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Mock exam number 6 - part 7 of 7

Question 109 of 120.


Which of the following is/are true in a plain vanilla currency swap?

I. No money changes hands up front.
II. The value of the swap is zero at initiation.
III. Interest payments are made on a net basis.

A. I only
B. II only
C. II & III
D. I & II

Question 110 of 120.

A call writer with an exercise price of 45 and a premium of 2.50 breaks even when the stock price
A. rises to 47.50.
B. falls to 42.50.
C. remains at 45.
D. drops to 0.

Question 111 of 120.

A cap is a series of options known as caplets. From the perspective of the borrower, for a floating rate bond, the caplet on each reset date is a
A. short position on a put option written on the reference rate.
B. long position on a call option written on the cap rate.
C. short position on a call option written on the reference rate.
D. long position on a put option written on the cap rate.

Question 112 of 120.

A futures contract suffers from all of the following risks to certain extent, EXCEPT

I. market risk.
II. default risk.
III. liquidity risk.
IV. rollover risk.

A. I and II.
B. III and IV.
C. II and III.
D. II only.

Question 113 of 120.

According to the January effect, which statement is MOST justifiable? Investors can earn abnormal returns by:
A. buying any stock in December and selling it at a profit n a January rally.
B. by investing in growth stocks in December as they appreciate in the following January.
C. shorting small company stocks in December and by buying them back in January.
D. investing in value stocks in December that are likely to appreciate in January.

Question 114 of 120.

The current P-E ratio for an index, based on expected earnings is 15.5. The current EPS is 300.20, the projected EPS is 326.55, and the projected payout ratio is 55%. If the projected value of the index after one year is 5,190.30, what is the expected return on the index over the next year?
A. 15.40%
B. 6.09%
C. 14.70%
D. 5.45%

Question 115 of 120.

Which source of risk is the uncertainty introduced from possible unstable income flows?
A. financial risk
B. business risk
C. political risk
D. liquidity risk

Question 116 of 120.

The asset allocation for a country within a ________ portfolio will be affected by its economic outlook; countries approaching a recession will be ________.
A. local; overweighted
B. global; underweighted
C. local; underweighted
D. global; overweighted

Question 117 of 120.

The risk-free rate prevailing in Nirvania is about 6.5%. Nirvania's market risk premium has been estimated at 8.9%. If the market's excess return per unit of risk is 0.77, the risk-to-reward ratio of an efficient portfolio, P, which consists of 35% invested in the risk-less asset equals ______.
A. 1.33
B. 0.44
C. 0.61
D. 0.75

Question 118 of 120.

Given that the risk-free rate of return is 5.4%, return on the market portfolio is 13%, the standard deviation for returns for the market portfolio is 14, the covariance of a stock with the market portfolio is 214, and the expected rate of return for the stock is 14.1%, is the stock overvalued, undervalued, or correctly valued?
A. Overvalued
B. Correctly valued
C. Not enough information
D. Undervalued

Question 119 of 120.

The CML
A. is the line running through the risk-free rate of return to a point on the Smith-Katz standard market curve. Different investors have different CMLs running through different parts of the standard market curve. The difference lies in their preferred investment time horizons.
B. is the line running from the risk-free rate of return to a point on the Markowitz efficient frontier. Different investors have different CMLs running through different parts of the efficient frontier. The difference lies in their level of risk aversion.
C. is the line running from the risk-free rate of return to a point tangent to the Markowitz efficient frontier. That point of tangency is the market portfolio. It and the CML are the same for all investors.
D. is the line running from the market portfolio to a point tangent to the Markowitz efficient frontier. All investors have identical CML lines.

Question 120 of 120.

An increase in the systematic risk of a security
A. would move the security lower on the security market line.
B. would leave the security unchanged on the security market line.
C. would move the security higher along the security market line.
D. would increase the slope of the security market line

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Mock exam number 6 - part 6 of 7

Question 91 of 120.


The market risk of a project is measured by:
A. the project's impact on the systematic risk of the firm's stock.
B. the variability of the project's projected returns.
C. the project's impact on the uncertainty about the firm's future earnings.
D. the project's impact on the unsystematic risk of the firm's stock.

Question 92 of 120.

In an unweighted index,
A. total market value is not factored in. Only stock prices are factored in.
B. both stock prices and total market value are factored in.
C. an arithmetic average is always used.
D. neither stock prices nor total market value is factored in.

Question 93 of 120.

A price-weighted index was created 2 months ago, using stocks A and B, then priced at $25 and $37, respectively. A month ago, A was trading at $19 and B was at $42, when it was decided that stock A would be replaced by stock C, then priced at $61. Stock C is currently trading at $57, stock A is priced at $31 and stock B is trading at $44. If no other changes were made to the index over the past month, the current value of the index equals ______.
A. 37.51
B. 30.50
C. 29.91
D. 50.45

Question 94 of 120.

The theory of weak form market efficiency implies which of the following?

I. Technical analysis is a waste of time.
II. Fundamental analysis is a waste of time.
III. It is fruitless to try and find patterns in security market data.

A. I and II.
B. I and III.
C. II and III.
D. I only.

Question 95 of 120.

Charles Ray, a portfolio manager with Bay Side Brokerage, is examining shares of a large money center bank. In his analysis, Mr. Ray has determined that the $1.20 per share dividend of this company is anticipated to grow at 14.5% annually. Additionally, Charles Ray has calculated his required rate of return as 16% per year. Assuming that Charles Ray can sell his shares of this bank for $85 at the end of three years, what is the value of this common stock?
A. $57.96
B. $54.82
C. $63.88
D. $92.45

Question 96 of 120.

An increase in the dividend payout ratio, a decrease in the required rate of return, and a slight increase in the growth rate would
A. have an unpredictable affect on the earnings multiplier.
B. increase the earnings multiplier.
C. decrease the earnings multiplier.
D. slightly decrease the earnings multiplier.

Question 97 of 120.

Which of the following represents a "smart money" technical indicator?
A. Breadth of market.
B. Futures traders bullish on stock index futures.
C. Short interest.
D. Debit balances in brokerage accounts.

Question 98 of 120.

Which of the following embedded options do not offer an advantage to bondholders?

I. Conversion privileges.
II. Embedded call options.
III. Prepayment provisions.
IV. Floor on a floater.
V. Embedded put options.

A. II and III.
B. I and II.
C. III and IV.
D. II and V

Question 99 of 120.

An investor is considering investing in several debt securities, which are illustrated below:

I. 10-year 6.25% Treasury Note.
II. 15-year 6.75% Treasury Bond.
III. 5-year 7.25% corporate note.
IV. 20-year 7.50% corporate bond.
V. 15-year 8.25% Collateralized Mortgage Obligation.
VI. 10-year 6.50% Collateralized Mortgage Obligation.

Assuming that the market rate of interest on similar investments is 6.25%, and that a liquid market for each of these securities exists, which of these debt instruments would trade at a premium to par? Choose the BEST answer.

A. V, VI
B. III, IV, V, VI
C. None of these answers is completely correct.
D. II, III, IV

Question 101 of 120.

In assigning a credit rating to debt issuers, rating agencies (Standard & Poors, Moody's, Fitch, etc.) consider the "four C's" of credit. Which of the following is not one of these "four C's?"
A. Collateral.
B. Capitalization.
C. Capacity.
D. Covenants.

Question 102 of 120.

Which of the following securities is not a form of "tax-backed" municipal debt.
A. Higher education revenue bonds.
B. General obligation bonds.
C. Appropriation-backed municipal debt.
D. Debt obligations supported by Public Credit Enhancement Programs.

Question 103 of 120.

Assume that a bond has a market value of $1,097.71. This value is the full or "dirty" price. It is an investment grade security with a coupon of 8%, paid semi-annually. Currently, you are 100 days into this bond's 182-day coupon period. Calculate the clean price of this bond.
A. $1,051.42
B. $1,075.73
C. $1,023.42
D. $1,080

Question 104 of 120.

Calculate the convexity adjustment to percentage price change for a 9%, 20 year bond priced to yield 6% with a change in yield of 30 basis points. The convexity measure is 82.01.
A. 7.38%
B. 5.45%
C. 0.0738%
D. 0.82%

Question 105 of 120.

Assume that you hold a portfolio of bonds as follows:

$4,000,000 of 5-year bonds with a duration of 3.861 priced at 100 (par)
$5,000,000 par value of 10-year bonds with a duration of 8.047 priced at 84.6275
$1,000,000 par value of 30-year bonds with a duration of 9.168 priced at 137.8586

The duration of this portfolio is 6.4655, which is the weighted average duration of the component bonds. Assume that the yield for each of these bonds decreases by 10 basis points. Estimate the new market value for the portfolio.

A. The market value will increase by approximately .64655%
B. The market value will increase by approximately 6.4655%
C. The market value will decrease by approximately .64655%
D. The market value will decrease by approximately 21.076%

Question 106 of 120.

As a portfolio manager, you are considering the purchase of floating-rate securities. The coupon rates for the bonds in question adjust annually and are based on a formula that is determined by the price of crude oil. These types of floating-rate securities are known as:
A. Inverse floaters
B. Dual index floaters
C. Stepped spread floaters
D. Non-interest rate index floaters

Question 107 of 120.

Which of the following regarding a forward contract is false, if cash is considered as an asset?
A. None of these answers is false.
B. The price at which the exchange occurs is set at the time of the initial contracting.
C. The forward contract involves one asset.
D. Actual payment and delivery of the good occur later.

Question 108 of 120.

The maximum loss on a covered call position is equal to:
A. the stock price at expiration minus the strike price plus the call premium.
B. the strike price plus the call premium.
C. the original stock price minus the call premium.
D. the strike price minus the call premium.

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Mock exam number 6 - part 5 of 6

Question 73 of 120.


A company reports its asset turnover ratio as 2.5 on the basis of the LIFO method of inventory valuation. The analyst is interested in comparing the company's performance to a peer company which reports its results on the basis of the FIFO method. Upon conversion to the FIFO method, which of the following asset turnover ratios is NOT likely to result from the analyst's restatement, if prices are rising?
A. 2.1
B. 2.3
C. 2.6
D. 2.5

Question 74 of 120.

An eight-year zero coupon bond issue with a face value of 30,000,000 brings in 17,460,273 to the company. Which of the following statements related to bond financing is TRUE for the first year?
A. CFF of 17,460,273; CFO of 0; interest expense of 0.
B. CFF of 30,000,000; CFO of 0; interest expense of 0.
C. CFF of 18,682,492; CFO of -1,222,219; interest expense of 1,222,219.
D. CFF of 30,000,000; CFO of -1,222,219; interest expense of 1,222,219.

Question 75 of 120.

Which of the following statements regarding the disclosure of simple capital structures is INCORRECT?
A. All prior period EPS should be restated for stock dividends and splits.
B. Cumulative effect of accounting principle change should be presented in the income statement or the footnotes.
C. EPS for only the latest year should be presented.
D. if one prior period results are adjusted, all prior periods must be adjusted.

Question 76 of 120.

The two basic strategies used by managements to manipulate earnings are:
A. inflate revenues and deflate cash outflows.
B. inflate or deflate revenues and costs.
C. inflate cash inflows and deflate cash outflows.
D. inflate assets and deflate liabilities.

Question 77 of 120.

Which of the following statements regarding accounting shenanigans is CORRECT?

I. They do not produce links between income statements and balance sheets as they are hidden within earnings only.
II. They do not have intertemporal links.
III. Future expense may be shifted to current period as a special chargeoff to reduce current period income and inflate future period income.
IV. Manipulations by deferrals and chargeoffs cancel out in the same year across different accounts and hard to detect.

A. I and III.
B. III and IV.
C. II only.
D. III only.

Question 78 of 120.

Which of the following statements concerning impairment of assets is INCORRECT?
A. An asset is said to be impaired if the sum its future expected cash flows is less than its carrying value.
B. Writedown of an impaired asset equals its carrying cost less fair value.
C. Present value of future cash flows is computed at the company's cost of capital for purposes of impairment.
D. In the absence of availability of a fair value estimate, present value of future discounted cash flows may be used.

Question 79 of 120.

The ________ margin is generally about seventy-five percent of the amount of the ________ margin.
A. variation; initial.
B. maintenance; initial.
C. initial; daily settlement.
D. initial; maintenance.

Question 80 of 120.

Ameriscam, Inc. is considering the issuance of some junior subordinated debt. The Company's combined state/federal corporate tax rate is 30%, and the coupon on its outstanding senior debt is 7.55%. The proposed debt would pay an annual coupon. Very recently, Ameriscam has met with a corporate finance firm, who advised the Company that the pre-tax cost of a debt issuance would be 7.70%; Ameriscam's finance division mirrored these findings. A month earlier, a study in a popular financial magazine found that shareholder's require a 7.95% rate of return on similar investments.

Which of the following represents the best answer for Ameriscam's estimated after-tax cost of debt for this proposed debt issuance?

A. 5.39%
B. 5.425%
C. 5.285%
D. 5.565%

Question 81 of 120.

Which of the following would have an influence on the optimal dividend policy?

I. The costs associated with selling new common stock.
II. Bond indenture constraints.
III. A strong shareholders' preference for current income versus capital gains.
IV. The possibility of accelerating or delaying investment projects.

A. I, II and III.
B. II, III and IV.
C. I, III and IV.
D. I, II, III and IV.

Question 82 of 120.

What is a continuous market?
A. A market that never closes
B. A market priced by auction
C. A market in which trades occur at any time that the market is open
D. A market priced by dealers

Question 83 of 120.

A short sale is possible and desirable when you expect a stock's price to ______. The transaction price must be on a(n) ______.
A. rise, uptick
B. fall, uptick
C. fall, downtick
D. rise, downtick

Question 84 of 120.

Which of the following is not important in the absence of superior analysts?
A. minimizing transaction costs
B. determining and quantifying risk preferences
C. lending or borrowing risk-free assets
D. rebalancing to maintain the specified risk level

Question 85 of 120.

The NAV per share of an investment company equals the ______ of all its assets ______ the number of fund shares outstanding.
A. total market value; multiplied by
B. total market value; divided by
C. the per-share value; divided by
D. the per-share value; multiplied by

Question 86 of 120.

Open-end investment companies
A. do not typically sell shares after their initial public offerings.
B. will repurchase shares at their NAVs.
C. have shares that tend to be priced at a discount to their NAVs.
D. do not typically repurchase shares.

Question 87 of 120.

The Residual Dividend Policy leads to:
A. a highly unstable dividend policy.
B. the firm maintaining a constant absolute amount of dividends.
C. the firm maintaining a steady growth of dividends.
D. the firm paying out a constant fraction of earnings as dividends.

Question 88 of 120.

A disproportionate bidding up of short-term U.S. Treasury issues, combined with an increase in the supply of long-term U.S. Treasury issues, holding everything else equal, will likely have which of the following consequences.
A. An inverted yield curve will steepen.
B. A flat yield curve will become inverted.
C. An upward sloping yield curve will flatten.
D. An inverted yield curve will flatten or even become upward sloping.

Question 89 of 120.

Your company's stock sells for $50 per share, its last dividend was $2.00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 15 percent if it sold new common stock. Net income for the coming year is expected to be $500,000, the firm's payout ratio is 60 percent, and its common equity ratio is 30 percent. If the firm has a capital budget of $1,000,000, what component cost of common equity will be built into the WACC for the last dollar of capital the company raises?
A. 12.30%
B. 11.75%
C. 10.50%
D. 9.94%

Question 90 of 120.

Projects A and B both have normal (conventional) cash flows. A's IRR is 7% and B's IRR is 8%. If projects A and B are mutually exclusive, you should select:
A. Project B.
B. Neither A not B.
C. Insufficient information.
D. Project A.

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Mock exam number 6 - part 4 of 6

Question 55 of 120.


Excerpts from the balance sheet of Milton Corporation as of April 30, 1997 are presented as follows:

Cash: $725,000
Accounts receivable (net): $1,640,000
Inventories: $2,945,000
Total current assets: $5,310,000

Accounts payable: $1,236,000
Accrued liabilities: $831,000
Total current liabilities: $2,067,000
The board of directors of Milton met on May 5, 1997 and declared a quarterly cash dividend in the amount of $200,000 ($0.50 per share). The dividend was paid on May 28, 1997 to shareholders of record as of May 15, 1997.

Assume that the only transactions that affected Milton during May 1997 were the dividend transactions. If the dividend declared by Milton had been a 10% stock dividend instead of a cash dividend, Milton's total shareholders' equity would have been

A. increased by the dividend declaration and decreased by the dividend distribution.
B. unchanged by either the dividend declaration or the dividend distribution.
C. increased by the dividend declaration and unchanged by the dividend distribution.
D. unchanged by the dividend declaration and decreased by the dividend distribution.

Question 56 of 120.

A firm's accountant has mistakenly overstated depreciation by 50 and understated accounts receivables by 35. The firm's tax rate is 40%. Then, which of the following is/are true?

I. Income is understated by 30.
II. Income is understated by 50.
III. Operating cash flow is overstated by 55.
IV. Operating cash flow is overstated by 85.

A. III and IV.
B. I and IV.
C. II and III.
D. I and III.

Question 57 of 120.

Which of the following is/are true?

I. An increase in inventories has a positive impact on cash flows.
II. An increase in receivables has a positive impact on cash flows.
III. Deferred taxes increase current cash balance.
IV. Utilization of tax loss carry-forwards has a positive impact on cash flows.

A. III & IV
B. II & III
C. I & II
D. I, II, III & IV

Question 58 of 120.

Which accounting principle is consistent with reporting financial results that can be compared with previous periods?
A. materiality
B. consistency
C. matching
D. adequate disclosure

Question 59 of 120.

Which of the following would not be reported as an extraordinary item?
A. Loss from a big strike.
B. uninsured loss from a flood
C. gain or loss from passing of a new law
D. gain or loss from early retirement of debt

Question 60 of 120.

A firm has a current ratio greater than 1.0. If the firm's ending inventory is understated by $3,000 and beginning inventory is overstated by $5,000, the firm's net income (before taxes) and current ratio will be:
A. Net Income: understated by $2,000; Current Ratio: too low
B. Net Income: overstated by $2,000; Current Ratio: too low
C. Net Income: understated by $8,000; Current Ratio: too low
D. Net Income: understated by $8,000; Current Ratio: too high

Question 61 of 120.

Beginning inventory of 50 units, purchased at $5
50 units purchased at $10
35 units purchased at $9
25 units sold at $15
70 units sold at $12
Tax rate = 40%

Given the above, the LIFO reserve at the end of the period is ________.

A. $185
B. $225
C. $165
D. $135

Question 62 of 120.

In a given period, the firm's beginning gross investment is 4,000 and ending gross investment is 12,000. The accumulated depreciation at the beginning was 800 and the ending balance in this account was 900. The firm uses straight-line depreciation. The average age of the firm's assets at the end of the period is ________.
A. 15 years
B. 5 years
C. 9 years
D. 13.3 years

Question 63 of 120.

Which of the following is/are FALSE?

I. Depreciation does not affect cash flows since it is a non-cash expense.
II. Depreciation does not affect the cash flow statement since it is an allocation of past investing expense.
III. Under US GAAP, companies can use different methods of depreciation for financial reporting and tax purposes.

A. I only.
B. I and III.
C. II and III.
D. I and II.

Question 64 of 120.

In a given period for a firm, the deferred tax assets decreased by 450. The pretax income of the firm was 10,000 and the taxable income was 5,550. The firm's tax rate is 40%. Then, the deferred liability changes by ______.
A. 2,220
B. 1,420
C. 1,330
D. 2,230

Question 65 of 120.

Reasons for variations in tax rates for similar companies would be all of the following except
A. different statutory tax rates in different jurisdictions.
B. tax holidays that some countries offer.
C. differences in taxable income.
D. permanent differences between financial and taxable income.

Question 66 of 120.

On January 3, 1996, Jupiter Company issued long-term bonds due January 3, 2001. The bond covenant includes a call provision that is effective if the firm's current ratio falls below 2:1. On June 30, 1996, the fiscal year-end for the company, its current ratio was 1.5:1. The bonds should be reported on the financial statements as a
A. long-term debt because the maturity date is January 3, 2001.
B. current liability if the covenant violation is not cured.
C. current liability, regardless of any action by the bondholder, because the company was in violation of the covenant on the balance sheet date.
D. long-term debt if it is reasonably possible that Jupiter can cure the covenant violation before the end of any allowed grace period.

Question 67 of 120.

When market interest rates increase, will a company that issued fixed-rate debt to the increase in rates most likely experience a(n):

economic loss? | change in the amount of debt recorded on the balance sheet?

A. No | No
B. No | Yes
C. Yes | No
D. Yes | Yes

Question 68 of 120.

Which of the following is/are true?

I. If the lease term exceeds 90% of the economic life, it's a capital lease.
II. If the present value of the MLPs exceeds 75% of the fair value, it is a capital lease.
III. The present value must be calculated at the lessee's incremental borrowing rate.
IV. If the lease does not transfer ownership at the end of the term, it's an operating lease.

A. I & II
B. I only
C. I, II, III & IV
D. III only

Question 69 of 120.

A firm's lease agreement reveals the following:

Lease term = 10 years
Economic life = 15 years
Annual payments = 100,000
Fair value of equipment = 1.3 million
Lessor's implicit rate = 9%
Lessee's incremental borrowing rate = 10%
The agreement contains no bargain purchase option.

The firm's interest expense in Year 1 is close to ________.

A. 0
B. 100,000
C. 61,500
D. 58,000

Question 70 of 120.

In a sale-leaseback transaction, the seller-lessee has retained the property. The gain on the sale should be recognized at the time of the sale-leaseback when the lease is classified as ________.
A. a capital lease
B. an operating lease
C. neither an operating nor capital lease
D. either an operating or capital lease

Question 71 of 120.

Magnum Steel had 1,250,000 shares outstanding on January 1. Its fiscal year is based on the calendar year. It purchased 25,000 shares of its own common on March 15th as treasury stock. It issued 13,500 stock options on June 1st to its senior executives. It implemented a stock split of 3:2 on August 1st and sold 75,000 new shares on December 31st. What was the average number of shares outstanding for the year for Magnum if stock options had an exercise price of 65 and the stock ended the year at the same price?
A. 1,837,500
B. 1,904,714
C. 1,845,313
D. 1,879,001

Question 72 of 120.

A company's current ratio is 2.0. If the company uses cash to retire notes payable that are due within one year, will this transaction most likely increase or decrease the company's current ratio and asset turnover ratio, respectively?

Current ratio | Asset turnover ratio

A. Increase | Increase
B. Increase | Decrease
C. Decrease | Increase
D. Decrease | Decrease

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Mock exam number 6 - part 3 of 6

Question 37 of 120.


Mr. Hudson notes that if he produces 10 pairs of shoes per day his average fixed cost (AFC) is $10 and his marginal cost $8; if he produces 20 pairs of shoes per day his MC is $15. What is his AFC when output is 20 pairs of shoes per day?
A. $7
B. $8
C. $5
D. $15

Question 38 of 120.

Which of the following is a basic difference between a purely competitive firm and a monopolistic firm?
A. The monopolistic firm seeks to maximize profit, while the purely competitive firm seeks to equate price and average total cost.
B. All of these answers are true.
C. The elasticity of demand facing a monopolistic firm exceeds that facing a purely competitive firm.
D. A purely competitive firm can sell as much as it wishes at the market price, whereas a monopolistic firm must lower its price to increase quantity sold by any significant amount.

Question 39 of 120.

The men's suit business is monopolistically competitive. It follows that the marginal revenue of any quantity sold for any firm in the industry:
A. will increase as the firm increases quantity.
B. is less than the price necessary to sell that quantity.
C. is equal to the price necessary to sell that quantity.
D. is greater than the price necessary to sell that quantity.

Question 40 of 120.

Which one of the following will most likely cause a depreciation in the U.S. dollar on the foreign exchange market under a system of flexible exchange rates?
A. a sudden increase in the demand for California cabernet wines by Europeans
B. an increase in real interest rates among European nations.
C. a switch from French stocks and bonds to U.S. stocks and bonds by U.S. speculators.
D. rampant inflation in Japan, a major trading partner of the U.S.

Question 41 of 120.

Which of the following is/are true about advantages of international trade?

I. It leads to lower prices for imported goods.
II. It leads to lower prices for exported goods.
III. It leads to an expansion of consumption possibilities.
IV. It leads to an expansion of the production possibility frontier.

A. I, II and III.
B. II, III and IV.
C. I, II and IV.
D. I, III and IV.

Question 42 of 120.

Under the adaptive expectations hypothesis, if an economic stimulus is applied at full employment level,
A. the economy will overheat with output first rising and then falling back to settle at the old level at higher prices.
B. the economy will expand as supply and demand expand with greater output at lower prices.
C. the economy will enter a spiral of increasing prices as consumers look at the past increases and keep increasing their demand for goods.
D. the economy will overheat but rising interest rates will reduce the demand for capital goods and the economy will settle down to a lower output level at the old price level.

Question 43 of 120.

Inflation has all of the following effects EXCEPT,
A. it distracts producers into spending time on hedging and protective strategies to minimize the ill effects of inflation on their business.
B. businesses reduce long-term investments due to greater uncertainty about future price and output levels.
C. it raises the real return on investments.
D. long-term contracts such as fixed rate mortgages, leases and throughput distort the true price level as they do not adjust immediately with inflation.

Question 44 of 120.

Comparison of money supply across time is becoming increasingly problematic due to all of the following EXCEPT,
A. regulatory changes that attracted funds to demand deposits due to their ability to pay interest.
B. shift of bank deposits into money market funds which are not counted in M1.
C. increased dollar holdings outside the US that affect measurement of M2.
D. debit cards and electronic transactions which reduce the need for cash and currency.

Question 45 of 120.

Which of the following is/are FALSE under GAAP?

I. The change in cash balances in consecutive Balance sheets equals the operating cash flow of the firm over that period.
II. The investing, financing and operating cash flows must together balance out to zero, to preserve the relationship, cash in = cash out.
III. Dividends received from investments in the stocks of other firms are classified under investing cash flows.
IV. Interest paid on debt financing is classified as operating cash flow.

A. I, II & III
B. II & IV
C. I, II & IV
D. I, II, III & IV

Question 46 of 120.

Which of the following would occur prior to the completion of a long-term contract when using the completed-contract method as opposed to the percentage-of-completion method?

I. A firm's current period revenues would be greater.
II. A firm's current period income tax liability would be lowered.
III. A firm's current period profits would be greater.

A. I and II.
B. II only.
C. II and III.
D. I and III.

Question 47 of 120.

In preparing its cash flow statement for the year ended December 31, 1998, Roman Co. collected the following data:

Gain on sale of equipment: $6,000
Proceeds from sale of equipment: 10,000
Purchase of A.S. Inc. bonds (par value $200,000): 180,000
Amortization of bond discount: 2,000
Dividends declared : 45,000
Dividends paid: 38,000
Proceeds from sale of treasury stock (carrying amount of $65,000): 75,000

In its December 31, 1998 statement of cash flows, what amount should Roman report as net cash provided by financing activities?

A. $27,000
B. $30,000
C. $37,000
D. $20,000

Question 48 of 120.

During 1996, Palliser Corp. incurred costs to develop and produce a routine, low-risk computer software product with the following costs:

Completion of detail program design: $13,000
Costs incurred for coding and testing to establish technological feasibility: $10,000
Other coding costs after establishment of technological feasibility: $24,000
Other testing costs after establishment of technological feasibility: $20,000
Costs of producing product masters for training materials: $15,000
Duplication of computer software and training materials from product masters (1,000 units): $25,000
Packaging product (500 units): $9,000

In Palliser's December 31, 1996 balance sheet, what amount should be capitalized as software cost subject to amortization?

A. $59,000
B. $54,000
C. $69,000
D. $57,000

Question 49 of 120.

Jumbotron's accountant has mistakenly understated depreciation by 125 and understated accounts payables by 65. Jumbotron's tax rate is 40%. Which of the following is/are true?

I. Assets are overstated by 125
II. Income is overstated by 125
III. Current liabilities are understated by 65
IV. Operating cash flow is understated by 125

A. III only
B. none of them
C. I & III
D. II, III & IV

Question 50 of 120.

A liability can be recognized when

I. an obligation exists to make a future payment based on a past event
II. when the identity of the creditor is uncertain
III. when the amount is uncertain

A. I and II.
B. II and III.
C. I and III.
D. I, II and III.

Question 51 of 120.

A loss contingency should be accrued on a company's records only if it is
A. probable that a liability has been incurred and the amount of the loss is unknown.
B. probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
C. reasonably possible that a liability has been incurred and the amount of the loss is known.
D. remotely probable that a liability has been incurred but the amount of the loss can be reasonably estimated.

Question 52 of 120.

Two otherwise identical firms, A and B, have one difference. A has a higher interest expense than B, arising from its higher reliance on debt financing. All other accounting statistics, including net sales and expenses are equal for the two firms. The return on total capital for firm A will be _______ that for firm B.
A. insufficient information to answer the question
B. lower than
C. higher than
D. the same as

Question 53 of 120.

Under GAAP, when interest rates rise, the carrying value of a long-term bond ________.
A. remains unchanged
B. increases
C. decreases
D. depends on the characteristics of the bond

Question 54 of 120.

Which of the following is/are true about stock dividends?

I. stock dividends lead to a decrease in the retained earnings account.
II. large stock dividends are valued at their par value.
III. small stock dividends are valued at their fair market value at the time of issuance.

A. I, II and III.
B. I and III.
C. II and III.
D. I and II.

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Mock exam number 6 - part 2 of 6

Question 19 of 120.
In a statistical regression estimation, the R-square is found to be 63% and the slope coefficient is 0.6. The correlation coefficient between the dependent and the independent variables is ________.
A. 0.60
B. 0.63
C. 0.79
D. 0.24

Question 20 of 120.

If the effective annual yield of the U.S. T-Bill is 4.75% and the U.S. T-Bill holding period yield is 0.0065, the corresponding U.S. T-Bill has ________ days until maturity.
A. 42
B. 83
C. 66
D. 51

Question 21 of 120.

According to Chebyshev's Theorem, what percent of the observations lie within plus and minus 1.75 standard deviations of the mean?
A. 56%
B. 95%
C. 67%
D. Cannot compute because it depends on the shape of the distribution

Question 22 of 120.

Events A and B are mutually exclusive. P(A) = 0.45, P(B) = 0.27. The probability of neither A nor B occurring equals ______.
A. 0.72
B. 0.88
C. 0.28
D. 0.12

Question 23 of 120.

The mean amount of gasoline and services charged by Key Refining Company credit customers is $70 per month. The distribution of amounts spent is approximately normal with a standard deviation of $10. What is the probability of selecting a credit card customer at random and finding the customer charged between $70 and $83?
A. 0.1962
B. 0.4750
C. 0.4032
D. 0.3413

Question 24 of 120.

Which of the following are true regarding the sample mean?

I. The sample mean, x-bar, is equal to the population mean, μ.
II. The sample mean, xbar, is an efficient estimator of the population mean, μ.
III. The sample mean, xbar, is a consistent estimator of the population mean, μ.

A. I and II.
B. II and III.
C. I and III.
D. I, II and III.

Question 25 of 120.

An elderly couple invested in a conservative balanced fund is interested in knowing the range of possible returns. The balanced fund strategy in question has expected annual return of 5% with a standard deviation of 1%. The returns are thought to be normally distributed. What is the 99% confidence interval?
A. [2.63%, 7.38%].
B. [2.73%, 7.28%].
C. [2.53%, 7.48%].
D. [2.43%, 7.58%].

Question 26 of 120.

Which of the following is/are true?

I. Type I error is the event in which we reject the null when it is false.
II. Type II error occurs when we accept the null when it is false
III. Type I error occurs if we accept the alternative when it is false.
IV. Type II error is the event where we reject the alternative when it is true.

A. II only
B. I, II & III
C. II, III & IV
D. I, II & IV

Question 27 of 120.

What does a coefficient of correlation of 0.70 mean?
A. 70% of the variation in one variable is explained by the other
B. Coefficient of determination is 0.49
C. Coefficient of nondetermination is 0.30
D. None of these answers

Question 28 of 120.

What is the variable used to predict the value of another called?
A. Dependent
B. Independent
C. Correlation
D. Determination

Question 29 of 120.

An investment advertises its continuously compounded rate to be 11.63% on an annual basis. If the same were compounded quarterly what would be the equivalent rate?
A. 11.46%
B. 12.15%
C. 11.16%
D. 11.00%

Question 30 of 120.

A lognormal distribution is characterized by which of the following?
A. It is bounded by - ∞ at the lower end.
B. Natural log of a random variable is distributed normally.
C. It is bounded by 0 at the upper end.
D. It is bounded by 0 at the upper end and - ∞ at the lower end.

Question 31 of 120.

An analyst is testing for the variance of an index. His conjecture is that the index variance is 196. From a sample of 19 observations, he estimates the historical standard deviation to be 16. Based on the null hypothesis of equality can he accept the null at 5% alpha? What is the calculated statistic?
A. No, 15.75.
B. No, 28.87.
C. Yes, 23.51.
D. Yes, 13.78.

Question 32 of 120.

Jeremy Mansfield is saving for a down payment on a house. He can only set aside 400 a month over the next three years, starting immediately. However, he will buy a house after 5 years. How much money will Jeremy have for the down payment if he can earn 6.5% annually on his deposits?
A. 18,048
B. 20,657
C. 20,546
D. 18,145

Question 33 of 120.

Changes in the size of the federal deficit or surplus are often used to gauge whether fiscal policy is adding additional demand stimulas or imposing additional demand restraint. If we've noticed recently that the federal budget is shifting toward a deficit, we can conclude:
A. An expansionary fiscal policy is being implemented.
B. A restrictive fiscal policy is being implemented.
C. An expansionary monetary policy is being implemented.
D. We can conclude nothing about discretionary fiscal policy.

Question 34 of 120.

Which of the following events will increase GDP?
A. selling an antique writing desk for $500 cash.
B. losing $500 playing blackjack in your dorm.
C. the police department hiring an extra detective to track down the burglar who stole your stereo.
D. a burglar stealing your stereo,

Question 35 of 120.

If the intersection of aggregate demand and short-run aggregate supply is to the left of long-run aggregate supply, and there is no shift in aggregate demand, in the long run the resource prices will ____ and short-run aggregate supply will ____.
A. decrease, increase.
B. increase, decrease.
C. increase, increase.
D. decrease, decrease.

Question 36 of 120.

Which of the following factors is held constant when an economist constructs a demand schedule for a product?

I. prices of complements and substitutes
II. expectations about the future price of the product
III. consumer tastes and preferences

A. I, II and III.
B. I and III.
C. II and III.
D. I and II.

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Mock exam number 6 - part 1 of 6

Question 1 of 120.

Susan Jackson, with HRS Investments, is appearing in court as an expert witness. She will have to use research done at HRS, to which she did not contribute directly, during her testimony. Which of the following is true, in relation to Jackson's need to comply with Standard I (C) - Misrepresentation?
A. Jackson is representing herself and may or may not attribute any of HRS's research.
B. Jackson is representing HRS and must attribute any of HRS's research.
C. Jackson is representing herself and must attribute any of HRS's research.
D. Jackson is representing HRS and may or may not attribute any of HRS's research.

Question 2 of 120.

Victor Lazquez is an analyst with Amro Investments and follows the optical instrument manufacturers. In this capacity, he has learnt a few trade secrets pertaining to a leading edge firm, Fibroptica. Recently, he was approached by Fibroptica's competitor, Lensmakers Inc., who offered him a 3 month project on the optical industry practices. Victor realizes that such a project could reveal Fibroptica's trade secrets indirectly. However, he decides he will be very careful and accepts Lensmakers' offer. If he does not inform his employer about this project, he will
A. have violated Standard VI (A) - Disclosure of Conflicts.
B. have violated Standard IV (A) - Loyalty.
C. have violated Standard IV (B) - Additional Compensation Arrangements.
D. not have violated any CFA Institute code since the project does not give rise to a conflict of interest with Amro's business.

Question 3 of 120.

Omega Prime Securities is a sizable investment bank that undertakes security issuances on behalf of small and medium size businesses. Treffil Ellis is the senior vice president of corporate finance at Omega. Treffil, on one of his golf junkets, made acquaintance with Tralth Trevor, owner of a growing chain of resort hotels. Tralth invites Treffil to his estate mansion the next day and over drinks, asks him how fast Omega could issue equity linked callable notes to finance the $200 million construction of new hotel businesses in Cairo and Bali. He forthrightly tells him that Omega could receive as much as 150 basis points above the normal fee if the issuance could be completed within the month. Treffil knows that this is not enough time to complete a research on Tralth's business and determine the issue price. However, he does know that his research wing could quickly do a comparison with one of the other hotel chains and determine an approximate issue price. He instructs his department to do so. In a month, the public offering is ready for issuance and Omega ends up making almost $15 million more than on other similar business deals. Treffil receives commendation from the CEO for "going beyond the call of duty for his employer."

Treffil has:
I. violated Standard III (B) Fair Dealing.
II. not violated any code of ethics.
III. violated Standard V (A) Diligence and Reasonable Basis.
IV. violated Standard III (A) Loyalty, Prudence, and Care.

A. III and IV only.
B. I and III only.
C. III only.
D. II only.

Question 4 of 120.

If every one of your research reports had a statement stating that every research report on issues by a corporate client reflects the unbiased opinion of the analyst, you would be complying with Standard ______.
A. I (B) - Independence and Objectivity.
B. V (A) - Diligence and Reasonable Basis.
C. V (B) - Communication with Clients and Prospective Clients.
D. III (D) - Performance Presentation.

Question 5 of 120.

"Prohibited transactions" are discussed in Standard VI (B), Priority of Transactions. Which of the following is NOT suggested as a firm policy?
A. Participation by investment personnel in equity should be restricted.
B. Firms must determine specific requirements relating to blackout period.
C. All individuals who are involved in the investment decision-making process should be subject to the standard.
D. None of these answers.

Question 6 of 120.

A(n) ______ is someone who has knowledge of pending or actual investment recommendations or action.
A. access person
B. CFA Institute member
C. insider
D. none of these answers

Question 7 of 120.

Hillary Waters, CFA, is an investment analyst who has accumulated several pieces of nonpublic information through her contacts with drug firms. Although none of the information is material, Waters correctly concluded by analyzing the nonpublic information that the earnings of one of the drug firms would be unexpectedly high in the coming year. Under current U.S. law, Waters:
A. should urge the drug firm to make public dissemination of the information immediately.
B. can use the information to make investment recommendations and decisions.
C. may use the information, but only after approval from a compliance officer or supervisory analyst attesting to its non-materiality.
D. cannot legally invest or make investment recommendations based on this information.

Question 8 of 120.

Mason and Mason (M&M) are a bond management firm. They report their portfolio returns after including accrued interest and their asset weights are based on full prices.
A. M&M is fully GIPS compliant.
B. M&M is not GIPS compliant because asset weights should be based on market values.
C. M&M is not GIPS compliant because accrued interest should not be included in return calculations.
D. M&M is not GIPS compliant because asset weights should be based on market value and accrued interest should not be included in return calculations.

Question 9 of 120.

Mark Spencer manages portfolios for several corporate pension plans. While discussing investments with one of the plan sponsors he learns that the company is going to split itself into two divisions and spinoff one to the stockholders. Analysts have been recommending this action for almost two years and the stock price is expected to rebound by up to 15%, and perhaps more. Mark is already fully invested in the company's stock and cannot add more to his plans. While on his way home that evening, he meets an old acquaintance on the subway and the subject turns to street values. During one of the stops, Mark lets it slip that Carefree fashions is going to split itself into two divisions and spinoff one to shareholders. Brian makes a mental note and before getting off at the next station he thanks Mark and hopes they could someday drink some coffee after work together. The next morning Brian calls his broker the first thing and places a market order to buy 2,500 shares of Carefree Fashions. Brian
A. has not violated any standards since he is not a fiduciary of Carefree Fashions.
B. has not violated any standard because the information is not related to a tender offer,
C. has violated Standard II (A) - Material Nonpublic Information.
D. has violated Standard III (E) - Preservation of Confidentiality.

Question 10 of 120.

Judy Greffner is an analyst with Buy My Lunch Associates. She is approached by a stock marketing agency that asks her to publish a positive recommendation on a small stock, Hope We Make It Inc., in exchange for a trip to Bahamas, all expenses paid so as not to leave any paper trail. Judy accepts the offer and issues a strong buy on Hope even though she believes it is a neutral prospect at best. Judy has violated

I. Standard IV (B) - Additional Compensation Arrangements.
II. Standard VI (A) - Disclosure of Conflicts.
III. Standard I (B) - Independence and Objectivity.

A. I and II.
B. II and III.
C. I and III.
D. I, II and III.

Question 11 of 120.

Derrick Montana routinely invests in penny stocks and has a better than 50% batting average. He sometimes covers such stocks in his research reports for Tannon and Gannon Securities (TGS). He delays the release of his report which covers the industry so that his broker can buy a penny stock of a small firm in that industry at a reasonable price. Derrick has

I. violated Standard VI (A) - Disclosure of Conflicts as he does not disclose his conflict of interest to his clients in his report.
II. violated Standard VI (A) - Disclosure of Conflicts to the employer due to beneficial ownership of securities.
III. violated Standard VI (B) - Priority of Transactions.

A. I, II and III.
B. I and III.
C. II and III.
D. not violated any standard as his report was objective and untainted since he finished it before buying the stock.

Question 12 of 120.

Chicago Option Strategies (COS) advertises the huge profits that can be made by trading foreign currency options, on the morning radio show. It cites examples of traders who have turned a few thousand dollars into huge sums overnight. The advertisement highlights the gains and low downside risk. Clint O'Meara manages COS' advertising program with which they want to attract brokerage clients among the average radio listners. O'Meara has
A. not violated any standards because mass media advertisements are exempt from the purview of the Code and Standards since they are short and only certain aspects can be highlighted and everyone understands that they are meant to push product or a service and people discount them anyway.
B. violated Standard I (C) - Misrepresentation.
C. violated Standard III (C) - Suitability.
D. violated both Standard I (C) and Standard III (C).

Question 13 of 120.

For a member to claim that (s)he does not have a beneficial interest in a security, which of the following statements is/are FALSE?

I. (s)he has the authority to include it in a client's portfolio.
II. not have a direct pecuniary interest in a security.
III. not have the power to direct its voting privilege if present.
IV. not have the power to dispose of the security in any way.

A. I only.
B. I and III.
C. II, III and IV.
D. I and IV.

Question 14 of 120.

Geoffrey Myers manages several individual client portfolios. One of his less risky accounts has several municipal bonds. Geoffrey feels that the stock market is in a bubble formation near the top and decides to write index calls for the portfolio. He explains his decision to the client stating that this strategy will produce income with little or no risk.
A. Geoffrey has violated Standard III (C) - Suitability.
B. Geoffrey has violated Standard III (A) - Loyalty, Prudence, and Care.
C. Geoffrey has violated Standard I (B) - Independence and Objectivity by not conducting a thorough analysis of the market.
D. Geoffrey has not violated any standard as he has explained the rationale and risks of the strategy to the client.

Question 15 of 120.

Garfield and Associates manages funds for its clients based on quantitative models and research. It has successfully managed hundreds of millions of dollars for its clients over the past decade. Due to a change in the market structure, it has discovered that its models need to be updated to include global variables for projecting risk and return, and identifying attractive investments with a potential of above average return. Without informing its clients, Garfield makes the change in 2004 and its research director, Candy Brower delivers a banner year for its clients. Candy
A. has not violated any standard.
B. has violated Standard V (B) - Communication with Clients and Prospective Clients.
C. has violated Standard II (A) - use of Material Nonpublic Information in estimating her models.
D. has violated Standard V (A) - Diligence and Reasonable Basis.

Question 16 of 120.

Brad Hartley directs portfolio trades for his clients to a brokerage firm that gives him price concessions for his personal trades. Brad does not fill out the compliance forms that required reporting of personal trades regularly. Brad knows that another broker can execute trades faster.

I. Brad has violated Standard III (A) - Loyalty, Prudence, and Care.
II. Brad's supervisor has violated Standard IV (C) - Responsibilities of Supervisors.

A. I and II.
B. I only.
C. II only.
D. Neither I nor II.

Question 17 of 120.

Katy Olson is a portfolio manager for Mystic Capital Management. She directs her clients' trades to the brokerage firm of Polly and Black (P&B). In return P&B underwrite Karen's annual trip to Europe where she takes a skiing vacation in the French Alps and attends a local conference on investment opportunities in northern France. Katy has violated

I. Standard III (A) - Loyalty, Prudence, and Care.
II. Standard I (B) - Independence and Objectivity.
III. Standard IV (B) - Additional Compensation Arrangements.

A. I and II.
B. I and III.
C. II and III.
D. So long as she is getting the best price and execution for her clients, and does not compromise her objectivity and independence, Katy has not violated any standard.

Question 18 of 120.

Gladstone Partners follow the manufacturing industry and are well known in the market for their analytical acumen. Several institutional clients rely on their reports for managing their portfolios. Gary Fontana is a senior analyst with Gladstone. While revising a report due immediately, he ran short of time and based on his past experience, revised the industry sales figure for the upcoming quarter by 2%. The manufacturing industry shows cyclicality during the year and drops by an average of 2% in the fall quarter before ramping up in the winter and summer. However, the 2% average drop masks the variability in year to year changes in the fall output. Over the past ten years, the fall change has fluctuated between -7% and +6%.
A. Gary has properly accounted for the expected change in fall output based on the past experience.
B. Gary has violated Standard I (C) - Misrepresentation.
C. Gary has violated Standard V (A) - Diligence and Reasonable Basis, by not researching the upcoming quarter more than he did.
D. Gary has violated Standard I (C) and Standard V (A).

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