Mock 8 Flashcards

Question

A country seeking nationalism but willing to cooperate with other countries is best classified as: autarkic. bilateral. hegemonic.

Answer 1

bilateral. B is correct because bilateralism describes a country seeking both nationalism and cooperation. "Bilateralism is the conduct of political, economic, financial, or cultural cooperation between two countries."

Answer 2

A is correct. Transaction Amount Totals Export of goods and services and income receipts 13,409 Export of goods and services 10,000 Investment income received from foreigners 3,409 Import of goods and services and income payments –16,735 Import of goods and services –14,216 Investment income payments made to foreigners –2,519 Net unilateral current transfers –761 Unilateral current transfers received 346 Unilateral current transfers paid –1,107 Current account balance –4,087

Answer 3

6.58%. C is correct because the EUR / CAD spot price increased from 0.6602 to 0.7036, which is an increase of 6.58%. First, find the CAD / EUR cross quotes; S0 = 1.4025 × 1.0800 = 1.5147; S1 = 1.3600 × 1.0450 = 1.4212. Second, convert CAD to the base currency; S0 = 1 / 1.5147 = 0.6602; S1 = 1 / 1.4212 = 0.7036. Third, find the percentage change; (0.7036 / 0.6602) – 1 = 0.0658, or 6.58%. An alternative solution is to take (S0 / S1) − 1 from the original cross quote, which is essentially the same as converting CAD to the base currency and using (S1 / S0) – 1; (1.5147 / 1.4212) −1 = 0.0658, or 6.58%.

Answer 4

214. C is correct because the 12-month forward rate is first calculated, then followed by the forward points. The 12-month forward rate is (CAD/EUR) x ((1 + CAD interest rate) / (1 + EUR interest rate)) = 1.4356 x ((1 + 0.02)/(1 + 0.005)) ≈ 1.4570. The forward points is the difference between the forward rate and the spot rate, and scaled up by 10,000 = (1.4570 – 1.4356) x 10,000 = 214.

Answer 5

operations A is correct because "[t]he income statement presents information on the financial performance of a company’s business activities over a period of time. It communicates how much revenue and other income the company generated during a period and the expenses it incurred to generate that revenue and other income. ... The income statement is sometimes referred to as a statement of operations or profit and loss (P&L) statement."

Answer 6

Regulatory authorities A is correct because "[a] distinction must be made between standard-setting bodies and regulatory authorities. Standard-setting bodies, such as the IASB and FASB, are typically private sector, self-regulated organizations with board members who are experienced accountants, auditors, users of financial statements, and academics. The requirement to prepare financial reports in accordance with specified accounting standards is the responsibility of regulatory authorities. Regulatory authorities, such as the Accounting and Corporate Regulatory Authority in Singapore, the Securities and Exchange Commission (SEC) in the United States, and the Securities and Exchange Commission of Brazil have the legal authority to enforce financial reporting requirements and exert other controls over entities that participate in the capital markets within their jurisdiction. In other words, generally, standard-setting bodies set the standards and regulatory authorities recognize and enforce the standards."

Answer 7

complex, because the options are convertible into ordinary shares. B is correct. When a company has issued any financial instruments that are potentially convertible into common stock, it is said to have a complex capital structure. Potentially convertible financial instruments include convertible bonds, convertible preferred stock, employee stock options, and warrants. Any antidilutive effect of a convertible security relates to the calculation of EPS and is not part of the distinction of simple vs. complex capital structure.

Answer 8

50. C is correct because “Under IFRS, total comprehensive income is ''the change in equity during a period resulting from transaction and other events, other than those changes resulting from transactions with owners in their capacity as owners''. […] comprehensive income includes both net income and other revenue and expense items that are excluded from the net income calculation (other comprehensive income).” Other comprehensive income (OCI) = ending shareholder's equity – beginning shareholder's equity – net income + dividend declared and paid = 180 – 140 – 30 + 10 = 20. Total comprehensive income is net income + OCI = 30 + 20 = 50.

Answer 9

120. C is correct. The allowance for doubtful accounts increases by the bad debt expense recognized for the year and decreases by the amounts written off during the year. Beginning balance allowance for doubtful accounts £56 million Plus bad debt expense ? Minus write-offs –£84 million Ending balance allowance for doubtful accounts £92 million Solve for bad debt expense = £120 million.

Answer 10

The cash flow statement reconciles the beginning and ending balances of cash reported on the balance sheet. B is correct. The statement of cash flows ultimately shows the change in cash during an accounting period. The company’s balance sheet shows the beginning and ending cash balances for the previous and current years, and the bottom of the cash flow statement reconciles beginning cash with ending cash. Non-cash changes in accounts may appear on the balance sheet; therefore, not all changes in the balance sheet are reconciled on the cash flow statement.

Answer 11

comparing companies that use different accounting methods. C is correct. Financial ratio analysis is limited by the use of alternative accounting methods. Accounting methods play an important role in the interpretation of financial ratios. The lack of consistency across companies makes comparability difficult to analyze and limits the usefulness of ratio analysis.

Answer 12

Specific identification C is correct. Specific identification best matches the physical flow of the inventory items because it tracks the actual units that are sold.

Answer 13

$17,000. C is correct. IFRS measures inventory at lower of cost and net realizable value. Net realizable value under IFRS is defined as the estimated selling price less the estimated costs necessary to get the inventory ready for sale and make the sale: Selling price: $180 Costs to get ready to sell: $10 (Free shipping is required in order to sell these chairs at $180) Net realizable value per chair: $170 For 100 chairs: $17,000

Answer 14

developed internally. A is correct because "the costs to internally develop intangible assets are generally expensed when incurred. There are some situations, however, in which the costs incurred to internally develop an intangible asset are capitalised." “Because costs associated with internally developing intangible assets are usually expensed, a company that has internally developed such intangible assets as copyrights, patents, or brands through expenditures on R&D or advertising will recognize a lower amount of assets than a company that has obtained intangible asset through external purchase.” "IFRS require that expenditures on research (or during the research phase of an internal project) be expensed rather than capitalized as an intangible asset."

Answer 15

cost model or the revaluation model. B is correct because “other long-lived tangible assets (i.e., property considered to be property, plant, and equipment) are owner-occupied properties used for producing the company's goods and services or for housing the company's administrative activities.” “The revaluation model is an alternative to the cost model for the periodic valuation and reporting of long-lived assets. IFRS permit the use of either the revaluation model or the cost model.”

Answer 16

£50,900. B is correct because "[u]nder the straight-line method, depreciation expense is calculated as depreciable cost divided by estimated useful life..." Year 1 Carrying value (accounting) = £54,000 – [(£54,000 – £0)/10] = £54,000 – £5,400 = £48,600. 2016 Carrying value (tax purposes) = £54,000 - [(£54,000 – £0)/6] = £54,000 – £9,000 = £45,000. "For tax purposes, ...the asset tax base is less than its carrying value under financial accounting principles. The difference results in a deferred tax liability." The Year 1 deferred tax liability = (£48,600 – £45,000) × 25% = £900. 2017 Carrying value (accounting) = £48,600 – £5,400 = £43,200. Year 2 Carrying value (tax purposes) = £45,000 – £9,000 = £36,000. The Year 2 deferred tax liability = (£43,200 – £36,000) × 25% = £1,800. "The changes in deferred tax assets and liabilities are added to income tax payable to determine the company's income tax expense (or credit) as it is reported on the income statement." Accordingly, income tax expense for Year 2 = Income tax payable in Year 2 + Change in deferred tax liability = £50,000 + (£1,800 – £900) = £50,900. Year 2 Year 1 Carrying value (accounting) 43,200 48,600 Carrying value (tax) 36,000 45,000 Deferred tax liability 1,800 900 Income tax payable 50,000 + Change in deferred tax liability 900 Income tax expense 50,900

Answer 17

Net income is adjusted to remove any gain or loss on the extinguishment of debt from operating cash flows. B is correct. In a statement of cash flows prepared using the indirect method, net income is adjusted to remove any gain or loss on the extinguishment of debt from operating cash flows.

Answer 18

Impairment charges for long-lived assets B is correct. To assist investors in evaluating operating performance, companies often report non-GAAP earnings by excluding asset impairment charges either for long-lived assets, goodwill, or other intangible assets.

Answer 19

13,500. A is correct because "[b]ook value reduced by all intangible assets (including goodwill) is known as “tangible book value.”" Accordingly, tangible book value = Total shareholders' equity – Goodwill – Other intangible assets; or = 15,000 – 1,000 – 500 = 13,500.

Answer 20

Managers A is correct because "[m]anagers, led by the chief executive officer of the company, are responsible for determining and implementing the corporation’s strategy under the oversight of the board of directors."

Answer 21

externalities. B is correct because "[a]n externality is the effect of an investment on other things besides the investment itself. Frequently, an investment affects the cash flows of other parts of the company, and these externalities can be positive or negative . . . If possible, companies should consider externalities in the investment decision."

Answer 22

2, 3, and 4. A is correct. The company should choose the combination of projects that maximizes net present value (NPV) subject to the budget constraint of $1,100. Projects Investment Required NPV Decision 1 + 2 600 + 500 = 1,100 100 + 100 = 200 1 + 3 + 4 600 + 300 + 200 = 1,100 100 + 50 + 50 = 200 2 + 3 + 4 500 + 300 + 200 = 1,000 100 + 50 + 50 = 200 NPV = $200 with the least investment

Answer 23

basing investment decisions on earnings per share. A is correct because "[p]aying too much attention to short-run accounting numbers can result in a company choosing investments that are not in the long-run economic interests of its shareholders." EPS is an accounting based measure.

Answer 24

1.32%. A is correct because they yield-to-maturity of this bond is: PV = 1010 FV = 1000 PMT = 20 N = 3 YTM = 1.6556% After-tax YTM = 1.6556(1 – 0.2) = 1.3245 ≈ 1.32%.

Answer 25

and cash conversion cycle are both longer. B is correct. Operating cycle = Number of days of inventory + Number of days of receivables. Cash conversion cycle = Operating cycle – Number of days of payables. Company Industry Number of days receivables 365/5.6 = 65 days 365/6.5 = 56 days Number of days inventory 365/4.2 = 87 days 365/4.0 = 91 days Operating cycle 65 + 87 = 152 days Longer 147 days (given) Cash conversion cycle 124 days (given) Longer 147 – 36 = 111 Therefore, both the operating and cash conversion cycles are longer for the company.

Answer 26

23.3%. A is correct because the current capital structure weight on debt (wd) is based on the market value of capital. wd = Debt / (Debt + Common Stock + Preferred Stock). wd = 35 / (35 + 100 + 15) = 0.2333 ≈ 23.3%.

Answer 27

increase. A is correct. Based on the equation: DTL=quantity×(price-variable cost)[quantity(price−variable cost)−fixed costs−financing costs] The change to accelerated depreciation increases the fixed costs making DTL increase (i.e., the numerator does not change and the denominator decreases).

Answer 28

Property and casualty insurance companies C is correct because insurance companies' risk tolerance is “typically quite low.” “Insurance companies receive premiums for the policies they write, and they need to invest these premiums in a manner that will allow them to pay claims. ... To pay claims to policyholders, regulatory guidelines maintain that an insurance company’s general account is typically invested conservatively in a diverse allocation of fixed- income securities.”

Answer 29

forecasting the internal rate of return of a project. C is correct because the CAPM-derived expected return is not used for forecasting the internal rate of return of a project, but instead is used as a hurdle rate or cost of capital for discounting forecast cash flows to arrive at a valuation. "Given an asset's systematic risk, the expected return can be calculated using the CAPM. Recall that the price of an asset is the sum of all future cash flows discounted at the required rate of return, where the discount rate or the required rate of return is commensurate with the asset's risk." On the other hand, "[t]he internal rate of return is the discount rate at which the sum of present values of ... [the project's] cash flows will equal zero."

Answer 30

Solvency risk C is correct because "[a]lthough most risks have monetary consequences, there are a number of risks that are typically classified as non-financial in nature. These risks arise from a variety of sources, such as from actions within the organization or from external origins, such as the environment as well as from the relationship between the organization and counterparties, regulators, governments, suppliers, and customers."

Answer 31

41.7%. A is correct. Investor's return (%) =Market value of the stock−LoanInvestor's equity−1=(70×100)−(60×100×0.6)(60×100×0.4)−1=41.67%

Answer 32

momentum effect. A is correct. The momentum effect is a characteristic of a market-capitalization-weighted index, not a fundamental index.

Answer 33

an initial public offering C is correct because "[i]n operating a publicly traded company, management often feels pressured to focus on short-term results (e.g., meeting quarterly sales and earnings targets from analysts biased toward near-term price performance) instead of operating the company to obtain long-term sustainable revenue and earnings growth."

Answer 34

guarantee certificate. A is correct because the "combination of the zero-coupon bond and the call option can be prepackaged as a structured financial instrument called a guarantee certificate."

Answer 35

a discount. B is correct. The bond would sell below par or at a discount if the yield required by the market rises above the coupon rate. Because the bond initially was purchased at par, the coupon rate equals the yield required by the market. Subsequently, if yields rise above the coupon, the bond’s market price would fall below par.

Answer 36

the yields-to-maturity on zero-coupon bonds at different maturities. C is correct because "[s]pot rates are yields-to-maturity on zero-coupon bonds maturing at the date of each cash flow. Sometimes these are called “zero rates.”

Answer 37

stated on a simple interest basis. C is correct because "the rate of return on a money market instrument is stated on a simple interest basis."

Answer 38

G-spread. B is correct because "[t]he yield spread in basis points over an actual or interpolated government bond is known as the G- spread. The spread over a government bond is the return for bearing greater credit, liquidity, and other risks relative to the sovereign bond."

Answer 39

of its superiority in measuring securities with ill-defined internal rates of return. B is correct. With callable bonds, future cash flows are uncertain because they are contingent on interest rate levels in the future. The issuer’s decision to call the bond depends on the ability to refinance the debt at a lower cost of funds. Therefore, callable bonds do not have well-defined internal rates of return and yield duration statistics, such as modified and Macaulay durations, do not apply. Effective duration is the appropriate duration measure.

Answer 40

change in yield-to-maturity. A is correct because "[t]he importance of yield volatility in measuring interest rate risk is that bond price changes are products of two factors: (1) the impact per basis-point change in the yield-to- maturity and (2) the number of basis points in the yield-to- maturity change. The first factor is duration or the combination of duration and convexity, and the second factor is the yield volatility."

Answer 41

660. B is correct. Free cash flow before dividends is calculated as net income (excluding non-recurring charges) plus depreciation and amortization minus the increase (plus the decrease) in working capital minus capital expenditures. It is, depending on the treatment of dividends and interest in the cash flow statement, approximated by the cash flow from operating activities minus capital expenditures. FCF = 516 + 88 + 66 + 44 – 62 + 8 = 660.

Answer 42

Funds from operations/debt B is correct because FFO/debt is a leverage ratio. "Credit rating agencies often use this leverage ratio. They publish key median and average ratios, such as this one, by rating category so analysts can get a sense of why an issuer is assigned a certain credit rating… A higher ratio indicates greater ability to pay debt by funds from operations."

Answer 43

currency option A is correct because “There are two general classes of derivatives. Some provide the ability to lock in a price at which one might buy or sell the underlying. Because they force the two parties to transact in the future at a previously agreed-on price, these instruments are called forward commitments. The various types of forward commitments are called forward contracts, futures contracts, and swaps. Another class of derivatives provides the right but not the obligation to buy or sell the underlying at a pre-determined price. Because the choice of buying or selling versus doing nothing depends on a particular random outcome, these derivatives are called contingent claims. The primary contingent claim is called an option.” Therefore, a currency option is an example of a contingent claim.

Answer 44

–$4.00 A is correct because the call seller’s payoff as: –cT = –Max(0, ST – X) = –Max(0, $42.00 – $38.00) = –$4.00.

Answer 45

derivatives market before the underlying spot market. C is correct. In an efficient market, the derivatives market is more likely to reflect fundamental value, even if only for a short period, before the underlying spot market because derivatives contracts require less capital, have lower transaction costs, and are easier to sell short.

Answer 46

earn returns in excess of those that would be fair compensation for the risk assumed. B is correct because "efficient markets are those in which it is not possible to consistently earn returns in excess of those that would be fair compensation for the risk assumed. Although abnormal returns can be earned in a variety of ways, arbitrage profits are definitely examples of abnormal returns." Arbitrageurs do not take any risk and only act when the expected return is greater than the risk-free rate thereby earning abnormal profits.

Answer 47

equal to zero. B is correct because "the forward price that the parties agree to at the initiation date of the contract is a special price that results in the contract having zero value and prohibiting arbitrage. Because neither the long nor the short pays anything to the other at the initiation date of a forward contract, the value of a forward contract when initiated is zero."

Answer 48

higher than forward prices C is correct because "[i]f futures prices are positively correlated with interest rates, futures contracts are more desirable to holders of long positions than are forwards." Hence the price of the future will be higher than the price of the forward.

Answer 49

higher than forward prices C is correct because "[i]f futures prices are positively correlated with interest rates, futures contracts are more desirable to holders of long positions than are forwards." Hence the price of the future will be higher than the price of the forward.

Answer 50

zero. A is correct because "[f]orwards, futures, and swaps start off with values of zero...[and swap price is] the fixed price or rate at which the underlying will be purchased at a later date." The value of a swap is zero at contract initiation.

Answer 51

requires knowledge of the magnitude of possible up and down moves. A is correct because the binomial model requires knowledge of what the upside case is (represented by S1+) and what the downside case is (as represented by S1–). "We cannot arbitrarily set these values at just anything. We will be required to know the values of S1+ and S1–."

Answer 52

Level 2 asset. B is correct because "GAAP accounting rules in the United States created a methodology that involves the categorization of investments into three buckets: Level 1, 2, and 3 asset pricing. Level 1 assets involve situations where an exchange-traded, publicly traded price is available and is mandated to be used for valuation purposes. When such pricing is not available, outside broker quotes, or Level 2 values, may be relied on."

Answer 53

18.35%. C is correct because "[t]he management fee for the year is [$120 × 1% = $1.2 million]. Because the ending gross value of the fund of [$120] million exceeds the high-water mark of [$110] million, the hedge fund can collect an incentive fee on gains above this high-water mark but net of the hurdle rate of return. The incentive fee calculation becomes [{$120− [$110 × (1 + 5%)]} × 10% = $0.45 million. The net return to the investor for the year is [($120 − $1.2 − $0.45) / $100] − 1 = 18.35%].

Answer 54

equity strategies only. B is correct because "[d]ifferent asset class strategies, including debt and mezzanine investment, are offered, but the vast majority of investors are focused on equity instruments. According to IJInvestor, equity is the preferred instrument for 77% of fund investors, with 10% looking for mixed strategies and 9% looking for debt and mezzanine strategies."

Answer 55

performance relative to a traditional index benchmark that may be hard to gauge. C is correct because "[a] contemporary hedge fund generally has the following characteristics: [...] It may be hard to gauge a hedge fund’s performance relative to a traditional index benchmark (after all, low correlation with traditional asset investing is frequently a selling point)."