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SchweserPrintableAnswersBook6Exam1AM
TestID#:1364808
Question1#44786
Youranswer:Cwascorrect!
StandardVI(C)ReferralFees.Membersandcandidatesshalldisclosetoclientsand
prospectsanyconsiderationorbenefitreceivedbythememberordeliveredtoothersforthe
recommendationofanyservicetotheclientorprospect.Thisallowstheclienttoevaluateany
partialityshowninmakingreferrals.
Question2#44787
Youranswer:Awascorrect!
StandardIV(C)ResponsibilitiesofSupervisorsexplicitlystatesthatspeakingtotheemployee
todeterminetheextentoftheviolationsandreceivingassurancesthatitwillnotberepeated
isnotenough.Finleymusttakepositivestepstoinsurethattheviolationwillnotberepeated
includingpromptlylaunchinganinvestigationandlimitingtheemployee抯activitiesand/or
increasingsupervisionoftheemployeduntiltheresultsoftheinvestigationareknown.
Question3#44788
Youranswer:Awascorrect!
SteinviolatedStandardI(C)Misrepresentationbypresentingmaterialdevelopedbyanother
withoutacknowledgement.
Question4#44789
Youranswer:Dwascorrect!
StandardV(A)DiligenceandReasonableBasis.Therecommendationreflectstheconsensus
ofthegroupandnotnecessarilytheopinionofthememberorcandidate.Iftheconsensus
opinionhasareasonablebasis,thememberdoesnothavetodissociatefromthereportbut
shoulddocumentthedifferenceofopinion.
Question5#44825
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Youranswer:Awascorrect!
StandardIV(C)ResponsibilitiesofSupervisors.IfKleinclearlycannotdischargesupervisory
responsibilitiesbecauseofaninadequatecompliancesystem,heshoulddeclineinwritingthe
supervisoryresponsibilityuntilthefirmadoptsreasonableprocedurestoallowhimto
adequatelyexercisesuchresponsibility.
Question6#44826
Youranswer:Cwasincorrect.ThecorrectanswerwasD)
StandardIII(A)Loyalty,Prudence,andCare.Crockerisessentiallyusingasoftdollar
arrangementtopayforresearchusedinmanagingherclients?accounts.Crockermaypay
higherfeeswithoutviolatingherfiduciarydutyaslongas(1)thecommissionpaidis
reasonableinrelationtotheresearchandexecutionofservicesreceivedand(2)theresearch
benefitsthefirm抯clients.
Question7#44827
Youranswer:Cwascorrect!
StandardIV(A)Loyalty.Thestandarddoesnotprohibitformeremployeesfromcontacting
clientsoftheirperviousfirmsolongasthecontactinformationdoesnotcomefromthe
recordsofthepreviousemployerorviolateanoncompeteagreement.
Question8#44828
Youranswer:Awascorrect!
StandardI(A)KnowledgeoftheLaw.ChambersresidesinanddoesbusinessinBotwariand
isboundbythestricteroflocallawandtheStandards.TheStandardspermitreferralfeesthat
areproperlydisclosedtoclientsanddonotprohibitgiftstoclientsinreturnforbusiness.
Question9#44829
Youranswer:Cwascorrect!
StandardVI(A)DisclosureofConflicts.Membersandcandidatesmustmakefulldisclosureof
allmattersthatcouldimpairtheirindependence.Sellsidemembersandcandidatesshould
disclosetotheirclientsanyownershipinasecuritythattheyarerecommending.

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Question10#44832
Youranswer:Bwascorrect!
AccordingtoStandardIV(B)AdditionalCompensationArrangements,membersand
candidatesmustobtainwrittenpermissionfromtheiremployerbeforeacceptinganofferof
compensation(fortheperformanceofworkdonefortheiremployer)inadditiontowhatthey
receivefromtheiremployerandthatiscontingentonfutureperformance.Suchcontingent
additionalcompensationisjudgedtobereasonablyexpectedtoimpairtheemployee抯
independenceandobjectivity.
Question11#44833
Youranswer:Awasincorrect.ThecorrectanswerwasD)
Compliancerequiresthatthefirmfollowlocallawanddisclosetheconflictbetweenlocallaw
andGIPS.
Question12#44834
Youranswer:Awascorrect!
StandardIII(D)PerformancePresentationrequiresthatstatementsaboutperformancebenot
onlyaccurate,butalsofairandcomplete.WhileVance抯statementmaybeaccurateina
technicalsense,itisneitherfairnorcomplete,anditseemsintendedtomisleadprospects
aboutVance抯trackrecordinmanagingequitiesaccountsand/orselectingequitysecurities.
WhilecompliancewithGIPSanditsmethodsofcompositeconstructionarerecommended,
theyarenotrequiredbytheStandard.
Question13#44835
Youranswer:Dwascorrect!
StandardV(B)CommunicationwithClientsandProspectiveClients.Briefcommunications
mustbesupportedbybackgroundreportsordatathatcanbemadeavailabletotheclientif
requested.Drakeshouldhavegiventheclientamoredetailedanalysisoftheinvestment
whentheclientcalledtorequestsuchinformation.DrakedidnotviolateStandardIII(C)

becausehe搕horoughly?readandevaluatedtheanalysisanddeterminedthatthestructured
productwasinlinewithhisclient抯objectivesbeforerecommendingtheproducttohisclient.
Question14#44836
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Youranswer:Cwascorrect!
StandardVI(B)PriorityofTransactions.Clienttransactionsmusttakeprecedenceover
members?orcandidates?trades.Heshouldhavesubmittedhispersonaltradeorderonlyafter
tradingforhisclient.StandardIII(B)FairDealingrequiresthatFarleydealfairlywithallclients
whenrecommendingsecuritiesortakinginvestmentaction.Sincetheendowmentfundis
Farley抯onlyaccount,hehasnotdisadvantagedanyotherclientbyonlytakingactiononthe
behalfoftheendowment.
Question15#44837
Youranswer:Dwascorrect!
StandardIII(A)Loyalty,Prudence,andCare.Membersandcandidatesmustcomplywiththeir
fiduciarydutytothosepersonsandinterestsbywhomthedutyisowed.Specifically,
membersmustalwaysactforthebenefitoftheirclientsandplaceclients?interestsbefore
theirown.Murphy抯actionsindirectingtradestoCasanovaviolatethefiduciarydutyowed
toWellington&Worrel抯clients,asheappearstobeselectingCasanovaforthediscounts
receivedonpersonalsecuritiestransactions.Casanovachargeshighercommissionratesand
deliverspoorerexecutionthanotherbrokersusedbythefirm.ByusingCasanova,Murphy
violateshisfiduciarydutybyfailingtoactintheclients?bestinterest.Alternatively,the
arrangementwithCedrockappearstocomplywithMurphy抯fiduciaryduty,asthefirm
receivesinvestmentresearchusedinmanagingclientportfolios(asoftdollararrangement)
andachievesbetterexecutionforclienttrades.Becausethetradingarrangementwith
Cedrockbenefitsclients,itdoesnotviolateStandardIII(A).
Question16#44838
Youranswer:Bwasincorrect.ThecorrectanswerwasC)

DoddhasmostlikelyviolatedStandardIII(B)FairDealingbygivingPhillipsanovergenerous
allocationoftheoversubscribed(揾ot?newissue.Theissueisnotthatheisoffering
compensationtoaclienttoresolveadispute,butthatbyoverallocatingtheIPOsharesto
Phillipsheisnottreatinghisotherclientsfairly.StandardIII(B)FairDealingrequiresthat
candidatesandmembersnotusesharesof揾otissues?asanincentivetoachieveareward
orbenefit.Thebenefitinthiscaseisthatthedisputewill揼oaway.?/SPAN>
Question17#44839
Youranswer:Dwascorrect!
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TheeightmajorsectionsoftheCFAInstituteGlobalInvestmentPerformanceStandardsare
FundamentalsofCompliance,InputData,CalculationMethodology,CompositeConstruction,
Disclosures,PresentationandReporting,RealEstate,andPrivateEquity.
Question18#44840
Youranswer:Bwascorrect!
StandardIII(C)Suitabilityrequiresthattheclientportfoliofittheclientriskandreturn
objectivesasstatedintheinvestmentpolicystatement,andthatseemstobethecasehere.
Theproperfocusofriskanalysisisontheentireportfolioandneednotbeappliedonan
issuebyissuebasis.ThereappearstobenoviolationofV(A)DiligenceandReasonable
Basissincehispreviousanalysisindicatedtheportfoliowassuitableandhisrecords
supportedthatconclusion.
Question19#44841
Youranswer:Bwascorrect!
Withnointerestpaidontheoriginal$5,000loan,at6%infiveyearstheloanbalancewillbe:
Newloanbalance=$5,000(1.06)
5
=$6,691.13orPV=5,000;I/Y=6;N=5;PMT=0;CPT
→FV=?6,691.13.$6,691.13istheloanthathastoberetiredoverthenextfiveyears.The

financialcalculatorsolutionis:PV=6,691.13;I/Y=6;N=5;CPT→PMT.YouobtainPMT=
?,588.45.
Question20#44844
Youranswer:Cwascorrect!
N=4;PV=?,000;FV=6,520;CPT→I/Y=12.99%,or
Question21#44845
Youranswer:Cwascorrect!
AandBdescribeahistogram,andDdescribesafrequencypolygon.
Question22#44846
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Youranswer:Awascorrect!
holdingperiodreturn(HPR)=
Question23#44847
Youranswer:Cwascorrect!
range=maximumvalue?minimumvalue=55?15=40Calculatethemean:
Togetthemeanabsolutedeviation,sumthedeviationsaround
themean(ignoringthesign),anddividebythenumberofobservations
Notethattheunitsofvarianceherearepercentsquared.Usingdecimalsratherthanwhole
percentyields0.0250.
Question24#44848
Youranswer:Bwascorrect!
Question25#44849
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Youranswer:Bwascorrect!

Forthepositivelyskeweddistribution,themodeislessthanthemedian,whichislessthan
themean.
Question26#44850
Youranswer:Bwasincorrect.ThecorrectanswerwasA)
ThenominalincreaseinindustrialproductionisexpectedtobeThusthe
realchangeisexpectedtobeGiventheregressionequation,our
forecastis9,397.54=8,950+395(1.133).
Question27#44851
Youranswer:Awascorrect!
ThefirstyearaccountreturnwasThesecondyearreturnwas
Thegeometricmeanis,whichisthetime
weightedreturn.Sinceonlyoneassetwasinvolved,alsogivesthetime
weightedreturn.Tocalculatethemoneyweightedreturn,usethecashflowfunctionwithCf0
=?2,000,Cf1=?5,000,andCf2=54,000×2=108,000,andcomputeIRR,whichis7.73%.
Themoneyweightedreturnislowerbecausetheamountintheaccountwasgreaterinthe
secondperiod,whenthereturnwaspoor.
Question28#44858
Youranswer:Dwascorrect!
Thebinomialdistributionisadiscretedistribution,whilethenormaldistributionisanexample
ofacontinuousdistribution.Univariateandmultivariatedistributionscanbediscreteor
continuous.
Question29#44859
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Youranswer:Dwascorrect!
About68%ofallobservationsfallwithin?standarddeviationofthemean.Thus,about68%
ofthevaluesfallbetween5and25.
Question30#44860

Youranswer:Bwascorrect!
Thecentrallimittheoremholdsforanydistributionaslongasthesamplesizeislarge(i.e.,n
>30).
Question31#44861
Youranswer:Bwascorrect!
Thepopulationvarianceisknown(inthiscase100),sothestandarderrorofthesample
meanis
Question32#44863
Youranswer:Cwascorrect!
Thettestisusedwhenthesamplesizeissmall.
Question33#44864
Youranswer:Dwascorrect!
Itwoulddecrease,notincrease,theprofitabilityofcorporateinvestmentprojects.
Question34#44865
Youranswer:Awascorrect!
Thepotentialdepositexpansionmultiplieristhereciprocalofthereserveratio.Ifthereserve
ratiois20%,then1/0.20=5.
Question35#44866
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Youranswer:Awascorrect!
Iftheeconomyisjustbeginningtocomeoutofarecession,aperiodofexpansionis
beginning.Inatypicalbusinesscycle,thiswillbefollowedbyabusinesspeak,andaperiod
ofcontraction,leadingtothenextrecessionarytrough.Thiswouldcompleteonecyclefrom
thetimeofthelastrecession.CandDarenotappropriatesincethequestionsaysthatthe
economyiscomingoutofarecession.Thissuggeststhattheeconomyisgettingbetter,not
worse.
Question36#44868

Youranswer:Dwascorrect!
Anindividualistechnicallyunemployedwhenheorsheisactivelyseekingemploymentoris
waitingtoreturntoajobfromwhichheorshewasjustlaidoff.Notallpeoplewhoarenot
workingareconsideredunemployed.Examplesincludehouseholdworkers,students,
prisoners,andretirees.
Question37#44869
Youranswer:Cwasincorrect.ThecorrectanswerwasD)
Thelongrunproductiondecisiondiffersfromtheshortrunproductiondecisioninthatfixed
costscanbechangedinthelongrunbutnottheshortrun.Thus,shortruncostcurvesapply
foragivensizeofaplant,andlongruncostcurvescanshowcostsfordifferentsizeplants.
Question38#44870
Youranswer:Cwascorrect!
Onebrandofflourlikelyhasmanygoodsubstitutes,andelasticityofdemandislikelyhigh.
Theotherstatementsaretrue.Demandelasticityisgreaterinthelongrunthanintheshort
run.Thedemandforgasolineislikelyinelastic.Thus,whenthepriceincreases,the
percentagechangeinquantitydemandedislessthanthepercentagechangeinprice.There
arefewsubstitutesforgasoline,especiallyintheshortrun.Forgoodsthatarecomplements,
crosselasticityisnegative.
Question39#44871
Youranswer:Bwascorrect!
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Themonopolistfacesadownwardslopingdemandcurve.Insomecases,amonopolistmay
beunabletosellforaprofit.Pricemaybeinsufficienttocovertheperunitcostofthe
monopolistevenwhenoperatingattheMR=MCrateofoutput.
Question40#44873
Youranswer:Dwascorrect!
Theseconditionscharacterizemonopolisticcompetition.Bycontrast,monopoliesand

oligopolieshavehighbarrierstoentryandinvolveeitherasingleseller(monopoly)orasmall
numberofinterdependentsellers(oligopoly).Similartomonopolisticcompetition,pure
competitioninvolvesalargenumberofindependentsellers.Withpurecompetition,products
arehomogeneous(notdifferentiated),nobarrierstoentryexist(notlowbarrierstoentry),and
thedemandscheduleishorizontal(notdownwardsloping)andperfectlyelastic(nothighly
elastic).
Question41#44874
Youranswer:Awascorrect!
PartofthetradingstrategywouldincludesellingtheforeignorU.S.currencyforward.When
theinterestrateislowrelativetothehedgedU.S.interestrate,aninvestorshouldborrow
domesticcurrency,convertthelocalcurrencytoforeigncurrencyatthecurrentspotrate,lend
attheforeigncurrencyinterestrate,andsimultaneouslysellforeigncurrencyunitsforwardto
hedgeorlockinyourforeignlendings.Attheendoftheperiod,theinvestorshouldliquidate
foreignlendingsanddelivertheforeigncurrencyproceedsagainsttheforwardcontractto
convertforeignloanproceedsbackintolocalcurrencyunits.Theinvestorthenrepays
domesticloansandreapsthearbitrageprofits.
Question42#44875
Youranswer:Bwascorrect!
Accountingprofitisoftenanunsatisfactoryperformancemeasurefromaneconomicpointof
viewbecauseaccountingcostsgenerallydonotincludetheopportunitycostsofequitycapital.
Accountingcostsdoreflectthecostofdepreciationandtaxes.
Question43#44876
Youranswer:Dwascorrect!
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Thecurrentaccountmeasurestheexchangeofmerchandisegoods,theexchangeof
services,theexchangeofinvestmentincome,andunilateraltransfers(giftstoandfromother
nations).

Question44#44878
Youranswer:Bwascorrect!
Ataminimumwageabovetheequilibriumwage,therewillbeanexcesssupplyofworkers.
Firmssubstituteotherproductiveresourcesforlaborandusemorethantheeconomically
efficientamountofcapital.Theresultisincreasedunemploymentandadecreasein
economicefficiency.Firmsmaydecreasethequalityorquantityofthenonmonetarybenefits
theypreviouslyofferedtoworkers.
Question45#44880
Youranswer:Bwascorrect!
Ifultimatepaymentisassuredandthecostestimatesareunreliable,thecompanymustuse
thecompletedcontractmethodandthuscannotrecognizeprofitsuntiltheendofthecontract.
Profitsinyear2arezero.Theotherstatementsaretrue.Attheendofyear3,thebalancein
thecashaccountwillbeequaltothecumulativeprofits,or10?7.5=2.5.Underthe
percentageofcompletionmethod,thecompanywouldrecognize$1millioninprofitsinyear2
Thepercentageofcompletionmethodsmoothsincome,
andtheprofitsrecognizedinyear3usingthismethodare(2.5/7.5)2.5=0.833.
Question46#44881
Youranswer:Dwascorrect!
cashconversioncycle(CCC)=receivablesdays+inventoryprocessingdays?payables
paymentperiod
Sincethepayablespaymentperiodincreasesreceivablesby3.32daysandreceivablesdays
increasesby5,CCCincreasesby1.68days.
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Question47#44883
Youranswer:Bwascorrect!
Becausenetincomeisgiven,thisprobleminvolvesusingtheindirectmethod.
Theinterestexpenseisignoredbecauseitisalreadydeductedbeforenetincomeis

calculated.Ignoresalesforthesamereason;netincomeincorporatessales.
Question48#44884
Youranswer:Awascorrect!
Investingcashflowsincludebuyingandsellingequipmentandland.Thisproblemdoesnot
involveanysuchcashflows.
Question49#44885
Youranswer:Bwascorrect!
Totalcashflowisthedifferencebetweentheendingcashbalanceandthebeginningcash
balance.InQuestions47and48,wecalculatedcashflowfromoperationsof$12andcash
flowfrominvestingof$0,soweneedtocalculatecashflowfromfinancing:
Totalcashflowisthus$102.Iftheendingcashbalanceis$200,thebeginningcashbalance
was$200?$102=$98.
Question50#44886
Netincome
+$100
Noncashitems:depreciation
+2
Changeinaccountsreceivable
?0
Changeininventory
?0
Changeinaccountspayable
?0
CFO
$12
Saleofcommonstock
$100
Repaymentofdebt
?0
Financingcashflows

$90
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Youranswer:Bwascorrect!
Note:Donotaddbackdepreciationwhenusingthedirectmethod.Dividendsareafinancing
cashflow.
Question51#44887
Youranswer:Dwascorrect!
freecashflow(FCF)=cashflowfromoperations?netcapitalexpenditures
FCF=$800?40(purchaseofplantandequipment)+30(saleofland)=$790
Question52#44888
Youranswer:Cwascorrect!
Asimplenumericalexamplecanhelp.AssumeCA=2andCL=1.Thennote
andDebtisdecreased,butequityisunchanged,soD/Eis
decreased.
Question53#44889
Youranswer:Cwascorrect!
Sales牋
+$4,000
牋
Cashreceivedfromcustomers牋
牋
+$4,000
(sincenochangeinAR)
Costofgoodssold牋
?,000
?/td>
Increaseininventory牋

?00
?/td>
Increaseinaccountspayable牋
+300
?/td>
Othercashinputexpenses牋
?00
?/td>
Cashpaidforinputs牋
牋牋
?,300
Cashpaidfortaxes牋
牋牋
?00
Cashflowfromoperations牋
?/td>
?1,500
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Ifthedebtratio(TD/TA)isequalto40%andthefirmhasnopreferredstock,thepercentage
ofequityis1?0.40,or60%.
Question54#44890
Youranswer:Bwascorrect!
Sharesissuedpostsplitneednotbeadjustedforthesplitastheyare搉ew?shares.
Question55#44892
Youranswer:Awascorrect!
BecausebasicEPSdoesnotadjustforwarrants,theadjustmentis0.DilutedEPSuses
averageprice.SinceAP>EX,

Question56#44893
Youranswer:Dwascorrect!
Aisnotnecessarilytrue.Byitself,alowreceivablesturnoverreferstotheaveragetimeit
takesthecompanytocollectitsreceivables,nottothelevelofreceivables(whichwillaffect,
butnotdictateitscurrentratio).Bisnotnecessarilytrue;whetherafirm抯ROAishigher
thanitsROEdependsontherelationofthecostofdebttoitsROA.Cisincorrect.Justthe
factthatacompanyhasahighgrossprofitmargindoesnotnecessarilymeanitwillhavea
highnetprofitmargin.Forexample,thecompanycouldhaveveryhighoperatingexpenses
andendupwithalownetprofitmargin.
Thecashconversioncycleis:(365/6)+(365/9)?(365/12)=60.8+40.6?30.4=71days.
Question57#44894
Youranswer:Cwascorrect!
Inperiodsofrisingpricesandstableorincreasinginventoryquantities,FIFO,comparedto
LIFO,resultsinhigherworkingcapital.
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Question58#44895
Youranswer:Awascorrect!
Question59#44896
Youranswer:Awascorrect!
Question60#44897
Youranswer:Dwascorrect!
FIFOendinginventory=FIFOINV=LIFOINV+LIFOreserve=22,000+4,000=$26,000
Question61#44898
Youranswer:Bwascorrect!
Thetotalcashflowsareequal,buttheexpensingfirmwillseelowerearlyyearprofitability
ratherthanhigherearlyyearprofitability.
Question62#44899

Youranswer:Cwascorrect!
Impairmentmustberecognizedwhenthereissufficientevidencetoindicatethatthevalueof
anassetcarriedonthebooksofacompanycannotberecovered.Indicatorsoflackof
recoverabilityincludeasignificantdecreaseinmarketvalue,adversechangesinlegalor
businessconditions,substantialcostoverruns,andasignificantdeclineinanasset抯long
termlikelihoodofgeneratingprofit.
100@$210=
$21,000
70@$225=
$15,750
$36,750
Purchases
190
Sales
170
Balance
20
@$210=$4,200
FIFOaftertaxprofit
=LIFOaftertaxprofit+(changeinLIFOreserve)(1?t)
=$2,000+($4,000?$3,000)(1?0.4)=$2,000+$600=$2,600
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Question63#44900
Youranswer:Bwascorrect!
Question64#44901
Youranswer:Dwascorrect!
Deferredtax:

Year1:$1,200?$400=$800
Year2:$1,200?$400=800
Balance=$1,600
Question65#44902
Youranswer:Bwascorrect!
TaxYear1
TaxYear2
FinYear1
FinYear2
Revenue
$5,000
$5,000
$5,000
$5,000
Depreciation
4,000
4,000
2,000
2,000
EBT
1,000
1,000
3,000
3,000
Tax(0.4)
400
400
1,200
1,200
EAT

$600
$600
$1,800
$1,800
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Gainsorlossesfrommarketingmarketablesecuritiestotheirmarketvalueswillreverseif
theyaresoldandarethustemporarydifferences.Theotherstatementsarecorrect.
Question66#44903
Youranswer:Awascorrect!
Whenanalyzingthefirm'sincometaxdisclosures,watchforthesewarningsignals:
1)Companiesthatgeneratesignificantpretaxincomeontheirfinancialstatementswhile
reportinglowtaxespayable(i.e.,loweffectivetaxrates)arelikelytobeemployingaggressive
accountingmethodsandhavelowqualityearnings.SoStatement1iscorrect.2)
Restructuringchargestypicallyhavenotaxcashfloweffectsintheyeartheyarerecordedbut
mayhavesignificanteffectsinfutureyearsastherestructuredoperationsandimpaired
assetsaresold.SoStatement2iscorrectandChoiceAisthecorrectanswer.
Ananalystmayalsolookoutforthefollowingadditionalitems:3)Adecreaseincapital
spendingmaysignalareversalofpasttemporarydifferencesrelatedtodepreciationmethods,
resultinginhighertaxespayable.4)Temporarydifferencesmayreversebecauseofchanges
intaxlaw,causinghighertaxespayable.
Question67#44904
Youranswer:Cwascorrect!
Atakeorpayagreementobligatesabuyertopaythesellerofaproductorservicea
minimumamount,regardlessofwhethertheproductorserviceisdelivered.Thisistreatedas
aliability,andthediscountedvaluemustbereflectedonthebuyer抯balancesheet.
Question68#44905
Youranswer:Cwascorrect!

Cisreversed.Grossprofitisrecognizedattheinceptionforthesalestypelease.
Question69#44906
Youranswer:Bwascorrect!
N=20;FV=1000;PV=?94;PMT=60;CPT→I/Y=7%
k
d
=(7%)(1?0.4)=4.2%
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Question70#44907
Youranswer:Bwascorrect!
$2/50+0.08=12.0%
Question71#44908
Youranswer:Bwascorrect!
Question72#44909
Youranswer:Bwascorrect!
Businessriskisthecombinationofsalesrisk,whichisthevariabilityofafirm'ssales,and
operatingrisk,whichistheadditionalvariabilityinoperatingearnings(EBIT)causedbyfixed
operatingcosts.Leverageisthecombinationofbusinessriskandfinancialrisk,whichisthe
additionalriskcommonshareholdersmustbearwhenafirmusesfixedcostsourcesof
financing.
Question73#44910
Youranswer:Dwascorrect!
Sinceequityis40%ofassets,theequitymultiplieris1/0.40=2.5.Usingthetraditional
DuPontformula,ROE=8.7%×2.4×2.5=52.2%.
Question74#44911
Youranswer:Dwascorrect!
g=(1?payout)(ROE)=(1?0.40)(16%)=9.6%

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Question75#44912
Youranswer:Awascorrect!
Straightlinedepreciation:$14million/7=$2.0million
Accelerateddepreciation:$14million×0.333=$4.662million
Question76#44913
Youranswer:Awascorrect!
Sunkcostsarenottobeincludedininvestmentanalysis.Opportunitycosts,changesinnet
workingcapital,andtheproject抯impactontaxesareallrelevantvariablesindetermining
projectcashflowforacapitalinvestment.
Question77#44914
Youranswer:Bwascorrect!
Forthe4yearperiod,theaveragenetincomeis:($42,000+$98,000+$56,000+$56,000)/
4=$63,000.
Theinitialbookvalueis$800,000,decliningby$200,000peryearuntilthefinalbookvalueis
$0.Theaveragebookvalueforthisassetis:($800,000?$0)/2=$400,000.
Theaverageaccountingrateofreturnis:AAR=averagenetincome/averagebookvalue=
$63,000/$400,000=0.1575=15.75%.
Question78#44915
Youranswer:Cwascorrect!
Regularlyreviewingperformance,independence,skills,andexperienceofexistingboard
membersisacharacteristicoftheRemunerations/CompensationCommittee,nottheAudit
Committee.AllotherchoicesarepositivecharacteristicsoftheAuditCommittee.
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Question79#44916
Youranswer:Dwasincorrect.ThecorrectanswerwasC)
Theintroductionofazerobeta(nosystematicrisk)portfoliowithareturnthatishigherthan
theriskfreeratecanresultinastraightCMLevenwiththeassumptionthatborrowingand
lendingratesaredifferent.Marginaccountsrepresentborrowing,sounlessthemargin
lendingrateisthesameastheriskfreerate,thisdoesnotsolvetheproblem(akinkedCML)
thatresultsfromunequalborrowingandlendingratesinthemodel.
Question80#44917
Youranswer:Dwascorrect!
TheStandardsofPracticehaveverylittletodowithinvestmentconstraints.
Question81#44918
Youranswer:Awascorrect!
Ariskaverseinvestorpreferslessrisktomorerisk.Thelowerthecorrelation,thegreaterthe
riskreduction.Thus,ariskaverseinvestorwouldmostprefertheportfoliowiththelowest
correlationcoefficientandleastprefertheonewiththehighest.Ofthechoicesgiven,AandC
抯correlationcoefficientof+0.6isthehighest.
Question82#44919
Youranswer:Bwascorrect!
TheCAPMconcludesthatexpectedreturnsareapositive(linear)functionofsystematicrisk.
Question83#44920
Youranswer:Cwascorrect!
TheSMLandCMLarebothlines,andbothintersecttheverticalaxisattheriskfreerate.The
SMLdescribestherisk/returntradeoffforindividualsecuritiesorportfolios,whereastheCML
describestherisk/returntradeoffofvariouscombinationsofthemarketportfolioandariskless
asset.
Question84#44922
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Youranswer:Dwascorrect!
Studieshavedemonstratedthatapproximately90%ofaportfolio抯returnscanbeexplained
byitstargetassetallocations.Itisverydifficulttogenerateabnormalportfolioreturnsby
markettimingandsecurityselectionwithinassetclasses.
Question85#44923
Youranswer:Awascorrect!
Marketweightedindex:
Day1:whichisscaledtoavalueof500.
Day2:whichnowhastobeadjustedrelativeto
theinitialbasevalueof500fromday1.Weget:
Finally,thepercentagechangeis
Question86#44924
Youranswer:Awascorrect!
AportfoliowithequalnumbersofsharesofeachstockintheDJIAwillmatchtheperformance
oftheindexassumingtherearenostocksplits,stockdividends,orchangesinthemakeupof
theindex.Thereturnontheindexdoesnotincludedividendpayments.Sincethereinvested
dividendswilladdtothenumberofsharesofthosestocksthatpaydividends,Gomez抯
portfolioreturnwillexceedthatoftheDJIA.
Question87#44925
Youranswer:Cwascorrect!
Thetopdown,threestepprocessgoesfromtheeconomytotheindustrytothefirm,inthat
order.
Question88#44926
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Youranswer:Bwascorrect!
Thefourfirmconcentrationratiois35%+10%+20%+30%=95%.Theequivalentnumber
offirmsisthereciprocaloftheHerfindahlindex.Sincethesefivefirmscomprise100%ofthe

market,theHerfindahlindexissotheequivalent
numberoffirmsis
Question89#44927
Youranswer:Awascorrect!
Optionfreebondshavepositiveconvexityandtheeffectof(positive)convexityistoincrease
themagnitudeofthepriceincreasewhenyieldsfallandtodecreasethemagnitudeofthe
pricedecreasewhenyieldsrise.
Question90#44928
Youranswer:Awascorrect!
Duringtherecoveryphaseofthebusinesscycle,cyclicals,commodities,andcommodity
linkedequitiesaregenerallyattractiveinvestments.
Question91#44929
Youranswer:Dwascorrect!
IncreasesinkreduceP/E.IncreasesingorthedividendpayoutratioincreaseP/E.
Question92#44930
Youranswer:Dwascorrect!
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Underlyingearningsshouldbeusedinthecalculation.Thesearetransitory,nonrecurring
componentsofearningsthatarespecifictothecompany.Also,themostrecentearnings
informationshouldbeusedinthecalculation.Thereforeweget:
Question93#44931
Youranswer:Awascorrect!
Theriskpremiumwillbeafunctionofbusinessrisk,financialrisk,liquidityrisk,exchangerate
risk,andcountry(politicalrisk).Stocksdonotinvolvedefaultrisk.
Question94#44932
Youranswer:Bwascorrect!
SemiannualcompoundrateisEndingvaluemustbe$888.94(1.0325)

14
=
$1,391.02.
Question95#44933
Youranswer:Bwascorrect!
Thisisasupernormalgrowthstockvaluationproblem.
Step1:Findthedividendsinthesupernormalgrowthperiod.
D
1
=1.00(1.20)=$1.20;D
2
=1.2(1.2)=$1.44;D
3
=1.44(1.15)=$1.656
Step2:Usetheconstantgrowthmodeltofindthepriceattheendofperiod3.
$1,391.02
?u>1,000.00
facevalueatmaturity
391.02
?u>315.00
totalcoupons(14×
22.50)
76.02
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Step3:Discountallofthecashflowsbacktotimezero.
Question96#44934
Youranswer:Cwascorrect!

Usethesamedividendsand搉ormal?growthpricefromQuestion96,excepttheperiod1
dividend($1.20)hasalreadybeenpaid,andwediscounttheremainingtwodividendsandthe
endofyearprice(P
3
)backtotheendofperiod1togetP
1
.
Step1:Findthedividendsinthesupernormalgrowthperiod.
D
2
=1.2(1.2)=1.44;D
3
=1.44(1.15)=$1.656
Step2:Usetheconstantgrowthmodeltofindthepriceattheendofperiod3.
Step3:Discountallofthecashflowsbacktotimeone.
Question97#44935
Youranswer:Dwascorrect!
TheOASisameasureoftheyieldspreadoverTreasuryspotrateswithouttheoption.
Question98#44936
Youranswer:Cwascorrect!
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Reinvestmentriskbecomesmoreproblematicwhenthecurrentcouponsbeingreinvestedare
relativelylarge.
Question99#44937
Youranswer:Awascorrect!
Municipalbondsaretradedintheoverthecountermarketsupportedbymunicipalbond
dealersacrossthecountry.

Question100#44938
Youranswer:Bwascorrect!
Thebondissoldatapremium.Astimepasses,thebond抯pricewillmovetowardpar.Thus,
thepricewillfall.
N=10;FV=1,000;PMT=100;I/Y=8;CPT→PV=$1,134
N=9;FV=1,000;PMT=100;I/Y=8;CPT→PV=$1,125
Question101#44939
Youranswer:Dwascorrect!
Theoptionadjustedspread(OAS)istheconstantspreadthatisaddedtoeachTreasuryspot
ratetoequatethepresentvalueoffuturebondcashflowstothepriceofasimilaroption
embeddedbond.
Question102#44940
Youranswer:Bwascorrect!
Thetwoinvestmentscombinetoforma10year,$1,000facevalue,8.0%semiannualcoupon
bondthatwouldsellatparbecausetheYTM(expressedasaBEY)equalsthecouponrate.
Thusthecombinedvalueis$1,000.Thezerocouponbondisworthand
theannuitypaymentsareworth$543.61(N=10×2=20,PMT=40,I/Y=8/2=4,FV=0,
PV=?43.61).