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CFA Level 1

MOCK EXAM 1
Morning Session
Time Limit: 3 Hours
1.

Tenence recently passed the CFA examination. When he seek for potential
employers, he writes in the cover letter: "I have passed all three levels of the CFA
Program and may be eligible for the CFA charter after I get the required work
experience." According to AIMR Standards of Professional Conduct, Terence:
A.
B.
C.
D.

2.

Amy, a CFA candidate, recently joined A&F Asset Management, and reports
directly to Tammy. Shortly after joining the firm, Amy learned that A&F Asset
Management does not have a copy of the Code and Standards. Which of the
following statements best complies with AIMR Standards of Professional Conduct?
A.
B.
C.
D.

3.

violated Standard IV (B.3) Fair Dealing.


violated Standard II (B) Professional Misconduct.
violated Standard II (A) Use of Professional Designation.
acted in a proper manner.

Amy must deliver a copy of the Code and Standards to Tammy.


Amy must notify Tammy, in writing, of her obligation to comply with the Code
and Standards.
Statement A and B.
None of the above.

The following are not the AIMR members with supervisory responsibility
EXCEPT:
A. Not expected to prevent violations of laws, rules and regulations by non-AIMR
member employees.
B. In compliance with AIMR Standards after warning an offending employee to stop
violating the applicable statutes, regulations, and provisions of the AIMR Code and
Standards.
C. Expected to evaluate personally the conduct of their employees concerning
applicable statutes, regulations, and provisions of the AIMR Code and Standards on
a continuing basis regardless of how many employees they supervise.
D. Expected to establish and implement written compliance procedures about
applicable statutes, regulations, and provisions of the AIMR Code and Standards.

4.

According to Standard II (B) Duty to Employer, which of the followings is TRUE?


A.
B.
C.

Members are prohibited from undertaking independent practice in competition


with their employer.
Members are prohibited from making arrangements or preparations to go into a
competitive business before terminating their employment.
Members must obtain their employer's written consent to engage in an independent

Mock Exam 1 (Morning Session ) (Rev. 1)

D.

5.

Keith, CFA, has been invited to join a group of analysts in touring the riverboats of
A & K Limited. Since commercial flight schedules are inconvenient and not
practical for the group's time schedule, A & K Limited has arranged chartered
flights from casino to casino. A & K Limited has also arranged to pay the hotel bill
for the three nights of the tour. The trip is purely business. According to AIMR
Standards of Professional Conduct, Keith should:
A.
B.
C.
D.

6.

The plan sponsor.


The firm's shareholders.
The plan participants and beneficiaries.
None of the above.

Daniel, CFA, is a portfolio manager with the trust department of Citi Nation Bank.
One of his accounts is his children's trust fund. Daniel allocated IPO shares to his
children's trust fund before he has completely satisfied all the needs of his other
accounts. According to AIMR Standards of Professional Conduct, which of the
following standards did Daniel violate?
A.
B.
C.
D.

8.

As the arrangements are inappropriate, decline to accept the trip.


Offer to pay for his share of the airfare and his own hotel bill.
Accept the flight, but pay his own hotel bill.
Accept the arrangements as they are.

Karen, CFA, is the investment manager of a corporate pension plan. Under ERISA,
she owes her fiduciary duty to:
A.
B.
C.
D.

7.

competitive consulting work.


Members are not obligated to obtain their client's written recognition that they are
engaging in an independent competitive consulting arrangement not related to
member's firm.

Standard (A.3) Independence and Objective.


Standard IV (B.4) Priority of Transactions.
Standard IV (B.7) Disclosure of Conflicts to Clients and Prospects.
Standard IV (A.1) Reasonable Basis and Representations.

Which of the following about the breach of Standard IV (B.4) Priority of


Transactions is correct:
A. Members wait to trade until after their firm's clients have been informed, but before
they have had time to act.
B. Members for their client's account before the release of material nonpublic
information.
C. Members trade on their family accounts after the member's clients and employer
have had an adequate opportunity to act.
D. Members buy stock for a client's account after the stock is put on the firm's
recommenced buy list but before this information is made public.

Mock Exam 1 (Morning Session ) (Rev. 1)

9.

As part of an AIMR investigation into the conduct of Helen, CFA, AIMR requests
records from Helen about her investment accounts. Helen writes AIMR a letter
stating that under Standard IV (B.5), Preservation of Confidentiality, that she is
unable to comply with their request. Which of the following statement is TRUE?
A.
B.
C.
D.

Is correct in her interpretation of Standard IV (B.5).


Should not turn over the information because it will violate federal material
nonpublic information statutes and AIMR's Standard V (A) Prohibit against Use of
Material Nonpublic information.
Will not be in violation of Standard IV (B.5) by turning over the requested
information because under the Professional Conduct Program, the Disciplinary
Review Subcommittee is considered an extension of Helen.
All of the above.

10. Vivian, CFA, a research analyst assigned to Double Limited, has been
recommending the stock's purchase in her quarterly report. Vivian has recently
married and just discovered her husband's trust account owns several million
dollars worth of Double Limited. The stock makes up more than 50 percent of the
trust's value but less than 5 percent of Double Limited's outstanding shares.
According to AIMR Standards of Professional Conduct, Vivian should:
A.
B.
C.
D.

take no action because the stock is not in her name.


disclose her interest in the stock at the time of her next report.
cease including Double Limited stock in her report.
take no action because the holding is less than 5 percent of the outstanding shares.

11. Which of the following statements concerning the AIMR Performance Presentation
Standards about the calculation of composite returns is True?
A.
B.
C.
D.

Asset weighting within composites is not required using beginning of period


weights.
Portfolios no longer under management should be included in historical
composites.
Model results may be presented if they conform to the portfolio's investment
strategy and objectives.
All of the above.

12. according to AIMR Performance Presentation Standards, which of the following


statements about composite return calculations is FALSE?
A.
B.
C.
D.

13.

Returns must be total returns.


Cost accounting is required.
Returns must be time-weighted rates of return calculated using geometric linking.
Returns from cash and cash equivalents held in portfolios must be included in
return calculations.

Kenneth, CFA, is a portfolio manager at A&B limited, if he suspects a colleague at


his company of engaging in ongoing illegal activities, as according to the AIMR
Standards of Professional Conduct, he is required to take all of the following
actions EXCEPT:
A. Determine whether the conduct is, in fact, illegal.

Mock Exam 1 (Morning Session ) (Rev. 1)

B. Disassociate him from any illegal activity.


C. Report the illegal violations to the appropriate governmental or regulatory
organizations.
D. None of the above.
14.

Gloria, CFA, has been assigned by her employer to analyze Well Limited. Which of
the following actions would most likely violate AIMR's Standard III(C), Disclosure
of Conflicts to Employer? Gloria does NOT report to her employer that:
A.
B.
C.
D.

15.

Paul, CFA, heads the research department of a large brokerage firm. Paul has
supervisory responsibility over 25 analysts. If Paul delegates some supervisory
duties, which statement best describes his responsibilities based on the AIMR
Standards of Professional Conduct?
A.
B.
C.
D.

16.

Paul is not responsible for those duties he has delegated to his subordinates.
Paul's supervisory responsibilities only apply to analysts with the CFA designation.
Paul retains supervisory responsibility for all subordinates despite his delegation of
some duties.
The AIMR standards prevent Paul from delegating supervisory duties to
subordinates.

Before disseminating changes in his firm's buy/sell list. Johnson, a CFA candidate,
calls his best clients to apprise them of the pending change. Based on the AIMR
Standards of Professional Conduct, what standard, if any, did Johnson violate?
A.
B.
C.
D.

17.

she owns three shares of Well Limited


her mother owns 10 shares of Well Limited.
she is trustee of the Well Limited Foundation for Heart Research.
her brother in-law works on the assembly line at Well Limited.

Standard IV(B.3), Fair Dealing.


Standard IV(B.4), Priority of Transactions.
Standard V(A), Prohibition Against Use of Material Nonpublic Information.
None of the above.

According to the AIMR Standards of Professional Conduct, which of the following


about Standard IV (B.5), Preservation of Confidentiality, is TRUE?
A. If a member receives information due to his or her special relationship with the
client indicating illegal behavior on the part of the client, the member may not have
an obligation to inform the appropriate authorities.
B. Confidentiality clauses in settlement agreements protect members from divulging
information during investigations.
C. Members having a special relationship with a client may withhold that information
from an AIMR Professional Conduct Program investigation of that client.
D. A member may disclose information received from a client, even to authorized
fellow employees who are also working for the client.

Mock Exam 1 (Morning Session ) (Rev. 1)

18.

Based on the AIMR Standards of Professional Conduct, which of the following


statements is least likely to be a violation of Standard IV (B.6), Prohibition against
Misrepresentation?
A.
B.
C.
D.

An analyst tells a prospective client that investment grade bonds involve less
default risk than junk bonds.
A bond trader tells a client that he can assist the client in all the client's investment
needs: equity, fixed income, and derivatives.
An investment manager recommends to a prospective client an investment in
mortgage IO strips because they are guaranteed by an agency of the federal
government.
A broker guarantees that a specific common stock will double in value over the
next six months.

19. John receive $1,000 at the beginning of each for the next 10 years. Assume that the
interest rate is 12%, calculate the value of this annuity at the end of the ten-year
period.
A.
B.
C.
D.

$13,578.24
$17,548.74.
$19,654.58.
None of the above.

20. There is a perpetuity of $500 and the interest rate is 10%. Calculate the present
value of this perpetuity.
A.
B.
C.
D.

$500.
$5,000.
$5,500.
None of the above.

21. John buy the computer through creating a loan of $40,000. It is to be paid off using
6 percent over ten years. Calculate the monthly payment.
A.
B.
C.
D.

$421.72.
$444.08.
$478.59.
None of the above.

22. Which of the following statements about probability concepts is TRUE?


A.
B.
C.
D.

The multiplication rule for independent events is P(AB) = P(A)(B).


A conditional probability is the probability of a particular event occurring given
that another event has not occurred.
The addition rule of probabilities is P(A or B) = P(A)+P(B).
All of the above.

23. For a binomial random variable B(n=12,p=0.5), Find out the mean and variance.
A.

Mean
6

Mock Exam 1 (Morning Session ) (Rev. 1)

Variance
3

B.
C.
D.

7
3.5
8
4
None of the above.

24. Which of the following statements best describes the binomial distribution?
A.
B.
C.
D.

Has a variance equal to -1.


Is skewed to right.
Is defined in terms of the mean and variance of its associated normal distribution.
Is a discrete probability distribution that is used to make probability statements
about quantities with binary outcomes?

25. Peter buys a stock for $25 per share. At the end of the one-year holding period the
price of the stock is $40 per share. Assume that it pays no dividends, calculate the
continuously compounded return.
A.
B.
C.
D.

35%.
47%.
56%.
None of the above.

26. Which of the following statements about time-series data is TRUE?


A.
B.
C.
D.
27.

Consists of a range of values that bracket the parameter with a specified level of
probability 1- is a confidence internal estimate.
Cross-sectional data are a set of values of a particular variable in sequential time
periods.
A point estimate is a single estimate of an unknown population.
None of the above.

Which of the following statements about correlation and linear regression is


TRUE?
A. A limitation of regression analysis is that regression relations can change over
time.
B. Outlines are small numbers of observations at either extreme (small or large) of a
sample.
C. Spurious correlation arises in data solely because each of two variables is related to
some third variable.
D. The dependent variable Y, is equal to the intercept b0 , plus a slope coefficient, b1 ,
times the independent X, plus an error term,.

28. Based on the following table, if the discount rate is 10%, calculate the present value
of the cash flow.

1
$100

Year-End Cash Flows


2
3
$150
$200

4
$250

If the discount rate is 12 percent, the present value of this stream of cash flows is

Mock Exam 1 (Morning Session ) (Rev. 1)

closest to:
A.
B.
C.
D.

$636.36
$579.87
$535.89
None of the above.

29. There is 5-year annuity of $3,000 per year. However, the first payment will not pay
until year 3. Assuming the interest rate is 10%, calculate the present value of this
annuity.
A.
B.
C.
D.
30.

Which of the following is the weakest and strongest measurement scale?


A
B
C
D

31.

Weakest
Ordinal
Ordinal
Nominal
Nominal

Strongest
Interval
Ratio
Interval
Ratio

Which of the following statements about statistical concepts is FALSE?


A.
B.
C.
D.

32.

$8397.
$9,399.
$10,258.
None of the above.

A frequency is a tabular display of data summarized into a relatively small number


of intervals.
An interval is a set of return values within which an observation not falls.
A parameter is any descriptive measure of a population characteristic.
None of the above.

The following shows the yearly returns of aggressive equity funds for four years:
1999 = +5%
2000 = +2%
2001 = +1%
2002 = -4%
Assume that this distribution can represent either the population or a sample of
aggressive equity funds. Calculate the population and sample standard deviation.

A.
B.
C.
D.

Population
Standard Deviation
2.73%
3.09%
3.24%
None of the above.

Mock Exam 1 (Morning Session ) (Rev. 1)

Sample
Standard Deviation
3.99%
4.55%
3.74%

33.

The minimum proportion of observations falling within 2 standard deviations of


the mean is closest to:
A.
B.
C.
D.

95%.
75%.
68%.
None of the above.

Use the following data to answer Questions 34 and 35.


The following table summarizes the results of a poll taken of CEOs and analysts about
the economic impact of a pending piece of legislation:
Group
Others
Analysts
Total
34.

Total
70
130
200

0.15.
0.3.
0.5.
None of the above.

What is the probability that a randomly selected individual from this group will be
either an analyst or someone who thinks this legislation will have a positive impact
on the economy?
A.
B.
C.
D.

36.

Think the legislation will


have a negative impact.
30
30
60

What is the probability of selecting an analyst who thinks that the legislation will
have a negative impact on the economy?
A.
B.
C.
D.

35.

Think the legislation will


have a positive impact.
40
100
140

0.35.
0.58.
0.64.
None of the above.

Accounting to a new classical view, what is the effect of increasing government


expenditures financed by a budget deficit.
A.
B.
C.
D.

Stimulate output if the marginal propensity to save is negative.


Exert little impact on aggregate demand.
Increase aggregate demand and employment.
None of the above.

37. Which of the following statement is FALSE?


A.
B.
C.

The crowding-out model implies that deficits will have a upward pressure on the
real rate of interest.
The new classical model contends that deficits exert little impact on interest rates.
Empirical studies consistently show a statistically significant relationship between

Mock Exam 1 (Morning Session ) (Rev. 1)

D.
38.

budget deficits and interest rates.


All of the above.

Based on the following information, if the Federal Reserve buys $150 million of
Treasury Bills from public, what is the effect on money supply?
Reserve requirement: 25%
Bank keeps no excess reserve
A.
B.
C.
D.

Increase by $112.5 million.


Increase by $150 million.
Increase by $600 million.
Decrease by $800 million.

39. If there is an unanticipated increase in the money supply, what will be the effect?
A.
B.
C.
D.

Decrease in price level.


Increase in interest rate.
Decrease in GDP.
Increase output as demand increases as people try to reduce their holdings of
money.

40. Which of the following about a purely competitive market is FALSE?


A.
B.
C.
D.

All firms in the market produce homogeneous products.


Each seller is small relative to the total market.
There are a large number of dependent firms.
There are no barriers to entry or exit.

41. Which of the following statements about supply curves is TRUE?


A.
B.
C.
D.

For decreasing cost industries, the supply cuve slopes downward to the right.
For increasing cost industries, the supply curve sweeps upward to the right.
For constant cost industries, the supply curve is horizontal.
All of the above.

42. Which of the following statements about a monopolist is TRUE?


A.
B.
C.
D.

There is no restriction for entrance.


Many competitors are found in the market.
Is the sole producer of a product for which there are several substitutes.
Sells a product for which consumers believe no adequate substitutes exist.

Mock Exam 1 (Morning Session ) (Rev. 1)

43.

Which of the following is the reason for the Oligopolists to collude and to cheat on
collusive agreements?
A.
B.
C.
D.

Restrict output.
Restrain trade.
Increase its share of the joint profit.
All of the above.

44. Under a system of flexible exchange rates, if there is a decrease in demand for the
U.S. dollar in the foreign exchange market will cause:
A.
B.
C.
D.

The U.S. trade surplus to increase.


The U.S. unemployment rate decrease.
The U.S. dollar to depreciate in value.
The U.S. dollar to appreciate in value.

45. Which of the following are the two specific conditions that must be met for revenue
recognition to take place under the accrual concept of income?
A.
B.
C.
D.
46.

In a flexible or floating change rate system, which of the following types of changes
is least likely to affect the exchange-rate?
A.
B.
C.
D.

47.

Changes in supply of currency.


Changes in demand of currency.
Changes in. interest rates.
Changes in unemployment.

If the real interest rates in the U.S. are lower than its trading partners, what is the
effect on the foreign exchange value of the dollar?
A.
B.
C.
D.

48.

Cash is received.
Delivery of goods and services and the absence of significant contingent obligation
on the part of the seller.
Passage of risk of ownership from seller to buyers.
Completion of the earnings process and assurance of payment.

Depreciate.
Appreciate,
Remain steady.
Uncertain.

Which of the following statements about the foreign exchange market is TRUE?
A.
B.
C.

A foreign currency is at a forward discount if the forward rate expressed in dollars


is below the spot rate, whereas a forward premium exists if the forward rate is
above the spot rate.
In the spot market, currencies are traded for immediate delivery but in the forward
market, contracts are made to buy and sell currencies for future delivery.
According to interest parity theory, when the forward discount (or premium)
exactly offsets the interest rate differential, then the forward rate is said to be
interest parity.

Mock Exam 1 (Morning Session ) (Rev. 1)

10

D.
49.

All of the above.

Based on the following information, find out the forward rate.


Domestic nominal rate of return: 30%
Foreign nominal rate of return: 25%
Current exchange rate: 0.4 (D/F)
A.
B.
C.
D.

0.273.
0.398.
0.436.
None of the above.

Use the following data to answer Question 50 to 52


.
Net Income
$1,000
Depreciation expense
70
Purchase of equipment
200
Goodwill amortization
30
Sale of motor car
25
Sale of common stock
100
Decrease in accounts receivable
40
Increase in inventory
35
Issuance of bonds
20
Increase in accounts payable
30
Increase in wages payable
15
Capital stock exchanged for equipment 10
50. Cash flow from operating activities is:
A.
B.
C.
D.

$1,065.
$1,090.
$1,135.
None of the above.

51. Cash flow from investing activities is:


A.
B.
C.
D.

-$200.
-$175.
+$175.
+$200.

52. Cash flow from financing activities is:


A.
B.
C.
D.

$20.
$100.
$120.
None of the above.

Mock Exam 1 (Morning Session ) (Rev. 1)

11

53. In a common-size financial statements, which of the following statement is TRUE?


A.
B.
C.
D.

A common size balance sheet expresses all balance sheet accounts as a percentage
of total asset.
Common size ratios are useful in comparing companies of different sizes.
Common size ratios are useful to examine trends over time within a single
company.
All of the above.

54. Based on the following information, calculate the:

The company had 1,000,000 shares outstanding at the beginning of the year.
On June 30th the company declared and issued a 20 percent stock dividend.
On September 30th the company sold 200,000 shares of common stock at par.

A.
B.
C.
D,

1,000,000.
1,200,000.
1,250,000.
1,400,000.

55. During deflation and decreasing inventory quantities, a company using last-in firstout (LIFO) rather than first-in first-out (FIFO). What is the effect on inventory
turnover and net profit margin?
Inventory Turnover Net Profit Margin
A.
B.
C.
D.

Higher
Higher
Lower
Lower

Lower.
Higher.
Lower.
Higher.

A.
B.
C.
D.

Cost of Good Sold


Lower
Higher
Lower
Higher

Cash Flow
Lower.
Lower.
Higher.
Higher.

56. During deflation and decreasing


inventory quantities, a company using LIFO rather than FIFO. What is the effect
on cost of goods sold and cash flows?

57.

The following information is calculated by using LIFI method, calculate the cost of
goods sold using FIFO.
2000
2001
Beginning Inventory
$80,000
$70,000
Ending Inventory
$70,000
$50,000
LIFO Reserve
$5,000
$8,000
LIFO Cost of Goods Sold
$300,000
$250,000
A.
B.
C.
D.

$219,000.
$238,000.
$247,000.
none of the above.

Mock Exam 1 (Morning Session ) (Rev. 1)

12

58. Two growing companies are identical except that Company X capitalizes whereas
Company Y expenses costs for long-lived resources. Which of the following
statements about financial statement effects is FALSE? Company X will show:
A.
B.
C.
D.

Lower income variability.


Lower profitability.
Higher leverage ration.
Higher cash flows from operations.

59. A company retires bond before the maturity date. Assume that the bond is initially
sold at discount, the difference between the bonds market value and the bonds
book value will:
A.
B.
c.
d.

Treated as ordinary income or loss.


Listed on the statement of retained earnings.
Treated as an extraordinary gain or loss.
Posted to the reserve account.

60. Which of the following is NOT a criteria for classifying a capital lease?
A.
B.
C.
D.

The term of the lease is 75 percent or more of the estimated economic life.
It contains a bargain purchase option.
Transfer ownership.
The present value of the minimum lease payments equals or exceeds 80 percent of
the fair value of the leased property.

61. Assume the present value discounted by 15% is $3,500,000 and it is used the
straight-line depreciated method. Find out the reported lease related expense for
the first year.
The lease is a 10-year capital lease with annual payments of $500,000.
There is a guaranteed residual value of $500,000 at the end of the lease.
A.
B.
C.
D.

$525,000.
$830,000.
$970,000.
None of the above.

62. What is the reason for an analyst should consider whether a company acquired
assets through a capital lease or an operating lease?
A.
B.
C.
D.

It could affect the leverage ratio.


It could affect the liquidity.
It could affect the turnover.
None of the above.

Mock Exam 1 (Morning Session ) (Rev. 1)

13

63. Under off-balance-sheet financing, which of the following is FALSE?


A.
B.
C.
D.
64.

Use of take-or-pay agreements to ensure the long-term availability of raw


materials and other inputs necessary for operations.
Sale of receivables to unrelated parties.
Issuance of debt with warrants to finance expansion.
All of the above.

Which of the following factor that affect the cost of capital and it is not control by
the company?
A.
B.
C.
D.

Interest rates and tax rates.


Wages policy.
Capital structure policy.
None of the above.

65. Which of the following statements about business risk and financial risk is TRUE?
A.
B.
C.
D.

Business risk is the riskiness of the company's assets if it uses debt.


Financial risk is the additional risk placed on the common stockholders when
more debt is acquired.
Interest rate risk can be avoided.
None of the above.

66. Which of the following statement about market is FALSE?


A.
B.
C.
D.

The fourth market describes direct trading of securities using the Internet.
The primary market is where most of the trading takes place on major exchanges
such as the New York Stock Exchange.
The secondary market describes block trades conducted by exchange members off
the exchange floor.
All of the above.

67. Which of the following statement about market is FALSE?


A.
B.
C.
D.
68.

Over-the-counter-market is called a continuous market.


Dealer-markets are price driven markets.
If trades occur at any time the market is open, it is called continuous market.
None of the above.

Which of the following statement about weighting schemes used in constructing


stock market indexes is FALSE?
A.
B.
C.
D.

The Nikkei Dow is a price-weighted index.


The Standards and Poor's indexes are market value-weighted indexes.
A market-weighted index automatically adjusts for stock splits.
None of the above.

Mock Exam 1 (Morning Session ) (Rev. 1)

14

69. Which of the following about a well functioning market is FALSE?


A.
B.
C.
D.

numerous buyers and sellers are willing to trade at prices about and below the
current price.
the current price of a security fully reflects all the information currently available
about the security.
market participants can buy and sell quickly at a known price.
transaction costs are low.

70. Study the following information about a stock, calculate the price earning ratio:

Required rate of return: 15%


Constant growth rate: 8%
A return on equity: 12%
The earning retention ratio: 20%.

A.
B.
C.
D.

3.8.
4.7.
5.6.
None of the above.

71. There is a stock selling for $25 and it has an expected annual dividend of $4.
Assume it will have a sustainable growth rate of 9% perpetual and the capital
markets are in equilibrium; calculate the market discount rate for this stock.
A.
B.
C.
D.

20%.
25%.
30%.
None of the above.

72. Study the following information; calculate the expected rate of return.

A.
B.
C.
D.

Index is now selling at $490.


Market index multiplier is expected to be 5x.
Index earnings are expected to be $100.
Dividend payment is expected to be $40.
10%.
20%.
30%.
40%.

73. Which of the following statement about market value added, Economic Value
Added and the franchise factor is TRUE?
A.
B.
C.
D.

The critical factors determining the franchise P/E are the risk premium.
Market Value added is used primarily for evaluating management.
Economic Value Added is a measure of external performance.
The franchise factor concept is similar to Economic Value Added because it
recognizes that adding value requires investing in projects that provide excess net
present value.

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15

74.

In accrual accounting, the matching principle states that:


A.
B.
C.
D.

75.

A change from an incorrect to an acceptable accounting method reported as:


A.
B.
C.
D.

76.

related revenues and expenses are accounted for during the same time period.
an entity should match the cash payment and cash receipt.
an entity should match the income and expense monthly.
none of the above.

An extraordinary item.
Correction of error.
A prior period adjustment.
None of the above.

Which of the following statements about the percentage-of-completion and


completed contract methods is FALSE? The completed contract method will
produce:
A.
B.
C.
D.

The same cash flows as that using the percentage-of-completion method.


Smaller net worth and retained earnings than using the percentage-of-completion
method.
Balance sheets with greater current assets (assuming cash receipts are at least as
great as revenue
earned) and greater liabilities than using the percentage-of-completion method.
Greater net income in the periods before construction is completed, but not at the
end of the contract, than using the percentage-of-completion method.

77. The following information is extracted from a financial statement:


Net income
$1000
Decrease in accounts receivable
120
Increase in inventory
40
Increase in accounts payable
20
Decrease in wages payable
10
Increase in deferred taxes
40
Depreciation
100
Profit from the sale of fixed assets
10
Dividends paid out
80
Cash flow from operations is:
A.
B.
C.
D.
78.

$940.
$1020.
$860.
none of the above.

Which of the following statements about cash flow is TURE?


A.
B.
C.
D.

Cash flow from operations includes changes in current asset accounts.


Cash flow from investing includes the sales of motor car.
Cash flow from financing includes the payment of dividend.
All of the above.

Mock Exam 1 (Morning Session ) (Rev. 1)

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79.

A increase in inventory over a period of time would be considered:


A.
B.
C.
D.

80.

81.

Use of cash.
Adjusting entry.
Non-cash flow item.
None of the above.

Study the following information, find out the cash conversation cycle.

Receivables Turnover: 30
Inventory Turnover: 15
Payable Turnover: 20

A.
B.
C.
D.

15 days.
18.25 days.
25.34 days.
none of the above.

Which of the following could increase the current ratio?


A.
B.
C.
D.

82.

Buys the equipment on credit.


Buy the stock on account.
Sells marketable securities for cash.
All of the above.

Based on the following information, calculate the return on equity.

Total asset turnover: 2.1


After-tax profit margin: 30%
Financial leverage multiplier is 0.5.

A.
B.
C.
D.
83.

25.9%.
28.3%
31.5%
none of the above.

Study the following information, calculate the return on equity.

84.

The asset turnover (S/A) is 2.5.


A leverage multiplier (A/E) is 1.2.
An interest expense ratio (I/A) of 0.08.
A tax retention rate (1 -1) is 0.6.
Pre-interest profit margin (EBIT/S) of 20 percent.

A. 30%.
B. 32%.
C. 34%.
D. none of the above.
Which of the following statements about dilative securities is TRUE?

Mock Exam 1 (Morning Session ) (Rev. 1)

17

A.
B.
C.
D.
85.

86.

Complex capital structure contains potentially dilutive securities.


Anti-dilutive security will cause earnings per share to increase if it is converted
into common stock.
Dilutive security will cause earnings per share to decrease if it is converted into
share capital.
None of the above.

Based on the following information, calculate the basic earnings per share.

Income after tax: $180,000


50,000 common stock of $5 par: $250,000
10,000, 8% preference share of $5 par: $50,000

A.
B.
C.
D.

$3.23.
$3.52.
$4.97.
None of the above.

during deflation compared with FIFO companies, LIFO companies will have:
A.
B.
C.
D.

Higher stock balances.


Higher cost of goods sold.
Higher net incomes.
Higher sales.

87. Compared with expensing companies, companies that capitalize costs:


A.
B.
C.
D.
88.

Which of the following is not the result of using an straight line depreciation
method instead of accelerated depreciation method in the early years of assets
life?
A.
B.
C.
D.

89.

Have higher cash flow from operations and lower cash flow from investing.
Have better debt/equity ratios.
Have better debt/asset and debt/equity ratios.
All of the above.

Lower depreciation expense.


Higher assets.
Lower net income.
All of the above.

Which of the following definitions used in accounting for income taxes is TURE?
A.
B.
C.
D.

A valuation allowance is a reserve against deferred tax assets.


A timing difference is the result of tax return treatment of a transaction that differs
from its financial reporting treatment.
Statement A and B.
None of the above.

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90.

Which of the following statements about temporary and permanent differences is


correct?
A.
B.
C.
D.

Permanent differences are differences between taxable and pretax income that are
never reversed.
Temporary differences are differences between taxable and pretax incomes that
will reverse in future years.
Both Statement A and B are correct.
None of the above.

91. What is the name for the collateralized borrowed arrangement used by
institutional investors in the bond market?
A.
B.
C.
D.

Futures.
Options.
A repurchase agreement.
None of the above.

92. Which of the following described premium bond can be described?


A.
B.
C.
D.

Coupon rate = required market yield = par value.


Coupon rate < required market yield < par value.
Coupon rate > required market yield > par value.
Coupon rate > required market yield < par value.

Use the following information for Questions 93 to 95.


Peter is considering two bonds:
Bond A yield 10%
Bond B yield 7%
93. Using Bond B as the reference bond, calculate the absolute yield spread.
A.
B.
C.
D.

-3.0%.
0%.
2%.
3%.

94. Using Bond B as the reference bond, calculate the relative yield spread.
A.
B.
C.
D.

40%.
43%.
47%.
None of the above.

95. Using Bond B as the reference bond, calculate the yield ratio.
A.
B.
C.

0.89.
1.43.
1.77.

Mock Exam 1 (Morning Session ) (Rev. 1)

19

D.

None of the above.

96. There is a $100 par value, 8% percent semiannual; 10 year debenture bond is
currently selling for $130. Find the bond's current yield.
A.
B.
C.
D.

5.77%.
6.25%.
8.34%.
None of the above.

97. There is a call option on a stock that is currently selling for $25 and it is in-themoney by $8. Find the call option's strike price:
A.
B.
C.
D.

$17.
$25.
$33.
None of the above.

98. Which of the following statement about American and European options is
FALSE?
A.
B.
C.
D.

The total number of options in Europe exceeds the number of American options.
European options can only exercise at expiration.
American options can exercise on or before expiration.
None of the above.

99. Given that there is a put on a stock with a strike price of $60 is priced at $5 per
share, while a call with a strike price of $60 is priced at $8. Find out the maximum
per share loss and the maximum per share gain to the writer?
A.
B.
C.
D.

Maximum loss to put writer


$55
$52
$52
Cannot be determining.

Maximum gain to the call writer


$8
$6
$8

100. Investors should NOT solely rely on the comparative sales approach to value real
estate? Because:
A.
B.
C.
D.

Every property is unique in some respect.


It relies on asking prices.
It relies on bid prices.
All of the above.

101. Which of the following statements about real estate limited partnerships (RELPs)
is TRUE?
A.
B.
C.

RELPs are sold as units of participation.


Investors have unlimited liability.
There is no active secondary market.

Mock Exam 1 (Morning Session ) (Rev. 1)

20

D.

None of the above.

102. The nominal rate of return investors require to take investments varies over time
and is a function of which of the following factors?
I.
Risk Premium.
II. Expected inflation rate.
III. Real risk-free rate.
A.
B.
C.
D.

I only.
I and II only.
II and III only.
I, II and III.

103. Which of the following factor determine the real risk-free rate of interest?
A.
B.
C.
D.

Consumer preferences for current consumption (time preference) and the set of
investment opportunities available in the economy (investment opportunities).
The set of investment opportunities available in the economy.
The uncertainty caused by the possibility of a major change in the political or
economic environment of a country (country risk).
None of the above.

104. Which of the following statements about the security market line is TRUE?
I.
II.

The security market line interact the y-axis at the real risk-free rate of return.
The tradeoff between risk and return is shown by movement along the security
market line.
III.
The slope of the security market line reflects investor's investment risk
premium.
A.
B.
C.
D.

II only.
III only.
I and III only.
II and III only.

105. Amy past the mid-point of their careers, identify the phase of lift cycle she is
typically in?
A.
B.
C.
D.

Accumulation.
Consolidation.
Gifting.
None of the above.

106. Endowment funds are typically characterized as having a ____________ horizon


and ____________ needs.
A.
B.
C.
D.

Short time, High Liquidity.


Long time, High Liquidity.
Short time, Low Liquidity.
Long time, Low Liquidity.

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107. Which of the following is about the major constrains faced by mutual funds is
CORRECT?
A.
B.
C.
D.

Law to protect mutual fund investors, and those placed on the mutual fund's
managers by investors.
Capital markets, and those that represent choices made by the mutual fund's
managers.
Law to protect mutual fund investors and those that represent choices made by the
mutual fund's managers.
None of the above.

108. Which of the following statement described the security market line (SML)
correctly?
A.
B.
C.
D.

Beta is the risk measure for the SML.


Risk-free rate determine how the SML interests the X-axis.
Securities fall above SML are over-valued.
All of the above.

109. A call option is in-the money if:


A.
B.
C.
D.

The stock price is greater than the strike price


The stock price is smaller than the strike price
The market rate is decreasing
None of the above.

110. Based on the following information, calculate the required return on stock.
Beta=1
Risk-free rate=5%
Expected return on market=10%
A.
B.
C.
D.

10%.
12%.
14%.
16%.

111. Which of the following is the primary reason for the slope of security market line
changes over time?
A.
B.
C.
D.

Risk characteristics.
Attitudes-of investors toward risk.
Expected rate of inflation.
Market conditions.

112. In the investment policy statement, which of the following is included as an input?
A. Investor's return objectives.
B. Investment constraints.

Mock Exam 1 (Morning Session ) (Rev. 1)

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C. Expected Return on Investment.


D. All of the above.
113. Which type of institutional investor must balance the need for current income and
the need for long-term protection of capital?
A.
B.
C.
D.

Bank.
Pension fund.
Endowment fund.
None of the above.

114. Which of the following about correlation of two assets is TURE?


A.
B.
C.
D.

The smaller correlation implies smaller risk reduction potential.


The smaller correlation implies greater risk reduction potential.
The larger correlation implies smaller risk reduction potential.
The larger correlation implies greater risk reduction potential.

115. Which of the following portfolios could NOT lie on the efficient frontier?
Portfolio
A
B
C
D
A.
B.
C.
D.

Expected Return
6
10
18
18

Standard Deviation
3
3
7
9

Portfolios A and B.
Portfolios A and D.
Portfolios B and C.
Cannot be determine.

116. Given that the covariance between two assets is 50 while their variances are 16 and
64, calculate the correlation coefficient between the two assets is closet to:
A.
B.
C.
D.

1.27
1.35
1.56
none of the above

117. Which of the following statements about risk is TRUE?


A.
B.
C.
D.

Systematic risk = Total risk + unsystematic risk.


Unsystematic risk is an undiversifiable risk.
Systematic risk is a diversifiable risk.
The market portfolio consists only of systematic risk.

118. Which of the following statements about the security market line (SML) and

Mock Exam 1 (Morning Session ) (Rev. 1)

23

capital market line (CML) is TRUE?


A.
B.
C.
D.

The SML is a curve but the CML is a straight-line.


The SML involves the concept of a risk-free asset but the CML does not.
For risk measurement, SML uses beta but the CML uses standard deviation.
Both statements B and C are correct.

119. Which of the following statements about the similarity between arbitrage pricing
theory (APT) and the capital asset pricing model (CAPM) is TRUE?
A.
B.
C.
D.

Both of them assume that unique effects are independent and will be diversified
away in a large portfolio
Both of them assume linear relationships between return and the factor(s) included
in the models.
Both of them are asset pricing models.
All of the above.

120. Which of the following is the least likely to explain how investing internationally
can benefit the investor's portfolio within a risk-return framework?
A.
B.
C.
D.

It provides substantial tax benefits.


It expands the efficient frontier above the domestic only frontier.
Portfolio diversification could be allowed through international investing.
All of the above.

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