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CFA Level 1 Practice Questions

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Adi FinShiksha Consultants Pvt. Ltd. This document contains a collated list of the 100 questions we have put on various forums over the last 4 months or so. The document also contains solutions, which should help you revise major concepts well. All the best!!! About Us FinShiksha is an IIM Calcutta Alumnus venture which was started with the objective of making learning of Finance fun and easy. FinShiksha boasts of trainers with rich experience in various domains of Financial Services. Our trainers also hold rich academic credentials like MBA from top B-schools and certifications such as Chartered Financial Analyst (CFA). Our training offerings cater a wide variety of recipients. Some of our offerings are For Individuals Certification in Equity Valuation Certification in Financial Modeling Preparatory program for CFA candidates. Certifications in o Applied Financial Statement Analysis o Derivative Applications o Wealth Management

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 question 1 Mark a student in university needs to pay tuition fees of USD 1100 per year for next three years with the first installment due on exactly one year from now. If Mark can earn 7% by investing in the bank, the minimum amount of money that Mark need to invest today to meet his total university fees requirement is closest to a) USD 2,887 b) USD 3,084 c) USD 2,982 Answer A: 1100/ (1+7%)^1+ 1100/(1+7%)^2+ 1100/(1+7%)^3 = USD 2886.7 CFA Level 1 question 2 Robert is investing USD 2,500 in a yearly Recurring Deposit (RD) scheme from last year. If the bank pays an interest of 8% p.a and his 2nd installment is due today then the amount of money he will get at the end of the RD is closest to a) \$ 15,568 b) \$ 15,840 c) \$ 14,667 Answer B: 2500*(1+8%)^5 + 2500*(1+8%)^4+2500*(1+8%)^3+2500*(1+8%)^2+2500*(1+8%)^1 = USD 15,839.8 CFA Level 1 question 3 Rahul is planning to go for an European tour. The cost of the tour if paid immediately is USD 4,500. Alternatively the tour operator provides an option to pay the tour cost in installments of USD.1200 per year for 4 years with the 1st due payable immediately. The rate of interest at which Rahul will be indifferent between choosing immediate payment and tour operators installment scheme is closest to a) 0.85% b) 2.63% c) 4.48% Answer C: 4,500 = 1200*(1+r)^0 +1200*(1+r)^1 +1200*(1+r)^2 +1200*(1+r)^3. Solve for r in the equation. R= 4.48% CFA Level 1 question 4 T &L Ltd is evaluating an investment in an infrastructure project which would require them to invest USD 45,000 and USD 25,000 at the beginning of year 1 and year 2 respectively. From year 3 through 5 the project is expected to give cash inflow of USD 30,500 at the end of the year for each of the three years. If T&Ls cost of capital is 8% then based on Net Present Value concept for evaluating a project T&L should
a) Accept this project as the NPV is USD 4,631

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b) Accept this project as the NPV is USD 4,289 c) Reject the project as NPV is USD (-760)

Answer C: NPV of cash outflows = 45000/(1+8%)^0 + 25,000/(1+8%)^1 = -68,148. NPV cash inflows = 30,500 /(1+8%)^3+ 30,500 /(1+8%)^4 +30,500 /(1+8%)^5 = 67,388 NPV = -68,148+67,388 = -760.07 CFA Level 1 question 5 Professional Ltd is evaluating 2 mutually exclusive projects. Project A would require an investment of USD 5000 at the beginning of year 1 and will give cash inflow of USD 3000 in the beginning of each of year 2 and year 3. Project B would require an investment of USD 10000 at the beginning of year 1 and will give cash inflow of USD 5800 at the beginning of year 2 and USD 6000 at the beginning of year 3. If Professional Ltds Cost of capital is 9% then the company should choose a) Project A as it has an IRR 13.07% which is higher than project Bs IRR b) Project B as it has an NPV USD 371 which is higher than project As NPV of USD 277 c) Project B as it has an NPV USD 340 which is higher than project As NPV of USD 254 Answer B: Project As NPV is USD 277 and Project Bs NPV is USD 371. (note that the cash flows are the beginning of the year). In case of conflict between NPV and IRR, project with higher NPV should be given preference. CFA Level 1 question 6 Mask Ltd is investing in a project which would require an investment of USD 100,000 immediately. The project will provide a cashflow of USD 42,000 for the next three years starting from the end of current year. The cost of capital for Mask Ltd is 7%. The Discounted Payback period for this project is close to a) 2.70 years b) 2 .67 years c) 2 .91 years Answer A: -100,000 * (1+7%)^0 + 42,000*(1+7%)^1+ 42,000*(1+7%)^2 = -24063. At the end 2nd year 24,063 need to be recovered. For the full year USD 34,285 on PV basis will be recovered. 24,063/34285 leaves us with 0.7 years. So discounted payback period = 2 years + 0.7 years CFA Level 1 question 7 Bluebay Ltd reported the following in their latest annual report. Value of equity USD 25.3 million, Value of Debt USD 9.82 million. The current market cap of the company is USD 38.6 million and the market value of debt is USD 9.82 million. The companys cost of equity is 12% and the post tax cost of debt is 7.5%. The companys effective tax rate is 40%. Bluebays weighted average cost of capital is close to a) 10.74% b) 11.09% c) 10.48%

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Adi FinShiksha Consultants Pvt. Ltd. Answer B 11.09%: Please note the given cost of debt is post tax and hence no tax shield adjustment is required for cost of debt. For calculating WACC market value should be used.

CFA Level 1 question 8 Farm Ltd has USD 10 mn debt outstanding at a cost of 6%. The company plans to issue new bonds worth USD 8 mn at a cost of 7% which is likely to be subscribed at par. The companys market value of equity is USD 24 mn and book value of equity is USD 14 mn. Farms cost of equity is 12%. If the companys effective tax rate is 30% then the weighted average cost of capital of the company post the new debt issue would be close to a) 9.86% b) 9.78% c) 8.96% Answer C: Remember for calculating WACC one need to use marginal cost of the respective capital. Hence pre tax cost of debt is 7%. Post tax cost of debt is 4.9%. Weight debt post new issue is 42.86%. Hence WACC = 42.86%*4.9% + 57.14% * 12% = 8.96% CFA Level 1 question 9 Brigade Ltd currently has total asset size of USD 110 mn. The companys book value of equity is USD 65 mn while the market cap is USD 97 mn. The cost of equity of brigade is 11.2%. The debt of the company is issued as bonds with coupon of 4.5% and has 5 years remaining for maturity. The bonds which pay coupons semi-annually are quoting at a yield of 3.9% The Companys marginal tax rate is 35%. The Weighted Average Cost of Capital of Brigade Ltd would be close to a) 8.40% b) 8.45% c) 8.84% Answer A: Finding market value of debt: Face value of debt = BV of assets BV of equities; 110- 65= 45; Coupon = 4.5%, yield 3.9%. Semi-annual coupon is known. Market Value of debt = 46.22

Market value of debt = \$46.22 mn. Market value of equity = \$97 mn. Cost of debt = 3.9%, post tax cost of debt = 3.9% * (1-35%)= 2.54%. WACC =8.40%. CFA Level 1 question 10 NNC Ltd has 100 mn preferred shares outstanding. The cumulative market value of these preference shares is USD 980 mn. Each preference share pays a dividend of USD 0.51. The effective tax rate of the company is 30% and the book value of these shares is USD 800 mn. The cost of NNCs preferred equity is close to a) 3.64% b) 5.20%

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Adi FinShiksha Consultants Pvt. Ltd. c) 6.38% Answer B: Price of Pref share = 980/100 =9.8. Cost of pref share = 0.51/9.8 = 5.20%. Remember Pref share do not attract tax shield.

CFA Level 1 Question 11 DIFC Ltd paid a dividend of \$1.3 last year and the dividends are expected to grow at a rate of 5% perpetually. The shares of DIFC are trading at a price of \$ 38.5. The cost of capital for DIFC using dividend discount model is closest to a) 8.38% b) 3.55% c) 8.55% Answer C; Remember r= D1/P +g (it is not D0 Do is the last dividend). D1 = D0*(1+g)= \$1.365. r= 1.365/38.5+5%=8.55% CFA Level 1 Question 12 Marc Ltd currently sells 45,000 units of its products. The Price per unit is \$7.5 and Total Fixed cost is \$101,250. The current operating income is \$56,250. The Degree of Operating Leverage for the company is close to a) 2.3 b) 2.8 c) 2.6 Answer B: Sales Fixed cost Variable cost = operating income; variable cost = 45000*7.5 101250 56250 = 180,000; VC per unit = 180,000/ 45000 = 4 DOL = Units *(Price Variable cost) / [Units *(Price Variable cost) Fixed cost] 45000* (7.5-4) / { 45000 * (7.5-4)-101,250) = 2.8 CFA Level 1 Question 13 JPM Ltd deposited a total amount of EUR 75,235 in its bank account in the month of January 2013. The average daily float for the company is EUR 3,955. Based on this which of the below conclusion can be arrived at a) On an average it takes 1.58 days for the checks deposited by JPM to be collected b) The companys float factor is 0.61 c) On an average it takes 1.63 days for the checks deposited by JPM to be collected

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Adi FinShiksha Consultants Pvt. Ltd. Answer: C; Note it is January 2013, so the month has 31 days. Average daily deposit = 75235/ 31 = EUR 2,427. Float factor = Average daily float/ Average daily deposit; 3955/2427=1.63; Indicating it takes 1.67 days on average to collect checks. CFA Level 1 Question 14 Raligam Ltd is looking for a short term financing of \$75,000 for 1 month. They are evaluating the following options i) ii) Line of credit (LoC) that costs 7.2% and a commitment of fee of 0.4%. Bankers acceptance (BA) of 7.6%, all inclusive.

Raligam should choose a) LoC as the cost is 7.6% which lower than BAs cost of 7.65% b) Either, as both costs 7.6% c) Either, as both costs 7.65% Answer A: LoCs cost = [75000*(7.2%+0.4%)/12]/ 75000 = 7.6%; Cost of BA = [75000*7.6%/12] /. [75000 (75000*7.6%/12)] = 7.65%

CFA Level 1 Question 15 Below are the current assets and current liabilities details of Bram Ltd. The acid test ratio of the company is close to Cash ; 34 Inventory; 55 32

Short term investments; Accounts Payables; 42

Accounts Receivables; 38 Short Term Borrowings; 21 a) 2.52 b) 1.83 c) 1.65 Answer C: ( Cash + Short term investments + Accounts Receivables ) / (Account payables + Short term borrowings) (34+32+38) / (21+42) = 1.65

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Question 16 Selected items from TAMSAC Ltd are presented below. The company plans to buyback 1.8 mn shares and they are proposing to fund this buyback through borrowing. The new EPS of TAMSAC after the buyback will be close to Shares Outstanding (mn); Price of the share (USD); EBT (USD mn); 8.46 EPS (USD); 0.283 20 3.74

Marginal Borrowing Rate; 5.70% a) USD 0.297 b) USD 0.440 c) USD 0.311

Answer A: PAT (EPS * Shares); Tax (EBT-PAT); 2.79 Tax rate(tax/EBT); 0.33

5.67

Money required to buy 1.8 mn shares (1.8*3.74 mn); Interest on Borrowed money (6.7* 5.7%); New EBT (old EBIT - incremental interest); New PAT (New EBP * (1-Tax rate)); New share OS (20-1.8); 18.2 New EPS (New PAT/ New shares OS); 0.297 5.41 0.384 8.07

6.732

CFA Level 1 Question 17 Cook an analyst is working on estimating asset beta for BigBet Ltd. He calculated the Beta of the equity from Stock price and relevant index return as 1.32. He also collected the below information from the latest financials of the company (values ate in USD mn). The Asset Beta of BigBet is closest to Net Worth: 750 Total Debt: 575

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Adi FinShiksha Consultants Pvt. Ltd. EBIT: 416.17 EBT: 373.04 Net Profit: 242.48 a) 1.98 b) 0.97 c) 0.88 Answer C: Beta(Asset) = Beta (Equity) * [ 1/ {1+ D/E* (1-t)}] Tax paid = EBT PAT = 130.57; Tax rate = 130.57/373.04 = 35% D/E = 575/750 =0.77; [ 1/ {1+(0.77*(1-35%))}] * 1.32 = 0.88

CFA Level 1 Practice Question 18 Which of the below corporate action will affect the capital structure of the company a) Cash Dividend b) Stock Dividend c) Stock Split Ans A; Stock dividend and stock split do not involve cash and hence will not affect capital structure. Post stock dividend and stock split the Net worth and Debt in Dollar terms will remain the same and hence the capital structure will not change. In case of cash dividend Net worth will decrease resulting in increase of Debt Equity ratio CFA Level 1 Practice Question 19 Rave Ltd has 10 million shares outstanding and they are planning to buyback 1 million shares using the cash in books. The shares of the company are presently trading at a Price to Book Value multiple of 1.7X. Post the buyback Rave Ltds Book Value Per Share (BVPS) will a) Increase b) Decrease c) Not Change Ans B: For example Let us take Book Value of Rave Ltds equity is \$100 mn. BVPS = 100/10 =10. Current price at P/B of 1.7X = 1.7*10 =\$17. IF Rave buys 1 mn shares are at \$17/share, the networth post buy back =\$83 mn. Shares outstanding post buyback = 10- 1 = 9mn. BVPS post buy back = 83/9 = \$9.2 which is less than BVPS of \$10 before buy back CFA Level 1 Practice Question 20 Tigeress Ltd has below operating details. The Degree of Total Leverage for the company is close to

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Adi FinShiksha Consultants Pvt. Ltd. Unit Produced 10,000 Price per unit - \$10 Variable cost per unit - \$4 Total Fixed cost - \$37,500 Total Borrowing \$75,000 Cost of Borrowing 5.2% a) Data Insufficient b) 2.67 c) 3.20 Ans C: DTL = DOL * DFL or Q * (P-V)/ [ Q (P-V)-F-C] = 10,000 * (10-4)/ [ 10000*10-4)-37500-75000*5%] = 3.2 CFA Level 1 Practice Question 21 Which of the below is NOT an essential characteristic of an effective board structure a) Majority of the board members should be independent b) Directors should have complete access to the companys financials c) Directors should have right to hire external consultants on the advice of Management Ans C: Directors should have right to independently hire consultants without Managements intervention. CFA Level 1 Practice Question 22 Which of the below statement is MOST accurate about stock Beta as defined by CAPM model a) Beta is a measure of sensitivity of the stocks price to the movement of the market b) Beta accounts only for diversifiable risk c) Beta is given by ratio of variance of the stock to variance of the market Ans A: Beta is given by the ratio of covariance between stock and market to variance of the market. Beta accounts for only risk that cannot be diversified. CFA Level 1 Practice Question 23 In case of stock split, which of the below type of index results in change in weight of ALL the constituent securities of an index a) Price weighted index b) Unweighted index c) Market Cap weighted index

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Adi FinShiksha Consultants Pvt. Ltd. Ans A: Unweighted index and market cap weighted index are not influenced by the price of the security. Only Price weighted index are influenced. For example in case of 1:2 split the weight of the split security will approximately fall by 50%. The remaining 50% of the erstwhile weight of this security will be distributed across all other remaining constituents, which would result in change in weight for all the securities. CFA Level 1 Practice Question 24 Mannar Exports Ltd reported a Networth of USD 72.35 mn on 31-Dec-2011. On 31-Dec-2012 the companys networth stood at USD 79.95 mn. Looking in to the cashflow statement of the company an analyst noticed that the company paid a total dividend of USD 3.26 mn in 2012 and there were no issue or buyback of equity during the year. Mannar Exports Dividend payout ratio for the year 2012 is closest to a) 4.50% b) 4.01% c) 30.02% Answer C: Net profit in 2012 = Increase in networth + Dividends; = 79.95-72.35+3.26 =10.86; Dividends pay-out ratio = dividend / Net profit = 3.26/ 10.86 = 30.02% CFA Level 1 Practice Question 25 Below are the details of a sector index. The closing value of market cap weighted index on the previous day is 1457. The value of index at the end of todays session will be closest to a) 1475.24 b) 1470.85 c) 1436.25 No of Shares (mn) 8,341 2,001 134 1,712

Today's closing price 359 633 1414 171

Answer B: Market cap to be determined by previous days price. For each stock market cap/ Total Market cap of index * Stock return will give the return contribution to the index. Sum of these contributions is total retun of index for the day which is 0.95%. Closing value = 1457 *(1+0.95%) = 1470.85 CFA Level 1 Practice Question 26 Rash Ltd reported an EPS of \$2.5 for the year 2012. The companys current market cap is \$340 mn and Price / share is \$17. The companys net worth at the end of 2012 is \$200 mn and the company paid no dividends for the year. The Return of equity of the company is closest to
a) 28.57% b) 25.00%

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c) 14.71%

Answer A: Shares OS = 340/17 = 20 mn. Current networth =200 mn; current year profit = 2.5 * 20 (shares OS) = 50. Last year book value = 200-50 0 (dividend) = 150. Average book value = 175. RoE= profit/ Avg Book value = 50/175= 28.57% CFA Level 1 Practice Question 27 Sailor Ltd has issued preference share issued at face value of \$10. These shares attract a dividend of 7%. Presently these shares are trading at \$9.23. The cost of these preference shares is closest to a) 7.58% b) 7.00% c) 6.46% Answer A: Price of preference share with no dividend growth = Dividend / Cost of pref capital. 9.23 = 0.7/r; r = 0.7/ 9.23 = 7.58%. Cost of capital need to be calculated on Marginal cost of capital, not issue price. CFA Level 1 Practice Question 28 Schindler Ltd issued common shares with face value of \$10. Presently the share are trading at \$25. The companys paid a 20% dividend on the face value of the shares last year. An analyst estimates the cost of equity for Schindler is 14.2%. The estimated growth of Schindler according to Dividend Discount model is close to a) 4.83% b) 6.20% c) 5.74% Answer C: DDM Price = D*(1+g)/ (r-g); Last year dividend = 10*20% =\$2; so, fo DDM 25 = 2*(1+g)/ (14.2% g); 2/25 *(1+g) = 14.2% -g; ( 8% + 8%*g) = 14.2% -g ; g+.08g = 14.2% - 8%; 1.08g = 6.2%; g =5.74% CFA Level 1 Practice Question 29 In Financial marketing Parlance which of the below statement correctly describes the way in which practitioners classify the Money Market and Capital Market a) Money Market is for trading debt instruments and Capital market is for trading equity instruments b) Money Market is for short term fund raising and Capital Market is for long term fund raising c) Money Market is used for raising fresh capital and capital market is used for trading existing issues Answer B: refer Page 15 in curriculum Book 5. CFA Level 1 Practice Question 30 Which of the below factors is LEAST likely to contribute to increasing the efficiency of the markets. The National stock exchange of India

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Adi FinShiksha Consultants Pvt. Ltd. a) Decreased the exposure limit for individuals on USD-INR currency position to USD 25,000 from USD 50,000 b) Decreased the maximum brokerage charged on trades from 2.5% to 2.0% c) Increased the number of securities traded in Futures and Options segment from 250 to 550 Answer A: decreasing position limits will lead to arbitrage opportunities CFA Level 1 Practice Question 31 When a person says I am long in a put option then he implies a) He has sold the right to sell a stock at a specific price b) He has bought the right to sell a stock at a specific price c) He has bought the right to buy a stock at a specific price Answer B: Long in an option means buying an option. Put option implies right to sell. The person has bought the right to sell. CFA Level 1 Practice Question 32 Which of the below option correctly lists the following securities in ascending order of their respective risks i) ii) iii) iv) v) Ordinary Equity shares Non convertible bonds Preference shares Optionally convertible bonds Callable bonds

a) V,IV, II, III,I b) V,II,IV,III,I c) IV,II,V,II,I Answer C: The optionally convertible bond gives option of converting the bond in to shares to the buyer and hence if share price increases he can convert else he can choose to redeem the bond. This makes option IV less risky than ordinary bonds. The callable bond gives issuer the right to call the bond which makes it more risky than ordinary bond. A preference share is more risky than bonds and ordinary share possesses highest risk in the list. CFA Level 1 Practice Question 33 Which of the below indices has the highest chance of suffering from representation bias a) Hedge fund indices b) Bond indices c) Global Equity Indices Answer A: Hedge funds report their performance only to specific index managers and hence the underlying representation in each index will be biased.

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Practice Question 34 Which of the below type of industry classification would MOST likely suffers from the disadvantage of possibility of frequent change in grouping a) Product based classification b) Business cycle sensitivity based classification c) Statistical classification Answer C: Statistical classification is done based on correlation of share price movement in the past. Hence it may change frequently. The other classifications are unlikely to change frequently CFA Level 1 Practice Question 35 Which of the below criteria is MOST likely to make Raze ltd incomparable with Braz Ltd for the purpose of Peer Valuation a) Both Raze Ltd and Braz Ltd produce and sell Steel and Copper. b) Raze Ltd derives 30% of its revenue from steel and the remaining from Copper while Braz limited derives 40% of its revenue from copper and the rest from Steel. c) Raze Ltd does retail sales of the metals through stores owned by the parent company and Braz ltd does retails sales through a wholly owned subsidiary Answer: B. The proportion of the revenues is different which makes them incomparable. The sale through subsidiary does not matter as on consolidated basis both companies will be same (all other things remaining the same) CFA Level 1 Practice Question 36 Ram bought one share of Sokia Ltd at Rs.2900 through leveraged buying. The initial margin for the position is 30% and Maintenance margin is 25%. The percentage price drop in sokias share price which will result in margin call for Ram is closest to a) 5.00% b) 6.67% c) 7.82% Answer B: Margin call price = (Purchase price Initial Margin)/ (1-Mainteneance margin) Price = 2900 Initial margin = 2900*30% = 870 M.Margin = 25% Margin call price = (2900- 870) / (1-25%) = 2707. Price drop % = 2707/ 2900 -1 = 6.67%

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Practice Question 41 Raghav an analyst is trying to find the intrinsic value of a company using discounted cash flow method. In the process he did most of the things right except for the fact that he overestimated the cost of equity. He will most likely ------------------------- the intrinsic value a) Overestimate b) Under estimate c) Correctly estimate Answer B: Underestimate. Over estimating cost of equity would lead to discounting of cash flows by a bigger denominator. This is turn would lead to estimation of intrinsic value that is lower than the correct value. CFA Level 1 Practice Question 42 Short term capital management Ltd (STML) declared a dividend per share of \$4.2 last year. Their dividends are expected to grow at 5% while the cost of equity for the company is estimated at 9.5%. STMLs book value of asset is \$ 622 mn and market value of these assets is estimated at \$ 710 mn. The company has total debt outstanding \$ 320 mn and shares outstanding of 10 mn. The minimum intrinsic value per share that the company should comment will be close to a) \$ 98.00 b) \$ 30.20 c) \$ 39.00 Answer C: The minimum price that a share should comment will be driven by asset based valuation. Asset based valuation of equity = (Market value of equity Debt) / Shares outstanding. Price = (710-320)/10 = 39 CFA Level 1 Practice Question 43 Raj invested \$ 1500 in a two year bank Fixed Deposit. At the end of 2 years he received \$ 1752. The FDs quoted interest rates are compounded quarterly. The quoted interest rate of bank would be close to a) 8.074% b) 7.84% c) 8.40% Answer B: Quoted interest rate = [ (Final value/ Starting value)^ {1/ (no of years* Compounding frequency)} ] -1 = { (1752/ 1500) ^ (1/ [@*4])} -1 = 7.84% CFA Level 1 Practice Question 44 A better measure to evaluate a fund managers performance is a) Holding period return

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Adi FinShiksha Consultants Pvt. Ltd. b) Money weighted return c) Time weighted return Answer C: Time weighted return eliminates the change in return due to timing of additional investment and partial withdrawal during the holding period, hence its is considered as better measure to evaluate fund managers performance (Book 1:Page 302) CFA Level 1 Practice Question 45 The mean of returns of German stock markets is 9.7% and the standard deviation is 36.4%. According to Chebyshevs inequality the proportion of returns that will be in the range from (-44.9%) to + 64.30% will be closest to a) 86.64% b) 55.56% c) 66.67% Answer B: Chebyshevs inequality states that the proportions of returns that lie between Mean +/ - k standard deviations will be given by 1 [ 1/ (1/ k^2) ] ; 9.7% - (-44.9%) = 54.6% and 64.3% - 9.7% = 54.6%. k = 54.6% / 36.4% = 1.5 ; appyling this in the above formula would leave us with a value of 55.56% CFA Level 1 Practice Question 46 A sample of return that has more frequent extreme large surprises is MOST likely to be a) Mesokurtic b) Platykurtic c) Leptokurtic Answer:C. When there are frequent surprises the number of observations around the mean will be lesser. This will lead to distribution being less peaked which is called leptokurtic. CFA Level 1 Practice Question 47 In a football match it is said the odds of Chemsivya winning the match are 11 to 4. The probability of Chemsivya not winning the match is closest to a) 26.67% b) 36.36% c) 73.33% Answer: A. Total events = 11+4 = 15; odds of not winning = 4/15 CFA Level 1 Practice Question 48 Raj an analyst estimates the following about BSI bank Ltd before Q1 results. The probability of EPS decreasing in the next quarter (Q1) is 40%. Probability of EPS increasing in the following quarter (Q2) after an increase in the previous quarter (Q1) is 70%.The probability of EPS decreasing in the following quarter

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Adi FinShiksha Consultants Pvt. Ltd. (Q2) followed by an EPS decrease in the previous quarter (Q1) is 75%. Later, given that EPS increased in Q2 the probability of EPS having increased in Q1 also is closest to a) 52.0% b) 60.0% c) 80.8% Answer C: Probability of Q1 Decrease=40%; Q1 Increase = 60% Probability of Q2 Increase followed by an increase = 60% * 70% = 42% Probability of Q2 Increase followed by a decrease = 40% * 25% = 10% Total probability of Q2 Increase = 42% + 10% = 52% Given that Q2 there was an increase, the probability of Q1 also have increased = 42% / 52% = 80.8%

Q1

Q2

Total Probability

Increase 70% Increase (1-40%) = 60% Decrease =(1-70%)= 30% Increase (1-75%) = 25% Decrease (1-40%) = 60% Decrease = 75%

=60%*70% =42%

=60%*30% =18%

EPS

=40%*25% =10%

=40%*75% =30%

Total probability of EPS increase in Q2 = 42%+10% = 52%. Probability of Increase followed by an increase = 42%/ 52%

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Practice Question 49 An analyst estimates that the yearly average and standard deviation of returns for Indian stock markets have as 14% and 18.5% respectively. The probability of the stock market delivering a return in the range of -5% and 0%, assuming the market follows normal distribution is close to (Use Z- Tables) a) 7.24% b) 15.22% c) 22.46% Answer: Z= (X-mu) / Sigma; Z value corresponding to 0% = -0.76; Z value corresponding to -5% = -1.03; From Z table -0.76 corresponds to 22.46% and -1.03 corresponds to 15.22%. This in essence means the probability of return being less than zero is 22.46% and probability of return being less than -5% is 15.22%. Hence the probability of return being between -5% and 0% is 22.46% - 15.22% = 7.24% CFA Level 1 Practice Question 50 The probability of a student sticking for more than a year in his first job is 10%. The probability of at least 2 students sticking to their job for more than one year in a sample of 8 students is closest to a) 14.88% b) 18.69% c) 61.74%

Answer: Using Binomial distribution P(0) = 43.04%, P(1) = 38.2%. P(X<2)=43.04%+38.2%=81.3%. P(X>= 2) = 1- 81.3% = 18.69% CFA Level 1 Practice Question 51 An analyst estimates that the monthly average return of a fund is 1.3% and monthly volatility of the fund is 3.7% using the data for past 24 months. The analyst makes a statement We can say with 95% confidence that monthly average return of this fund is greater than Zero. The analyst is a) Incorrect based chi-square test with degrees of freedom of 23. b) Correct based on student-t test and the standard error of this sample is 0.76% c) Incorrect based on student-t test and the standard error of this sample is 0.77% Answer: A. For testing mean of a sample students t-test need to be used. Standard error = Sample SD/ Sqrt(n) = 3.7%/ Sqrt(24). Degrees of freedom for t-test are n-1. At 95% confidence level t-table value is 1.714. H0= Mean>0%. 1.3% - 1.741 * 0.76 = 0.01% hence H0 is accepted. CFA Level 1 Practice Question 52 A credit analyst estimates that the probability of default within 1 year for bonds with less than 1.5X interest coverage ratio is 35%. The analyst is tracking 45 such companies. The standard deviation of default for the analysts tracking portfolio is closest to

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Adi FinShiksha Consultants Pvt. Ltd. a) 22.75 b) 10.24 c) 3.20 This follows Bernoulis distribution where variance will be given by n*P*(1-P); 45*35*65 = 10.24; Standard deviation = sqrt(10.24) = 3.20 CFA Level 1 Practice Question 53 A technical analyst watching movements of two large cap indices in India, Nifty and Sensex believed that later is more volatile than the earlier. To test this he collected data for last 25 trading sessions. Nifty: Average: 0.9%, Standard Deviation: 7.2% Sensex: Average: 0.85%, Standard Deviation: 4.9% F value with Df1=24 and Df2=24 at 5% significance is 1.98 F value with ds1=24 and Df2=24 at 2.5% significance is 2.27

The analysts believe that the volatility of the Sensex is lesser is a) Right at 5% significance as Ratio of SD > Critical F Value b) Right at 2.5% significance as ratio of SD > Critical F Value c) Not right at 5% significance as ratio of SD < Critical F Value Answer: C. 7.2%^2 / 4.9%^2 = 2.15. The critical value at 5% is 1.98; since 1.98< 2.15 at 2.5% significance the volatilities are different CFA Level 1 Practice Question 54 An analyst read in a news item that Chincinnati fund reported a Sharpe ratio of 0.167 for the last year and a treynor ratio of 0.033 for the same period. He calculated the market volatility for the period as 16%. The coefficient of correlation of the fund with the market is closest to a) 0.90 b) 0.81 c) 0.13 Answer: B. In the below explanation symbols with suffix p indicates portfolio and suffix m indicates market. Sharpe = (Rp Rm) / SDp; Treynor =(Rp Rm) / Beta; Sharpe / Treynor = Beta/ SDp; = (Correlation * SDp * SDm) / (SD m^2 * SDp) = Correlation/ SDm; Sharpe / Treynor = Correlation/ SDm = 0.167/0.033 = 5.06

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Adi FinShiksha Consultants Pvt. Ltd. Correlation = 5.06 * 16% = 0.81 CFA Level 1 Practice Question 55 Below are excerpts from real Ltds Financial statements (all values are in mn). The companys Free cash flow to firm is closest to EBITDA : 2200 EBIT : 1925 EBT: 1800 Net Profit: 1500 Net Debt Raised: 500 Increase in Current Liabilities: 100 Increase in Current Assets: 120 Dividend paid : 200 Capital Expenditure: 600 a) Rs. 1259 mn b) Rs. 1299 mn c) Rs.1280 mn Answer A: FCFF = [EBIT x (1-tax rate)] + Dep - FCInv WCInv; Tax rate = (EBT-NP) / EBT = 16.67%; 1925 * (1-16.67%)+275-600+100-120= Rs. 1259 CFA Level 1 Practice Question 56 Below are the details of a bond. For 100 bps change in yield the convexity adjustment that needs to be done for the bond is closest to Coupon %: 5% Coupon Payment per year: 1 FV USD: 100 Maturity Years: 5 Yield: 4.50% a) 0.12 b) 12.10 c) 24.20 Answer A: With given data find current Market price =USD 102.1935 Find price if yield drops to 3.5% = USD 106.7689 Find price if yield increases by 100 bps = USD 97.8655 Convexity = V1 + V2- 2Vo/ (2*Vo*100*(change in yield)^2) = [106.7689+97.8655-2*102.1935] / [2*102.1935*0.01^2*100] = 0.12

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Practice Question 57 Maya Limited reported an Inventory Turnover Ratio of 0.4X. The company uses FIFO inventory valuation method in the present inflationary environment. If the company had used LIFO inventory valuation instead their Inventory turnover would have been a) Higher b) Lower c) Same

Ans A: LIFO inventory turnover ratio would have been higher. Inventory Turnover = COGS/ average inventory In an inflationary environment under FIFO the older items which are cheaper will become part of COGS and costlier items will become part of Inventory. If we convert FIFO in to LIFO then COGS will increase and the inventory will decrease. Let us take numbers: COGS 40, Average inventory 100. Last year LIFO reserve is 25 and current year LIFO reserve is 30. Inventory turnover under FIFO = 40/100 = 0.4X Now, under LIFO LIFO COGS = FIFO COGS + Change in LIFO Reserve; LIFO COGS = 45 LIFO inventory = FIFO inventory - LIFO Reserve; LIFO inventory = 100-30 = 70 LIFO Inventory turnover = 45/70 = 0.64X CFA Level 1 Practice Question 58 Subjective follows LIFO inventory system for its reporting purpose in the current inflationary environment. All else remaining the same if the company has used FIFO inventory system the cash on books would have been

a) Higher b) Lower c) Same Ans B: Lower. When it comes to cash flow the only difference between LIFO and FIFO is the tax paid. LIFO company reports higher cost and hence ends up paying lower tax. This leads to higher cash at the end of the year. CFA Level 1 Practice Question 59 In May 2009 Air Chennai the airline operator opened the online advance booking for flights in November 2009. All the tickets got sold in May 2009 and the company collected Rs.125 crs in May 2009. The passengers travelled in November 2009 however Air Chennai paid the flight lease charges only in March 2010. Air Chennai should report the revenue with respect to this advance booking in a) May 2009

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Adi FinShiksha Consultants Pvt. Ltd. b) November 2009 c) March 2010 Answer B: Revenue should be recognized when it is earned. Revenue is earned only one the service is delivered which is in November 2009. CFA Level 1 Practice Question 60 Laurence Ltd has leased an asset and currently reporting the lease as an operating lease and reported an interest coverage ratio of 4.0x. An analyst feels that the lease is essentially capital in nature and hence adjusted the financials accordingly for his analysis. Post the adjustment the Interest coverage ratio under capital lease would be ------------- compared to the Interest coverage ratio under operating lease a) Same b) Higher c) Lower Ans C: Two adjustments will be made. The operating lease rental will be removed Increase Gross profit i) The amount equal to principle will be amortized There will be a net increase in EBIT because cost of goods sold decreased but amortization increase but by an amount that is lesser than decrease in COGS Interest payment increases. Because part of the lease payment is interest

ii)

To conclude EBIT would be higher and interest also would be higher. This difference will be equal on a Dollar basis. Given that the ratio currently is more than 1x, the above adjustments will lead to decrease of interest coverage ratio. If the current ratio is less than 1X, the answer does not hold good. CFA Level 1 Practice Question 61 Laxman Ltd reported a return on equity of 27%. Net profit margin of 6% and Asset turn over ratio of 1.4X. If the company had Equity of 550 crs what would be the companys Average total assets a. Rs. 1767 crs b. Rs.183.3 crs c. Rs.2475 crs Ans A: This question uses dupont analysis. Financial leverage = RoE/ (NPM * 1.4) = 0.27/ (0.06 * 1.4) =3.2X. Assets = Equity * Financial leverage = 3.2* 550 = 1767. CFA Level 1 Practice Question 62 Natural Pharma a bio pharma company sold a new molecule about which it has researched and established commercial feasibility to Pfizer inc . The molecule is yet to be commercially developed. Natural Pharma has

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Adi FinShiksha Consultants Pvt. Ltd. so far spent Rs.120 crs in researching this molecule and the molecule has been sold to Rs.200 crs. What would be the incremental profit before tax recognized by Natural Pharma during the year of sale? a) Rs.0 b) Rs. 80 crs c) Rs. 200 crs Ans C: Q1 All the costs incurred during research phase has to be completely expensed (both IFRS and US GAAP) so the Rs.120 crs is anyways expensed. The incremental profit is because of selling the molecule is thus Rs.200 crs. CFA Level 1 Practice Question 63 It is a normal inflationary situation and prices are increasing. MAS ltd which uses FIFO inventory valuation reported a Net Loss of Rs.125 crs and earnings before tax of Rs.( -125 crs). The company reported an operating cash flow of Rs. (-75 crs). All else being the same if the company has used LIFO instead of FIFO MASs Net loss and Operating cash flow would have been Net Loss and OCF of a) Lower and Higher b) Same and Higher c) Higher and Same

Answer:C. LIFO leads to higher COGS in inflationary environment. Higher COGS means higher loss. The difference between LIFO and FIFO inventory will create difference in CFO only through tax (i.e Tax = EBIT * Tax rate, if EBIT is lower with LIFO tax will be lower leading to higher CFO and vice versa). In this case since company is making losses there in no tax and hence CFO under both LIFO and FIFO will be same. CFA Level 1 Practice Question 64 Happy Inc which uses LIFO inventory valuation system reported the following 2011 Inventory 325 2012 Inventory 345 2011 LIFO reserve 35 2012 LIFO reserve 45 For the year 2012 the 2012 Happy Inc reported as sales Rs.1250 crs and Gross profit of Rs.470 crs. An analyst makes the necessary adjustment for converting the inventory to FIFO and calculates happy Incs Inventory turnover ratio. The analysts estimate would be closest to a) 3.33X b) 1.98X c) 2.05X Ans C:

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Adi FinShiksha Consultants Pvt. Ltd. FIFO Inventory = LIFO inventory + LIFO Reserves FIFO COGS = LIFO COGS Increase in LIFO Reserves. FIFO Inv 2012= 345+45 = 390; FIFO inv 2011 = 325+35=360; Change in LIFO Reserves 2012 = 45-35=10 LIFO COGS 2012 = 1250-470 = 780 FIFO COGS 2012 = 780-10 = 770 Inventory Turnover = COGS/ Average inventory = 770/ Average (390, 360) = 770/375= 2.05X CFA Level 1 Practice Question 65 Edusuper limited bought a patented learning system and recognized Rs.80 crs of intangible assets in relation to this purpose. Edusuper should a) Ammortize this expense every year b) Test the impairment of the patent every year c) Both amortize every year and test for impairment

Ans C: Patent is for specific years and this is an identifiable intangible asset. Identifiable intangible asset with finite life should be amortized every year. This also should be checked for impairment every year. On the other hand Intangible Assets with infinite life will ONLY be tested for impairment every year. CFA Level 1 Practice Question 66 Hayden and Gill were discussing about effect of ESOPs on accounting statements and they made the following statements Hayden: Companies can get tax benefits when ESOPs are exercised which will be shown as part of operational activities. This may artificially increase the effective tax rate of the company which an analyst should adjust for analytic purpose. Gill: It is an irony that while money spent on stock buyback, for issuing shares during exercise of ESOP is considered as financing cash flow the tax benefit arising out of this is considered as operational cash flow. This results in situation wherein more is the difference between ESOP strike price and actual stock price more will be the operational cash flow of the company. a) Both are wrong b) Only Hayden is wrong c) Only Gill is wrong Ans B: Exercising of ESOP will happen when current market price is greater than strike price. This will lead to loss, which will result in effecting tax rate artificially decreasing and not increasing. Other statements are correct

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Practice Question 67 Nestle Ltd reported a net profit of Rs.9620 million for the year ending December 2011. At the start of 2011 the company had 48.2 million shares outstanding. The company issued a 1:1 bonus on 1-July-2011. The company also had 5 million ESOPs outstanding at an exercise price of Rs.7000/share (at the start of the year) throughout the year. Nestles closing share price on 31-December-2011 was Rs.4500/share and average share price (adjusted for bonus) during the year was Rs.4300/share. Calculate the diluted EPS for the company. a) Rs.97.90 b) Rs.133.06 c) Rs.94.64

Ans A: Pre-bonus shares: 48.2*12 months =578.4 Post Bonus shares: 48.2* 12 months=578.4 Weighted average shares outstanding = (578.4 + 578.4)/12 = 96.4 mn Post bonus the ESOP will become 10 million shares (5 million adjusted for 1:1 bonus) outstanding with a strike price of Rs.3500 (i.e 7000/2) By treasury stock method, if 10 million options were exercised company would receive 10*3500= 35000mn. Using this company can buy shares at Rs.4300 (average price). i.e 35000/4300=8.14 mn shares. So dilutive shares added would be 10 8.14 =1.86 mn. Total shares to be used for calculating diluted EPS = 96.4+1.86 = 98.26 mn. Diluted EPS = 9620/98.26 = 97.90 CFA Level 1 Practice Question 68 Rabi Ltd reported an Total Asset turn over ratio of 1.9X and Net profit margin of 8.6% for year 2011. At the end of 2012 Rabi used its entire net profit for 2011 to repay its debt and brought down the debt equity ratio to 0.6X. If the sales for 2012 remained exactly same as 2011 then Rabis Total Asset turn over ratio for 2012 would be (no equity capital raised during the year) a) Same as 1.9X b) Below 1.9X c) Above 1.9X

Ans A: If the company uses its entire profit to repay the debt then the size of the balance sheet will remain the same. i.e the increase in owners equity will be offset by decrease in Debt. The point to note here is irrespective of Debt repayment equity will increase, a decrease in debt will be offset by decrease in cash. If the balance sheet remains size the same as does the sales then both numerator and denominator of asset turn over ratio will remain the same. This would lead to same asset turn over ratio.

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Adi FinShiksha Consultants Pvt. Ltd. Let us see some numbers Year 0 (Y0) -- Equity = 50 ; Debt = 50; total asset = 100; Net profit in Y1 = 10; Step 1 Profit gets added to R&S Y1Equity = 60; debt = 50; TA = 110; simultaneously cash increases by 10 on Asset side (assuming everything is cash profit) Step 2 Debt Repayment Y1Equity = 60; debt = 40; TA =100; simultaneously cash would decrease by 10 on Asset side towards debt repayment. Hence Total asset remains at 100. CFA Level 1 Practice Question 69 All else remaining equal during the initial years of life of an asset, the Operating Cash flow (CFO) of a company that follows Double declining Balance depreciation (DDB) for the asset compared to a company that follows Straight line (SL) depreciation for the asset would be a) CFO of DDB company = CFO of SL company b) CFO of DDB company > CFO of SL company c) CFO of DDB company < CFO of SL company Ans B: CFO of DDB will be higher. Let us see how this works. Let us assume the company does not have capex or change in working capital requirements For SL Company Gross profit = 100; depreciation =25; EBT=100-25=75; Tax @33.3% =25; so Net profit = 75-25=50; CFO = Net profit+ Non cash charges-capex-increase in working capital; CFO= 50+25-0-0=75 For DDB company Gross profit = 100; depreciation =35; EBT=100-35=65; Tax @33.3% =21.7; so Net profit = 65-21.7=43.3; CFO =43.3+35 -0-0 = 78.3 The difference arises because of the tax shield on depreciation expenses. If the effective tax rate is zero then only CFO of SL company = CFO of DDB company CFA Level 1 Practice Question 70 Given below are particulars of Blake Ltd. Calculate the diluted EPS Net Profit Rs.220 million 10 million shares outstanding. Average share price is Rs.300. Year-end share price is Rs.330.

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Adi FinShiksha Consultants Pvt. Ltd. i. 100,000 Convertible Debentures with Face value of 1000 and coupon of 8% p.a ii. Each bond can be converted in to 4 shares of Blake Ltd. iii. Tax rate 30% a) Rs.21.69 b) Rs.20.00 c) Rs.21.92 Answer A: Conversion will increase 400,000 shares. So post conversion shares Outstanding will be 10.4 mn. Conversion will save the coupon which is 100,000* 1000 * 8% = 8mn. However tax shield will be lost so net increase in profit after conversion would be 8 mn * (1-30%) = 5.6 mn. Adj Net profit = 220+ 5.6 = 225.6 mn. Adj Shares OS = 10.4 mn. Dilued EPS = Rs. 21.69 CFA Level 1 Practice Question 71 Rahul and Khan were discussing about Long lived assets and they made the following comments Rahul: Calculating depreciation under US GAAP is bit more difficult as it requires component wise depreciation. However when it comes to writing back of impairment loss it makes prediction of EPS bit easier as it does not allow writing back of impairment loss recognized earlier. Khan: The classification of Investment property category under IFRS helps analyst to separate operational assets from non-operational assets in many cases. However US GAAP does not have any such classification. a) Only Rahul is correct b) Only Khan is correct c) Both are correct

Ans B: Component wise depreciation is required by IFRS and not US GAAP Writing back of impairment loss is not allowed under US GAAP. However IFRS allows writing back to the extent of loss recognized earlier Classification of investment property is applicable only under IFRS. CFA Level 1 Practice Question 72 Zeal Ltd bought a machinery for Rs.200 mn. The tax base of the machine at the end of Year 3 is Rs.50 mn and carrying value at the end of year 3 is Rs.80 mn. The tax rate is 35% till the end of year 3.At this point if the tax rate decreases to 25% what would be the change in deferred tax a) Deferred tax liability will increase by Rs. 3 mn b) Deferred tax liability will decrease by Rs.3 mn c) Deferred tax asset will increase by Rs.3 mn

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Adi FinShiksha Consultants Pvt. Ltd. Ans B: When carrying Value >tax base it will result in deferred tax liability. Deferred tax liability@35% tax rate would be (80-50)*35%, when tax becomes 25% DL would be (80-35)*25% Decrease in DL = (80-50)*(35%-25%) = Rs.3 mn CFA Level 1 Practice Question 73 Kashyap Ltd and Peter Ltd reported exactly similar financial profile and business during last financial year, except for the fact that Kashyap Ltd used LIFO inventory and Peter Ltd used FIFO inventory in the current inflationary environment. All else being equal the working capital turnover ratio of a) Kashyaps > Peters b) Peters > Kashyaps c) Peters = Kashyap Ans A: Working capital turnover ratio = Sales / Working capital Working capital = Current assets current liabilities When LIFO inventory is used in an inflationary scenario the cheapest items will remain in the inventory compared to FIFO. Hence Current assets will be lower which will lead to lower working capital under LIFO. (this will hold good even if we account for increased cash which would arise because of higher OCF in LIFO) With sales remaining same under both LIFO and FIFO and lower Working capital under LIFO would lead to higher Working capital turnover ratio, when LIFO is used in an inflationary environment CFA Level 1 Practice Question 74 Tamo Ltd and MM Ltd are similar is all aspects including their financials and credit ratings. Both Tamo and MM issued 10,000 bonds of Rs.100 FV and a coupon of 9%. The bonds will mature after 5 years. However Tamos issue price was Rs.98/bond while MMs issue price was Rs.102/bond. All else remaining equal Tamos Interest coverage ratio compared to MMs interest coverage ratio will be a) Tamos ICR > MMs ICR b) Tamos ICR < MMs ICR c) Data Insufficient

Ans B: At a conceptual level, Yield on Premium Bond < Yield on Discount Bond. Interest expense reported in Income statement Carrying Value * Yield. So the interest expense on a discount bond will be higher than interest expense on a premium bond. We know Interest coverage ratio = EBIT/ Interest. Given the financials are same only denominators will differ.

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 Practice Question 77 Bellweather Ltd issued \$100 face value bonds at \$98 at the beginning of FY1. This bond which has 5 years tenure pays annual coupon of 5% p.a. The total money raised by the company through this issue is \$ 1,960,000. If the company uses effective yield method for amortizing bond discount then the interest expense (related to this bond only) that would be reported by the company in FY2 would be closest to a) \$100,000 b) \$109,362 c) \$107,567 Answer C: The yields on the bond is 5.47%. The company issued 20,000 bonds (1960000/98). FY 1 the company would have reported interest expense per bond of 98*5.47%=5.36. So, 0.36 will be amortized from bond discount at the beginning of FY 2 and the bond would be carried at 98.36. FY2 interest expense is 98.36*5.47%= \$5.38 per bond. Total interest expense = 5.38% * 20000 = 107,567 CFA Level 1 Practice Question 78 Below are selected items from Corebiz Ltd. The Cash flow from Financing of the company according to US GAAP is closest to (All values are in mn) Net profit: \$2500 Increase in Working Capital: \$375 Secured Loan borrowed: \$450 Unsecured loan repaid: \$ 200 New machine bought: \$ 300 Old machine sold (scrap): \$ 50 Dividends Paid: \$650 a) \$ 1300 b) \$ 250 c) \$ (-400) Answer C: In general Long term liabilities are Cash flow from financing activities. Secured loan borrowed Loan repaid Dividends paid are the liability side items. 450-200-650= (-400) CFA Level 1 Practice Question 79 Below are excerpts from a financial statement. The free cash flow to firm of this company would be closest to EBITDA: 1650 EBIT: 1375

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Adi FinShiksha Consultants Pvt. Ltd. EBT: 1250 Net Profit: 875 Inc in Acc. Receivable: 150 Inc. In Acc Payable: 170 Loan borrowed: 200 Loan Repaid: 150 Dividends Paid: 225 Capex: 450 a) 857.5 b) 257.5 c) 807.5 Answer C: FCFF = EBIT * (1-t)- Inc in WC Capex + Depreciation and Amortization; Dep = EBITDA EBIT = 275; Int = EBIT EBT =125; Tax = PAT EBT =375; tax rate = 375/ EBT = 30% FCFF = 962.5 (-20) 450 +275 = 807.5 CFA Level 1 Practice Question 80 Fastcars Ltd reported a Return on Equity of 17.9% last year. The companys Return on Total Assets for the period was 12.12%. Assuming that the company does not have any non interest bearing debt, Fastcars Debt to Equity Ratio is closet to a) 47.8% b) 67.68% c) 148.8% Answer A: RoE = NP/ Equity; RoA = NP/ Total Assets; RoE/ RoA = Assets/ Equity (which is financial Leverage); FL = 17.9%/ 12.12%= 1.48%; Equity/ Assets = 67.68% = Equity/ (equity+Debt)= 67.68%; Debt Asset = 1- 67.68% = 32.32%; this implies debt is 32.32% of assets and equity is 67.68% of assets. So, D/E = 32.32%/67.68% = 47.8%. CFA Level 1 Practice Question 81 James and Bailey were discussing about Inventory reporting. They made the following statements. How is correct? James: All else remaining the same, the inventory turnover ratio of a company that uses LIFO will be greater than the company that uses FIFO. However when it comes to working capital turn over ratio both FIFO and LIFO company will have same ratio

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Adi FinShiksha Consultants Pvt. Ltd. Bailey: If the taxes are zero then cash flow from operations of FIFO and LIFO company will be the same. However net profit margin for a LIFO company will be lower than FIFO company ir-respective of taxes. a) Both of them are wrong b) Both of them are right c) Only Bailey is right Answer C: James Statement 1: We know that LIFO companys inventory will be lower and COGS will be higher. This makes Statement 1 correct.

James Statement 2: WC = CA CL; CL will not change. CA = Cash + inventory + other CA. LIFO cos cash will be higher (CFO is higher) and inventory will be lower. However they will not compensate each other. The higher cash will be to the extent of tax saving i.e (LIFO COGS FIFO COGS) * tax rate. So in essence CA will be lower for LIFO co. this would makes net WC lower. WC Turnover ratio = Sales / Net WC. So, LIFO co will have higher WC turnover ratio Bailey Statement 1: Is right. Bailey Statement 2: Is right. As COGS for LIFO is higher, the EBIT, EBT and Pat will be lower resulting in lower Net profit margin. CFA Level 1 Practice Question 82 Agassi and Sampras were discussing about long lived assets and made the following statements. Who is correct? Agassi: The US GAAP does not allow capitalizing intangible assets if they are created internally, except for software developed for internal use. If the tangible asset is received in exchange for another asset then the asset received should be capitalized ONLY at its fair value Sampras: Long lived assets that are Held for sale need to be checked for impairment at the time of reclassification. Post this if the fair value of assets increases then both US GAAP and IFRS allows recognizing gain equal to Fair Value Carrying value. a) Both are correct b) Both are wrong c) Only Sampras ins correct Answer B: Aggasi S1: Is correct Aggasi S2: Is wrong. The asset exchange can be capitalized ta Fair value of the asset received or FV of asset given up or Book value of asset given up Sampras S1: Is correct

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Adi FinShiksha Consultants Pvt. Ltd. Sampras S2: HFS assets gain are allowed only to the extent of loss recognized earlier. Any amount of gain cant be recognized. CFA Level 1 Practice Question 83 Below are the excerpts from Kuko Ltd. The analyst does an analysis of the statement and finds that the deferred tax asset is because of companys last year loss and he also believes that company is not expected make profits for the foreseeable future to setoff this carry forward. He also notices that there is a deferred tax liability which arose because difference in depreciation rate of a machinery. The machine which has a life of 20 years has completed just 1 year of life. For analytical purpose the Financial leverage that the analyst should calculate is closest to Share holder equity: 3500 Borrowed Liabilities: 1500 Deferred tax Liabilities: 400 Total Liabilities: 5400 Net Fixed Assets: 4600 Current Assets: 200 Deferred tax assets: 600 Total Assets: 5400 a) 1.54X b) 1.45X c) 1.38X Answer B: Since the company is loss making DTA cant be recovered and DTL need not be paid back (tax is anyways Zero). So reduce DTA and reduce Share holder equity by the same amount. Reduce DTL and Increase Share holder equity(SHE) by same amount. DTL Adjustment: SHE = 3500+400 = 3900; DTL =0; total Equities+ tot Liabilities = 5400 DTA adjustment: SHE = 3900-600=3300, DTA=0; Tot Equities + Total Liabilities = 4800 Fin leverage = 4800/ 3300 = 1.45X

CFA Level 1 Practice Question 84 During the initial years of bond issue which of the following statement(s) would be true for a company that uses effective yield method of amortization for carrying the bonds. All else remaining the same, i) Debt Equity ratio of the company that issues premium Bond< D/E of the company that issues discount bond
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Adi FinShiksha Consultants Pvt. Ltd. ii) iii) a) b) c) Financial Leverage of the company that issues premium bond > FL of the the company that issues discount bond Operating cash flow of the company that issues premium bond < OCF of company that issues discount bond All of the above I & II only II & III Only

Answer C: I is wrong: At inception \$ 100 par bond issued at premium will be recorded at more than \$ 100, let us say \$105. This will increase the liability of the company, while equity remains the same. As a result D/E of Premium Bond Company will be higher II is Correct: As an extension of previous statement D+E will increase for premium bond while equities remain same for the premium bond. As a result FL will be higher for premium bond. In simple terms debt will be higher hence FL will be higher III is correct: The operating cash flow of both Premium bond and Discount bond will be same if the taxes are absent (because even though interest expense are different, the actual outflow is only coupon which is same for both bonds). However remember discount bond has to pay higher interest under effective yield method, these results in lower EBT and lower tax. As a result the discount bond company will have higher OCF. CFA Level 1 Practice Question 85 Dum Ltd sold an asset for Rs.500 crs and reported a gain of Rs.50 crs in the income statement as Gain from the disposal of asset. The carrying value of this asset before sale is a) 500 crs b) 450 crs c) 550 crs Ans B:Gain from sale of disposal of asset = Sale value Carrying value 50 = 500-CV CV=450 CFA Level 1 Practice Question 86 Which of the below statement is NOT correct about Zero coupon bond a. Zero coupon bonds will never trade above par value b. Price of Zero coupon bonds are less sensitive to change in interest rates c. Zero coupon bonds will be issued at a deep discount to the face value

Ans B: For bonds with similar maturity the 'Duration' of Zero coupon bond will be higher than coupon paying bond. Hence the price of Zero coupon bond is more sensitive to change in interest rates.

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 question 87 A 5 year semi annual coupon paying bond with a face value of \$100 is currently trading at \$97.54. The bond pays a coupon of 6.5% p.a. The convexity of this bond is closest to
a) 0.1058 b) 10.58 c) 4.19

CFA Level 1 question 88 A 15 year Zero coupon bon is currently trading at 68-24. The bond equivalent yield of this issue is closest to a) 2.498% b) 2.529% c) 2.514% Answer C: Price of the bond is 68.75. Annualised yield of the bond = [100/68.75] ^ (1/15)=2.529%. Bond equivalent yield is semi-annual yield so,{ [(1+2.529%) ^0.5] *2 } -1 = 2.514. CFA Level 1 question 89 If the interest rate volatility increases, all else remaining the same the price of a putable bond will a) Increase b) Decrease c) Remain the same

Ans A: Price of a Callable bond = Price of an ordinary Bond Call option Premium Price of a putable bond = Price of an ordinary Bond + Put option Premium An option premium will be determined by Spot price, Strike price, Volatility of the underlying, Time for expiry and Risk free interest rate. An increase in the last 3 parameters will lead to increase of option premiums of both call option and put option. So, when volatility of interest rate (the underlying) increases the put option premium will increase. As per the above formula, when put option premium increases the price of the putable bond will increase. CFA Level 1 question 90 The price yield relationship curve of the bond for prices above the callable price a) Will have higher convexity compared to an option free bond b) Will have negative convexity c) Will have similar convexity as an option free bond

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Adi FinShiksha Consultants Pvt. Ltd. Ans B: Convexity is the second derivative of price change for a unit change in yield. For a large change in yields one need to do convexity adjustment to get a better approximation of price change of the bond. For a callable bond when the market price are above the callable price the bond faces the risk of being called and hence for further drop in yield the bond price will not make big moves. At this point the convexity of the bond will turn negative. CFA Level 1 question 91 The current treasury spot rates for various maturities are given below 0.5 Years 3% 1.0 years 3.1% 1.5 years -3.25% 2.0 years 3.3% The arbitrage free price of a semi annual coupon paying treasury bond with coupon rate of 7% p.a, face value of USD 100 and exactly 1.5 years left to maturity will be closest to. a) USD 105.4470 b) USD 105.4563 c) USD 105.4593

Ans B: In an arbitrage valuation all coupons need to be discounted by respective treasury spot rates. The discount rate should be converted to semi annual rates i.e for 0.5 year it would be 3.0%/2 and so on. Arb free price = 3/(1+1.5%)^1 + 3/(1+1.55%)^2+ 103/(1+1.625%)^3=USD 105.4563 CFA Level 1 question 92 A bond which pays a coupon of 5.5% pa is trading at a price of USD 102. The bond pays coupon semiannually, has a face value of USD 100 and has 3 years left for maturity. If the Macaulay duration of this bond is 2.80 years then for a 25 bps increase in yield the price of the bond would a) Decrease to USD 101.27 b) Decrease to USD 101.30 c) Decrease to USD 101.22

Ans B: Duration In general indicates price sensitivity of the bonds price to change in yields. In specific Macaulay Duration: Indicates the time taken to get the invested capital back. Faster you get better it is. So, lesser the yield lesser the time required to get your money back and vice versa. However this still does not provide the exact quantum of risk w.r.t yield change. Macaulay duration will be given by:( t1*PVCF1+t2*PVCF2+.+ tn * PVCFn)/ (k*Price of the bond)

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Adi FinShiksha Consultants Pvt. Ltd. Where t1, t2 etc represent each cash flow i.e either coupon or principle repayment, PVCFn indicates Present value of cash flow n and k indicates number of coupon per year. Modified duration: Modified duration provides the likely percentage change in price of a bond for a percentage change in yield. In other words a modified duration of 4.2 would indicated for every 100 bps change in yield price would approximately change by 4.2% (note the word approximately as for large changes this relationship will not hold good, effect of convexity will come in to play) Modified duration will be given by = Macaulay duration/(1+[yield/k]) For our question we need Modified duration to find the price change. For which we need to find the yield of the bond. The yield of this bond can be found as 4.78%. Modified duration = 2.8/(1+[4.78%/2]) = 2.73. This indicates for every 100 bps change in yield price will change by 2.73%. So for 25 bps change the price change will be approximately 2.73/4 = 0.68. The price of 102 will decrease by 0.68% i.e 102*0.68= 0.70 Price of the bond after increase in yield will be equal to 102 - 0.69 = USD 101.3 CFA Level 1 question 93 Adam purchased a 5 years semiannual floater bond at a price of \$101.23. The face value of the bond is \$100 and the coupon is LIBOR+40 bps. The spread for life of this bond is closest to A) 15.21 bps B) 15.40 bps C) 63.82 bps

SFL = { [100 * (100-Price)]/ Life of the bond + Spread above reference rate} * 100/ Price of bond

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Adi FinShiksha Consultants Pvt. Ltd. {[100*(100-101.23) / 5] + 40} * 100/ 101.23} = (-24.6+40)* 100/101.23 = 15.21 bps CFA Level 1 question 94 A Zero coupon bond with exactly four years left for maturity is trading at USD 77.52. The face value of this bond is USD 100. The Yield to Maturity of this bond is closest to a) 6.67% b) 6.57% c) 6.47% Ans C: While many of us felt that this is an easy and straight forward question, some of us missed the important point. In the absence of coupon all bonds are considered as semi annual coupon paying bonds.(refer page 457 book 5). For our question this would imply 100/(1+r)^8 = 77.52. And the yield on bond is r*2. I.e 100 discounted by semiannual yield for eight period (8 semi annual coupon paying periods). Solving for r we would could 3.234% which is semiannual yield. The annual yield would be 3.234*2 = 6.47% CFA Level 1 question 95 A 5 year annual coupon paying bond is trading at a price of USD 102.19. The duration of the bond is 4.35 and convexity of the bond is 0.24. For a 200 bps increase in yield the price of the bond will approximately move to a) USD 93.79 b) USD 93.30 c) USD 92.80

Ans B: The modified duration gives price change of a bond only for a small movement in yield. For larger changes one need to do convexity adjustment. So, for large movement in yields price changes should be estimated by Duration * Change in yield in percentage + 0.5 * Convexity * (change in yield )^2 -4.35*.02 + 0.5*0.24 *(.02)^2 = -8.7% The price of USD 102.19 will decrease by 8.7% i.e 102.19*(1-8.7%) = 93.30 CFA Level 1 question 96 Eva purchased Treasury Inflation protected securities (TIPS) on 1-January-2011. The annualized inflation at that time is 2.4% and after six months the same has increased to 2.8%. The TIPS has a face value of

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Adi FinShiksha Consultants Pvt. Ltd. CFA Level 1 question 99 Which of the following is Most likely correct? a) Under imperfect competition, the marginal revenue curve is lower than average revenue curve b) Under imperfect competition, the marginal revenue curve is higher than average revenue curve c) Under imperfect competition, the marginal revenue curve is the same as the average revenue curve Answer A. In imperfect competition, you can only sell more by cutting prices. Thus MR < AR CFA Level 1 question 100 In the case of an inflationary gap, an investor would want to a) Increase investments in defensives b) Decrease investments in Commodities c) Decrease investments in long maturity fixed income securities Answer C. As interest rates are expected to rise

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Adi FinShiksha Consultants Pvt. Ltd. FinShiksha CFA Level I Batch for 2014 starting in December 2013 Some of the highlights of the program are You can choose to attend preparatory sessions only for specific topics and not the entire syllabus for CFA Level 1. For example if you need assistance only for Fixed income then you can attend that alone The program is conducted online through LIVE INTERACTIVE webinars, hence you can attend it from anywhere. Post the classes you will get access to the videos of these sessions which you can access any number of times. The videos are non-downloadable. Each session is 1.5 hours and there is maximum of only one session per day, which will help you to keep your concentration intact as against day long sessions. Having short sessions will allow you to have enough revision time during the weekends. The pricing for individual modules starts at Rs.2,000 or USD 35, Steep discounts are available for people opting to attend the entire program Faculty with CFA or MBA from IIMs and with rich industry experience. Each candidate will be attached to a mentor who can be accessed for doubts.

The list of our sessions is as follows

Module Name Ethics Equities Corporate Finance Quantitative Methods Economics Fixed Income Financial Reporting & Analysis AI, Derivatives & Portfolio Management 1 mock test + 4 Sectional Mock Tests All Modules + Mock Test + Videos # of Sessions 5 sessions 6 sessions 5 sessions 7 sessions 7 sessions 6 sessions 12 sessions 8 sessions 60 sessions Live sessions + Videos INR USD 2,000 35 3,000 55 2,000 35 3,000 55 3,000 55 3,000 55 5,500 100 2,000 35 1,000 20 18,000 350 Only Videos INR USD 1,600 28 2,400 44 1,600 28 2,400 44 2,400 44 2,400 44 4,400 80 1,600 28 1,000 20 13,500 263

For more details and enquiries, kindly get in touch with us at Email: nirmal.k@finshiksha.com / peeyush@finshiksha.com