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WEIGHTED PROGRESS EXAM - 120 Questions
1. L2-00987 - Lecture: SS-15 (page 12), topic: L2-L15-01
As a general rule, what type of CMO tranche is likely to have the most stable average life?
a. PO.
b. PAC.
c. IO.
d. Floating rate.
2. L2-00526 - Lecture: SS-08 (page 43), topic: L2-L08-05
For the fiscal year ended December 31, 2003, KFG Company had sales of \$75.0 million and EBIT of \$30.0 million,
which represented an increase of 2.5% and 6.0%, respectively, versus the prior fiscal year. Assuming the
company had interest expense of \$5.0 million and income taxes of \$2.0 million in fiscal 2003, what is the degree of
operating leverage (DOL) and the degree of financial leverage (DFL) for the year ended December 31, 2003?
DOL DFL
a. 2.4 1.2
b. 2.8 1.3
c. 2.6 1.3
d. 2.2 1.2
3. L2-01581 - Lecture: SS-15 (page 12), topic: L2-L15-01
Sebastian Lee is planning to purchase one of the three collateralized mortgage obligation (CMO) tranches
described in Exhibit 1. The three tranches-a Planned Amortization Class (PAC) Bond, a Scheduled Bond, and a
Support Bond-are the only three tranches for this particular CMO issue.
Exhibit 1
Selected Data
Three Federal Home Loan Mortgage Corporation (FHLMC) CMO Tranches
Tranche Coupon
Stated
Maturity
M/D/Y
Yield
(basis
points)
Original
Duration
(years)
Current
Duration
(years)
Current
Effective
Principal
Payment Collar
(PSA
prepayment
assumptions)
PAC Bond 6.50% 5/15/27 170 5.98 4.60 109 – 244
Scheduled
Bond
6.50% 1/15/31 200 5.98 2.56 146 – 213
Support Bond 6.75% 8/15/31 248 4.88 1.65 ---

Indicate which of the three CMO tranches described in Exhibit 1 has third priority to receive principal payments.
a. PAC Bond.
b. Scheduled Bond.
c. Support Bond.
d. It depends on prepayment speeds.
4. L2-00611 - Lecture: SS-01 (page 6), topic: L2-L01-01
Rosalie Simms' family is very influential in her city. Her father is on the board of several banks and corporations
and she and her family own large stock positions in many corporations. As a member, when Rosalie joins an
investment firm, she must:
I. Sell her stock holdings to avoid any conflict of interest when dealing with clients.
II. Tell her employer about her family's involvement and significant holdings.
III. Not accept an outside directorship herself without the permission of her new employer.
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IV. Act prudently and not tell anyone of her family's situation.
a. I and IV only.
b. I and III only.
c. II and III only.
d. I, II, and IV only.
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5. L2-00373 - Lecture: SS-06 (page 7), topic: L2-L06-01
KAS Corp. is a U.S. company with a Japanese subsidiary. This subsidiary began operations on 1 January 20X0,
when its equity was funded and assets were purchased. Inventory is accounted for using the LIFO method.
Exchange Rate Data: ¥ per \$:
31 December 20X0 ¥100 (or .01 \$ per ¥)
1 January 20X0 ¥125
Weighted Average Exchange Rate 20X0 ¥111
SUBSIDIARY FINANCIAL STATEMENTS
Balance Sheet (¥)

Income Statement (¥)

12/31/20X0

12/31/20X0
Cash ¥ 180,000

Sales ¥ 500,000
Accounts Receivable 70,000

Costs of Goods 200,000
Inventory 50,000

Depreciation 20,000
Net Fixed Assets
450,000

EBIT 280,000
Total Assets
¥ 750,000

Interest 30,000
Accounts Payable ¥ 100,000

Pretax Income 250,000
Long-term Debt 390,000

Taxes 100,000
Contributed Capital 110,000

Net Income
¥ 150,000
Retained Earnings ¥150,000

Total Liability and Equity
¥ 750,000

Using the all-current method, the accounts receivable balance in dollars on 12/31/20X0 is:
a. \$560
b. \$700
c. \$7,000,000
d. \$8,750,000
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6. L2-01759 - Lecture: SS-16 (page 42), topic: L2-L16-02
Woodward Allen is the manager of a long-term government bond mutual fund. Since he is free to use derivatives
in order to enhance his returns, he has become interested in what he perceives to be mispriced Treasury bond
futures contracts. Allen has used the cost-of-carry futures pricing model to estimate the theoretical Treasury bond
futures price, using the price of the long-term Treasury bond with the lowest coupon rate available and the short-
term financing rate as inputs into the model. Allen does not know about delivery options that exist for Treasury
bond futures.
The fair value of a Treasury bond futures contract is calculated using the cost-of-carry model. The model is:
( )
( ) ( ) ( )
( )
T
0 0
0
B T Y 1 r T FV CI, 0, T
f T
CF T
+ + −

=
Which answer is the correct description of how to compute the theoretical price of a Treasury bond futures
contract (ignore delivery options)?
a. B0(T + Y) is the current spot price of the most likely to be delivered Treasury bond. This is not necessarily the
bond with the lowest coupon rate. FV(CI, ∅, T) is the coupon interest that will be paid from today until the
delivery date of the futures on the Treasury bond that is most likely to be delivered. r
0
is the financing rate.
CF(T) is the conversion factor for the cheapest to deliver bond.
b. B0(T + Y) is the coupon interest that will be paid from today until the delivery date of the futures on the
Treasury bond that is most likely to be delivered. FV(CI, ∅, T) is the current spot price of the Treasury bond
that is most likely to be delivered. This is not necessarily the bond with the lowest coupon rate. r
0
is the
financing rate. CF(T) is the conversion factor for the cheapest to deliver bond.
c. B0(T + Y) is the current spot price of the most likely to be delivered Treasury bond. This is not necessarily the
bond with the lowest coupon rate. FV(CI, ∅, T) is the coupon interest that will be paid from today until the
delivery date of the futures on the Treasury bond that is most likely to be delivered. r
0
is the conversion factor
for the cheapest to deliver bond. CF(T) is the financing rate.
d. None of the above.
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7. L2-00861 - Lecture: SS-01 (page 6), topic: L2-L01-01
Allen Anderson, who works in a large brokerage firm, gets a call from Bart Bergstrom, the son of the founder
(Carl) of company Dearborn International (both of whom are clients of Anderson's). Bergstrom tells Anderson to
"dump" all of his shares in Dearborn (approximately 5% of the market capitalization of the stock). The next day,
the share price of Dearborn falls by approximately two-thirds due to an adverse regulatory ruling.
To show his gratitude for Anderson's quick work, Bergstrom buys Anderson an expensive gift (estimated cost of
\$3,000), which Anderson fails to disclose.
Anderson's supervisor, Edward Evans, also a CFA charterholder, decides not to begin an investigation when he
becomes aware of these facts, fearing adverse publicity and potential legal liability.
During subsequent investigations by the U.S. Securities and Exchange Commission, Anderson defends his
actions by noting that the firm's compliance manual was not made readily available to employees.
If Anderson's claim of not having ready access to the firm's compliance manual is true, which of the following
individuals (if any) would have violated Standard III(E): Responsibilities of Supervisors (relating to supervisors
exercising control over their subordinates)?
a. Standard III(E) is not relevant to Anderson's claim.
b. Anderson.
c. Evans.
d. The chief executive officer of the firm.
8. L2-01445 - Lecture: SS-13 (page 58), topic: L2-L13-03
Paul Johnson, CFA, is analyzing a grocery store company. He wants to approach this analysis using franchise
factor and growth duration, as he believes each will help him to better understand the pricing of the shares.
He estimates the rate of return on the market to be 10%. He has calculated that grocer's cost of equity is 12%
and its weighted-average cost of capital is 8%. The firm has a current price-to-earnings (P/E) ratio of 22.2 and the
market's P/E ratio is 20.4. The grocer's current market value is \$250 million.
The consensus forecast is for the grocer to grow at a 7% rate, which is 1% better than the expected 6% rate of
growth for the market. Finally, Johnson has noted that the grocer shares have a current dividend yield of 4%,
which is well above the market's current dividend yield of 1%.
Johnson remembers the formula for growth duration to be as follows:
| | + + | |
|
|
|
+ +
\ ¹
\ ¹

0 0
0 0
g g g g
a a a a
P E 1 G D
ln Tln
P E 1 G D
Using the above formula and the data provided, which of the following is closest to the growth duration for the
grocer?
a. 0.1 year.
b. 1.0 year.
c. 2.3 years.
d. 9.0 years.
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9. L2-01441 - Lecture: SS-13 (page 55), topic: L2-L13-03
A firm has a 15% return on equity (ROE), 12% after-tax return on capital (ROC), 8% coupon debt, 11% cost of
equity, and a 10% weighted-average cost of capital (WACC). Choose which of the following is closest to the firm's
a. 1%
b. 2%
c. 5%
d. Cannot be determined, as capital structure weights are required.
10. L2-01332 - Lecture: SS-14 (page 59), topic: L2-L14-04
You have completed the initial projection of a binomial interest rate tree for treasury rates based on the current on-
the-run treasury yield curve and an assumption of 8% interest rate volatility. You know the next step is to apply the
backward induction methodology to assure the tree properly validates the current prices of on the run treasuries.
In your first pass to validate the prices you find that the model prices are higher than actual trading prices of the
bonds in the marketplace. If the high value for the one-year rate one year forward in the model is 4.44% and the
low value for the rate is 3.78%, which of the following actions would be appropriate in adjusting the model?
a. Raise both rates.
b. Lower both rates.
c. Raise the high rate, while leaving the low rate unchanged.
d. Leave the high rate unchanged, while lowering the low rate.
11. L2-01583 - Lecture: SS-15 (page 18), topic: L2-L15-02
Alex Siegel is a mortgage-backed securities portfolio manager. Recently he has been given the authority to
purchase other asset-backed securities (ABS). He is aware that the credit quality of ABS is a primary
consideration in their evaluation but is uncertain about credit enhancement structures.
Siegel is considering two asset-backed securities to purchase for his portfolio, but he is concerned about the
performance of each security if interest rates decline. Characteristics of the two securities are given in Exhibit 15-
1.
Exhibit 15-1
Characteristics of Two Asset-backed Securities
Type Structure Lockout Seasoning
Weighted
Average Maturity
Home Equity Loans
Closed-end None 10 months 350 months
Automobile Receivables
--- 18 months 10 months 50 months

Which of the following is an example of an external credit enhancement structure?
a. Corporate guarantees.
b. Bank letters of credit.
c. Bond insurance.
d. All of the above.
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12. L2-02034 - Lecture: SS-11 (page 12), topic: L2-L11-02
Al Latsbob, CFA, is constructing a diversified portfolio of equity securities. He seeks to diversify the portfolio on
the basis of industry life cycle position (pioneer stage, growth stage, mature stage, and decline stage). He
hypothesizes that the different stages of the industry life cycle provide different investment characteristics with
respect to profit margins, cash flow, certain risk factors, and valuation.
What valuation model should Al use to make investment decisions while evaluating companies in each industry
life cycle stage?
a. Pioneer stage industries should be valued based on multiples of sales.
b. Growth stage industries should be valued based on free cash flow to equity.
c. Mature stage industries should be valued based on a multiple stage growth model.
d. Decline stage industries should be valued based on price to earnings.
13. L2-00199 - Lecture: SS-04 (page 79), topic: L2-L04-05
In analyzing HGF Company, Jones prepared a regression analysis. He regressed SG&A Expense against Sales
and found the following result:
Total SG&A Cost = \$1,000,456 + 0.2445 (Sales)
In this equation, the \$1,000,456 represents:
a. The variable portion of the SG&A cost.
b. The fixed portion of the SG&A cost.
c. The variable and fixed portion of the SG&A cost.
d. The estimate of the next year's SG&A cost.
14. L2-00590 - Lecture: SS-05 (page 26), topic: L2-L05-01
Which item is the basis for determining the income tax expense reported on the income statement?
a. Taxable income.
b. Income taxes payable.
c. Pretax income.
d. Operating income.
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15. L2-02159 - Lecture: SS-12 (page 51), topic: L2-L12-02
Rob Sykes, CFA, is analyzing C-ville Company, a United States based maker of exam booklets. The company
has just signed a new two-year contract that will allow it to grow at a 20% pace until the contract expires. This is a
one-time deal and thereafter, the company's growth will fall back to its long-term rate of 3%. Sykes has opted to
look at several factors and valuation methods. He has gathered the following information:
C-ville Company
Financial Statements for Years Ended 3/31/X0 and 3/31/X1
(\$ million, except per share data)
Income Statement 20X0 20X1
Revenue \$89 \$93
Cost of Goods Sold 40 41
Other Operating Costs 10 11
Depreciation 5 6
Earnings before taxes \$34 \$35
Taxes 14 14
Net Income \$20 \$21
Earnings Per Share \$2.00 \$2.10
Dividends Per Share \$1.60 \$1.68
Common Stock Outstanding (millions) 10 10
Balance Sheet 20X0 20X1
Current Assets \$ 28 \$ 34
Net Property, Plant, and Equipment 112 125
Total Assets \$140 \$159
Current Liabilities \$ 40 \$ 55
Long-term Debt 0 0
Total Liabilities \$ 40 \$ 55
Stockholders' Equity 100 104
Total Liabilities & Equity \$140 \$159
Capital Expenditures \$ 15 \$ 19
Sykes decides to start his analysis with a look at the company's sustainable growth rate and ROE.
What is the value of a share of C'ville's common stock at the end of 20X1 using the two-stage FCFE method
(assume a cost of equity of 10.4%)?
a. \$33.66
b. \$31.81
c. \$29.80
d. \$33.82
16. L2-00619 - Lecture: SS-01 (page 6), topic: L2-L01-01
The Standard Priority of Transactions applies to "access" persons. An example of an "access" person is:
b. A supervisory analyst who reviews all research reports prior to dissemination.
c. The investor relations officer of the issuer company who provided information that influenced the investment
recommendation.
d. All of the above.
17. L2-01051 - Lecture: SS-16 (page 41), topic: L2-L16-02
S&P 500 Index 1,047.00
S&P 500, 12-month Futures Contract 1,100.00
S&P Dividend Yield 2.5%
12-month risk-free rate 6.0%
Calculate the fair value for the S&P 500 futures contract.
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a. 1,100.00
b. 1,083.65
c. 1,109.92
d. 1,012.43
18. L2-01201 - Lecture: SS-14 (page 6), topic: L2-L14-01
Mary McDonald, CFA, is analyzing the bonds of ABC Corp., a high technology public company with several
international subsidiaries. ABC Corp. is using some of its assets as a collateral for its outstanding bonds.
The most important factor that McDonald should consider during the analysis of ABC Corp.'s financial statements
is:
a. Cash flow from operations.
b. Discretionary cash flow.
c. The company's key ratios (short-term solvency ratios, capitalization ratios, and coverage ratios).
d. The company's assets used as a collateral.
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19. L2-00327 - Lecture: SS-03 (page 57), topic: L2-L03-03
Noah Sales, CFA, has created a multiple regression model to forecast revenues for a small Miami cruise line. The
dependent variable of the regression is company revenues, stated in millions of dollars. The 3 independent
variables are the percentage increase or decrease in i) hotel occupancy rates in Florida, ii) the airline ticket-price
index (inverse relationship), and iii) U.S. gross domestic product. Noah regressed 40 quarters of data, and his
statistical program has produced the following:
Regression statistics:
Regression coefficient Value Standard Error t-value
Hotel occupancy 87.34 28.17 3.1
Airline ticket-price index −67.94 16.18 4.2
GDP 68.87 25.51 2.7
Intercept of the regression line = 250.2 (in \$million)
Standard error of the intercept = 38.30
Degrees
ANOVA of freedom Sum of Squares Mean SS F-Value
Regression 3 RSS = 3,082.68 MSSR = 1,027.56 Fcalc = 13.56
Error 36 SSE = 2,728.79 MSSE = 75.80
Total 39 TSS = 5,811.47
Correlation matrix of independent variables
Airline ticket
Occupancy price GDP
Hotel occupancy 1.00 −0.45 0.90
Airline ticket price −0.45 1.00 −0.73
GDP 0.90 −0.73 1.00
The intercept of the regression line (in \$ millions):
a. Is not significantly different from 0.
b. Is significantly different from 0.
c. Is significantly different from 250.
d. Significance cannot be determined based on the information provided.
20. L2-00204 - Lecture: SS-04 (page 79), topic: L2-L04-05
The following regression equation shows the relationship between widget sales and changes to GDP for country
X:
Widget sales (in millions) = 1.7 + 0.025(Percentage Growth in GDP)
Assuming 2% expected GDP growth over the year, calculate projected widget sales next year.
Note: A 2% GDP growth should be represented in the formula as 2.0, rather than 0.02.
a. 1,700,500
b. 1,750,000
c. 1,775,000
d. 1,734,000
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21. L2-01336 - Lecture: SS-14 (page 69), topic: L2-L14-04
As interest rates become more volatile, the price of a putable bond will tend to:
a. Decrease.
b. Increase.
c. Remain unchanged.
d. It could increase or decrease.
22. L2-01395 - Lecture: SS-13 (page 15), topic: L2-L13-01
Tom Hamm, CFA, is analyzing Kell Corporation (current stock price is \$16.25) using market multiples. He plans
to start with a look at the firm's price-to-earnings (P/E) ratios. Hamm's firm requires that all research reports
include an estimate of the earnings for the upcoming (next) quarter and for the next year. Hamm has gathered the
following historical information on Kell and has made the following projections:
1Q 20X4 2Q 20X4 3Q 20X4 4Q 20X4 1Q 20X5 20X5 Year
Actual Actual Actual Actual Estimated Estimated
Net Income \$2.3 mil. \$2.0 mil. \$1.8 mil. \$2.6 mil. \$2.5 mil. \$10.1 mil.
Extraordinary
Loss (net of tax) \$0 \$0 \$0.3 mil. \$0 \$0 \$0
Common Stock
Dividends \$1.0 mil. \$1.0 mil. \$1.0 mil. \$1.0 mil. \$1.1 mil. \$4.4 mil.
Shares
Outstanding 10 mil. 10 mil. 10 mil. 10 mil. 10 mil. 10 mil.
One of Hamm's co-workers prefers to use the P/E-to-growth ratio (PEG) and wishes to apply this to Kell
Corporation. When calculating PEG, the co-worker uses a leading P/E ratio. The co-worker agrees with Hamm's
estimate that Kell Corporation's long-term growth will be 4.5%. Furthermore, he agrees with the 10% required rate
of return on equity, 8% long-term ROE and that the firm will pay \$4.4 million in dividends in 20X5. The co-worker
has made his own estimate of what Kell will earn in 20X5. His number is \$1.20 per share, which is higher than
Hamm's estimate. Which of the following is closest to the PEG that the co-worker will calculate?
a. 1.7
b. 3.0
c. 3.6
d. 13.5
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23. L2-00401 - Lecture: SS-06 (page 7), topic: L2-L06-01
KAS Corp. is a U.S. company with a Japanese subsidiary. This subsidiary began operations on 1 January 20X0,
when its equity was funded and assets were purchased. Inventory is accounted for using the LIFO method.
Exchange Rate Data: ¥ per \$:
31 December 20X0 ¥100 (or .01 \$ per ¥)
1 January 20X0 ¥125
Weighted Average Exchange Rate 20X0 ¥111
SUBSIDIARY FINANCIAL STATEMENTS
Balance Sheet (¥)

Income Statement (¥)

12/31/20X0

12/31/20X0
Cash ¥ 180,000

Sales ¥ 500,000
Accounts Receivable 70,000

Costs of Goods 200,000
Inventory 50,000

Depreciation 20,000
Net Fixed Assets
450,000

EBIT 280,000
Total Assets
¥ 750,000

Interest 30,000
Accounts Payable ¥ 100,000

Pretax Income 250,000
Long-term Debt 390,000

Taxes 100,000
Contributed Capital 110,000

Net Income
¥ 150,000
Retained Earnings ¥150,000

Total Liability and Equity
¥ 750,000

Translate the subsidiary's 12/31/20X0 income statement and 20X0 balance sheet into the parent's currency using
Balance Sheet Translation (All-Current Method)
Translated
Using
All-Current
12/31/20X0 Conversion Method
Cash ¥180,000
Accounts Receivable 70,000
Inventory 50,000
Net Fixed Assets 450,000
Total Assets ¥750,000
Accounts Payable ¥100,000
Long-term Debt 390,000
Contributed Capital 110,000
Retained Earnings 150,000
Total Liability and Equity ¥750,000
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Income Statement Using All-Current Method
12/31/20X0 Conversion All-Current
Method
Sales ¥ 500,000
Costs of Goods Sold 200,000
Depreciation 20,000
Earnings before interest
and taxes
280,000
Interest 30,000
Pretax Income 250,000
Taxes 100,000
Net Operating Income 150,000
Gain (Loss) from Currency
Translation

Net Income ¥ 150,000

Using the all-current method, the retained earnings balance in dollars on 12/31/20X0 is closest to:
a. \$720
b. \$1,350
c. \$12,250,000
d. \$24,750,000
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24. L2-00256 - Lecture: SS-06 (page 7), topic: L2-L06-01
Giga Corp is a U.S. company with a subsidiary located in Zambia that began operations on January 1, 20X1 when
Giga funded its equity with a \$33.07 million investment, borrowed additional funds in the local market, and
purchased all the subsidiary's fixed assets. Inventory is on a LIFO basis and was also entirely purchased on
January 1. The currency unit in Zambia is the "Kwacha," abbreviated ZKW. The Zambian subsidiary is a relatively
self-contained, independent foreign subsidiary operating primarily in the local market (which includes neighboring
countries) that pays no dividends.
Inflation has averaged approximately 25% annually over the past five years.
Exchange rate information:
January 1, 20X1 ZKW4,500/\$
December 31, 20X1 ZKW6,075/\$
Weighted Average, 20X1 ZKW5,300/\$
Balance Sheet (ZKW billions) Income Statement (ZKW billions)
12/31/20X1 12/31/20X1
Cash 243.54 Sales 676.50
Accounts Receivable 94.71 Cost of Goods Sold 270.60
Inventory 67.65 Operating Expenses 13.53
Net Fixed Assets 608.85 Depreciation 13.53
Total Assets 1,014.75 EBIT 378.84
Interest 40.59
Accounts Payable 135.30 Pre-tax Income 338.25
Long-term Debt 527.67 Taxes 135.30
Contributed Capital 148.83 Net Income 202.95
Retained Earnings 202.95
Total Liab. & Equity 1,014.75
The CFO of Giga Corp. informs you that one of her accounting analysts made a mistake in reporting the inflation
rate. Inflation in Zambia has actually averaged approximately 35% annually (rather than 25%) over the past five
years, but all other information (including the financial statements and reported exchange rates) is correct.
Operating net income in U.S. dollars for 12/31/20X1 is closest to:
a. \$45 million.
b. \$38 million.
c. \$29 million.
d. \$25 million
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25. L2-00024 - Lecture: SS-02 (page 10), topic: L2-L02-01
Cindy Franz, a CFA charterholder, is a partner of Millennium Investments, a U.S. firm registered with the SEC as
an investment adviser. The trading desk reports to Franz and is responsible for the allocation of client brokerage.
During 1999, Franz allocated clients' brokerage commissions to certain registered representatives and
broker/dealers whom she believed could secure or introduce new business to Millennium. Additionally, Franz
directed brokerage to broker/dealers who provided Millennium with goods and services. One broker provided
Millennium with great seats to football games (Franz did not use these seats for personal use, but used the tickets
to entertain clients). Another broker provided Millennium with proprietary research used by several of the
investment teams at Millennium. Lastly, Franz directed a portion of trading activity to Star Inc. because of a
friendship between Franz and a trader at Star. Star's commission structure is high in comparison with other firms
and its research services and execution capabilities are only considered average. In appreciation for the
business, Star provides Millennium with pension fund liability and asset allocation studies. In addition, Star
Millennium maintains a list of brokers and registered representatives to whom brokerage commissions were
directed and makes this list available to clients. Justification for the direction of client brokerage was not made
available.
Millennium did not adhere to the Soft Dollar Standards with respect to:
a. Disclosure.
b. Investment recommendations.
c. Client directed brokerage.
d. All of the above.
26. L2-02045 - Lecture: SS-17 (page 19), topic: L2-L17-01
The Black-Scholes-Merton model includes the following equation for a call option:
) N(d Xe ) N(d S c
2
T
c
r
1 0

− =
Consider a call option with a strike price of \$40 on the stock of Integrated Monkeyshines, Inc. (IMI) with 73 days
left until expiration. The price of IMI is currently \$49, the continuously compounded risk-free rate is 6.4%, and the
annualized volatility of IMI is 34%. The areas under the normal curve for N(d1) and N(d2) are 0.9325 and 0.9103,
respectively.
What is the value of this call using the Black-Scholes-Merton model?
a. \$7.78
b. \$9.00
c. \$9.74
d. \$11.54
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27. L2-00593 - Lecture: SS-05 (page 27), topic: L2-L05-01
At year-end 20X1, a company prepares a detailed deferred tax liability schedule showing both the impact of
straight-line depreciation on its assets for book purposes and accelerated depreciation on its assets for tax
purposes. As a result of timing differences between the two methods, a total of \$45.0 million in taxes will be owed
over the next five years. Assuming beginning deferred tax liabilities of \$18.0 million and income taxes owed this
period of \$8.0 million, what is the income tax expense recorded on the income statement for 20X1?
a. \$26.0 million.
b. \$35.0 million.
c. \$39.0 million.
d. \$53.0 million.
28. L2-00788 - Lecture: SS-07 (page 30), topic: L2-L07-02
Elgin Corporation
Balance Sheet, December 31, 20X1
(\$ millions)
Assets Liabilities
Cash 289.03 Accounts payable 172.79
Accounts receivable 201.06 Current Portion of Debt 31.42
Inventory 157.08 Income Taxes Payable 9.42
Total Current Assets 647.17 Other Current Liabilities 15.71
PP&E (Net) 860.80 Total Current Liabilities 229.34
Goodwill 314.16 Long-term Debt 706.86
Total Assets 1,822.12 Deferred Tax Liabilities 47.12
Total Liabilities 983.32

Equity
Common Stock 157.07
Retained Earnings 681.73
Total Equity 838.80

Total Liabilities & Equity 1,822.12

Income Statement
Year Ended December 31, 20X1
(\$ millions)
Cash Flow Statement
Year Ended December 31, 20X1
(\$ millions)
Sales 1,413.72 Net Income 113.10
Cost of Goods Sold 785.40 Add: Depreciation/Amort. 78.54
Gross Profit 628.32 Add: Restructuring Charge 37.70
Operating Expenses 235.62 Increase in Payables 50.27
Depreciation & Amortization 78.54 (Increase) in Receivables (37.70)
Operating Income 314.16 (Increase) in Inventories (25.13)
Interest Expense 62.83 Operating Cash Flow 216.77
Pretax Operating Income 251.33
Income Taxes 100.53 Capital Expenditures (109.96)
Net Income from Continuing
Operations
150.80 Capitalized Interest (6.28)
Restructuring Charge (Net of Tax) 37.70 Investing Cash Flow (116.24)
Net Income 113.10 Net Increase in Debt 125.66
Dividends Paid (12.57)
Financing Cash Flow 113.10

Net Change in Cash 213.63
Additional Information (all amounts in millions)
Stalla Review Course Registered to:
− Inventories are valued on a LIFO basis. The LIFO Reserve is \$15.71.
− Elgin has numerous operating leases. The present value of these leases was \$157.08 at the beginning of
20X1 and \$147.65 at the end of 20X1. At the beginning of 20X1, the leases had an average term of 10
years and an average implied interest rate of 12%. The annual payments are \$27.80, which is recorded
as a part of cost of goods sold on the income statement. Using the annual payment, we can project the
present value of the leases to be approximately \$138.23 one year hence. In addition, the equipment being
leased had a 10-year remaining life at the beginning of the year and no estimated salvage value. Straight-
line depreciation is used.
− Elgin capitalized interest of \$6.28 during 20X1. This capitalized interest increased the property, plant and
equipment.
− The restructuring charge is \$62.83 and is recorded net of the expected tax benefit of \$25.13. The charge
is for future expenses related to a change in the way the firm is structured.
− Elgin does not believe it will ever have to pay its Deferred Tax Liability.
− Goodwill amortization in 20X1 was \$9.42.
− Based on studies done by a valuation firm, Elgin estimates the following fair market values: Goodwill,
\$188.50.
− Elgin's tax rate is 40%.
− All other assets (except inventories) and liabilities have market values equal to their recorded values in the
balance sheet.
The adjusted net income reported on the Income Statement is closest to:
a. \$115
b. \$120
c. \$130
d. \$150
Stalla Review Course Registered to:
29. L2-00801 - Lecture: SS-05 (page 13), topic: L2-L05-01
On December 31, 2000, Atkinson Company purchases a new machine for \$1,300,000, which has an estimated
useful life of ten years and an estimated salvage value of \$150,000. On March 31, 2003, management
determines that the initial life is too aggressive and projects the machine has only five years of remaining useful
life. Based on the above, what is the total amount of depreciation expense that the company should record on this
machine for the year ended December 31, 2003?
a. \$115,000
b. \$162,438
c. \$178,250
d. \$184,938
30. L2-00469 - Lecture: SS-08 (page 43), topic: L2-L08-05
The income statement for the Folsome Corporation is as follows:
Sales \$100 million
Cost of Sales 70
Interest Expense 10
SG&A 15
Pretax Income \$ 5
Income Taxes 2
Net Income \$ 3
Folsome's degree of financial leverage is:
a. 1.67
b. 2.00
c. 3.00
d. 3.33
31. L2-01216 - Lecture: SS-14 (page 10), topic: L2-L14-01
In addition to traditional debt analysis, high yield bonds should also be analyzed like:
a. Preferred stock.
b. Options.
c. Common equity.
d. Swaps.
Stalla Review Course Registered to:
32. L2-02059 - Lecture: SS-03 (page 17), topic: L2-L03-01
Jennifer Chan, a sell side analyst claims that her stock picks outperform the market by at least 4%. A pension
fund portfolio manager decides to test her claim by choosing 15 of Jennifer's stock picks at random and
measuring their annualized returns relative to the performance of the S&P 500 index over the same holding
periods. The S&P 500 return is 12.2% and Jennifer's stock picks have an average return of 14.0%. The standard
deviation of the sample of excess returns is 2.52%.
Distribution df 0.025 0.050 0.100
t-table 13 2.160 1.771 1.350
t-table 14 2.145 1.761 1.345
t-table 15 2.131 1.753 1.341
Chi-sq table 13 24.736 22.362 19.812
Chi-sq table 14 26.119 23.685 21.064
Chi-sq table 15 27.488 24.996 22.307
A pension fund portfolio manager wants to test Jennifer's claim that her stock picks outperform the market by 4%.
What test and null hypothesis should he use?
a. Chi-sq test. H0: µd ≥ 4%.
b. t test. H0: µd ≠ 4%.
c. t test. H0: µd ≥ 4%.
d. Chi-sq test. H0: µd ≠ 4%.
33. L2-00892 - Lecture: SS-10 (page 23), topic: L2-L10-02
Rodriguez Encino, CFA, discovers that Topanga Canyon Enterprises (TCE) maintains a special purpose entity
(SPE) called Topanga Canyon Yacht Sales with the purpose of holding ownership to the president's yacht. TCE
should:
a. Consolidate the SPE to the parent company financial statements.
b. Exclude the subsidiary under IAS 27.
c. Include a one-line reference on the financial statements recognizing profit or loss of the SPE.
d. None of the above.
Stalla Review Course Registered to:
34. L2-01242 - Lecture: SS-18 (page 19), topic: L2-L18-02
A portfolio is determined to have the following positions (including individual betas):
Stock Position Held Stock's Beta
XYZ \$1,000,000 0.80
RFR 5,000,000 1.00
WER 3,000,000 1.20
ALS 1,000,000 1.05
Assuming a risk free rate of 5% and a market return of 10%, calculate the expected excess return for the portfolio:
a. 5.225%
b. 10.450%
c. 5.063%
d. 10.125%
35. L2-00940 - Lecture: SS-11 (page 3), topic: L2-L11-01
Factors enabling a firm to have a competitive advantage are:
I. A favorable brand image.
II. An efficient distribution system.
III. Strong financial resources.
a. I and II only.
b. II and III only.
c. I and III only.
d. I, II, and III.
36. L2-01088 - Lecture: SS-15 (page 31), topic: L2-L15-03
A Monte Carlo valuation model can produce more accurate OAS calculations than a binomial model because the
Monte Carlo model:
a. Makes prepayments dependent on the past course of interest rates.
b. Allows for an assumption of interest rate volatility.
c. Discounts future security cash flows using forward interest rates consistent with the current term structure of
interest rates.
d. Allows for the security to have prepayments.
37. L2-01568 - Lecture: SS-09 (page 12), topic: L2-L09-02
Westcoast Trainers, Inc. is considering an acquisition of the Eastcoast Sneaker Co. The two companies are
valued at \$70 million and \$35 million, respectively. Manufacturing and distribution costs are expected to decrease
by \$1.5 million per year indefinitely, net of tax. The required rate of return is 10.0%.
Westcoast Trainers, Inc. pays a 50% interest in shares of the combined entity to the shareholders of Eastcoast
Sneaker Co. Compute the NPV of the stock offer.
a. -\$25 million.
b. -\$10 million.
c. \$15 million.
d. \$60 million.
38. L2-01108 - Lecture: SS-15 (page 41), topic: L2-L15-04
Which of the following statements regarding balloon risk is false?
a. It is also known as extension risk.
b. It is also known as contraction risk.
c. Balloon defaults may delay payments to the CMBS investor.
d. Both "a" and "c".
Stalla Review Course Registered to:
Stalla Review Course Registered to:
39. L2-00337 - Lecture: SS-03 (page 63), topic: L2-L03-03
You are developing new statistical software and are testing its regression capabilities, including a test for
heteroskedasticity. Examine the following output and indicate which of the 3 independent variables contain(s)
obvious errors or suspect output that should be verified further.
Conventional Robust
Value error t-value error t-value
a. Variable 1 −1.52 0.37 4.11 0.80 −0.53
b. Variable 2 1.57 1.09 1.44 0.49 3.20
c. Variable 3 0.49 0.08 3.92 0.29 1.69
d. All of the above contain errors or suspect output.
40. L2-02136 - Lecture: SS-12 (page 34), topic: L2-L12-01
Rob Sykes, CFA, is analyzing C-ville Company, a United States based maker of exam booklets. The company
has just signed a new two-year contract that will allow it to grow at 20% pace until the contract expires. This is a
one-time deal and thereafter the company's growth will fall back to its long-run rate of 3%. Sykes has opted to
look at several factors and valuation methods. He has gathered the following information.
C-ville Company
Financial Statements for Years Ended 3/31/X0 and 3/31/X1
(\$ million, except per share data)
Income Statement 20X0 20X1
Revenue \$89 \$93
Cost of Goods Sold 40 41
Other Operating Costs 10 11
Depreciation 5 6
Earnings Before Taxes \$34 \$35
Taxes 14 14
Net Income \$20 \$21
Earnings Per Share \$2.00 \$2.10
Dividends Per Share \$1.60 \$1.68
Common Stock Outstanding (millions) 10 10
Balance Sheet 20X0 20X1
Current Assets \$ 28 \$ 34
Net Property, Plant, and Equipment 112 125
Total Assets \$140 \$159
Current Liabilities \$ 40 \$ 55
Long-term Debt 0 0
Total Liabilities \$ 40 \$ 55
Stockholders' Equity 100 104
Total Liabilities & Equity \$140 \$159
Capital Expenditures \$ 15 \$ 19
Sykes decides to start his analysis with a look at the company's sustainable growth rate and ROE.
Which of the following is C-ville's sustainable growth rate for 20X1? Unless otherwise noted, use year end rather
than average equity to calculate ROE.
a. 4.04%
b. 3.85%
c. 4.00%
d. 4.20%
Stalla Review Course Registered to:
41. L2-01509 - Lecture: SS-08 (page 30), topic: L2-L08-03
Imboden Analytics (IA) provides capital budgeting support for large companies. Jeffrey Rogers, CFA, examines
the following data for two projects under consideration by an IA client.
Exhibit 1:
Net Present Value
Machine A Machine B
Cash Flow PV CF Cash Flow PV CF
0 -\$500,000 -\$500,000 -\$600,000 -\$600,000
1 250,000 223,214 200,000 178,571
2 250,000 199,298 200,000 159,438
3 250,000 177,945 200,000 142,356
4 200,000 127,104
5 200,000 113,485
6 200,000 101,326
NPV \$100,457 \$222,280
Which of the following is closest to the NPV that Rogers would calculate for each project using the replacement
chain (common life) approach and which project would Rogers select, assuming the client has a 12% cost of
capital?
Machine A Machine B Selection
a. \$171,962 \$222,280 A
b. \$210,093 \$222,280 A
c. \$171,962 \$222,280 B
d. \$210,093 \$222,280 B
Stalla Review Course Registered to:
42. L2-01689 - Lecture: SS-01 (page 6), topic: L2-L01-01
Sonia Chapman, CFA, is a Belgian citizen managing portfolios for high net worth individuals in France, Germany,
and Algeria from her office overlooking Paris. Chapman is not registered as an investment advisor in the U.S. or
Belgium.
The securities laws in France are different, but not necessarily less strict than mandated by the Code and
Standards. Securities laws are less strict in Algeria and are more strict in Germany.
Assume that France, like the U.S., uses the "conduct" and "effects" test to analyze each case and apply their
version of the Investment Advisers Act of 1940. Germany is more strict in that any conduct contrary to its laws
constitutes a violation, regardless of the nationality of the person on whom the effect occurs.
Exhibit 1 shows a copy of a solicitation letter Chapman sent to a client in Algeria.
Exhibit 1
Letter from Sonia Chapman
1 June, 20X4
M. Monsoor Ijaz
Rte nac.5, Cinq-Maison 65
Cité du 5 juillet
Bab Ezzouar
16200 Alger
Dear Mr. Ijaz:
We are pleased to announce that we have assumed the business interests of Faux Plume Investment Advisory in
Alger. Chapman-Faux Plume welcomes the opportunity to serve you in the future as Faux Plume has in the past.
Toward the goal of providing the best possible advisory services, Chapman-Faux Plume now employs the services
of 125 CFAs, and has 240 partial CFA charterholders enrolled for the next examination. We feel that this level of
expertise will provide superior results to the high net worth individuals entrusting us with their wealth.
Girard Plume or I will contact you shortly for your annual review appointment. In the interim, know that we uphold
the highest standards of respect for our clients.
Yours sincerely,
Mme. Sonia Chapman, CFA
Chapman-Faux Plume Investments
Which of the following is most correct with regard to Chapman's communication to the Algerian client?
a. Chapman has not violated the Code and Standards in the communication.
b. Chapman has violated the Code and Standards only by referring to the candidates for the CFA designation as
"partial CFA charterholders."
c. Chapman has violated the Code and Standards only by referring to the CFA charterholders as "CFAs."
d. Chapman has violated the Code and Standards by referring to the candidates for the CFA designation as
"partial CFA charterholders," and by referring to the CFA charterholders as "CFAs."
Stalla Review Course Registered to:
43. L2-00190 - Lecture: SS-08 (page 4), topic: L2-L08-01

No. of bonds outstanding (rated Baa) = 50,000
Par value per bond = \$1,000
Price per bond = \$1,000
Coupon rate on bonds = 8%
No. of preferred shares outstanding = 1,000,000
Price of a preferred share = \$50
Annual dividend for preferred shares = \$3.50
No. of common shares outstanding = 4,500,000
Price of a common share = \$30
Last annual dividend for common shares = \$1.20
Expected growth rate of dividends = 5%
Corporate tax rate = 40%

Calculate the cost of preferred capital for Xanadu Corporation.
a. 2.4%
b. 11.7%
c. 2.8%
d. 7.0%
44. L2-00772 - Lecture: SS-05 (page 13), topic: L2-L05-01
To account for the purchase of a machine, a company may use either straight-line (SL) depreciation or the sum-
of-the-years'-digits (SYD) depreciation. Return on investment for the machine will:
a. Initially be higher under SYD than under SL.
b. Remain constant under SL.
c. Decrease over time under SL.
d. Initially be higher under SL than under SYD.
45. L2-00708 - Lecture: SS-09 (page 17), topic: L2-L09-02
The C-Minus Company is anxious about ongoing consolidation in their industry. They have significant cash
reserves and have encountered an unfortunate series of negative NPV investments as they attempted to find
viable expansion opportunities. The C-Minus Company shareholders are restless and there have been rumors
that both the A+Plus Company and the B+Plus Company are in acquisition mode. Although no direct merger
overtures have been made, the officers and directors have decided to take defensive steps to prevent an
unwanted takeover.
At this time, which of the following courses of action is the least viable?
a. Charter amendments to require a "supermajority" vote to approve any merger.
b. Adopt a "poison pill" allocating share rights to existing shareholders.
c. Establish a "poison put" option for bondholders.
d. Undertake an asset restructuring to acquire assets a suitor does not want or which raise antitrust concerns
upon further consolidation.
Stalla Review Course Registered to:
46. L2-01029 - Lecture: SS-01 (page 69), topic: L2-L01-03
Many perceive the Prudent Man Rule as being rigid and outdated because it has failed to reflect the emergence of
capital market theory and its application.
Tony Esante, a CFA candidate, was studying for his Level II exam. He read about the Prudent Man Rule and
understood its requirements. He then read about capital market theory and its applications. Esante felt the
prudent man rule was in conflict with capital market theory. Instead of going on to the study session, Esante spent
some time thinking of ways the Prudent Man Rule could be updated so it would not conflict with capital market
theory.
To satisfy capital market theory, the Prudent Man Rule would need to be adapted so that:
a. Unsatisfactory performance of an individual security would not be acceptable.
b. Satisfactory total portfolio performance would satisfy the Prudent Man Rule.
c. Each security would be analyzed on its own merits.
d. Both "a" and "c".
47. L2-01113 - Lecture: SS-16 (page 46), topic: L2-L16-02
The current deliverable Treasury bill (T-bill) for the 120-day futures contract is the current:
a. 90-day T-bill.
b. 120-day T-bill.
c. 150-day T-bill.
d. 210-day T-bill.
48. L2-00992 - Lecture: SS-15 (page 17), topic: L2-L15-02
The description of collateral for an asset-backed security states that the loans require the borrowers to make a
minimum monthly payment and that the loans have no scheduled payoff date. This indicates the collateral is
composed of:
a. Mortgage pass-through securities.
b. Non-amortizing loans.
c. Amortizing loans.
d. Any of the above.
49. L2-00926 - Lecture: SS-01 (page 18), topic: L2-L01-02
The Standard relating to Priority of Transactions states that the financial analyst shall conduct himself in such a
way that transactions for his customers, clients and employer have priority over his own personal transactions.
"Personal transactions" include transactions for:
a. Immediate family members.
b. Immediate family members and all business associates.
c. Immediate family members and all personal friends.
d. Immediate family members, all business associates, and all personal friends.
Stalla Review Course Registered to:
50. L2-01776 - Lecture: SS-12 (page 52), topic: L2-L12-02
One of the companies that Jones is researching is Mackinac, Inc., a U.S. based manufacturing company.
Mackinac has released its June 2001 financial statements, which are shown in Exhibits 2-1, 2-2 and 2-3.
Exhibit 2-1
Mackinac, Inc.
Annual Income Statement
for the Year ended June 30, 2001
(in thousands, except per-share data)
Sales \$250,000
Cost of Goods Sold 125,000
Gross Operating Profit \$125,000
Selling, General, and Administrative Expenses 50,000
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) \$ 75.000
Depreciation and Amortization \$ 10,500
Earnings Before Interest and Taxes (EBIT) \$ 64,500
Interest Expense 11,000
Pretax Income \$ 53,500
Income Taxes 16,050
Net Income \$ 37,450
Shares Outstanding 13,000
Earnings Per Share (EPS) \$ 2.88

Exhibit 2-2
Mackinac, Inc.
Balance Sheet
As of June 30, 2001
(in thousands)
Current Assets:
Cash and Equivalents \$20,000
Receivables 40,000
Inventories 29,000
Other Current Assets 23,000
Total Current Assets \$112,000
Non-current Assets:
Property, Plant, and Equipment \$145,000
Less: Accumulated Depreciation (53,500)
Net Property, Plant, and Equipment \$102,000
Investments 70,000
Other Non-current Assets 36,000
Total Non-current Assets \$208,000
Total Assets \$320,000
Current Liabilities:
Accounts Payable \$41,000
Short-term Debt 12,000
Other Current Liabilities 17,000
Total Current Liabilities \$70,000
Non-current Liabilities:
Long-term Debt \$100,000
Total Non-current Liabilities \$100,000
Total Liabilities \$170,000
Shareholders’ Equity
Common Equity \$40,000
Retained Earnings 110,000
Total Equity \$150,000
Total Liabilities and Equity \$320,000

Exhibit 2-3
Mackinac, Inc.
Cash Flow Statement
Stalla Review Course Registered to:
for the Year ended June 30, 2001
(in thousands)
Cash Flow from Operating Activities:
Net Income \$37,450
Depreciation and Amortization 10,500
Change in Working Capital:
(Increase) Decrease in Receivables (\$5,000)
(Increase) Decrease in Inventories (8,000)
Increase (Decrease) in Payables 6,000
Increase (Decrease) in Other Current Liabilities 1,500
Net Change in Working Capital \$5,500
Net Cash from Operating Activities \$42,500
Cash Flow from Investing Activities:
Purchase of Property, Plant, and Equipment (\$15,000)
Net Cash from Investing Activities (\$15,000)
Cash Flow from Financing Activities:
Change in Debt Outstanding \$4,000
Payment of Cash Dividends (22,470)
Net Cash from Financing Activities (\$18,470)
Net Change in Cash and Cash Equivalents \$8,980
Cash at Beginning of Period 11,020
Cash at End of Period \$20,000

Mackinac has announced that it has finalized an agreement to handle North American production of a successful
product currently marketed by a foreign company. Jones decides to value Mackinac using the dividend discount
model (DDM) and the free cash flow-to-equity (FCFE) model. After reviewing Mackinac's financial statements in
Exhibits 2-1, 2-2 and 2-3 and forecasts related to the new production agreement, Jones concludes the following:
● Mackinac's earnings and FCFE are expected to grow 17% per year over the next three years before
stabilizing at an annual growth rate of 9%.
● Mackinac will maintain the current payout ratio.
● Mackinac's beta is 1.25.
● The government bond yield is 6% and the market equity premium is 5%.
What is the value of a share of Mackinac's common stock using the two-stage FCFE model?
a. \$99.77
b. \$97.25
c. \$97.14
d. \$102.51
51. L2-00867 - Lecture: SS-07 (page 47), topic: L2-L07-03
Stalla Review Course Registered to:
Spartacus Corporation
Balance Sheet
12/31/20X1 12/31/20X0
Assets
Cash \$ 120,000 \$ 36,000
Accounts Receivable 240,000 360,000
Inventory 720,000 480,000
Property, Plant & Equipment 1,680,000 1,764,000
Total Assets \$ 2,760,000 \$ 2,640,000
Liabilities and Shareholders' Equity
Accounts Payable \$ 453,600 \$ 600,000
Mortgage Payable 960,000 996,000
Common Stock (250 shares o/s) 720,000 720,000
Retained Earnings 626,400 324,000
Total Liabilities & Capital \$ 2,760,000 \$ 2,640,000
Spartacus Corporation
Income Statement
For the Year Ended December 31, 20X1
Sales \$ 2,160,000
Less Expenses:
Cost of Goods Sold \$ 1,200,000
Salaries Expense 396,000
Depreciation Expense 84,000
Interest Expense 48,000
Total Expenses \$ 1,728,000
Pre-Tax Income \$ 432,000
Income Tax Expense (30%) 129,600
Net Income \$ 302,400

What is the company's fixed asset turnover ratio for 20X1?
a. 0.80
b. 1.25
c. 1.29
d. 0.93
Stalla Review Course Registered to:
52. L2-01995 - Lecture: SS-11 (page 3), topic: L2-L11-01
Katherine Cooper is preparing a report on the optical network component business. She begins her research by
analyzing the competitive conditions of the industry. One of the dominant firms in the industry is Rubylight, Inc.
Exhibit 6-1
Rubylight, Inc.
2004 Annual Report
Excerpt from President's Letter
[1] Rubylight, Inc. had an exceptional year in 2004. [2] The results in almost every corner of the business
exceeded our expectations. [3] Sales at Rubylight climbed 73 percent over fiscal 2003 to \$135 million,
representing the strongest year-on-year sales growth in the company's history. [4] Our gross margin remained
constant, compared to the prior year, at a respectable 67 percent. [5] We managed to maintain our margins,
despite aggressive price reductions negotiated by our customers, through an improvement in product mix and
production efficiencies. [6] The capital markets have rewarded us for this superior financial performance; the
company's stock price closed the year at an all time high. [7] We have an outstanding team here at Rubylight,
deserving high praise for performance.
[8] The backlog (unfulfilled orders) expanded by 39 percent. [9] This was principally due to an inability of our
supplier to ship two application-specific integrated circuits ("ASIC") that are critical to the superior performance of
the Rubylight product. [10] Although the ASIC designs are owned by Rubylight, the integrated circuits must be
fabricated in highly specialized facilities, of which there are only two worldwide. [11] The extremely capital
intensive nature of these facilities prevents us from manufacturing the integrated circuits ourselves. [12]
Shortages of electronic component supplies and fabrication time are worldwide phenomena that have also
plagued our major competitor.
[13] One of the strategic imperatives in the optical components industry is to get your components incorporated
into the designs of your customers' products, known as "design wins," which makes it very expensive for the
customer to make a component substitution. [14] Early in the year we announced the appointment of Dr. Brian
Richards as the Chief Technology Officer. [15] Dr. Richards is one of the pioneers of the optical switching industry
and has numerous patents to his credit. [16] He and his very fine team in our Research and Development
department continue to work closely with our customers to ensure design wins for the next generation of products.
[17] On the competitive landscape, we have seen some interesting developments over the last year. [18] Our
major competitor has focused on building distribution in the European market. [19] That competitor appears to be
exiting North America and the Far East, which are our strongholds. [20] However, we have seen several start-ups
enter the North American market. [21] They have been able to attract significant venture capital financing, which
gives them greater ability to build brand recognition than start-ups have enjoyed in the past.
[22] On the technology front, recent developments in micro-electronic mechanical technology have created the
promise of a dramatic improvement in product performance. [23] Typically the start-ups have been focused on
this technology.
Which statement contained in the excerpt from Rubylight's President's Letter increases the bargaining power of
a. [5] We managed to maintain our margins, despite aggressive price reductions negotiated by our customers,
through an improvement in product mix and production efficiencies.
b. [8] The backlog (unfulfilled orders) expanded by 39 percent.
c. [10] Although the ASIC designs are owned by Rubylight, the integrated circuits must be fabricated in highly
specialized facilities, of which there are only two worldwide.
d. [20] However, we have seen several start-ups enter the North American market.
Stalla Review Course Registered to:
53. L2-00826 - Lecture: SS-07 (page 47), topic: L2-L07-03
Spartacus Corporation
Balance Sheet
12/31/20X1 12/31/20X0
Assets
Cash \$ 120,000 \$ 36,000
Accounts Receivable 240,000 360,000
Inventory 720,000 480,000
Property, Plant & Equipment 1,680,000 1,764,000
Total Assets \$ 2,760,000 \$ 2,640,000
Liabilities and Shareholders' Equity
Accounts Payable \$ 453,600 \$ 600,000
Mortgage Payable 960,000 996,000
Common Stock (250 shares o/s) 720,000 720,000
Retained Earnings 626,400 324,000
Total Liabilities & Capital \$ 2,760,000 \$ 2,640,000
Spartacus Corporation
Income Statement
For the Year Ended December 31, 20X1
Sales \$ 2,160,000
Less Expenses:
Cost of Goods Sold \$ 1,200,000
Salaries Expense 396,000
Depreciation Expense 84,000
Interest Expense 48,000
Total Expenses \$ 1,728,000
Pre-Tax Income \$ 432,000
Income Tax Expense (30%) 129,600
Net Income \$ 302,400

The company's average inventory processing period for 20X1 is:
a. 219 days.
b. 146 days.
c. 182.5 days.
d. 365 days.
54. L2-02125 - Lecture: SS-12 (page 35), topic: L2-L12-01
Frank Stahl, the CFO at RDU Corporation, is looking into the implications of divesting one of its divisions. RDU is
a conglomerate, with businesses ranging from shoe repair to laser guided missiles. The division to be sold, Temp
Services, is growing slowly and a buyer has expressed an interest. To assess the effect of this divestiture, Stahl
has gathered the following historical information and made projections for the next year, with and without Temp
Services.
Stalla Review Course Registered to:
RDU Corporation
Historical Financial Statements for Years Ended 12/31/X0 and 12/31/X1
(\$ million, except per share data)
Income Statement 20X0 20X1
Revenue \$ 3,234 \$ 3,396
Cost of Goods Sold 1,294 1,358
Other Operating Costs 323 340
Depreciation and Amortization 565 585
Earnings Before Interest & Taxes \$ 1,052 \$ 1,113
Interest 205 210
Earnings Before Taxes \$ 847 \$ 903
Taxes 381 406
Net Income \$ 466 \$ 497
Earnings Per Share \$ 1.86 \$ 1.94
Dividends Per Share \$ 0.93 \$ 0.97
Common Stock Outstanding (millions) 250 256
Balance Sheet 20X0 20X1
Current Assets \$ 646 \$ 680
Net property, Plant, and Equipment 4,154 4,490
Goodwill 1,000 1,110
Total Assets \$ 5,800 \$ 6,280
Current Liabilities \$ 323 \$ 340
Long-term Debt 2,050 2,100
Total Liabilities \$ 2,373 \$ 2,440
Stockholders' Equity 3,472 3,840
Total Liabilities & Equity \$ 5,800 \$ 6,280
Capital Expenditures/Acquisitions \$ 990 \$ 1,055
Stalla Review Course Registered to:
RDU Corporation
Pro Forma Financial Statements for Year Ending 12/31/X2
(\$ million, except per share data)
Assuming Without
Income Statement Divestiture Divestiture
Revenue \$ 3,266 \$ 3,566
Cost of Goods Sold 1,143 1,426
Other Operating Costs 303 357
Depreciation and Amortization 580 620
Earnings Before Interest & Taxes \$ 1,240 \$ 1,163
Interest 200 220
Earnings Before Taxes \$ 1,040 \$ 943
Taxes 468 424
Net Income \$ 572 \$ 519
Earnings Per Share \$ 2.20 \$ 2.00
Dividends Per Share \$ 1.10 \$ 1.00
Common Stock Outstanding (millions) 260 260
Assuming Without
Balance Sheet Divestiture Divestiture
Current Assets \$ 653 \$ 712
Net property, Plant, and Equipment 4,096 4,690
Goodwill 1,086 1,086
Total Assets \$ 5,835 \$ 6,488
Current Liabilities \$ 326 \$ 356
Long-term Debt 2,000 2,200
Total Liabilities \$ 2,326 \$ 2,556
Stockholders' Equity 3,509 3,932
Total Liabilities & Equity \$ 5,835 \$ 6,488
Capital Expenditures/Acquisitions \$ 900 \$ 1,105
Note: Use December 31, 20X0 and 20X1 year-end balance sheet data rather than averages in ratio calculations.
Which of the following is the leverage calculation for RDU using the DuPont ROE model for year 20X0?
a. 13.42%
b. 1.6705
c. 12.94%
d. 1.6354
Stalla Review Course Registered to:
55. L2-01416 - Lecture: SS-13 (page 9), topic: L2-L13-01
Jim Johnson, CFA, is analyzing Toller Corporation using market multiples. The common shares of Toller are
trading at \$123.45. Johnson plans to start his analysis with a calculation of Toller's price-to-earnings (P/E) ratios.
Toller is extremely aggressive in its accounting and Johnson realizes he must adjust Toller's net income. Johnson
has gathered the following historical and projected information:
1Q 20X4 2Q 20X4 3Q 20X4 4Q 20X4 1Q 20X5 20X5 Year
Actual Actual Actual Actual Estimated Estimated
Net Income \$12.1 mil. \$14.0 mil. \$11.8 mil. \$11.6 mil. \$12.0 mil. \$60.1 mil.
accounting
methods
(net of tax) \$0.5 mil. \$0.6 mil. \$0.3 mil. \$0.4 mil. \$0.4 mil. \$2.2 mil.
Common
Stock
Dividends \$1.0 mil. \$1.0 mil. \$1.0 mil. \$1.0 mil. \$1.1 mil. \$4.4 mil.
Shares
Outstanding 10 mil. 10 mil. 10 mil. 10 mil. 10 mil. 10 mil.
Using the data provided, Johnson calculates the trailing P/E ratio for Toller based on underlying earnings.
Choose which of the following choices is closest to this calculation?
a. 24.1x
b. 24.9x
c. 25.9x
d. 28.2x
56. L2-01569 - Lecture: SS-09 (page 18), topic: L2-L09-02
Which one of the following statements is false?
a. In a cash offer merger, the cash purchase of the target firm's stock is taxable. The shareholders of the target
firm are viewed as having disposed of the shares, and the resulting potential capital gains trigger taxes.
b. In a cash offer merger, assets of the target firm are revalued in the merged entity and depreciation is taken
from the adjusted, usually higher, amount.
c. In a share offer merger, the stock purchase of the target firm is not taxable. The shareholders of the target
firm are viewed as having exchanged shares and capital gains are deferred until the new shares are sold.
d. In a share offer merger, assets of the target firm are transferred at their current market value and depreciation
is taken from the market value.
Stalla Review Course Registered to:
57. L2-00664 - Lecture: SS-05 (page 4), topic: L2-L05-01
All of the following are true about LIFO, except:
a. It allows managers to manipulate income by timing inventory purchases.
b. It produces lower net income than FIFO during periods of rising prices.
c. It produces higher reported inventory on the balance sheet than FIFO in an inflationary (rising prices)
environment.
d. All of the following are true.
58. L2-00040 - Lecture: SS-02 (page 9), topic: L2-L02-01
A portfolio manager calls Vic, a trader at Sonic Brokerage, to place a buy order for 100,000 shares of American
Digital Equipment. Vic calls Tully, a trader at another brokerage firm, and orders "100,000 shares of ADE at the
market." Tully later calls to confirm the purchase of 100,000 shares of Aerospace Dynamics at \$60.50. Vic says
that he wanted to buy American Digital Equipment, not Aerospace Dynamics. Tully explains that ADE is the
symbol for Aerospace Dynamics. The symbol for American Digital Equipment is AMD. The market on Aerospace
Dynamics is now off by \$0.25, so Vic asks Tully to sell the shares and have Tully's firm take the \$25,000 loss
(cover the trade). Tully agrees, but says he will need to recoup the loss in additional trades. Over the next month,
Vic directs a number of trades to Tully in order to compensate his firm for the loss.
Regarding trading errors, an important factor is:
a. Standard IV(B.3), Fair Dealing, which requires members to treat all clients and prospects fairly when taking
investment action.
b. The SEC states that if a member makes a trading error, he/she must personally bear the loss.
c. If a member makes an investment recommendation to a client, his/her objectivity may be compromised.
d. All of the above.
Stalla Review Course Registered to:
59. L2-02052 - Lecture: SS-17 (page 61), topic: L2-L17-02
Speculative Microsystems has a large bond issue outstanding with a fixed coupon payment. Internal company
analysts genuinely believe that interest rates are going to increase to a level that is above the fixed payment,
though they aren't sure exactly when this will happen. It doesn't make sense for the firm to contractually commit to
a different interest payment arrangement at this time; however, they would like the ability to take advantage of the
situation if, in fact, interest rates increase sometime in the near future.
Suppose that Speculative Microsystems decides to buy a European payer swaption that expires one-year from
today and allows the firm at the time of expiration to enter into a one-year swap with quarterly payments based on
an (pay-fixed) exercise rate of 8%. Further suppose that the following table gives annualized LIBOR spot rates
and their respective discount factors on the day of expiration:
Time to Maturity LIBOR Rate (%) Discount Factor
90 Days 5.5 0.9864
180 Days 8.5 0.9592
270 Days 10.5 0.9270
360 Days 12.5 0.8889
If, at the time of expiration, the market rate for the underlying swap would require a fixed payment of 11.81%
annually, then what is the (annualized) value of this swaption on expiration day per \$1 of notional principal?
a. −\$0.1433
b. \$0.1433
c. \$0.1854
d. \$0.0297
60. L2-01261 - Lecture: SS-14 (page 27), topic: L2-L14-02
Which of the following bonds should have the highest effective duration (i.e., have the greatest price change for
any given small change in interest rates)?
Bond Maturity Coupon Price Embedded Options
A 10 year 6.6% \$100 none
B 15 year 6.8% \$100 Immediately callable at \$100.00
C 5 year 6.6% \$100 Immediately putable at \$101.00
a. Bond A.
b. Bond B.
c. Bond C.
d. Cannot be determined.
61. L2-00535 - Lecture: SS-08 (page 43), topic: L2-L08-05
You have the following information about Qwerty Corporation:

Last year This year
Sales \$240 million \$276 million
EBIT \$50 million \$54 million
EPS \$3.00 \$4.20

Calculate the firm's degree of total leverage (DTL).
a. 5.00
b. 5.53
c. 0.53
d. 2.65
Stalla Review Course Registered to:
62. L2-01200 - Lecture: SS-17 (page 50), topic: L2-L17-02
An interest rate swap could be replicated by:
I. Issuing a fixed-rate note and buying a floating-rate note.
II. Entering a series of forward-rate agreements to receive a floating-rate.
III. Buying an interest rate floor.
a. I, II, III.
b. II and III only.
c. I and III only.
d. I and II only.
63. L2-01238 - Lecture: SS-18 (page 16), topic: L2-L18-02
Standard deviation and beta both measure risk, but they are different in that:
a. Beta measures both systematic and unsystematic risk while standard deviation measures only unsystematic
risk.
b. Beta measures only systematic risk while standard deviation is a measure of total risk.
c. Beta measures only unsystematic risk while standard deviation is a measure of total risk.
d. Beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk.
64. L2-01453 - Lecture: SS-18 (page 6), topic: L2-L18-01
Abigail Grace has a \$900,000 fully diversified portfolio. She subsequently inherits ABC Company common stock
worth \$100,000. Her financial advisor provides her with the forecasted information given in Exhibit 15-1.
Exhibit 15-1
Risk and Return Characteristics

Expected Monthly
Returns
Expected Standard
Deviation of Monthly
Returns
Original Portfolio 0.67% 2.37%
ABC Company 1.25% 2.95%

The expected correlation coefficient of ABC stock returns with the original portfolio returns is 0.40.
The inheritance changes her overall portfolio and she is deciding whether or not to keep the ABC stock.
Assuming Grace keeps the ABC stock, the expected return of her new portfolio that includes the ABC stock is
closest to:
a. 2.80%
b. .531%
c. 2.27%
d. .728%
65. L2-00899 - Lecture: SS-07 (page 54), topic: L2-L07-03
The Shearhouse Corporation has a pretax profit margin of 15% and an effective income tax rate of 40%. If its
asset turnover is 1.2, what should management select as a target financial leverage ratio in order to obtain a
return on equity of 20%?
a. 2.78x
b. 1.85x
c. 1.11x
d. 2.22x
Stalla Review Course Registered to:
66. L2-01086 - Lecture: SS-15 (page 29), topic: L2-L15-03
Why must the future paths of interest rates generated for a Monte Carlo model be adjusted?
a. To factor in the analyst's interest rate forecast.
b. To factor in the market's forward rate expectations.
c. To factor in expected interest rate volatility.
d. None of the above.
67. L2-00966 - Lecture: SS-15 (page 10), topic: L2-L15-01
The creation of the CMO market has increased total demand for mortgage pass-throughs by:
I. Eliminating prepayment risk.
II. Allowing investors to select tranches that match their duration objectives.
III. Allowing investors to select tranches that meet their tolerance for reinvestment risk.
a. I, II, III.
b. I only.
c. II and III only.
d. CMOs have not expanded the market for pass-throughs.
Stalla Review Course Registered to:
68. L2-01785 - Lecture: SS-12 (page 45), topic: L2-L12-02
Rio National Corp. is a U.S. based company and the largest competitor in its industry. Exhibits 5-1 through 5-4
present the financial statements, which are prepared according to U.S. Generally Accepted Accounting Principles
(U.S. GAAP), and related information for the company. Exhibit 5-5 presents relevant industry and market data.
Exhibit 5-1
Rio National Corp.
Summary Balance Sheets
on 31 December
(U.S. \$ millions)

2002 2001
Cash \$ 13.00 \$ 5.87
Accounts Receivable 30.00 27.00
Inventory 209.06 189.06
Current Assets \$252.06 \$221.93
Gross Fixed Assets 474.47 409.47
Accumulated Depreciation (154.17) (90.00)
Net Fixed Assets 320.30 319.47
Total Assets \$572.36 \$541.40

Accounts Payable \$ 25.05 \$ 26.05
Notes Payable 0.00 0.00
Current Portion of Long-term Debt 0.00 0.00
Current Liabilities \$ 25.05 \$ 26.05
Long-term Debt 240.00 245.00
Total Liabilities \$265.05 \$271.05
Common Stock 160.00 150.00
Retained Earnings 147.31 120.35
Total Shareholders' Equity \$307.31 \$270.35
Total Liabilities and Shareholders' Equity
\$572.36 \$541.40

Exhibit 5-2
Rio National Corp.
Summary Income Statement
for the Year Ended 31 December 2002
(U.S. \$ millions)
Revenue \$300.80
Total Operating Expenses (173.74)
Operating Profit 127.06
Gain on Sale 4.00
Earnings Before Interest, Taxes, 131.06
Depreciation & Amortization (EBITDA)
Depreciation and Amortization (71.17)
Earnings Before Interest & Taxes (EBIT) 59.89
Interest (16.80)
Income Tax Expense (12.93)
Net Income \$ 30.16
Exhibit 5-3
Rio National Corp.
Supplemental Notes for 2002
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Note 1: Rio National had \$75 million in capital expenditures during the year.
Note 2: A piece of equipment that was originally purchased for \$10 million was
sold for \$7 million at year-end, when it had a net book value of \$3 million.
Equipment sales are unusual for Rio National.
Note 3: The decrease in long-term debt represents an unscheduled principal
repayment; there was no new borrowing during the year.
Note 4: On 1 January 2002, the company received cash from issuing 400,000
shares of common equity at a price of \$25.00 per share.
Note 5: A new appraisal during the year increased the estimated market value of
land held for investment by \$2 million, which was not recognized in 2002
income.
Exhibit 5-4
Rio National Corp.
Common Equity Data for 2002
Dividends Paid (U.S. \$ millions) \$3.20
Weighted Average Shares Outstanding during 2002 16,000,000
Dividend per Share \$0.20
Earnings per Share \$1.89
Beta 1.80
Note: The dividend payout ratio is expected to be constant.
Exhibit 5-5
Industry and Market Data
31 December 2002
Risk-free Rate of Return 4.00%
Expected Rate of Return on Market Index 9.00%
Median Industry Price/Earnings (P/E) Ratio 19.90
Expected Industry Earnings Growth Rate 12.00%
While valuing the equity of Rio National Corp., Katrina Shaar is considering the use of either cash flow from
operations (CFO) or free cash flow to equity (FCFE) in her valuation process.
Shaar decides to calculate Rio National's FCFE for the year 2002, starting with net income.
What is Rio National's free cash flow to equity for the year 2002?
a. \$24.33 million
b. \$10.33 million
c. \$0.33 million
d. \$5.33 million
Stalla Review Course Registered to:
69. L2-01484 - Lecture: SS-18 (page 34), topic: L2-L18-02
Timmy Timmonds, has just completed his MBA at Theory Tech, a university that is known for its quantitative
approach to finance. He has been hired as an assistant portfolio manager at Tradem & Weep Investments.
Tradem & Weep has a list of 245 stocks that its research department rates suitable for inclusion in the firm's
portfolios. These "buyable" stocks are categorized into 67 industries.
Timmonds has been asked to construct a well-diversified stock portfolio for Mr. M. T. Pokkets, a middle-income
gentleman of modest wealth. Timmonds understands that because Mr. Pokkets does not have a large amount of
cash available for investment, the portfolio will have to be limited to no more than twenty stocks. From his courses
on portfolio construction, Timmonds knows that a reasonably well-diversified portfolio can be constructed with a
relatively few stocks as long as the individual security returns are not well correlated. Consequently, he decides to
select 20 industries at random out of the 67 industries in which there is at least one "buyable" stock on the firm's
research list. He then selects one stock, at random, from each of the selected industries for inclusion in Pokkets'
portfolio.
All of the following are disadvantages of Timmond's portfolio construction technique, except:
a. Timmond's method may result in the portfolio not being well diversified.
b. Timmond's method does not account for the tax situation of the client.
c. Timmond's method assures only the stocks approved for purchase on the firm's recommended list will
become part of the portfolio.
d. Timmonds' method does not guarantee that the risk of the resulting portfolio constructed for Pokkets will be
consistent with his needs and circumstances.
Stalla Review Course Registered to:
70. L2-02014 - Lecture: SS-11 (page 3), topic: L2-L11-01
Jim Vala, CFA, is analyzing companies in the Telecommunications Industry. Vala attends a June 20X5 meeting
where Tom Anderson, DCom Corp.'s Chief Operating Officer makes a presentation. After the meeting with
Anderson, Vala is concerned about the long-haul data communications industry and wonders if DCom's business
model is viable in the long term. He contacts David Blume, a partner at Communication Consulting Group, who
specializes in this industry.
Blume makes the following observations:
1. Long-haul data communications market revenues are \$23 billion per year.
2. From the supply perspective, network growth (measured in kilometers of installed fiber) will increase by 75
percent in total over the next two years, driven mainly by start-up carriers attempting to compete on quality of
service.
3. New data traffic technology virtually eliminates capacity issues in long-haul networks by allowing more data to
flow over the same lines. As a result, the marginal cost of carrying data traffic for an established service
provider with an existing network is very low.
4. Demand for data traffic will grow at a rate of 60 percent annually over the next two years because of
decentralization of computing resources, the rise of telecommuting, and Internet traffic.
5. Until recently, established service providers had been prevented from competing effectively against start-up
carriers because of government price regulation.
What is the key factor to successfully implementing the product differentiation strategy?
a. The strategy requires advertising to build a perception of product differentiation.
b. The strategy requires that products be sold at a premium price to recover costs of developing a differentiated
product.
c. The strategy becomes more effective when it raises switching costs by building customer loyalty.
d. The strategy depends on the ability to create real differences that uniquely describe products from the
competitor.
71. L2-00660 - Lecture: SS-05 (page 36), topic: L2-L05-01
Which of the following is not an off-balance-sheet financing technique used by a company?
a. Sale of accounts receivable.
b. Issuing a zero-coupon bond.
c. Take-or-pay contracts.
d. A parent guaranteeing the debt of an affiliate.
Stalla Review Course Registered to:
72. L2-00883 - Lecture: SS-07 (page 47), topic: L2-L07-03
XYZ Corporation
Balance Sheet
12/31/20X2 12/31/20X1 12/31/20X0
Assets
Cash \$100,000 \$50,000 \$30,000
Accounts Receivable 500,000 400,000 300,000
Inventory 200,000 180,000 120,000
Goodwill 10,000 — —
Fixes Assets 50,000 45,000 40,000
Total Assets \$860,000

\$675,000

\$490,000

Accounts Payable \$100,000 \$ 90,000 \$ 80,000
Notes Payable 10,000 — —
Long-Term Debt 50,000 85,000 10,000
Shareholders' Equity 700,000 500,000 400,000
Total Liabilities and Equity \$860,000

\$675,000

\$490,000

XYZ Corporation
Income Statement
For the Year Ended
12/31/20X2 12/31/20X1
Sales \$1,000,000 \$800,000
Cost of Sales \$700,000 \$550,000
SG&A \$150,000 \$100,000

In 20X2, the payables turnover and the payables payment period were:
a. 7.4 times; 52 days.
b. 7.4 times; 50 days.
c. 8.9 times, 52 days.
d. 8.9 times, 50 days.
Stalla Review Course Registered to:
73. L2-01701 - Lecture: SS-01 (page 18), topic: L2-L01-02
Donald Thierath, CFA, supervises proxy voting and soft dollar management for manufacturing firm Dealux
Technologies Corporation (DTC) on behalf of his employer, portfolio management firm Startling Bright and
Adamson (SBA). SBA owns 2% of DTC in other accounts unrelated to the DTC pension fund. MYB Industries
(MYB) recently made an unsolicited takeover offer for DTC. In an attempt to discourage MYB from the takeover,
DTC makes an unsolicited bid for KLK Corporation (KLK) which MYB would not want to own.
To further complicate matters, DTC pressures SBA to vote shares of the pension plan and shares held in other
SBA accounts in favor DTC's takeover of KLK. DTC threatens to withdraw all current and future pension fund
management business from SBA unless they deliver the proxy votes in support of the KLK takeover.
Thierath concluded some time before DTC contacted his employer that the MYB merger would benefit existing
shareholders in both the DTC pension accounts and other accounts unrelated to the DTC pension fund. Thierath
believes that voting the proxies in favor of MYB's takeover of DTC benefits existing DTC shareholders and the
DTC plan beneficiaries, but requests DTC to direct in writing that SBA vote the proxies in favor of the KLK merger.
DTC sends the written request that SBA vote for the DTC merger with KLK, along with paperwork indemnifying
SBA for voting as DTC has requested.
Thierath directs that SBA sell the 2% holding of DTC in other accounts unrelated to the DTC pension fund,
because those shares create a conflict of interest between the DTC directive and the benefit of the unrelated
shareholders.
SBA's research department continues to recommend DTC on the strength of the MYB offer, unaware that DTC
directed SBA to vote proxies in favor of the KLK merger.
With the DTC merger situation seemingly under control, Thierath turns his attention to the request submitted by
portfolio manager Paula Martinez, CFA (PM). PM asks Thierath if she can have a Bloomberg terminal, and wants
SBA to pay for the terminal and the desk on which it would reside with soft dollars earned through client
brokerage. PM further requests that SBA use soft dollars to purchase some general interest subscriptions (Time,
NewsMax, and People) for the client waiting room.
PM makes the argument that all clients will benefit from her enhanced ability to access information on the
Bloomberg terminal, and the magazines will benefit all clients who come to the offices and use the waiting room.
SBA's clients receive annually a statement indicating that SBA complies with all mandatory provisions of the CFA
Institute Soft Dollar Standards.
Anna Nicole Sutton (ANS), a large retail client and heir to the Sutton fortune, demands that SBA direct some of the
brokerage deriving from trades in her account to Bertha Trendy (BT), an incompetent retail broker specializing in
penny stocks. SBA, however, believes that BT charges higher commissions than comparable brokerage firms.
Thierath has indicated in writing that BT may not be suitable as a broker for the type and style of investing
approved by the ANS Investment Policy Statement.
Which of the following is most correct with regard to expenses payable with soft dollars with regard to CFA
Institute Soft Dollar Standards ("Yes" indicates an allowable soft dollar expenditure)?
Bloomberg
Terminal Credenza Magazines
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No No No
Stalla Review Course Registered to:
74. L2-00735 - Lecture: SS-05 (page 4), topic: L2-L05-01
Which of the following inventory cost flow methods is usually chosen by management because it minimizes taxes
and maximizes net cash flow?
a. The average cost method.
b. The specific identification method.
c. The first-in, first-out (FIFO) method.
d. The last-in, first-out (LIFO) method.
75. L2-01739 - Lecture: SS-16 (page 41), topic: L2-L16-02
On May 15, 20X2, the one-year risk-less interest rate in Japan is 0%. The futures price for the May X3 yen futures
contract, calling for the delivery of 12.5 million yen one year hence, is \$0.00922/¥. The expected spot price of a
Japanese yen one year hence, is \$0.00910. The yen market is:
a. In contango.
b. In normal contango.
c. In backwardation.
d. In normal backwardation.
76. L2-01681 - Lecture: SS-04 (page 22), topic: L2-L04-02
Spillman & Tuttle, LLC provides economic analysis on proposed regulation to private sector companies in the U.S.
and Canada. Roger Dalton, CFA, must approve reports with economic and financial data prior to release.
A large U.S.-based pharmaceutical company recently discovered, quite by accident, that an experimental drug
promoted for repairing neural pathways in stroke victims actually improved eczema conditions in those trial
participants exhibiting the symptoms in pre-trial screening. Another pharmaceutical company producing an equally
effective drug for eczema has pressured the FDA not to allow the results of the stroke victim study in verifying the
efficacy of the drug for eczema treatment.
Which of the following statements from the scenario should Dalton emphasize in preparing Spillman & Tuttle's
argument that stroke victim study results should be used in determining the drug's efficacy in treating eczema?
a. Health and safety regulations protect workers and the environment through the regulation of processes used
in producing drugs.
b. Additional studies performed on the drug to specifically prove efficacy in treating eczema will increase the cost
of the drug to consumers.
c. The delay in introducing the new drug for eczema treatment will delay treatment to those suffering from
eczema.
d. Price competitiveness in health care provides essentially the same benefits at the same costs as
competitiveness in the software market.
Stalla Review Course Registered to:
77. L2-00281 - Lecture: SS-08 (page 13), topic: L2-L08-02
RCA is considering two independent projects, A and B. Both projects have a cost of capital of 14%. The cash
follows that the projects will produce are:
Year 0 1 2 3
Project A \$ (9,000) 4,000 4,000 4,000
Project B \$(10,334) 3,000 5,000 6,000
RCA uses the IRR method for project selection. Based on the above data:
118. L2-01022 - Lecture: SS-16 Answer sheet
1. B
2. A
3. C
4. C
5. B
6. A
7. C
8. C
9. B
10. A
11. D
12. A
13. B
14. C
15. B
16. B
17. B
18. B
19. B
20. B
21. B
22. B
23. B
24. C
25. A
26. C
27. B
28. D
29. B
30. C
31. C
32. C
33. A
34. A
35. D
36. A
37. B
38. B
39. D
40. A
41. C
42. D
43. D
44. D
45. D
46. B
47. D
48. B
49. A
50. A
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51. B
52. A
53. C
54. B
55. C
56. D
57. C
58. A
59. B
60. A
61. D
62. D
63. B
64. D
65. B
66. D
67. C
68. C
69. C
70. C
71. B
72. B
73. C
74. D
75. B
76. B
77. A
78. C
79. D
80. B
81. C
82. B
83. B
84. B
85. A
86. A
87. A
88. D
89. D
90. A
91. A
92. C
93. D
94. C
95. D
96. A
97. C
98. B
99. D
100. D
101. B
102. B
103. B
104. C
105. B
106. B
107. B
108. D
109. D
110. C
111. C
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112. D
113. C
114. A
115. A
116. C
117. B
118. B
119. C
120. C

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IV. Act prudently and not tell anyone of her family's situation. a. b. c. d. I and IV only. I and III only. II and III only. I, II, and IV only.

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5. L2-00373 - Lecture: SS-06 (page 7), topic: L2-L06-01 KAS Corp. is a U.S. company with a Japanese subsidiary. This subsidiary began operations on 1 January 20X0, when its equity was funded and assets were purchased. Inventory is accounted for using the LIFO method. Exchange Rate Data: ¥ per \$: 31 December 20X0 1 January 20X0 Weighted Average Exchange Rate 20X0 ¥100 (or .01 \$ per ¥) ¥125 ¥111

SUBSIDIARY FINANCIAL STATEMENTS Balance Sheet (¥) 12/31/20X0 Cash Accounts Receivable Inventory Net Fixed Assets Total Assets Accounts Payable Long-term Debt Contributed Capital Retained Earnings Total Liability and Equity ¥ 180,000 70,000 50,000 450,000 ¥ 750,000 ¥ 100,000 390,000 110,000 ¥150,000 ¥ 750,000 Sales Costs of Goods Depreciation EBIT Interest Pretax Income Taxes Net Income Income Statement (¥) 12/31/20X0 ¥ 500,000 200,000 20,000 280,000 30,000 250,000 100,000 ¥ 150,000

Using the all-current method, the accounts receivable balance in dollars on 12/31/20X0 is: a. b. c. d. \$560 \$700 \$7,000,000 \$8,750,000

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6. L2-01759 - Lecture: SS-16 (page 42), topic: L2-L16-02 Woodward Allen is the manager of a long-term government bond mutual fund. Since he is free to use derivatives in order to enhance his returns, he has become interested in what he perceives to be mispriced Treasury bond futures contracts. Allen has used the cost-of-carry futures pricing model to estimate the theoretical Treasury bond futures price, using the price of the long-term Treasury bond with the lowest coupon rate available and the shortterm financing rate as inputs into the model. Allen does not know about delivery options that exist for Treasury bond futures. The fair value of a Treasury bond futures contract is calculated using the cost-of-carry model. The model is:
T

f0 ( T ) =

B0 ( T + Y ) 1 + r0 ( T )  − FV ( CI, 0, T )   CF ( T )

Which answer is the correct description of how to compute the theoretical price of a Treasury bond futures contract (ignore delivery options)? a. B0(T + Y) is the current spot price of the most likely to be delivered Treasury bond. This is not necessarily the bond with the lowest coupon rate. FV(CI, ∅, T) is the coupon interest that will be paid from today until the delivery date of the futures on the Treasury bond that is most likely to be delivered. r0 is the financing rate. CF(T) is the conversion factor for the cheapest to deliver bond. b. B0(T + Y) is the coupon interest that will be paid from today until the delivery date of the futures on the Treasury bond that is most likely to be delivered. FV(CI, ∅, T) is the current spot price of the Treasury bond that is most likely to be delivered. This is not necessarily the bond with the lowest coupon rate. r0 is the financing rate. CF(T) is the conversion factor for the cheapest to deliver bond. c. B0(T + Y) is the current spot price of the most likely to be delivered Treasury bond. This is not necessarily the bond with the lowest coupon rate. FV(CI, ∅, T) is the coupon interest that will be paid from today until the delivery date of the futures on the Treasury bond that is most likely to be delivered. r0 is the conversion factor for the cheapest to deliver bond. CF(T) is the financing rate. d. None of the above.

Mature stage industries should be valued based on a multiple stage growth model.2445 (Sales) In this equation. Distributed by DeVry Educational Products. topic: L2-L05-01 Which item is the basis for determining the income tax expense reported on the income statement? a. Growth stage industries should be valued based on free cash flow to equity.Stalla Review Course Registered to: 12. c. The fixed portion of the SG&A cost. Operating income. CFA. b. d. c. cash flow. L2-00199 . Inc.456 represents: a. certain risk factors.Lecture: SS-05 (page 26). The variable and fixed portion of the SG&A cost. Pretax income. d. growth stage. mature stage. All rights reserved. The estimate of the next year's SG&A cost.000.Lecture: SS-04 (page 79). The variable portion of the SG&A cost. is constructing a diversified portfolio of equity securities.Lecture: SS-11 (page 12). Decline stage industries should be valued based on price to earnings. Income taxes payable. c. He seeks to diversify the portfolio on the basis of industry life cycle position (pioneer stage. L2-00590 . He hypothesizes that the different stages of the industry life cycle provide different investment characteristics with respect to profit margins. 13. and valuation. L2-02034 . Pioneer stage industries should be valued based on multiples of sales. . What valuation model should Al use to make investment decisions while evaluating companies in each industry life cycle stage? a. 14. Jones prepared a regression analysis. Copyright © 2005 DeVry/Becker Educational Development Corp. d. b.000. topic: L2-L11-02 Al Latsbob. Taxable income. the \$1. topic: L2-L04-05 In analyzing HGF Company. He regressed SG&A Expense against Sales and found the following result: Total SG&A Cost = \$1.456 + 0. b. and decline stage).

a United States based maker of exam booklets. Copyright © 2005 DeVry/Becker Educational Development Corp. All rights reserved.82 16. topic: L2-L01-01 The Standard Priority of Transactions applies to "access" persons.60 10 20X0 \$ 28 112 \$140 \$ 40 0 \$ 40 100 \$140 \$ 15 20X1 \$93 41 11 6 \$35 14 \$21 \$2. 1. \$29.047. \$33. d. 12-month Futures Contract S&P Dividend Yield 12-month risk-free rate Calculate the fair value for the S&P 500 futures contract. An example of an "access" person is: a.00 S&P 500. except per share data) Income Statement Revenue Cost of Goods Sold Other Operating Costs Depreciation Earnings before taxes Taxes Net Income Earnings Per Share Dividends Per Share Common Stock Outstanding (millions) Balance Sheet Current Assets Net Property. Inc.Lecture: SS-16 (page 41).10 \$1.100.68 10 20X1 \$ 34 125 \$159 \$ 55 0 \$ 55 104 \$159 \$ 19 Sykes decides to start his analysis with a look at the company's sustainable growth rate and ROE. L2-00619 . What is the value of a share of C'ville's common stock at the end of 20X1 using the two-stage FCFE method (assume a cost of equity of 10.80 d. A supervisory analyst who reviews all research reports prior to dissemination. The investor relations officer of the issuer company who provided information that influenced the investment recommendation. \$33. is analyzing C-ville Company. the company's growth will fall back to its long-term rate of 3%.0% Distributed by DeVry Educational Products.81 c. All of the above. c. and Equipment Total Assets Current Liabilities Long-term Debt Total Liabilities Stockholders' Equity Total Liabilities & Equity Capital Expenditures 20X0 \$89 40 10 5 \$34 14 \$20 \$2.4%)? a. 17. This is a one-time deal and thereafter. CFA. topic: L2-L12-02 Rob Sykes.Stalla Review Course Registered to: 15. topic: L2-L16-02 S&P 500 Index 1. L2-01051 . Sykes has opted to look at several factors and valuation methods. . b. Plant. An independent auditor with access to material nonpublic information about the issuer.Lecture: SS-12 (page 51).00 2. He has gathered the following information: C-ville Company Financial Statements for Years Ended 3/31/X0 and 3/31/X1 (\$ million.00 \$1. L2-02159 . The company has just signed a new two-year contract that will allow it to grow at a 20% pace until the contract expires.66 b.Lecture: SS-01 (page 6).5% 6. \$31.

The company's assets used as a collateral. Cash flow from operations. c. All rights reserved.Stalla Review Course Registered to: a. and coverage ratios). b. The company's key ratios (short-term solvency ratios. a high technology public company with several international subsidiaries.'s financial statements is: a. CFA.012. . topic: L2-L14-01 Mary McDonald.65 1. Distributed by DeVry Educational Products..083. Copyright © 2005 DeVry/Becker Educational Development Corp.109. b. Discretionary cash flow. ABC Corp. Inc. The most important factor that McDonald should consider during the analysis of ABC Corp.Lecture: SS-14 (page 6). d. d. is using some of its assets as a collateral for its outstanding bonds.100. capitalization ratios. L2-01201 .00 1.92 1. c.43 18. 1. is analyzing the bonds of ABC Corp.

082.18 25.45 0.94 68.000 1. Significance cannot be determined based on the information provided. 1.811. stated in millions of dollars.02. a. 20. The dependent variable of the regression is company revenues. Is significantly different from 0.30 Sum of Squares RSS = 3.56 MSSE = 75.90 −0.728.51 t-value 3.34 −67.000 1. c. rather than 0.56 Correlation matrix of independent variables Occupancy 1.00 Hotel occupancy Airline ticket price GDP The intercept of the regression line (in \$ millions): a.73 1. L2-00327 .2 2.0. L2-00204 .775.700.73 GDP 0.87 Standard Error 28. All rights reserved.500 1. d.Stalla Review Course Registered to: 19. topic: L2-L03-03 Noah Sales. Note: A 2% GDP growth should be represented in the formula as 2.750. topic: L2-L04-05 The following regression equation shows the relationship between widget sales and changes to GDP for country X: Widget sales (in millions) = 1.80 F-Value Fcalc = 13.47 Mean SS MSSR = 1.Lecture: SS-04 (page 79). Copyright © 2005 DeVry/Becker Educational Development Corp.79 TSS = 5. gross domestic product. has created a multiple regression model to forecast revenues for a small Miami cruise line.7 = 250.025(Percentage Growth in GDP) Assuming 2% expected GDP growth over the year.000 Distributed by DeVry Educational Products.Lecture: SS-03 (page 57). b.S. CFA. Inc. ii) the airline ticket-price index (inverse relationship). . calculate projected widget sales next year. Is significantly different from 250.734. and iii) U.7 + 0.027. c.68 SSE = 2.00 −0.17 16. Is not significantly different from 0. d.1 4.45 1.90 Airline ticket price −0.00 −0. Noah regressed 40 quarters of data. The 3 independent variables are the percentage increase or decrease in i) hotel occupancy rates in Florida.2 (in \$million) = 38. b. and his statistical program has produced the following: Regression statistics: Regression coefficient Hotel occupancy Airline ticket-price index GDP Intercept of the regression line Standard error of the intercept ANOVA Regression Error Total Degrees of freedom 3 36 39 Value 87.

8 mil.4 mil.3 mil. His number is \$1.0 mil. 2Q 20X4 Actual \$2. He plans to start with a look at the firm's price-to-earnings (P/E) ratios. Hamm has gathered the following historical information on Kell and has made the following projections: 1Q 20X4 Actual \$2. topic: L2-L13-01 Tom Hamm.0 mil. 22. 4Q 20X4 Actual \$2.7 b.6 d.1 mil.6 mil. 1. is analyzing Kell Corporation (current stock price is \$16. \$0.5 Distributed by DeVry Educational Products. \$0 \$1. the price of a putable bond will tend to: a. 3.5 mil. L2-01336 . Decrease.Lecture: SS-13 (page 15). All rights reserved.Lecture: SS-14 (page 69). 20X5 Year Estimated \$10. . \$0 \$1. Remain unchanged.Stalla Review Course Registered to: 21. c. 1Q 20X5 Estimated \$2. 10 mil.0 c. 10 mil.20 per share.0 mil. 10 mil. The co-worker has made his own estimate of what Kell will earn in 20X5. he agrees with the 10% required rate of return on equity. It could increase or decrease. 3Q 20X4 Actual \$1. One of Hamm's co-workers prefers to use the P/E-to-growth ratio (PEG) and wishes to apply this to Kell Corporation. b. 8% long-term ROE and that the firm will pay \$4. L2-01395 . 3. Inc. Net Income Extraordinary Loss (net of tax) Common Stock Dividends Shares Outstanding \$0 \$1. Which of the following is closest to the PEG that the co-worker will calculate? a. The co-worker agrees with Hamm's estimate that Kell Corporation's long-term growth will be 4. \$0 \$1. which is higher than Hamm's estimate. \$1. Copyright © 2005 DeVry/Becker Educational Development Corp.4 million in dividends in 20X5. d.25) using market multiples. 10 mil. When calculating PEG. Furthermore.1 mil.5%. 10 mil.0 mil.3 mil. CFA. the co-worker uses a leading P/E ratio. \$0 \$4. Hamm's firm requires that all research reports include an estimate of the earnings for the upcoming (next) quarter and for the next year. Increase. 10 mil. topic: L2-L14-04 As interest rates become more volatile. 13.0 mil.

000 450. Balance Sheet Translation (All-Current Method) Translated Using All-Current 12/31/20X0 Conversion Method Cash Accounts Receivable Inventory Net Fixed Assets Total Assets Accounts Payable Long-term Debt Contributed Capital Retained Earnings Translation Adjustment Total Liability and Equity ¥180.000 390. L2-00401 .S. Use your results to answer the next question.000 110.000 150.000 ¥150.000 Sales Costs of Goods Depreciation EBIT Interest Pretax Income Taxes Net Income Income Statement (¥) 12/31/20X0 ¥ 500.Lecture: SS-06 (page 7).000 110. Inventory is accounted for using the LIFO method. company with a Japanese subsidiary. .000 Translate the subsidiary's 12/31/20X0 income statement and 20X0 balance sheet into the parent's currency using the all-current method.000 ¥ 100. This subsidiary began operations on 1 January 20X0.000 70. Copyright © 2005 DeVry/Becker Educational Development Corp.000 390.000 30.000 250.000 50.000 ¥ 150.000 450.000 280.Stalla Review Course Registered to: 23. topic: L2-L06-01 KAS Corp.000 − ¥750. Exchange Rate Data: ¥ per \$: 31 December 20X0 1 January 20X0 Weighted Average Exchange Rate 20X0 ¥100 (or .01 \$ per ¥) ¥125 ¥111 SUBSIDIARY FINANCIAL STATEMENTS Balance Sheet (¥) 12/31/20X0 Cash Accounts Receivable Inventory Net Fixed Assets Total Assets Accounts Payable Long-term Debt Contributed Capital Retained Earnings Total Liability and Equity ¥ 180.000 70. is a U.000 ¥ 750.000 20. All rights reserved.000 Distributed by DeVry Educational Products.000 200.000 100.000 ¥ 750.000 ¥750.000 50. Inc.000 ¥100. when its equity was funded and assets were purchased.

000 20.000 Distributed by DeVry Educational Products.000 200.000 Conversion All-Current Method Using the all-current method.750. \$12. Copyright © 2005 DeVry/Becker Educational Development Corp. Inc. \$720 b.Stalla Review Course Registered to: Income Statement Using All-Current Method 12/31/20X0 Sales Costs of Goods Sold Depreciation Earnings before interest and taxes Interest Pretax Income Taxes Net Operating Income Gain (Loss) from Currency Translation Net Income ¥ 500.000 150.000 280.000 30. the retained earnings balance in dollars on 12/31/20X0 is closest to: a.350 c. .000 d.000 250. \$1.000 − ¥ 150.000 100. All rights reserved.250. \$24.

85 Total Assets 1. 20X1 ZKW4. topic: L2-L06-01 Giga Corp is a U.83 202.75 Accounts Payable Long-term Debt Contributed Capital Retained Earnings Total Liab. informs you that one of her accounting analysts made a mistake in reporting the inflation rate. Inflation has averaged approximately 25% annually over the past five years.59 Pre-tax Income 338.50 Cost of Goods Sold 270. and purchased all the subsidiary's fixed assets. \$29 million. Operating net income in U. & Equity 135. Exchange rate information: January 1. 20X1 December 31.71 Inventory 67. independent foreign subsidiary operating primarily in the local market (which includes neighboring countries) that pays no dividends.53 Depreciation 13. 20X1 Weighted Average.Stalla Review Course Registered to: 24. c.75 The CFO of Giga Corp. Inventory is on a LIFO basis and was also entirely purchased on January 1. dollars for 12/31/20X1 is closest to: a.30 Net Income 202.S.014. All rights reserved.07 million investment.Lecture: SS-06 (page 7)." abbreviated ZKW.S.65 Net Fixed Assets 608.075/\$ ZKW5. d. company with a subsidiary located in Zambia that began operations on January 1.67 148.300/\$ Income Statement (ZKW billions) 12/31/20X1 Sales 676.60 Operating Expenses 13.54 Accounts Receivable 94. Copyright © 2005 DeVry/Becker Educational Development Corp.30 527.500/\$ ZKW6.84 Interest 40. The currency unit in Zambia is the "Kwacha. borrowed additional funds in the local market. \$25 million Distributed by DeVry Educational Products.95 1. b. 20X1 when Giga funded its equity with a \$33. \$38 million. but all other information (including the financial statements and reported exchange rates) is correct. . Inc.53 EBIT 378. The Zambian subsidiary is a relatively self-contained.95 Balance Sheet (ZKW billions) 12/31/20X1 Cash 243. L2-00256 .014.25 Taxes 135. \$45 million. Inflation in Zambia has actually averaged approximately 35% annually (rather than 25%) over the past five years.

77 Capital Expenditures Capitalized Interest Investing Cash Flow Net Increase in Debt Dividends Paid Financing Cash Flow Net Change in Cash (109.0 million.80 1. 20X1 (\$ millions) Net Income 113.17 860.40 Gross Profit 628.96) (6.10 Add: Depreciation/Amort.Lecture: SS-05 (page 27). Inc. \$26.28) (116.822.822.54 Add: Restructuring Charge 37.0 million in taxes will be owed over the next five years. c.33 Income Taxes 100. topic: L2-L05-01 At year-end 20X1.08 647. b.66 (12.32 157.70 Increase in Payables 50.13) Operating Cash Flow 216.62 Depreciation & Amortization 78. . Copyright © 2005 DeVry/Becker Educational Development Corp. \$35.63 Additional Information (all amounts in millions) Distributed by DeVry Educational Products. 28. All rights reserved. As a result of timing differences between the two methods. a total of \$45.70 Net Income 113.42 9.57) 113. 78.53 Net Income from Continuing 150.03 201.24) 125.86 47. December 31. 20X1 (\$ millions) Assets Cash Accounts receivable Inventory Total Current Assets PP&E (Net) Goodwill Total Assets 289.71 229.12 Liabilities Accounts payable Current Portion of Debt Income Taxes Payable Other Current Liabilities Total Current Liabilities Long-term Debt Deferred Tax Liabilities Total Liabilities Equity Common Stock Retained Earnings Total Equity Total Liabilities & Equity 172.0 million.10 213.0 million.0 million and income taxes owed this period of \$8.80 Operations Restructuring Charge (Net of Tax) 37.07 681. \$39. L2-00593 .12 Income Statement Year Ended December 31.Stalla Review Course Registered to: 27.32 Operating Expenses 235.10 Cash Flow Statement Year Ended December 31. d.79 31.42 15.72 Cost of Goods Sold 785.27 (Increase) in Receivables (37.80 314. topic: L2-L07-02 Elgin Corporation Balance Sheet.73 838. \$53.12 983.Lecture: SS-07 (page 30). a company prepares a detailed deferred tax liability schedule showing both the impact of straight-line depreciation on its assets for book purposes and accelerated depreciation on its assets for tax purposes.34 706. Assuming beginning deferred tax liabilities of \$18. L2-00788 .83 Pretax Operating Income 251.16 1. what is the income tax expense recorded on the income statement for 20X1? a. 20X1 (\$ millions) Sales 1.413.0 million.70) (Increase) in Inventories (25.06 157.54 Operating Income 314.16 Interest Expense 62.0 million.

All rights reserved. This capitalized interest increased the property. Based on studies done by a valuation firm. The present value of these leases was \$157. Copyright © 2005 DeVry/Becker Educational Development Corp. .65 at the end of 20X1. Goodwill amortization in 20X1 was \$9. \$115 \$120 \$130 \$150 Distributed by DeVry Educational Products. d. b. − − − − − − − The adjusted net income reported on the Income Statement is closest to: a.42.80. Using the annual payment. Straightline depreciation is used. \$188.08 at the beginning of 20X1 and \$147. c. the leases had an average term of 10 years and an average implied interest rate of 12%. Elgin's tax rate is 40%. The charge is for future expenses related to a change in the way the firm is structured.71. Inc.50. Elgin estimates the following fair market values: Goodwill. Elgin does not believe it will ever have to pay its Deferred Tax Liability. we can project the present value of the leases to be approximately \$138. In addition. The LIFO Reserve is \$15.28 during 20X1.83 and is recorded net of the expected tax benefit of \$25.23 one year hence. All other assets (except inventories) and liabilities have market values equal to their recorded values in the balance sheet.Stalla Review Course Registered to: − − Inventories are valued on a LIFO basis. At the beginning of 20X1. The restructuring charge is \$62. plant and equipment. Elgin capitalized interest of \$6.13. Elgin has numerous operating leases. the equipment being leased had a 10-year remaining life at the beginning of the year and no estimated salvage value. which is recorded as a part of cost of goods sold on the income statement. The annual payments are \$27.

000. which has an estimated useful life of ten years and an estimated salvage value of \$150. topic: L2-L08-05 The income statement for the Folsome Corporation is as follows: Sales Cost of Sales Interest Expense SG&A Pretax Income Income Taxes Net Income Folsome's degree of financial leverage is: a. 2000. Copyright © 2005 DeVry/Becker Educational Development Corp.33 \$100 million 70 10 15 \$ 5 2 \$ 3 31. d.Lecture: SS-08 (page 43). All rights reserved.00 3. L2-01216 . management determines that the initial life is too aggressive and projects the machine has only five years of remaining useful life.Lecture: SS-05 (page 13).000 \$162. b. On March 31. Distributed by DeVry Educational Products. what is the total amount of depreciation expense that the company should record on this machine for the year ended December 31. b. topic: L2-L14-01 In addition to traditional debt analysis. topic: L2-L05-01 On December 31. 2003. b. Options. 2003? a.Stalla Review Course Registered to: 29. Inc. d. . \$115.67 2. Swaps.00 3. c. c.250 \$184.Lecture: SS-14 (page 10).300.938 30. Preferred stock. Based on the above. c.000.438 \$178. d. L2-00801 . L2-00469 . Atkinson Company purchases a new machine for \$1. 1. high yield bonds should also be analyzed like: a. Common equity.

Distributed by DeVry Educational Products.736 26.362 23. L2-00892 . 33.753 22. The S&P 500 return is 12. Copyright © 2005 DeVry/Becker Educational Development Corp. All rights reserved.488 0.761 1. Include a one-line reference on the financial statements recognizing profit or loss of the SPE. H0: µd ≠ 4%.0%.145 2. Chi-sq test. The standard deviation of the sample of excess returns is 2.Stalla Review Course Registered to: 32. b. H0: µd ≠ 4%.Lecture: SS-03 (page 17). Inc.685 24. What test and null hypothesis should he use? a. a sell side analyst claims that her stock picks outperform the market by at least 4%. CFA.119 27. H0: µd ≥ 4%. t test.050 1.996 0.812 21.307 A pension fund portfolio manager wants to test Jennifer's claim that her stock picks outperform the market by 4%.Lecture: SS-10 (page 23). t test. d. d.350 1. Distribution t-table t-table t-table Chi-sq table Chi-sq table Chi-sq table df 13 14 15 13 14 15 0. A pension fund portfolio manager decides to test her claim by choosing 15 of Jennifer's stock picks at random and measuring their annualized returns relative to the performance of the S&P 500 index over the same holding periods.52%. Consolidate the SPE to the parent company financial statements. c.160 2. c.100 1.771 1. .131 24.341 19. TCE should: a. topic: L2-L03-01 Jennifer Chan. Exclude the subsidiary under IAS 27.064 22.025 2. None of the above. topic: L2-L10-02 Rodriguez Encino.2% and Jennifer's stock picks have an average return of 14.345 1. Chi-sq test. H0: µd ≥ 4%. b. discovers that Topanga Canyon Enterprises (TCE) maintains a special purpose entity (SPE) called Topanga Canyon Yacht Sales with the purpose of holding ownership to the president's yacht. L2-02059 .

\$60 million. net of tax.000 1. topic: L2-L15-04 Which of the following statements regarding balloon risk is false? a. Allows for an assumption of interest rate volatility. 36. L2-01242 .0%. II. c. L2-01568 . Allows for the security to have prepayments. respectively. d. I. a. b. All rights reserved. b. III. topic: L2-L15-03 A Monte Carlo valuation model can produce more accurate OAS calculations than a binomial model because the Monte Carlo model: a.000 Stock's Beta 0. It is also known as extension risk. c. Distributed by DeVry Educational Products. b.Lecture: SS-11 (page 3). -\$10 million. c. calculate the expected excess return for the portfolio: a. is considering an acquisition of the Eastcoast Sneaker Co. .450% 5. The two companies are valued at \$70 million and \$35 million. topic: L2-L18-02 A portfolio is determined to have the following positions (including individual betas): Stock XYZ RFR WER ALS Position Held \$1. I and III only.00 1.063% 10. Copyright © 2005 DeVry/Becker Educational Development Corp. d. Strong financial resources. c. d. Discounts future security cash flows using forward interest rates consistent with the current term structure of interest rates.05 Assuming a risk free rate of 5% and a market return of 10%.5 million per year indefinitely.Stalla Review Course Registered to: 34. The required rate of return is 10. Westcoast Trainers. It is also known as contraction risk. Makes prepayments dependent on the past course of interest rates. Manufacturing and distribution costs are expected to decrease by \$1. II.000. I and II only. d.Lecture: SS-15 (page 31).000. topic: L2-L09-02 Westcoast Trainers. \$15 million. 5. 37. II and III only. L2-01088 . L2-01108 . An efficient distribution system.225% 10. 38. a.80 1. Inc. b. d. Both "a" and "c".Lecture: SS-09 (page 12). Compute the NPV of the stock offer. A favorable brand image.000 3. pays a 50% interest in shares of the combined entity to the shareholders of Eastcoast Sneaker Co.Lecture: SS-18 (page 19). c. -\$25 million. and III.000. topic: L2-L11-01 Factors enabling a firm to have a competitive advantage are: I.Lecture: SS-15 (page 41).125% 35. Inc.000.20 1. Balloon defaults may delay payments to the CMBS investor. b.000 5. Inc. L2-00940 .

00 \$1.52 0.04% 3.60 10 20X0 \$ 28 112 \$140 \$ 40 0 \$ 40 100 \$140 \$ 15 20X1 \$93 41 11 6 \$35 14 \$21 \$2.37 4.Lecture: SS-12 (page 34). .11 0.44 0. The company has just signed a new two-year contract that will allow it to grow at 20% pace until the contract expires. Inc. d. 40. L2-00337 .00% 4. Examine the following output and indicate which of the 3 independent variables contain(s) obvious errors or suspect output that should be verified further. This is a one-time deal and thereafter the company's growth will fall back to its long-run rate of 3%. Variable 2 1. except per share data) Income Statement Revenue Cost of Goods Sold Other Operating Costs Depreciation Earnings Before Taxes Taxes Net Income Earnings Per Share Dividends Per Share Common Stock Outstanding (millions) Balance Sheet Current Assets Net Property.10 \$1. He has gathered the following information. Conventional Robust Standard Standard Adjusted Value error t-value error t-value a.49 3. topic: L2-L12-01 Rob Sykes. Plant. All rights reserved. a.Lecture: SS-03 (page 63).57 1. CFA. Variable 3 0. and Equipment Total Assets Current Liabilities Long-term Debt Total Liabilities Stockholders' Equity Total Liabilities & Equity Capital Expenditures 20X0 \$89 40 10 5 \$34 14 \$20 \$2.92 0. is analyzing C-ville Company. b. Copyright © 2005 DeVry/Becker Educational Development Corp.80 −0.53 b. Variable 1 −1. a United States based maker of exam booklets.Stalla Review Course Registered to: 39. C-ville Company Financial Statements for Years Ended 3/31/X0 and 3/31/X1 (\$ million.20% Distributed by DeVry Educational Products.69 d. All of the above contain errors or suspect output.20 c.09 1. 4.29 1. c.68 10 20X1 \$ 34 125 \$159 \$ 55 0 \$ 55 104 \$159 \$ 19 Sykes decides to start his analysis with a look at the company's sustainable growth rate and ROE. Which of the following is C-ville's sustainable growth rate for 20X1? Unless otherwise noted. topic: L2-L03-03 You are developing new statistical software and are testing its regression capabilities. Sykes has opted to look at several factors and valuation methods. including a test for heteroskedasticity.85% 4. use year end rather than average equity to calculate ROE.08 3. L2-02136 .49 0.

topic: L2-L08-03 Imboden Analytics (IA) provides capital budgeting support for large companies.214 200.000 142.457 \$222.945 200.280 Selection A A B B Distributed by DeVry Educational Products. Copyright © 2005 DeVry/Becker Educational Development Corp. .000 199.962 \$210. Exhibit 1: Net Present Value Machine A Machine B Cash Flow PV CF Cash Flow PV CF 0 -\$500.093 \$171. Jeffrey Rogers.280 Which of the following is closest to the NPV that Rogers would calculate for each project using the replacement chain (common life) approach and which project would Rogers select.280 \$222.000 -\$500.000 -\$600.Stalla Review Course Registered to: 41. assuming the client has a 12% cost of capital? a.000 127.Lecture: SS-08 (page 30). CFA. Machine A \$171.298 200. Inc. c.000 177.326 NPV \$100.438 3 250. examines the following data for two projects under consideration by an IA client.093 Machine B \$222. All rights reserved.000 159.571 2 250.000 223.000 1 250.000 -\$600. d. L2-01509 .000 101.104 5 200.000 113.962 \$210.356 4 200.485 6 200.280 \$222. b.000 178.280 \$222.

500) \$102. 2-2 and 2-3. Inc.500 11.000 \$40.000 \$41.000 23. and Amortization (EBITDA) Depreciation and Amortization Earnings Before Interest and Taxes (EBIT) Interest Expense Pretax Income Income Taxes Net Income Shares Outstanding Earnings Per Share (EPS) \$250.. which are shown in Exhibits 2-1. Plant.000 \$ 10.000 \$125. a U.000 \$ 2.000 \$100.000 \$ 75. Plant.000 \$320.500 16. Copyright © 2005 DeVry/Becker Educational Development Corp.000 70.500 \$ 64.88 Exhibit 2-2 Mackinac.S.000 Exhibit 2-3 Mackinac.000 \$112. 2001 (in thousands. except per-share data) Sales Cost of Goods Sold Gross Operating Profit Selling. Mackinac has released its June 2001 financial statements. Balance Sheet As of June 30.000 40.Lecture: SS-12 (page 52).000 \$100. Exhibit 2-1 Mackinac. 2001 (in thousands) Current Assets: Cash and Equivalents Receivables Inventories Other Current Assets Total Current Assets Non-current Assets: Property. Inc. and Administrative Expenses Earnings Before Interest. based manufacturing company. All rights reserved. Cash Flow Statement Distributed by DeVry Educational Products. . and Equipment Investments Other Non-current Assets Total Non-current Assets Total Assets Current Liabilities: Accounts Payable Short-term Debt Other Current Liabilities Total Current Liabilities Non-current Liabilities: Long-term Debt Total Non-current Liabilities Total Liabilities Shareholders’ Equity Common Equity Retained Earnings Total Equity Total Liabilities and Equity \$145. Taxes.000 12. Inc.000 17.000 \$320.000 (53.000 \$70.000 \$ 53.450 13. and Equipment Less: Accumulated Depreciation Net Property. topic: L2-L12-02 One of the companies that Jones is researching is Mackinac.000 \$208.000 125.000 \$170.000 50.000 36. General.000 \$20. Inc.000 \$150.000 110. Inc.000 29. Annual Income Statement for the Year ended June 30. L2-01776 . Depreciation.Stalla Review Course Registered to: 50.050 \$ 37.

The government bond yield is 6% and the market equity premium is 5%.450 10. b. Jones decides to value Mackinac using the dividend discount model (DDM) and the free cash flow-to-equity (FCFE) model.500 Mackinac has announced that it has finalized an agreement to handle North American production of a successful product currently marketed by a foreign company. 2-2 and 2-3 and forecasts related to the new production agreement.980 11. All rights reserved. Copyright © 2005 DeVry/Becker Educational Development Corp. .000) 6. L2-00867 .Stalla Review Course Registered to: for the Year ended June 30.020 \$20. \$99.25 \$97.51 51.500 \$42.500 \$5.470) (\$18.14 \$102. Inc.470) \$8. c. topic: L2-L07-03 Distributed by DeVry Educational Products.000) (\$15.000) \$4. After reviewing Mackinac's financial statements in Exhibits 2-1.25.000) (8. d. Mackinac will maintain the current payout ratio. What is the value of a share of Mackinac's common stock using the two-stage FCFE model? a.77 \$97.000 \$37.Lecture: SS-07 (page 47).000 1.000 (22. Plant. and Equipment Net Cash from Investing Activities Cash Flow from Financing Activities: Change in Debt Outstanding Payment of Cash Dividends Net Cash from Financing Activities Net Change in Cash and Cash Equivalents Cash at Beginning of Period Cash at End of Period (\$5. 2001 (in thousands) Cash Flow from Operating Activities: Net Income Depreciation and Amortization Change in Working Capital: (Increase) Decrease in Receivables (Increase) Decrease in Inventories Increase (Decrease) in Payables Increase (Decrease) in Other Current Liabilities Net Change in Working Capital Net Cash from Operating Activities Cash Flow from Investing Activities: Purchase of Property. Mackinac's beta is 1. Jones concludes the following: ● ● ● ● Mackinac's earnings and FCFE are expected to grow 17% per year over the next three years before stabilizing at an annual growth rate of 9%.500 (\$15.

000 453.000 \$ 1.000 720.400 \$ 2.640.000 324.29 0.25 1. d.80 1.400 Distributed by DeVry Educational Products. All rights reserved.000 84.640. c.000 \$ 2.000 \$ 600.160. 0.000 1.760.000 48.000 720. b.000 396.000 720.000 \$ 1.000 240.000 \$ 2.000 129.680. .760.Stalla Review Course Registered to: Spartacus Corporation Balance Sheet 12/31/20X1 12/31/20X0 Assets Cash Accounts Receivable Inventory Property.93 \$ 2.000 \$ 2. Inc.600 \$ 302.000 360.000 \$ Spartacus Corporation Income Statement For the Year Ended December 31. Copyright © 2005 DeVry/Becker Educational Development Corp. 20X1 Sales Less Expenses: Cost of Goods Sold Salaries Expense Depreciation Expense Interest Expense Total Expenses Pre-Tax Income Income Tax Expense (30%) Net Income What is the company's fixed asset turnover ratio for 20X1? a.764.728.000 1. Plant & Equipment Total Assets Liabilities and Shareholders' Equity Accounts Payable Mortgage Payable Common Stock (250 shares o/s) Retained Earnings Total Liabilities & Capital 120.200.000 480.000 626.000 996.000 \$ \$ 36.600 960.000 \$ 432.

000 996.000 129.400 \$ 2. Stahl has gathered the following historical information and made projections for the next year.Lecture: SS-12 (page 35). 219 days.000 \$ 1.728.760. RDU is a conglomerate.000 1.640. 182.000 720.000 48.764.000 396.600 960.000 360. 365 days. with businesses ranging from shoe repair to laser guided missiles. c.000 720. .600 \$ 302.Lecture: SS-07 (page 47).000 \$ Spartacus Corporation Income Statement For the Year Ended December 31. Distributed by DeVry Educational Products.000 \$ 432.000 \$ 1. 54. Temp Services.000 324. Inc.000 453.000 240. 146 days.000 \$ 2. L2-00826 . is looking into the implications of divesting one of its divisions.000 626. topic: L2-L07-03 Spartacus Corporation Balance Sheet 12/31/20X1 12/31/20X0 Assets Cash Accounts Receivable Inventory Property.760.Stalla Review Course Registered to: 53. All rights reserved.000 1.000 \$ 2.400 The company's average inventory processing period for 20X1 is: a. To assess the effect of this divestiture.000 84.000 \$ 600. L2-02125 . topic: L2-L12-01 Frank Stahl.5 days.160.680.640.000 \$ \$ 36. the CFO at RDU Corporation.000 480. 20X1 Sales Less Expenses: Cost of Goods Sold Salaries Expense Depreciation Expense Interest Expense Total Expenses Pre-Tax Income Income Tax Expense (30%) Net Income \$ 2.000 \$ 2. The division to be sold. Copyright © 2005 DeVry/Becker Educational Development Corp.200. b. d. is growing slowly and a buyer has expressed an interest. with and without Temp Services. Plant & Equipment Total Assets Liabilities and Shareholders' Equity Accounts Payable Mortgage Payable Common Stock (250 shares o/s) Retained Earnings Total Liabilities & Capital 120.000 720.

373 3. Copyright © 2005 DeVry/Becker Educational Development Corp.840 \$ 6.000 \$ 5.97 256 Balance Sheet Current Assets Net property.800 \$ 323 2.472 \$ 5. and Equipment Goodwill Total Assets Current Liabilities Long-term Debt Total Liabilities Stockholders' Equity Total Liabilities & Equity Capital Expenditures/Acquisitions 20X0 646 4.800 \$ 990 \$ 20X1 680 4.93 250 20X1 \$ 3. Inc.396 1.86 \$ 0.100 \$ 2.055 \$ Distributed by DeVry Educational Products. All rights reserved.052 205 \$ 847 381 \$ 466 \$ 1.050 \$ 2.358 340 585 \$ 1. . except per share data) Income Statement Revenue Cost of Goods Sold Other Operating Costs Depreciation and Amortization Earnings Before Interest & Taxes Interest Earnings Before Taxes Taxes Net Income Earnings Per Share Dividends Per Share Common Stock Outstanding (millions) 20X0 \$ 3.94 \$ 0.110 \$ 6.440 3.234 1.154 1. Plant.Stalla Review Course Registered to: RDU Corporation Historical Financial Statements for Years Ended 12/31/X0 and 12/31/X1 (\$ million.294 323 565 \$ 1.280 \$ 1.113 210 \$ 903 406 \$ 497 \$ 1.490 1.280 \$ 340 2.

except per share data) Income Statement Revenue Cost of Goods Sold Other Operating Costs Depreciation and Amortization Earnings Before Interest & Taxes Interest Earnings Before Taxes Taxes Net Income Earnings Per Share Dividends Per Share Common Stock Outstanding (millions) Assuming Divestiture \$ 3.105 Note: Use December 31.566 1.143 303 580 \$ 1.086 \$ 6.00 260 Balance Sheet Current Assets Net property.096 1.6354 Distributed by DeVry Educational Products.509 \$ 5.240 200 \$ 1.488 \$ 356 2. and Equipment Goodwill Total Assets Current Liabilities Long-term Debt Total Liabilities Stockholders' Equity Total Liabilities & Equity Capital Expenditures/Acquisitions Assuming Divestiture \$ 653 4.835 \$ 326 2.932 \$ 6. Which of the following is the leverage calculation for RDU using the DuPont ROE model for year 20X0? a.163 220 \$ 943 424 \$ 519 \$ 2. Plant. b.20 \$ 1.Stalla Review Course Registered to: RDU Corporation Pro Forma Financial Statements for Year Ending 12/31/X2 (\$ million.266 1.556 3. d.426 357 620 \$ 1.00 \$ 1.690 1. Copyright © 2005 DeVry/Becker Educational Development Corp. 13. 20X0 and 20X1 year-end balance sheet data rather than averages in ratio calculations. . Inc.000 \$ 2.488 \$ 1.94% 1.086 \$ 5.10 260 Without Divestiture \$ 3.200 \$ 2.040 468 \$ 572 \$ 2. c.326 3.42% 1. All rights reserved.835 \$ 900 Without Divestiture \$ 712 4.6705 12.

topic: L2-L13-01 Jim Johnson. 1Q 20X5 Estimated \$12. Toller is extremely aggressive in its accounting and Johnson realizes he must adjust Toller's net income. the cash purchase of the target firm's stock is taxable. c. \$1. \$1. the stock purchase of the target firm is not taxable. \$2. \$1. Using the data provided.4 mil.0 mil.Stalla Review Course Registered to: 55. 10 mil. Choose which of the following choices is closest to this calculation? a. Inc. . c. 4Q 20X4 Actual \$11. 2Q 20X4 Actual \$14.0 mil.4 mil. Johnson plans to start his analysis with a calculation of Toller's price-to-earnings (P/E) ratios. The shareholders of the target firm are viewed as having disposed of the shares. assets of the target firm are transferred at their current market value and depreciation is taken from the market value. Net Income Adjusting accounting methods (net of tax) Common Stock Dividends Shares Outstanding \$0. In a share offer merger.6 mil.Lecture: SS-13 (page 9).2x 56. 10 mil. The shareholders of the target firm are viewed as having exchanged shares and capital gains are deferred until the new shares are sold.1 mil. is analyzing Toller Corporation using market multiples. b. \$1.9x 28. Copyright © 2005 DeVry/Becker Educational Development Corp. and the resulting potential capital gains trigger taxes. 10 mil. \$0. b. \$0. All rights reserved.6 mil. topic: L2-L09-02 Which one of the following statements is false? a.0 mil. In a cash offer merger. \$1. Johnson has gathered the following historical and projected information: 1Q 20X4 Actual \$12.1 mil.5 mil.8 mil. CFA.3 mil. amount. 10 mil.0 mil.4 mil. assets of the target firm are revalued in the merged entity and depreciation is taken from the adjusted.0 mil.9x 25. d. Johnson calculates the trailing P/E ratio for Toller based on underlying earnings. \$4. 3Q 20X4 Actual \$11. L2-01569 .Lecture: SS-09 (page 18). 10 mil. 24.0 mil. 10 mil.45. In a share offer merger.1 mil. Distributed by DeVry Educational Products.2 mil. d. The common shares of Toller are trading at \$123.1x 24. \$0. In a cash offer merger. \$0. L2-01416 . 20X5 Year Estimated \$60. usually higher.

topic: L2-L14-02 Which of the following bonds should have the highest effective duration (i.9864 0.6% Price \$100 \$100 \$100 Embedded Options none Immediately callable at \$100. c. topic: L2-L08-05 You have the following information about Qwerty Corporation: Sales EBIT EPS Last year \$240 million \$50 million \$3. b.81% annually.9270 0.65 Distributed by DeVry Educational Products. L2-00535 .e. d. L2-01261 . though they aren't sure exactly when this will happen.Lecture: SS-08 (page 43).1854 \$0. Further suppose that the following table gives annualized LIBOR spot rates and their respective discount factors on the day of expiration: Time to Maturity 90 Days 180 Days 270 Days 360 Days LIBOR Rate (%) 5.. in fact. they would like the ability to take advantage of the situation if. Bond C.00 This year \$276 million \$54 million \$4. All rights reserved.00 5.1433 \$0. It doesn't make sense for the firm to contractually commit to a different interest payment arrangement at this time. L2-02052 .9592 0. Copyright © 2005 DeVry/Becker Educational Development Corp.5 Discount Factor 0. 5.00 Immediately putable at \$101. Suppose that Speculative Microsystems decides to buy a European payer swaption that expires one-year from today and allows the firm at the time of expiration to enter into a one-year swap with quarterly payments based on an (pay-fixed) exercise rate of 8%. c.00 a.8% 6. d. Cannot be determined. however. Internal company analysts genuinely believe that interest rates are going to increase to a level that is above the fixed payment. have the greatest price change for any given small change in interest rates)? Bond A B C Maturity 10 year 15 year 5 year Coupon 6. interest rates increase sometime in the near future. .0297 60.53 2. the market rate for the underlying swap would require a fixed payment of 11. b. at the time of expiration. c.Stalla Review Course Registered to: 59. Bond A.8889 If.1433 \$0. d. −\$0.20 Calculate the firm's degree of total leverage (DTL). b.5 12. then what is the (annualized) value of this swaption on expiration day per \$1 of notional principal? a.5 8.6% 6. a. topic: L2-L17-02 Speculative Microsystems has a large bond issue outstanding with a fixed coupon payment.53 0.5 10. 61.Lecture: SS-17 (page 61).Lecture: SS-14 (page 27). Inc. Bond B.

Exhibit 15-1 Risk and Return Characteristics Expected Monthly Returns Original Portfolio ABC Company 0. II.728% 65. L2-00899 . L2-01238 .Lecture: SS-07 (page 54).40. III. d. topic: L2-L18-02 Standard deviation and beta both measure risk. d. Beta measures only systematic risk while standard deviation is a measure of total risk. 2. b.Lecture: SS-18 (page 16). d. but they are different in that: a. c. L2-01453 . II.80% .85x 1.Lecture: SS-17 (page 50).25% Expected Standard Deviation of Monthly Returns 2. Beta measures both systematic and unsystematic risk while standard deviation measures only unsystematic risk.67% 1.000 fully diversified portfolio. b. Beta measures both systematic and unsystematic risk while standard deviation measures only systematic risk. c. Her financial advisor provides her with the forecasted information given in Exhibit 15-1. c.2. Assuming Grace keeps the ABC stock.37% 2.27% . Copyright © 2005 DeVry/Becker Educational Development Corp. Issuing a fixed-rate note and buying a floating-rate note. topic: L2-L07-03 The Shearhouse Corporation has a pretax profit margin of 15% and an effective income tax rate of 40%. Buying an interest rate floor.000. what should management select as a target financial leverage ratio in order to obtain a return on equity of 20%? a. I and II only.78x 1. .22x Distributed by DeVry Educational Products. III. She subsequently inherits ABC Company common stock worth \$100. 2. Beta measures only unsystematic risk while standard deviation is a measure of total risk. I and III only. The inheritance changes her overall portfolio and she is deciding whether or not to keep the ABC stock. a. the expected return of her new portfolio that includes the ABC stock is closest to: a. b. All rights reserved. b. topic: L2-L18-01 Abigail Grace has a \$900. topic: L2-L17-02 An interest rate swap could be replicated by: I.95% The expected correlation coefficient of ABC stock returns with the original portfolio returns is 0. II and III only.11x 2.Lecture: SS-18 (page 6). Entering a series of forward-rate agreements to receive a floating-rate. d. L2-01200 .531% 2. I. c.Stalla Review Course Registered to: 62. If its asset turnover is 1. 64. 63. Inc.

II and III only. topic: L2-L15-03 Why must the future paths of interest rates generated for a Monte Carlo model be adjusted? a. To factor in the analyst's interest rate forecast. b. None of the above. Copyright © 2005 DeVry/Becker Educational Development Corp. Inc. CMOs have not expanded the market for pass-throughs. II. topic: L2-L15-01 The creation of the CMO market has increased total demand for mortgage pass-throughs by: I. 67. b. All rights reserved. L2-01086 . I only. Eliminating prepayment risk. III. Distributed by DeVry Educational Products. a. III. II. Allowing investors to select tranches that meet their tolerance for reinvestment risk. I.Lecture: SS-15 (page 10). Allowing investors to select tranches that match their duration objectives.Stalla Review Course Registered to: 66.Lecture: SS-15 (page 29). To factor in expected interest rate volatility. c. . c. To factor in the market's forward rate expectations. d. d. L2-00966 .

00 0.30 \$572. is a U. Generally Accepted Accounting Principles (U.S. All rights reserved.31 \$307.05 160.05 0. and related information for the company. Depreciation & Amortization (EBITDA) Depreciation and Amortization Earnings Before Interest & Taxes (EBIT) Interest Income Tax Expense Net Income Exhibit 5-3 Rio National Corp.87 27.36 \$ 2001 5.00 \$265.06 474.05 0. GAAP). Summary Income Statement for the Year Ended 31 December 2002 (U. Exhibits 5-1 through 5-4 present the financial statements. which are prepared according to U.40 Exhibit 5-2 Rio National Corp.06 4.47 (90.S.47 \$541.S. topic: L2-L12-02 Rio National Corp.05 245. \$ millions) Revenue Total Operating Expenses Operating Profit Gain on Sale Earnings Before Interest. \$ millions) 2002 Cash Accounts Receivable Inventory Current Assets Gross Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets Accounts Payable Notes Payable Current Portion of Long-term Debt Current Liabilities Long-term Debt Total Liabilities Common Stock Retained Earnings Total Shareholders' Equity Total Liabilities and Shareholders' Equity \$ 13. Exhibit 5-1 Rio National Corp.00 \$ 25.S.05 150.00 131.17) 320. Exhibit 5-5 presents relevant industry and market data.Stalla Review Course Registered to: 68.00 0.47 (154.35 \$270.80 (173.93 409. Taxes.00) 319. Inc.06 \$221.80) (12.40 \$ 26.74) 127.93) \$ 30. Copyright © 2005 DeVry/Becker Educational Development Corp. .05 240.00 \$271.36 \$ 25.S. Supplemental Notes for 2002 \$300. based company and the largest competitor in its industry.89 (16.35 \$541. L2-01785 .06 \$252.00 209.17) 59.00 120. Summary Balance Sheets on 31 December (U.00 147.Lecture: SS-12 (page 45).00 30.00 189.00 \$ 26.16 Distributed by DeVry Educational Products.06 (71.31 \$572.

33 million Distributed by DeVry Educational Products.80 Risk-free Rate of Return Expected Rate of Return on Market Index Median Industry Price/Earnings (P/E) Ratio Expected Industry Earnings Growth Rate 4.000 \$0.00% While valuing the equity of Rio National Corp. Note 5: A new appraisal during the year increased the estimated market value of land held for investment by \$2 million. Inc.S. . Exhibit 5-5 Industry and Market Data 31 December 2002 \$3.33 million \$5.20 16. Shaar decides to calculate Rio National's FCFE for the year 2002. Exhibit 5-4 Rio National Corp. Katrina Shaar is considering the use of either cash flow from operations (CFO) or free cash flow to equity (FCFE) in her valuation process. Note 4: On 1 January 2002. c.89 1. All rights reserved. What is Rio National's free cash flow to equity for the year 2002? a. Equipment sales are unusual for Rio National. when it had a net book value of \$3 million.00% 9.20 \$1. \$ millions) Weighted Average Shares Outstanding during 2002 Dividend per Share Earnings per Share Beta Note: The dividend payout ratio is expected to be constant.90 12. which was not recognized in 2002 income. b..33 million \$0. \$24.33 million \$10.Stalla Review Course Registered to: Note 1: Rio National had \$75 million in capital expenditures during the year. the company received cash from issuing 400. starting with net income. Note 2: A piece of equipment that was originally purchased for \$10 million was sold for \$7 million at year-end.000 shares of common equity at a price of \$25. d. there was no new borrowing during the year.00% 19. Copyright © 2005 DeVry/Becker Educational Development Corp.000. Common Equity Data for 2002 Dividends Paid (U.00 per share. Note 3: The decrease in long-term debt represents an unscheduled principal repayment.

and Internet traffic. d. The strategy becomes more effective when it raises switching costs by building customer loyalty. Demand for data traffic will grow at a rate of 60 percent annually over the next two years because of decentralization of computing resources. established service providers had been prevented from competing effectively against start-up carriers because of government price regulation. He contacts David Blume. CFA. who specializes in this industry. A parent guaranteeing the debt of an affiliate. Take-or-pay contracts. the rise of telecommuting. Sale of accounts receivable. New data traffic technology virtually eliminates capacity issues in long-haul networks by allowing more data to flow over the same lines. network growth (measured in kilometers of installed fiber) will increase by 75 percent in total over the next two years. The strategy requires advertising to build a perception of product differentiation. c.Lecture: SS-11 (page 3). 4. Issuing a zero-coupon bond. topic: L2-L05-01 Which of the following is not an off-balance-sheet financing technique used by a company? a. The strategy depends on the ability to create real differences that uniquely describe products from the competitor. The strategy requires that products be sold at a premium price to recover costs of developing a differentiated product. 5. 2. As a result. L2-00660 . Long-haul data communications market revenues are \$23 billion per year. topic: L2-L11-01 Jim Vala.Stalla Review Course Registered to: 70.Lecture: SS-05 (page 36). the marginal cost of carrying data traffic for an established service provider with an existing network is very low. 3. From the supply perspective. Vala is concerned about the long-haul data communications industry and wonders if DCom's business model is viable in the long term. d. b. is analyzing companies in the Telecommunications Industry. Copyright © 2005 DeVry/Becker Educational Development Corp. c. a partner at Communication Consulting Group. Vala attends a June 20X5 meeting where Tom Anderson. All rights reserved. 71. driven mainly by start-up carriers attempting to compete on quality of service.'s Chief Operating Officer makes a presentation. . Until recently. What is the key factor to successfully implementing the product differentiation strategy? a. Distributed by DeVry Educational Products. b. After the meeting with Anderson. DCom Corp. L2-02014 . Blume makes the following observations: 1. Inc.

000 500.000 — 10. the payables turnover and the payables payment period were: a.4 times.000 \$675. Distributed by DeVry Educational Products.000.000 12/31/20X0 \$30. topic: L2-L07-03 XYZ Corporation Balance Sheet 12/31/20X2 Assets Cash Accounts Receivable Inventory Goodwill Fixes Assets Total Assets Accounts Payable Notes Payable Long-Term Debt Shareholders' Equity Total Liabilities and Equity \$100.000 — 40.000 \$100. .000 \$700.000 10.000 XYZ Corporation Income Statement For the Year Ended Sales Cost of Sales SG&A 12/31/20X2 \$1.Stalla Review Course Registered to: 72.000 700. 8.000 — 85.000 10. 50 days.Lecture: SS-07 (page 47). All rights reserved. d. c.000 50. 8.000 12/31/20X1 \$50.000 \$150. Copyright © 2005 DeVry/Becker Educational Development Corp.000 \$490. 7. 52 days.000 120.000 \$ 90.000 400.000 300. 52 days. L2-00883 .4 times.000 \$860.000 50.000 400.000 180.000 \$550.000 \$100.000 200.000 \$ 80.000 \$675.000 \$490.000 12/31/20X1 \$800. b.9 times. 50 days. Inc.000 500.9 times.000 \$860. 7.000 — 45.000 In 20X2.