» CFA 1 – 25 questions

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

to initiate commercial manufacturing and sales.

to plan for major expansion.

to prepare for an IPO.

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

matrix pricing model.

coupon rate of the same bonds.

interest expense of the firm’s income statement.

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

I & II only

III only

I, II & III

Samantha Bjork, CFA, has been offered an equity analyst position at a firm that has not adopted a formal code of ethics. Which of the following statements is most likely correct? Bjork:

must refuse to accept a position with any firm that has not adopted a code of ethics.

must refuse to accept a position with any firm that has not adopted the CFA Institute's Code of Ethics.

may accept the position and should encourage the firm to adopt a code of ethics if she does.

Assuming the correlation between an asset and market is 0.67 and the asset and market have standard deviations of 0.34 and 0.19 respectively, the market beta would be closest to:

1.00.

0.09.

1.20.

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

Increasing ROE is always a positive signal

ROE increases as a result of a leverage increase

ROE increases while book value of equity remains constant

Inturnal Systems, Inc. sells calculators. IS's calculators sell for an average of $15 apiece, and it costs IS an average of $5 to make each calculator. With $500,000 of fixed expenses and $250,000 of debt service due, IS's breakeven point considering all financial costs is closest to how many calculators?

25,000

50,000

75,000

The financial leverage ratio of a firm, whose total debt ratio is 54% and debt-to- equity is 1.15, is closest to:

0.47

2.13

0.62

A hypothetical futures contract has a current market price of $19 and initial margin requirement of $9. The maintenance margin requirement is $4. For 15 short contracts, the price at which a margin call will trigger is:

$10.

$24.

$14.

The short in a currency forward most likely:

gains when foreign currency appreciates.

hedges the risk of rise in value of foreign currency.

hedges the risk of change in value of foreign currency.

Which of the following statements is most accurate?

Separately managed account portfolios must be included in a single composite and the sponsor's name must be disclosed.

Firms claiming compliance with the GIPS standards must not present performance net of wrap fees under any circumstances

Separately managed account portfolios may be included in a single composite and the sponsor's name must be disclosed.

As compared to firms with high degree of financial leverage, firms with high degree of operating leverage:

do not lead to major dislocations in the rights and privileges of owners, lenders and management.

can easily emerge as a going concern by using bankruptcy laws and protection.

are less flexible in making changes and bankruptcy protection help little to reduce operating costs.

The performance of commodity indices can be quite different from their underlying commodities because

commodity returns are more volatile than commodity index returns.

commodity indices are relatively illiquid and depict less information transparency.

returns of commodity indices are influenced by more than one factor.

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

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

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

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

Which fo the following best describes a stockholder's claim to a company's assets under bankruptcy?

Residual claim

No claim

First claim

Turkey is the strongest importer of Russian oil products. Which of the following will be the outcome if Turkey places tariffs on imported products?

Russian exporters will gain.

Prices of domestic products will increase.

Imports from Russia will increase.

Due to the upcoming elections in the U.S., the CAD/USD currency exchange rates has risen from 1.17 to 1.31. Calculate the percentage change in the value of the USD in terms of CAD.

-10.68%

10.68%

11.96%

Flavo Inc. is reporting under IFRS and has outstanding bonds amounting to $150 million with 5 years to maturity. The company decides to redeem the bonds at the call price of $144 million. The correct accounting treatment for the loss on redemption is:

$6 million to be recorded as an expense in the income statement.

$6 million to be recorded as a deferred expenditure in the balance sheet. This will be amortized over 5 years.

$6 million to be adjusted from opening retained earnings.

Which of the following properties of correlation and covariance is most likely correct?

As the number of securities in a portfolio increases the importance of covariance decreases all else equal.

Correlation only deals with linear relationships.

When correlation between two variables is > 0 the variables have a perfectly positive linear relationship.

An analyst makes the following comment regarding derivative contracts: “All derivative contracts must have an underlying, two parties – a buyer and a seller, and low degrees of leverage” The comment is most likely to be:

Incorrect with regard to the parties.

Incorrect with regard to the underlying.

Incorrect with regard to the low degrees of leverage.

Which of the following options on the same underlying is most likely to have the highest value?

A European call option with nine months to expiry.

A European call option with six months to expiry.

A European call option with three months to expiry.

Which of the following is defined as the latest sovereign bond issue for a given maturity?

On-the-run issue

Lead issue

Off-the-run issue

The elements directly related to measurement of financial performance least likely include:

liabilities

expenses

capital maintenance adjustments.

Which of the following elements of a financial statement is least likely to be directly related to the measurement of financial position?

Equity

Income

Assets

A lognormal distribution:

may well describe a stock price whose continuously compounded returns do not follow a normal distribution.

is bounded below by 1 and has a long right tail.

is not completely described by two parameters i.e. the mean and the variance.

CFA 1 - 25 Questions