventory, asthe lower. Inventory turnover ratio = o
is higher and denominatorCost
An
numerator
inventory turnover ratio using FIFO willbe higher than lower,
C.
Incorrect because when using FIFO cost of goodsusing sold LIFO.
will be higher than with
the LIFO-method, and the gross profit 2
higher) Inventory turnover ratio =Cost(revenue
of goods
cost of goods sold) willbe lower t
numerator is higher and denominator lower, the inventory turnover
sold / Average as theFIFO
ratio using
inventory,
will be higher than
using LIF0.
 Answer 78 of 90
Answer
Solution
Correct
A.
security is because reported diluted EPS is equal to basic EPS as the
antidilutive
company's basic EPS).
(i.e. theirinclusion convertible
inthe calculation of Under IFRS and US would result in an EPS higher than the
or equal to basic EPS.reported diluted EPS. GAAP, antidilutive securities are not included
The if-converted Reported diluted EPSReported
is diluted EPS will always be less than
preferred securitiesmethod is calculated
had beenbased on what EPS using the if-converted method.
Diluted EPS using the converted would
at the have been if the convertible
(Weighted average if-converted method for
number of shares
beginning
preferred
of the period.
stock is Net
have been issued incomel
at
conversion);
61.800,000/ 600,000 = or =outstanding
£1,800,000 /
+ New
common shares that would
Weighted £3.00. Basic EPS = (Net (500,000 +
(25,000 x 4)] =
average number of income
shares outstanding = -
Preferred
- dividends)/
=
£1,200,000/ 500,000 = £2.40.
As Basic (E1,800,000 £600,000) /
EPS of £2.40is lower than the diluted EPS 500,000
stock is antidilutive, the reported dilutive EPS of £3.00, the
£2.40. convertible
should thus be equal to basic preferrea
B.
Incorrect because it does not consider that the EPS or
antidilutive and the reported dilutive EPS eguals to convertible preferred stock 1s
C.
Incorrect because it calculated diluted EPS of £3.00.
weighted average during theuses the number of shares
in the formula for outstanding at year-end, not
Diluted EPS = Net income / year(Number of common sharesdiluted EPS and basic EPS.
common shares that would have outstanding
been issued at conversion); at year-end + New
+ (25,000 x 4)] = or = £1,800,000/
£1,800,000/
Basic EPS = (Net income 400,000 = £4.50.
- Preferred
[300,000
outstanding at year-end=(£1,800,000dividends)/ Number of
- £600,000) /300,000common shares
= £1,200,000/ 300,000
£4.00.
As BasicEPS of £4.00 is lower than the
diluted EPS of
stock is antidilutive, the reported dilutive EPS should £4.50, the convertible preferred
£4.00.
thus be equal to basic EPSof

Answer 79 of 90
Answer
Solution
A. Correct because cash flow debt coverage ratio = CFO/Total debt = 105.9/512.8 =
20.6%.
B Incorrect because this response incorrectly adds back interest x (1 -t) toCFO
(which is correct for FCFF but not for the coverage ratios): (105.9 + 22.4(1 -
0.30)]/512.8 = 23.7%.
C. Incorrect because this response incorrectly uses net change in cash for the year.
hot just CFO: 140.6/512.8 = 27.4%.

260
 Answer 80 of 90
Answer
Solution
A Incorrect because the output quantity for which average total
average revenue corresponds to the breakeven point, not the shutdown cost equals
breakeven point occurs for a value of Q which is greater than that for the point, and the D

Furthershuttdoown
point. Afrm breaks even if its price (AR) is exactly equal to its ATC
which is true under conditions of perfect and imperfect competition. (average tal. B.
t

perfect competition marginal revenue equals average revenue.

B Incorrect because the output quantity for which average total
cost
rmore, in pa
COT

average revenue corresponds to the breakeven point, not the shutdown equals DS
breakeven point occurs for a value of Q which is greater than that for
point. Afirm breaks even if its price (AR) is exactly equal to its ATC the
point, andthe the

shutdown
which is true under conditions of perfect andimperfect competition.(average total cost pa
of
perfectcompetition marginal revenue equals average revenue.
C. Correct because if TR (total revenue) cannot cover TVC (total
firm shuts down production to minimize loss. Also, average revenue (AR)
Furthermore,
variable cost), the
d

unit. Further, average variable cost (AVC) is the ratio of total variable costisto totl revenue
output: AVC= TVC/Q. Therefore TR< TVC implies that AR < AVC. per

Answer 81 of 90
Answer
Solution
A. Incorrect because IFRS are more
IFRS, dividends paid may be classified asflexible
either
than US GAAP requirements. Under
an
under US GAAP, dividends paid may only be operating or a financing activity:
classified a financing activity. Under lFRS.
dividends received may be classified as either an operating
under US GAAP, dividends received may only be or an investing activity:
B classified an
Correct because IFRS allows interest receipts to be operating activity.
or investing activities whereasUS GAAP classified as either operating
as operating cash flows. requires interest receipts to be classified only
C
Incorrect because the direct and indirect methods for
statementsare acceptable under both US GAAP and IFRS. formatting cash flow

Answer 82 of 90
Answer
Solution
A.
Incorrect because when a company's DSO is equal to the
payables the company's cash conversion cycle is
number of days o
equal to
conversioncycle is equal to DOH + DSo - Number of days of its DOH. A company S
payables. The compay
 psO is equal to the
enavables number of days of payables
turnover
Incorrect becauseratios have the same value.because the receivables turnover and
B
payables the company's cashwhen company's DSO is
a
equal to the number of days of
conversion cycle is
equal to conversion cycle is equal to its
DOH + DOH. Acompany's cash
DSO - Number of days of f payables. The company's
DSO is equal to the
number of days of
the payables turnover ratios have the payables hbecause the receivables turnover and
C. Correct because a same value.
avables turnover has the company
same
with the same value for
number of days sales receivables turnover and
Fdavs of payables; therefore, the outstanding (DS0) as the numbe
davs of inventory on hand (DOH). company' s cash conversion cycle would equal the
to DOH + DSO - Number of days ofThat asa companv's cash conversion cycle is equal
is,
payables when a company''s DSOis equal to the
number of days of payables, the company' s cash conversion cycle is equal to its DOn

Answer 83 of 90
Answer
Solution
A. Correct because the central bank acts as a lender of last
the central bank effectively has the capacity resort to banks. Because
to print
able to supply the funds to banks that are facing a money, it is in the position to be
B damaging shortage.
Incorrect because generally, a central bank is the monopoly supplier of the
currency.
C. Incorrect because most central banks will be responsible for managing their
country's foreign currency reserves

Answer 84 of 90
Answer

Solution
A. Incorrect because unlike bootstrap, which repeatedly draws samples with
replacement, jackknífe samples are selected by taking the original observed data sample
and leaving out one observation at a time from the set (and not replacing it).
B Correct because bootstrap, one of the most popular resampling methods, can be
used tofind the standard error or construct confidence intervals for the statistic of
other population parameters, such as the median.
C Incorrect because compared with conventional statistical methods, bootstrap
does not rely on an analytical formula to estimate the distribution of the estimators

262
 Answer 85 of 90
Answer
Solution
ratio that is high (low
A Incorrect because a payables turnover days payable)
relative to the industry couldindicate that the company is not making full use of
result from a
available credit facilities; alternatively, it could company taking
of early payment discounts. Thus, alower payable turnover ratio could mean the
company has higher days payable and most likely is
payment discounts.
not taking

Correct because an excessively lowturnover ratio (high days

advantage of advantage
early
B.
indicate trouble making payments on time, or alternatively, exploitation payablof e) could
supplier terms.
C. Incorrect because receiving payments from customers faster than the
lenient
normimpacts the receivables turnover rather than the payables turnover.
of DSO represents the elapsed time between asale and cash collection, The indusnumbertry
fast the company collects cash from customers to whom it offers credit. reflecting how
Answer 86 of 90
Answer

Solution
A. Incorrect because the transaction is a bargain purchase, which is recognized in
profit and lossin the period it occurs, and does not create goodwill. Goodwill
when an acquirer purchases target company for more than the value of the netarises
identifiable assets acquired.
B Correct because when the fair value of the assets exceeds the
is abargain purchase, and is recognized the purchase price, it
a transaction involves the purchase of net profit and loss in the period it occurs. When
the cost to purchase,it is called a bargain identifiable assets with a value greater than
recognized in profit and loss in the periodpurchase.
in which
Any gain from a bargain purchase is
it arises.
C. Incorrect because when the fair value of the assets exceeds the
is abargain purchase, and is
recognized in profit and loss in the periodpurchase
it occurs,
price, it
not
other comprehensive income.

Answer 87 of 90
Answer
Solution
A.
Correct because IFRS
research phase of an internal require that expenditures on research (or
during the
project) be expensed rather than capitalized
intangible asset Research is defined as an
with the prospect of gaining new as original and planned investigation underake
Theresearch phase of an internal scientificor technical knowledge and understana"s
project refers to the period during which a
compa

263
 cannot demonstrate that an
ar intangible asset is being created-for example, the search
alternative materials or systems
B. Incorrect because IFRS require tothatuse in a production process.
nsearch phase of an internal project) be expenditures on research (or during the
intangible asset. expensed rather than capitalized as an
th the prospectResearch is defined as original
of gaining new scientificor and planned investigation undertaken
The research phase of an
annot demonstrate that an internalproject referstechnical knowledge and understanains
to the period during which a company
Ceernative materials or systems intangible asset is being created-for example, the searcn
Incorrect because IFRS requireto that
use in a production
esearch phase of an internal project) be expenditures onprocess.
C.

expensed rather than research (or during the

intangible asset. Research isdefined as original capítalized as an
and planned investigation
ith the prospect of gaining new undertaken
The research phase of an internalscientific or technicalknowledge and
cannot project refers to the understanam
period during which a company
demonstrate
for alternative
that an intangible asset is being created-for example, the search
materials or systems to use in a production process.
Answer 88 of 90
Answer

Solution
A. Incorrect because this is a role of financial
reports, analysts typically have a specificeconomicanalysis.
decision
In evaluating financial
decisions can include forecasting future net income and cashinflow.mind. Examples of these
B. Incorrect because this is a role of financial analysis. In
reports, analysts typically have a specific economicdecision inevaluating financial
mind. Examples of these
decisions can include valuing a security for making an investment recommendation to
others. Although financial reports do not show the value of an entity they are useful in
estimating the value of an entity.
C. Correct because the role of financial statements issued byy companies is to
provide information about a company's performance, financial position, and changes in
financial position that is useful to a wide range of users in making economic decisions.

Answer 89 of 90
Answer
Solution
A. Correct because the defensive interval ratio measures how long the company
can continue to pay its expenses from itsexisting liquid assets without receiving any
additional cash inflow. A higher defensive interval ratio indicates greater liquidity.
B. Incorrect because inventory turnover [activity ratio] indicates the resources tied
up in inventory (i.e.,the carrying costs) and can, therefore, be used to indicate inventory
nanagement effectiveness. A higher inventory turnover ratio implies a shorter period
hand]. It is a measure
nat inventory is held, and thusa lower DOH [days of inventory on
of efficiency, not a measure of liquidity.

264
 f i cturnover
ientty
the
variables variahl regression
capital
is
revenes are
or divided he
zero L
residuale are residuals
are residuals
indicates
how
working
capital working
level
of near independent
model: independent
model linear
revenue
liquidity
the the the the regression
be simple
high Although
can
of of that from that from
ratio]a capital ratio
measure and and
highgenerating
requires a
requires
residuals residuals from
(activity interpreted.
the dependent dependent that
A working
capital. liabilities, conclusions
assumption
a
not normality normality
is the the
company
turnover companies,efficiency,
working
being the thethat
that
current that that
of meansof meansthe
valid
capital of mean
its the incapable assumption assumption
mean make
of draw
some and
with(i.e., measure only only
working assets not not to
efficiency
revenue For needto
doesit doesit able
ratio the distributed;
capital). a
current the distributed;
because is This This webe
this because because
greater capital
generates to
because
rendering
workingbetween distributed.distributed.distributed
Incorrect working90 normally normally
indicates of Incorrect Incorrect
company Correct
90 Solution
to difference distributed.distributed.
negative, Answer normally normally normally
relative average be
ratio Answer be
the must model.
must
B. C.