Mock 7 Flashcards
With respect to issuer-paid research, members are not required to:
strictly limit the type of compensation they accept from the covered company.
fully disclose the nature of compensation received from the covered company.
accept compensation related only to investment performance of the covered company.
accept compensation related only to investment performance of the covered company.
C is correct because according to Standard I (B), Independence and Objectivity, “independent analysts must also strictly limit the type of compensation that they accept for conducting issuer-paid research. Otherwise, the content and conclusions of the reports could reasonably be expected to be determined or affected by compensation from the sponsoring companies. Compensation that might influence the research report could be direct, such as payment based on the conclusions of the report, or indirect, such as stock warrants or other equity instruments that could increase in value on the basis of positive coverage in the report. In such instances, the independent analyst has an incentive to avoid including negative information or making negative conclusions.”
According to the Standard relating to additional compensation arrangements, a member must not accept a benefit offered by a third party that might create a conflict of interest with his employer’s interest unless he obtains written consent:
only from his employer.
only from the third party offering the benefit.
both from his employer and from the third party offering the benefit.
both from his employer and from the third party offering the benefit.
C is 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 consent from all parties involved.” Therefore, the member is required to obtain consent from the employer and from the third party.
Yun Hae, CFA, is a portfolio manager at Citadel Capital (CC). Hae’s brother maintains a fee-paying retirement account at CC. Hae has no beneficial ownership in her brother’s account. Whenever an IPO becomes available that is suitable for her clients, Hae first allocates shares to other clients before placing any remaining shares in her brother’s account. She adopts this procedure to avoid potential conflicts of interest. Hae’s actions violate the Standard(s) relating:
only to fair dealing.
only to priority of transactions.
both to fair dealing and to priority of transactions.
both to fair dealing and to priority of transactions.
C is correct because Standard VI(B), Priority of Transactions states that “[i]nvestment transactions for clients and employers must have priority over investment transactions in which a Member or Candidate is the beneficial owner” and “[f]amily accounts that are client accounts should be treated like any other firm account and should neither be given special treatment nor be disadvantaged because of the family relationship.” So, Hae’s actions are not consistent with this Standard. In addition, Hae’s actions are not consistent with Standard III(B), Fair Dealing which states that “[m]embers and Candidates must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.” Further, “[i]f the investment professional’s family-member accounts are managed similarly to the accounts of other clients of the firm, however, the family-member accounts should not be excluded from buying such shares.” So, Hae’s actions are not consistent with this Standard as well.
According to the Standard relating to fair dealing, when members disseminate investment recommendations, they are most likely required to make every effort to treat individual clients in a(n):
fair and equal manner.
fair and impartial manner.
equal and impartial manner.
fair and impartial manner.
B is correct because according to Standard III (B), Fair Dealing, “[m]embers and candidates must make every effort to treat all individual and institutional clients in a fair and impartial manner.” Additionally, “[t]he 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. Standard III(B) does not state ‘equally’ because members and candidates could not possibly reach all clients at exactly the same time..
A 12-year old investment firm adopts the GIPS standards. To claim compliance with the GIPS standards, the firm is initially required to present GIPS-compliant performance history:
for at least five years.
for at least ten years.
since the firm’s inception date.
for at least five years.
A is correct because according to GIPS, “A firm is required to initially present, at a minimum, five years of annual investment performance that is compliant with the GIPS standards. If the firm or the composite has been in existence less than five years, the firm must present performance since the firm’s inception or the composite inception date.”
A firm claiming compliance with the GIPS standards:
can claim compliance on specific composites.
is responsible for maintaining that compliance.
must have the verification of its claim of compliance performed by an independent third party.
is responsible for maintaining that compliance.
B is correct because according to GIPS standards, “Firms that claim compliance with the GIPS standards are responsible for their claim of compliance and for maintaining that compliance.”
A portfolio manager gathers the following information about her fund:
Allocation of corporate bonds 20%
Allocation of bonds that are both corporate and high-yield 10%
If the portfolio manager randomly picks a corporate bond, the probability that the bond is high yield is closest to:
0.02.
0.10.
0.50.
0.50.
C is correct because using the definition of conditional probability P(A | B) = P(AB)/P(B), where P(AB) is the joint probability of A and B and P(B) is the probability of B, then the conditional probability that the portfolio manager randomly picks a high-yield bond, given that it is a corporate bond is equal to P(bond is high yield | corporate bond) = P(bond is high-yield and corporate bond)/P(corporate bond) = 0.1/0.2 = 0.5.
An analyst gathers the following information about three portfolios:
Portfolio X Portfolio Y Portfolio Z
Expected annual return 10% 12% 14%
Standard deviation of returns 12% 16% 20%
If the shortfall level is 5%, which portfolio has the largest safety-first ratio?
Portfolio X
Portfolio Y
Portfolio Z
Portfolio Z
C is correct because the safety-first ratio is calculated as SF Ratio = (E(r) – RL)/σp, where E(r) is the expected return, RL is the shortfall level, and σp is the standard deviation. Since the shortfall level RL = 5%, the SF Ratios for the three portfolios are:
Portfolio X: (0.10 – 0.05)/0.12 = 0.417
Portfolio Y: (0.12 – 0.05)/0.16 = 0.438
Portfolio Z: (0.14 – 0.05)/0.20 = 0.450
Therefore, Portfolio Z is the best alternative according to the safety-first criterion.
Sampling error is the difference between the observed value of a statistic and the:
mean of the sample.
quantity it is intended to estimate.
observed value of the random variable.
quantity it is intended to estimate.
B is correct because “[s]ampling error is the difference between the observed value of a statistic and the quantity it is intended to estimate as a result of using subsets of the population.”
The central limit theorem is best described as stating that the sampling distribution of the sample mean will be approximately normal for large-size samples:
if the population distribution is normal.
for populations described by any probability distribution.
if the population distribution is symmetrical.
for populations described by any probability distribution.
B is correct. The central limit theorem holds without regard for the distribution of the underlying population.
Two populations are normally distributed with unknown variances that are assumed to be equal. If a large independent random sample is drawn from each population, the most appropriate test statistic for testing the difference between the population means is the:
t-statistic.
z-statistic.
F-statistic.
t-statistic.
A is correct because, for tests concerning differences between population means, “[w]hen we can assume that the two populations are normally distributed and that the unknown population variances are equal, a t-test based on independent random samples is given by” t = [(X1 – X2) – (μ1 – µ2)]/√(sp2/n1 + sp2/n2), where (X1 – X2) is the difference between the sample means, (μ1 – µ2) is the hypothesized difference between the population means, sp2 is a pooled estimator of the common variance, and n1 and n2 are the corresponding sample sizes.
GDP = Consumer spending on goods and services + Business gross fixed investment + Change in inventories + Government spending on goods and services + Government gross fixed investment + Exports – Imports + Statistical discrepancy
Which of the following is most likely to cause a shift to the right in the aggregate demand curve?
Boom in the stock market
Increase in taxes
Decrease in real estate values
Boom in the stock market
A is correct. A boom in the stock market increases the value of financial assets and household wealth. An increase in household wealth increases consumer spending and shifts the aggregate demand curve to the right.
With respect to the production function approach to analyzing sources of economic growth, total factor productivity best reflects the portion of growth related to:
labor.
capital.
technology.
technology.
C is correct because total factor productivity, representing primarily technological change, “is a scale factor that reflects the portion of growth that is not accounted for by the capital and labor inputs. The main factor affecting TFP is technological change.”
In theory, money neutrality holds in the long run if:
the money supply is positively related to the velocity of circulation of money.
increases in the money supply do not influence output and employment.
price levels are unaffected by changes in the money supply.
increases in the money supply do not influence output and employment.
B is correct. The phenomenon of money neutrality states that, in the long run, an increase in the money supply will simply lead to an increase in the price level while leaving real economic variables such as output and employment unaffected.
The objective of general purpose financial reporting is best described as:
providing information about financial performance to a wide range of users.
facilitating resource allocation decisions by current and potential investors and creditors.
reporting an entity’s economic resources and claims, and changes therein, to shareholders.
facilitating resource allocation decisions by current and potential investors and creditors.
B is correct. According to the Conceptual Framework for Financial Reporting 2010 within the International Financial Reporting Standards, as well as Concept Statement 8 under US GAAP, “the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.”
Which of the following best describes a component of the income statement?
Amounts that a company owes its vendors for purchases of goods and services
Outflows or depletions of assets in the course of a business’s activities
Obligations from past events that are expected to result in an outflow of economic benefits
Outflows or depletions of assets in the course of a business’s activities
B is correct. Expenses are a component of the income statement and are defined as outflows, asset depletions, and liabilities incurred in the course of a business’s activities.
If practical, retrospective application is required for a change in accounting:
policies only.
estimates only.
policies and estimates.
policies only.
A is correct because “changes in accounting policies (e.g., from one acceptable inventory costing method to another) are made for other reasons, such as providing a better reflection of the company’s performance. Changes in accounting policies are reported through retrospective application unless it is impractical to do so.” Changes in accounting estimates, however, are handled prospectively.
An analyst gathers the following information (in ¥ billions) about a company:
Interest received 100
Repurchase of stock 200
Principal repayment of the company’s debt 300
The net cash used for financing activities (in ¥ billions) is:
300.
400.
500.
500.
C is correct because financing “[c]ash outflows include cash payments to repurchase stock (e.g., treasury stock) and to repay bonds and other borrowings…under IFRS, interest received may be classified either as an operating activity or as an investing activity.” Therefore, the cash outflow from financing activities is: Payment for repurchase of stock + Principal repayment of debt = ¥200 million + ¥300 million = ¥500 million.
An analyst gathers the following information (in € millions) about a company:
Net income 125
Depreciation expense 22
Interest expensed and paid 20
Capital expenditures 50
Working capital expenditures 25
Dividends declared and paid 11
The income tax rate is 25%. Free cash flow to the firm (in € millions) is:
87.
92.
98.
87.
A is correct because FCFF = 125 + 22 + 20 × ( 1 – 0.25 ) – 50 – 25 = 87. FCFF is calculated as FCFF = NI + NCC + Int × ( 1 – tax rate ) – FCInv – WCInv.
An analyst collects the following information about a company:
Net profit margin 4%
Return on average assets 8%
Return on average equity 16%
Revenue €2,500,000
The company’s:
total asset turnover is 4.
financial leverage ratio is 4.
average shareholders’ equity is €625,000.
average shareholders’ equity is €625,000.
C is correct because the company had net profit of €100,000 calculated as revenue × Net profit margin = €2,500,000 × 4% = €100,000. Return on equity = Net profit ÷ Average shareholders’ equity. Therefore, average shareholders’ equity = Net profit ÷ Return on Equity = €100,000 ÷ 16% = €625,000.
All else being equal, cash dividends paid to common shareholders result in a:
lower ROA than if no dividends were paid.
higher ROE than if no dividends were paid.
lower net profit margin than if no dividends were paid.
higher ROE than if no dividends were paid
B is correct because ROE = Net income ÷ Average total equity. ““The basic components of owners’ equity are paid- in capital and retained earnings. Retained earnings include the cumulative amount of the company’s profits that have been retained in the company . . . For retained earnings . . . a dividend payment is the most common decrease.” Declaring and paying cash dividends to shareholders does not change net income but reduces retained earnings thus decreases total equity. As a result, ROE will increase compared to no dividends declared and paid.
An analyst gathers the following information about a company for its fiscal year:
Net profit margin 8%
Total asset turnover 1.5
Financial leverage 1.2
EPS €0.15
Dividend per common share €0.10
The sustainable growth rate is closest to:
3.2%.
4.8%.
9.6%.
4.8%.
B is correct because the Sustainable growth rate = Retention rate × ROE, where Retention rate = (1 – Payout ratio), and the payout ratio is “the percentage of earnings that the company pays out as dividends to shareholders”, or (EPS – DPS) / EPS, and using the DuPont analysis ROE = Net profit margin × Total asset turnover × Leverage. The retention rate = 1 – (0.10 / 0.15) = 1 – 0.667 = 0.333. ROE = 8% × 1.5 × 1.2 = 0.1440. Substituting into the sustainable growth rate formula: 0.333 × 0.1440 = 0.0480, or 4.8%.
The choice of a periodic or a perpetual inventory system could affect ending inventory and cost of sales under the:
FIFO inventory valuation method.
specific identification inventory valuation method.
weighted average cost inventory valuation method.
weighted average cost inventory valuation method
C is correct because “[c]ompanies typically record changes to inventory using either a periodic inventory system or a perpetual inventory system. … Under either system, the allocation of goods available for sale to cost of sales and ending inventory is the same if the inventory valuation method used is either specific identification or FIFO. This is not generally true for the weighted average cost method.”
The reversal of an inventory write-down:
reduces cost of sales.
increases other comprehensive income.
is permitted under both IFRS and US GAAP.
reduces cost of sales.
A is correct because in each period subsequent to inventory write-down, “a new assessment of net realisable value is made. Reversal (limited to the amount of original write-down) is required for a subsequent increase in value of inventory previously written down. The reversal of any write-down of inventories is recognized as a reduction in cost of sales (reduction in the amount of inventories recognized as an expense).”
