2010年12月CFA一级第四套模拟试题
Sample Examination Structure
Question Topic Percent Minutes
1–18 Ethical and Professional Standards 15 27
Analysis 12
21
19–32 Quantitative
18
Analysis 10 33–44 Economic
45–78 Financial Statement Analysis and Corporate
28 51
Finance
79–114 AssetValuation 30
54
9
115–120 PortfolioManagement 5
180 Total 100
QUESTIONS 1 THROUGH 18 RELATE TO ETHICAL AND PROFESSIONAL
STANDARDS AND ARE ALLOCATED 27 MINUTES.
1. Alexander Newton, CFA, is the chief compliance officer for Mills Investment
Limited. Newton institutes a new policy requiring the pro rata distribution of new
security issues to all discretionary accounts for which the new issues are appropriate.
The policy does not provide for the distribution of new issues to non-discretionary
accounts, but this is disclosed to all existing and potential clients. Did Newton most
likely violate any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, because the distribution policy fails to treat all discretionary accounts equally.
C. Yes, because disclosure of inequitable allocation methods does not fulfill the duty
for fair and equitable trade allocation procedures.
2. When Jefferson Piedmont, CFA, joined Branch Investing, Branch began using a
quantitative stock selection model that Piedmont had developed on his own personal
time prior to his employment with Branch. One year later when Piedmont left the firm,
he found the original copy of the model that he had developed in a file at his home
and presented it to his new employer, who immediately began using the model.
According to the Standards of Practice Handbook, did Piedmont violate any CFA
Institute Standards of Professional Conduct?
A. No.
B. Yes, because he failed to act in Branch's best interest.
C. Yes, because he misappropriated property that now belonged to Branch.
3. Lawrence Hall, CFA, and Nancy Bishop, CFA, began a joint research report on
Stamper Corporation. Bishop spent several days visiting Stamper's corporate
headquarters and meeting with all company officers. Prior to the completion of the
report, Bishop was reassigned to another project. Hall utilized his and Bishop's
research to write the report. According to the CFA Institute Standards of Practice
Handbook, did Hall violate any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, with respect to misrepresentation.
C. Yes, with respect to independence and objectivity.
4. According to the Global Investment Performance Standards (GIPS), verification procedures do NOT include:
A. disclosures.
B. calculation methodology.
C. sample account selection.
5. Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors (AA), a mid-sized mutual fund firm. She has watched the hedge fund boom and on numerous occasions pushed her firm to create such a fund. Senior management has refused to commit resources to the area. Frustrated by the inaction, and attracted by the higher fees associated with hedge funds, Grabbo and several other employees organize a hedge fund in their non-work hours. Grabbo is careful to work on the fund only on her own time. Because AA management thinks that hedge funds are a fad, she does not inform her supervisor about the hedge fund. According to the Standards of Practice Handbook, Grabbo least likely violated the Standard relating to:
A. loyalty.
B. disclosure of conflicts.
C. priority of transactions.
6. David Donnigan enrolled to take the Level II CFA examination in the current year; however, he did not take the exam. Donnigan advised his employer that he was confident that he passed Level II. Did Donnigan violate the CFA Institute Standard of Professional Conduct relating to:
professional misconduct?duty to employer?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
7. Jeffrey Jones passed the Level I CFA examination in 1997 and the Level II examination in 1999. He is not currently enrolled for the Level III examination. According to the CFA Institute Standards of Professional Conduct, which of the following is the most appropriate way for Jones to refer to his participation in the CFA Program?
A. Jeffrey Jones, CFA II.
B. Jeffrey Jones, CFA Level II.
C. Passed Level II of the CFA examination in 1999.
8. Winnie Wong and William Leung are enrolled to take the Level I CFA examination. Wong and Leung jointly purchased study materials from a well-known CFA review program. Wong made a photocopy of the copyrighted materials and gave the copied materials to Leung. Wong studied from the original materials. Did Wong and Leung, respectively, violate the CFA Institute Code of Ethics or any Standards of Professional Conduct?
Wong Leung
A. No No
B. No Yes
C. Yes Yes
A. Answer A
B. Answer B
C. Answer C
9. Nicholas Bennett, CFA, is a trader at a stock exchange. Another trader approached Bennett on the floor of the exchange and verbally harassed him about a poorly executed trade. Bennett pushed the trader and knocked him to the ground. Which of the following best describes Bennett's conduct? Bennett:
A. did not violate either the CFA Institute Code of Ethics or any Standards of Professional Conduct.
B. violated the CFA Institute Code of Ethics, but did not violate any Standards of Professional Conduct.
C. violated the CFA Institute Code of Ethics and the Standard of Professional Conduct that relates to Professional Misconduct.
10. According to the Standards of Practice Handbook, which of the following statements about fair dealing is least accurate? The Standard relating to fair dealing:
A. states that members should treat all clients equally.
B. imposes a duty with respect to both clients and prospective clients.
C. pertains to both investment recommendations and investment actions.
11. David Sandridge earned the right to use the CFA designation in September 1968. Sandridge recently retired from the investment management profession. As he is retired, Sandridge no longer attends CFA Institute society meetings and has stopped paying his CFA Institute dues. According to the Standards of Practice Handbook, how should Sandridge refer to his affiliation with the CFA Program?
A. David Sandridge, CFA.
B. David Sandridge, CFA (retired).
C. "I was awarded the CFA charter in 1968."
12. The Standards of Practice Handbook is least likely to require a member or member's firm to disclose which of the following to clients and prospective clients?
A. Market-making activities.
B. Underwriting relationships.
C. Obligation to abide by CFA Institute Code of Ethics and Standards of Professional Conduct.
13. Sam Snead, CFA, is the founder and portfolio manager of the Everglades Fund. In its first year the fund generated a return of 30%. Building on the fund's performance, Snead created new marketing materials that showed the fund's gross 1-year return as well as the 3-, and 5-year returns which he calculated by using back-tested performance information. As the marketing material is used only for presentations to institutional clients, Snead does not mention the inclusion of back-tested data. According to the Standards of Practice Handbook, did Snead violate any CFA Institute Standards of Professional Conduct?
A. No.
B. Yes, because he did not disclose the use of back-tested data.
C. Yes, because he failed to deduct all fees and expenses before calculating the fund's track record.
14. Guillermo Sandoval, CFA owns an asset management firm with offices downtown. To minimize rent expenses, each year Sandoval ships the previous year's research records to a nearby warehouse. There, the reports are digitized and stored in both electronic and hard-copy forms. After five years, all paper copies are destroyed and only electronic copies are retained. Are Sandoval's record-retention procedures in compliance with the CFA Institute Standards of Practice?
A. Yes.
B. No, because he did not retain the copies in his offices.
C. No, because he failed to retain the original documents.
15. Roberto Vargas, CFA, is in charge of the compliance program at his investment firm. According to the Standards of Practice Handbook, as a supervisor, Vargas should least likely perform which of the following activities?
A. Respond promptly to all violations.
B. Disseminate the contents of the program to all personnel.
C. Periodically update the procedures to ensure that the measures are adequate under the law.
16. Elizabeth Stargate, CFA, supervises eight junior analysts at Spartan Financial Services. Stargate suspects that one of the analysts is violating Spartan's personal investing policy. According to the Standards of Practice Handbook, Stargate's most
appropriate initial action is to:
A. initiate an investigation.
B. notify her supervisor of the analyst's suspected misconduct.
C. require the analyst to liquidate and close all personal accounts.
17. Bart Wiley, CFA, agreed in writing with his former employer not to solicit former clients for a period of one year after his termination. After he left his former employer, he consulted with a lawyer about whether the agreement was legally enforceable. The lawyer advised Wiley that it was doubtful that the agreement could be enforced, so Wiley sent a marketing brochure about his new firm to his former clients. According to the Standards of Practice Handbook, which of the following statements is most accurate with respect to Wiley's conduct?
A. The Standards do not apply to Wiley's conduct.
B. The Standards require Wiley to comply with the agreement with his former employer.
C. Because Wiley relied upon the opinion of legal counsel, he did not violate the Standards.
18. Regarding the definition of the firm, do the GIPS Standards require that total firm assets include the market value of the firm's:
Nondiscretionary assets
non-fee-paying assets?
under management?
A. No No
B. No Yes
C. Yes Yes
A. Answer A
B. Answer B
C. Answer C
QUESTIONS 19 THROUGH 32 RELATE TO QUANTITATIVE ANALYSIS AND ARE ALLOCATED 21 MINUTES
19. If the observations in a dataset have different values, is the geometric mean for that dataset greater than that dataset's:
harmonic mean? arithmetic mean?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
20. An analyst gathered the following information ($ millions) about the performance of a portfolio:
Quarter Value at Beginning
of Quarter
(prior to inflow or outflow)
Cash Inflow (Outflow)
At Beginning of Quarter
Value at End
of Quarter
1 2.0 0.
2 2.4
2 2.4 0.4 2.6
3 2.6 (0.2) 3.2
4 3.2 1.0 4.1
The portfolio's annual time-weighted rate of return is closest to:
A. 8%.
B. 27%.
C. 32%.
21. An investor currently has a portfolio valued at $700,000. The investor's objective is long-term growth, but the investor will need $30,000 by the end of the year to pay her son's college tuition and another $10,000 by year-end for her annual vacation. The investor is considering four alternative portfolios:
Portfolio Expected Return Standard Deviation of Returns
1 8% 10%
2 10% 13%
3 14% 22%
4 18% 35%
Using Roy's safety-first criterion, which of the alternative portfolios minimizes the probability that the investor's portfolio will have a value lower than $700,000 at year-end?
A. Portfolio 1.
B. Portfolio 2.
C. Portfolio 3.
22. A mutual fund manager wants to create a fund based on a high-grade corporate bond index. She first distinguishes between utility bonds and industrial bonds; she then, for each segment, defines maturity intervals of less than 5 years, 5 to 10 years, and greater than 10 years. For each segment and maturity level, she classifies the bonds as callable or non-callable. For the manager's sample, which of the following
best describes the:
sampling approach? number of sampling cells?
A. Simple random sample 3
B. Simple random sample 12
C. Stratified random sample12
A. Answer A
B. Answer B
C. Answer C
23. A utility analyst performed a regression analysis relating monthly energy consumption to average monthly temperature over the last four years. Total variation of the dependent variable was 58.6 and the unexplained variation was 31.3. The coefficient of determination and standard error of estimate, respectively, for the regression model are closest to:
Coefficient of determination Standard error of estimate
A. 0.4659 0.8075
B. 0.4659 0.8249
C. 0.5341 0.8075
A. Answer A
B. Answer B
C. Answer C
24. For an investment portfolio, the coefficient of variation of the returns on the portfolio is best described as measuring:
A. risk per unit of mean return.
B. mean return per unit of risk.
C. risk per unit of mean excess return.
25. An analyst conducted a significance test to determine if the relationship between two variables was real or the result of chance. His null hypothesis is that the population correlation coefficient is equal to zero and his alternative hypothesis is that the population correlation coefficient is different from zero. He developed the following information:
Value of the test statistic 2.8092
Critical value at the 0.05 significance
1.96
level
Critical value at the 0.01 significance 2.58
level
A. one-tailed test and can reject his null hypothesis.
B. two-tailed test and can reject his null hypothesis.
C. one-tailed test and cannot reject his null hypothesis.
26. An assumption of classical linear regression is that the:
A. independent variable is random.
B. expected value of the error term is one..
C. variance of the error term is the same for all observations.
27. To evaluate excess return per unit of risk for different portfolios, the most appropriate measure is:
A. variance.
B. the Sharpe ratio.
C. standard deviation.
28. If no other estimator of a given parameter has a sampling distribution with a smaller variance, the estimator used is best characterized as:
A. accurate.
B. efficient.
C. unbiased.
29. An analyst adjusts the historical probability of default for high-yield bonds to reflect her perceptions of changes in the quality of high-yield bonds. The analyst is best characterized as obtaining a(n):
A. a priori probability.
B. objective probability.
C. subjective probability.
30. An economist predicts that over the next year, there is a 60 percent probability that oil prices will fall slightly and a 20 percent probability that new estate tax legislation will be enacted. According to this prediction, the probability that at least one of these independent events will occur is closest to:
A. 12%.
B. 40%.
C. 68%.
31. A linear regression with the returns on a stock as the dependent variable and returns on the market index as the independent variable resulted in the following statistics:
Intercept coefficient (%) -0.26
Slope coefficient 1.483
Multiple R 0.764
R-squared 0.584
Standard error of estimate (%)5.3
F-statistic 73.28 Which of the following statements about the regression results is most accurate?
A. About 76% of the variation in the dependent variable is explained.
B. About 42% of the variation in the dependent variable is unexplained.
C. The F-statistic is a measure of the variation in the intercept coefficient.
32. An investor plans to retire eight years from today. To maintain her standard of living through retirement, she needs to have $2.5 million accumulated when she retires. Her portfolio is currently valued at $1.2 million and is expected to earn 7.0 percent annually. The minimum annual amount she must save at the beginning of each of the next eight years to achieve a retirement accumulation of $2.5 million is closest to:
A. $0.
B. $31,875.
C. $39,914.
QUESTIONS 33 THROUGH 44 RELATE TO ECONOMIC ANALYSIS AND ARE ALLOCATED 18 MINUTES.
33. In a foreign currency quotation, does the size of the bid-ask spread decrease with a decrease in:
trading volume? exchange rate volatility?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
34. A U.S. investor can borrow dollars in New York at an 8 percent annual rate and invest British pound sterling in London at a 13 percent annual rate. The spot rate for the pound is US$1.81 and the one-year forward rate for the pound is US$1.75. By borrowing US$2,000,000 now, the investor can, one year from now, earn a covered interest arbitrage profit closest to:
A. $25,083.
B. $30,387.
C. $177,486.
35. Which of the following fiscal policy models is most likely to support the
conclusion that government budget deficits will stimulate aggregate demand?
A. Keynesian.
B. Supply-side.
C. New classical.
36. In order to implement a more expansionary monetary policy, would an effective strategy for a government's central bank include:
selling the government抯
Raising reserve requirements?
securities?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
37. With respect to foreign currency markets in which maturities are different for different contracts, as the maturity of contracts in the forward currency market increases, will:
bid-ask spreads decrease?liquidity decrease?
A. No No
B. No Yes
C. Yes No
D. Yes Yes
A. Answer A
B. Answer B
C. Answer C
38. In perfectly competitive constant-cost industries and perfectly competitive increasing-cost industries, respectively,what is the most likely long-run effect of a permanent increase in demand?
Constant-cost industry Increasing-cost industry
A. Price decreases Price decreases
B. Price decreases Price remains unchanged
C. Price remains unchanged Price increases
A. Answer A
B. Answer B
C. Answer C
39. A bank in London that quotes the value of the euro at 1.6 euros per British pound is utilizing which system of foreign exchange quotation?
A. Direct.
B. Indirect.
C. European.
40. A major bank quotes the spot exchange rates for the U.S. dollar per euro at $1.3245 and the U.S. dollar per Australian dollar at $0.7246. The euro per Australian dollar cross rate is closest to:
A. 0.5471.
B. 0.9597.
C. 1.0420.
41. The short-run effects of an unanticipated expansionary monetary policy are most likely to include:
A. a decrease in the inflation rate.
B. a decrease in the real interest rate.
C. a decrease in real output and employment.
42. At low wage rates, will an increase in the wage rate most likely result in:
the substitution effect? an increase in the supply of labor?
A. No No
B. No Yes
C. Yes Yes
A. Answer A
B. Answer B
C. Answer C
43. In foreign exchange markets characterized by interest rate parity, if the domestic country has a lower risk-free interest rate than the foreign country, the currency of the domestic country is most likely to be trading at a forward:
A. discount, and to appreciate.
B. discount, and to depreciate.
C. premium, and to appreciate.
44. Will favorable short-run and long-run growth prospects for a country, relative to that country's trading partners, likely increase the country's:
current account? financial account?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
QUESTIONS 45 THROUGH 78 RELATE TO FINANCIAL STATEMENT ANALYSIS AND CORPORATE FINANCE AND ARE ALLOCATED 51 MINUTES
45. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst gathered the following information about Waynesboro, Inc.'s common stock:
- 1 January 2004 180,000 shares outstanding
- 1 June 2004 60,000 shares issued
- 1 August 2004 2 for 1 stock split
- 31 December 2004 480,000 shares outstanding
To calculate earnings per share for 2004, Waynesboro's weighted average number of shares outstanding is closest to:
A. 210,000.
B. 215,000.
C. 430,000.
46. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Carlton Company uses the LIFO inventory method, but most of the other companies in Carlton's industry use FIFO. Which of the following best describes one of the adjustments that would be made to Carlton's financial statements to compare Carlton with other companies in the industry? An increase in Carlton's LIFO reserve for the year would be:
A. added to ending inventory.
B. added to cost of goods sold.
C. subtracted from cost of goods sold.
47. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A company entered into a three-year construction project with a total contract price of $5.3 million and expected cost of $4.4 million. The following table provides cash flow information relating to the contract:
Year 1Year 2Year 3 Costs incurred and paid $600,000 $3,000,000 $800,000
Amounts billed and payments
received
$1,200,000 $2,800,000 $1,300,000 What is the cumulative effect of the contract on the cash balance that would have been recorded on the company's balance sheet at the end of Year 2 using the:
percentage-of-completion
method?
completed contract method?
A. $400,000 $0
B. $400,000 $400,000
C. $2,800,000 $0
A. Answer A
B. Answer B
C. Answer C
48. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst gathered the following information (U.S. $ millions) for two companies operating in the same industry during the same period:
Butler Enterprises Annandale Corporation
Net sales $120 $300
Total assets $70 $140
Total liabilities$25 $40
If both companies achieved a return on equity of 15 percent for the period, the company most likely to have the higher net profit margin and higher financial leverage multiplier, respectively, is:
Higher net profit margin Higher financial leverage multiplier
A. Butler Butler
B. Butler Annandale
C. Annandale Butler
A. Answer A
B. Answer B
C. Answer C
49. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
On January 2, 2005, Lyon Limited bought a piece of manufacturing equipment for $250,000. At that time they estimated its useful life to be 10 years and its salvage value to be $10,000. During 2007, it became apparent that the equipment was wearing out more quickly than they had originally estimated. It now appeared that its useful life would only be 6 years in total. If Lyon Limited uses the straight-line method for depreciation and has a policy of only taking one-half year's depreciation in the year of acquisition, the depreciation expense on this piece of equipment for 2007 will be closest to:
A. $48,000.
B. $51,000.
C. $53,125.
50. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
GreenTech Incorporated recently paid more than the net book value to acquire Cleanway Corporation. Cleanway operates an active research and development program into environmentally friendly cleaning products. GreenTech is very interested in this research program as well as the good management team in place at Cleanway. The excess price paid over the net book value of the assets should be accounted for on GreenTech's financial statements as:
A. goodwill.
B. a trademark.
C. an expense in the period of acquisition.
51. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An adjustment to operating income for the effects of a change in LIFO reserves will most likely be required if the change in the LIFO reserve is the result of:
A. price declines.
B. price increases.
C. a decrease in the number of units held in inventory.
52. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
All else equal, will a company's implementation of the accounting standard (SFAS 143) related to asset retirement obligations incurred because of environmental damage most likely increase or decrease that company's:
return on assets? net income?
A. Increase Increase
B. Increase Decrease
C. Decrease Decrease
A. Answer A
B. Answer B
C. Answer C
53. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Crockett, Inc., had 100,000 shares of common stock outstanding on 1 January 2004. The company has no plans to issue additional shares or purchase treasury shares during the year, but does plan either a two-for-one stock split or a 100 percent stock dividend on 1 July. The number of shares that will be used to determine earnings per share at 31 December 2004, if the company uses the two-for-one stock split or 100 percent stock dividend, respectively, is closest to:
Two-for-one stock split 100 percent stock dividend
A. 150,000 150,000
B. 150,000 200,000
C. 200,000 200,000
A. Answer A
B. Answer B
C. Answer C
54. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst gathered the following information ($ millions) about four companies operating in the same industry:
Company Annual Depreciation Expense Accumulated Depreciation
1 10.8 58.9
2 18.9 78.6
3 27.8 80.3
Although the companies have different levels of sales and assets, they are all experiencing sales growth at about the same rate and use the same type of equipment
in the manufacturing process. All four companies also use the same depreciation method. Based only on the information above, which company is least likely to require major capital expenditures in the near future?
A. Company 1.
B. Company 2.
C. Company 3.
55. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
During inflationary periods, a company's reported net income is least likely to be overstated relative to economic income if the company depreciates fixed assets using:
A. accelerated depreciation and long average lives.
B. accelerated depreciation and short average lives.
C. straight-line depreciation and long average lives.
56. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Two companies are identical except for their accounting treatment of research and development costs. One company expenses all such costs immediately, while the other company capitalizes a portion of the costs. Compared to the company that capitalizes costs, the company that expenses immediately will most likely:
A. earn a lower return on assets.
B. have lower financial leverage.
C. report lower cash flow from operations in the statement of cash flows.
57. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
During a period of declining prices, a company using the LIFO inventory method instead of FIFO would most likely report:
A. lower current assets and lower gross income.
B. lower current assets and higher gross income.
C. higher current assets and higher gross income.
58. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst gathered the following information about a company:
Net profit margin 4%
Shareholders' equity $1,000,000
Dividend payout ratio 35%
Total assets $2,500,000
Net income $200,000
The company's potential (sustainable) growth rate is closest to:
A. 2.6%.
B. 7.0%.
C. 13.0%.
59. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst gathered the following information about a company and the company's industry:
Company Industry
Current ratio1.6 1.6
Quick ratio 0.3 0.9
Cash ratio 0.2 0.2
After preparing common-size balance sheets for the company and the industry, the analyst noted that the company and the industry both have the same proportion of current liabilities, long-term liabilities, and shareholders' equity. Would the common-size balance sheets for the company or the industry most likely have a higher percentage associated with inventory and accounts receivable, respectively?
Higher percentage associated with inventory Higher percentage associated with accounts receivable
A. Industry Industry
B. Industry Company
C. Company Industry
A. Answer A
B. Answer B
C. Answer C
60. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst is preparing common-size financial statements for each of five companies in the same industry during the same period. The most appropriate way of expressing the ending inventory for each company is as a percentage of:
A. total assets for the industry.
B. total assets for that company.
C. current assets for the industry.
61. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Which of the following best describes the reason for recording depreciation on a long-term asset?
A. To match the cost of the asset to its physical life.
B. To value the asset at market value on the balance sheet.
C. To allocate the cost of the asset to the periods that benefit from its use.
62. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Which of the following factors is least likely to influence international diversity in accounting practices?
A. Taxation.
B. Legal system.
C. Relationship between standard setters and securities regulators.
63. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
An analyst has calculated the following ratios from a company's financial statements: Year ended 31 December 2003 2004
Return on Equity 16.8% 18.0%
Return on Total Assets 10.5% 10.0%
Net Profit Margin 4.2% 4.0%
Based on the information above, during 2004, did the company experience an increase in the:
financial leverage ratio? asset turnover ratio?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
64. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Compared to expensing the costs of long-lived assets, would capitalizing the costs increase the firm's:
debt-to-equity ratio? cash flow from operations?
A. No No
B. No Yes
C. Yes No
A. Answer A
B. Answer B
C. Answer C
65. Assume U.S. GAAP (generally accepted accounting principles) applies unless
otherwise noted.
Which one of the following items would most likely result in a permanent difference between pretax financial income and taxable income?
A. Tax credit.
B. Warranty expense.
C. Depreciation expense.
66. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
With respect to bonds sold at a premium by the issuing company, which of the following statements best characterizes the company's total interest expense and cash flow from operations (CFO)? Over the life of the bonds prior to the maturity date, total interest expense is:
A. less than total coupon payments, and CFO is overstated.
B. less than total coupon payments, and CFO is understated.
C. greater than total coupon payments, and CFO is overstated.
67. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
A lessee entered into a five-year lease on 1 January 2004. With respect to this lease only, capitalizing the lease, instead of classifying the lease as operating, will most likely cause the company's 2008 cash flow from operations and return on equity, respectively, to be:
Cash flow from
Return on equity
operations
A. Lower Lower
B. Lower Higher
C. Higher Higher
A. Answer A
B. Answer B
C. Answer C
68. Assume U.S. GAAP (generally accepted accounting principles) applies unless otherwise noted.
Compared to the FIFO method of inventory accounting, during periods of rapidly rising prices and increasing inventory quantities, the use of LIFO will most likely result in higher:
A. cash flows.
B. income taxes.
C. working capital.
69. An analyst is developing net present value (NPV) profiles for two investment projects being considered by a company. The only difference between the two projects is that Project 1 is expected to receive larger cash flows early in the life of the project, while Project 2 is expected to receive larger cash flows late in the life of the project. Compared to Project 1, which of the following best describes the: A. Answer A
slope of the NPV profile for Project 2?sensitivity of the NPV for Project 2 to
changes in the company 抯 cost of
capital?
A. Flatter Less sensitive
B. Flatter More sensitive
C. Steeper
More sensitive
B. Answer B
C. Answer C
70. Braxton Energy is planning a new issue of $100 par preferred stock with a 12 percent dividend. The stock can be sold for $95 per share and the company must pay flotation costs of 5 percent of the market price. Assuming a marginal tax rate of 40 percent, Braxton Energy's after-tax component cost of preferred stock is closest to: A. 7.6%. B. 8.0%. C. 13.3%.
71. In comparing the use of the IRR and NPV methods to make decisions on mutually exclusive capital projects for a specific firm, which of the following statements is least accurate?
A. The IRR method can result in multiple values.
B. The NPV rankings depend on the cost of capital.
C. The IRR method has the more appropriate reinvestment rate assumption.
72. Sorbonne Systems Incorporated wants to determine the cost of equity that can be used in the calculation of the weighted average cost of capital. The CFO has gathered the following information:
Rate of return on 3-month Treasury bills 3.0% Rate of return on 10-year Treasury bonds 3.5% Market equity risk premium 6.0% Sorbonne 抯 estimated beta 1.6 Sorbonne 抯 after-tax cost of debt 8.0% Risk premium of equity over debt
4.0%
Using the capital asset pricing model (CAPM) approach and the bond yield plus risk