CFA LEVEL - 1 MOCK PAPER

Time:- 150 mins. Full Marks:- 100

EQUITY VALUATION

1. An analyst gathered the following information about a company:

Current earnings per share $6.00

Current dividend per share $2.40

Current market price per share $35

Required rate of return on the stock 15.0%

Expected growth rate of earnings and dividends 8.0%

Which of the following statements best describes the company’s price-to-earnings ratio (P/E)?
Compared to the company’s trailing P/E ratio, the justified forward P/E ratio based on the
Gordon growth dividend discount model is:
A. the same.
B. higher.
C. lower.

2. A company’s series B, 8% preferred stock has the following features:

 A par value of $50, and it pays quarterly dividends.
 Its current market value is $35.
 The shares are retractable (at par) with the retraction date set for three years from today.
 Similarly rated preferred issues have an estimated nominal required rate of return of 12%.
 Analysts expect a sustainable growth rate of 4% for the company’s earnings.
The intrinsic value estimate of a share of this preferred issue is closest to:
A. $33.33.
B. $45.02.
C. $52.00.

3. An investor has gathered the following data for a common stock.

Earnings per share, 2013 $2.50

Dividend payout ratio, 2013 60%

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 Dividend growth rate expected during 2014 and 2015 25%

Dividend growth rate expected after 2015 5%

Investors’ required rate of return 12%

Using the two-stage dividend discount model, the value per share of this common stock
is closest to:
A. $38.70.
B. $31.57.
C. $28.57.

4. An investor gathers the following data.

Year Earnings per Share ($) Dividends per Share ($) ROE

2014 3.20 1.92 12%

2013 3.60 1.80 17%

2012 2.44 1.71 13%

2011 2.50 1.60 15%

To estimate the stock’s justified forward P/E, the investor prefers to use the compounded
annual earnings growth and the average of the payout ratios over the relevant period (i.e.,
2011−2014).
If the investor uses 11.5% as her required rate of return, the stock’s justified forward P/E
is closest to:
A. 21
B. 10
C. 12

5. An investor evaluating a company’s common stock has gathered the following data.
Current dividend per share $2.40

Dividend growth rate expected during Years 1 to 2 20%

Dividend growth rate expected from Year 3 onward 4%

Company’s weighted average cost of capital 13%

Required rate of return on equity 15%

The intrinsic value per share of this common stock is closest to:
A. $29.82.

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 B. $24.86.
C. $26.59.

6. An investor who wants to estimate the enterprise value multiple (EV/EBITDA) of a company has
gathered the following data:
Market value (MV) of debt $10 million

Market capitalization $45 million

Cash and short-term investments $2.5 million

EBITDA $15 million

Firm’s marginal tax rate 40%

The company’s EV/EBITDA multiple is closest to
A. 3.5
B. 5.8
C. 2.5

7. Assuming a 4% required rate of return, what is the intrinsic value per share of an outstanding
issue of 5% perpetual preferred stock with a par value of £100 and no embedded options?
A. £80
B. £100
C. £125

8. A company just paid an annual dividend of €1.25 per share. If the required annual rate of return
is 14% and dividends are expected to grow indefinitely at a constant rate of 8%, the company’s
intrinsic value per share is:
A. €16.88.
B. €20.83.
C. €22.50.

9. An asset with a current market price of $15.50 and an estimated intrinsic value of $12.50
is bestdescribed as being:
A. undervalued.
B. fairly valued.
C. overvalued.

10. Which version of the dividend discount model (DDM) would most likely be appropriate for
valuing a fairly young, publicly traded company?
A. A two-stage DDM

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 B. A three-stage DDM
C. The Gordon growth model

11. An asset-based valuation model is most applicable for a company with significant:
A. intangible assets.
B. property, plant, and equipment.
C. proportions of current assets and current liabilities and few intangible assets.

12. If an investor changes his investment horizon from 10 years to 20 years, what will it do to the
stock’s intrinsic value, keeping all other factors constant?
A. Increases.
B. Decreases.
C. Remains same.

13. Which of the following statements is incorrect about FCFE model?

A. FCFE is a measure of a firm’s expected dividends.
B. It can also be used for a non-dividend paying stock unlike DDM which requires the timing and
the amount of the first dividend to be paid.
C. Not all of the available cash flow is distributed to shareholders because a company retains
some part of it for future investments as a going concern.

14. The present value of a non-callable, perpetual, preferred share is 117.6. What will an investor be
willing to pay for another preferred share which is similar in all respects except it is callable?
A. More than 117.6.
B. Exactly 117.6.
C. Less than 117.6.

15. The following data is available for a company:

Par value of preferred stock offered at a 6% dividend rate: $100
Company's sustainable growth rate: 3%
Yield on comparable preferred stock issues: 9.5%
Investor's marginal tax rate: 40%
The value of the company's preferred stock is closest to:
A. $43.48.
B. $55.26.
C. $63.16.

16. Given that the value of the preferred stock of a company is $56, which of the following is most
likely to be the dividend rate for the stock? Assume par value of stock to be $100, tax rate to be
35%, sustainable growth rate to be 5% and required rate of return of 13.4%.
A. 4.87%.
B. 7.15%.
C. 7.50%.

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17. Two companies, Gamma and Theta have justified forward P/E ratios of 12.59x and 14.29x
respectively. Their ROE and payout ratios are:
Company Gamma Theta
Return on equity 13.50% 15.00%
Payout ratio 45.00% 50.00%
The required rate of return is 11%. If Gamma’s payout ratio increases to 55% and Theta’s payout
ratio decreases to 40%, what would be the most likely resultant effect on their justified P/E ratios?
A. Gamma’s P/E ratio will increase but Theta’s P/E ratio will decrease.
B. Gamma’s P/E ratio will decrease but Theta’s P/E ratio will increase.
C. Both P/E ratios will increase.

18. An investor gathers the following data on a company:

Next year’s sales revenue: $150 million
Next year’s net profit margin: 10%
Dividend payout ratio: 40%
Dividend growth rate expected during Years 2 and 3: 15%
Dividend growth rate expected after Year 3: 5%
Investors' required rate of return: 12%
Number of outstanding shares: 7.5 million
The current value per share of the company’s common stock according to the two-stage dividend
discount model is closest to:
A. $13.49.
B. $14.08.
C. $15.86.

19. A company has the following figures for its dividends history over the last four years:
A company analyst uses the average of the compounded annual growth rate over the 4-year period
and the sustainable growth rate for 2013 in order to estimate the growth rate of the company. She
then uses the Gordon growth model to find the value of company’s stock.
Given that the required rate of return is 12%, company’s ROE in 2013 is 14% and the earnings
retention rate is 38%, the stock’s intrinsic value is closest to:
A. $25.98.
B. $30.82.
C. $31.92.

20. An analyst gathers following information about two companies:

Company A Company B
Current price per share 72 32
Last year’s EPS 5.38 6.58
Current year’s expected EPS 4.58 3.22
Which of the following statements is most accurate?
A. B has higher trailing multiple than A.
B. A has higher current expected multiple than B.
C. B has higher trailing and current expected multiple than A.

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PORTFOLIO MANAGEMENT

21. Which of the following is the most appropriate reason for a written investment policy statement? A
written IPS:
A. provides investment managers with a ready protection against client lawsuits.
B. communicates a plan for trying to accomplish investment success.
C. allows investment managers to educate clients about the correct use and purpose of
investments.

22. Which of the following is the most difficult to quantify, while preparing an investment policy
statement?
A. Time horizon.
B. Willingness to expect risk.
C. Ability to take risk.

23. Mr. Amjad Mirza, director of Acme &Co. (a publicly listed company) cannot trade his company’s
stock at certain points of the year when disclosure of financial results are pending. What step
regarding this restriction is most appropriate for Salahuddin Shaukat, who is managing Mirza’s
fund, in preparing a written investment policy statement (IPS)?
A. The restriction should be included in the IPS.
B. The restriction is irrelevant to the IPS.
C. The restriction makes it illegal for the portfolio manager to work with this client.

24. Joseph Jackson, a fund manager at Hermes Global Equities, is preparing an IPS for his client. Which
of the following will he least likely place in the appendices of this IPS?
A. Procedures to update IPS.
B. Rebalancing policy of the portfolio.
C. Strategic asset allocation.

25. An investment policy statement that includes a risk objective of “Return should be within 4% of the
S&P 500 index return” is best characterized as having a(n):
A. arbitrage-based risk objective.
B. absolute risk objective.
C. relative risk objective.

26. A financial advisor gathers the following information about a new client:
 The client is a famous physics professor at one of the biggest universities in New York.
 The client owns a penthouse and two cars with currently zero outstanding debt.
 The client is currently working full-time and plans to continue this way for another five years
after which he will work part time for 4 years before retirement.

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  The client has accumulated retirement savings of approximately $ 1.75 million through their
employer’s retirement plan and anticipates retirement spending needs of $80,000 per year.
 Despite the concern regarding the current condition of the global economy, the client maintains
to remain a long-term investor.
 The client follows numerous financial publications closely and is aware of the evolving markets.
Based on the above information, which of the following best describes this client?
A. High ability to take risk and a high willingness to take risk.
B. Low ability to take risk, but a high willingness to take risk.
C. High ability to take risk, but a low willingness to take risk.

27. After interviewing a client in order to prepare a written investment policy statement (IPS), you
have established the following:
 The client has earnings that have exceeded $150,000 (pre-tax) each year for the past four years
and has no dependents.
 The client’s basic needs are approximately $49,500 per year.
 The client states that he feels particularly uncomfortable with his limited understanding of
securities markets.
 All of the client’s current savings are invested in short-term securities guaranteed by an agency
of her national government.
 The client responded to a standard risk assessment questionnaire suggesting that he has low
risk tolerance.
The client is best described as having a:
A. high ability to take risk and a high willingness to take risk.
B. low ability to take risk, but a high willingness to take risk.
C. high ability to take risk, but a low willingness to take risk.

28. Which of the following factors is most likely to impact an individual's willingness to take risk?
A. Time horizon.
B. Personality type.
C. Wealth.

29. Which of the following factors is least likely to impact the risk-taking ability of a client?
A. Expected income.
B. Personality type.
C. Time horizon.

30. Which of the following best describes the time horizon, liquidity needs and level of risk tolerance
for an endowment?
Time Horizon Liquidity Needs Level of Risk Tolerance
A. Short Low High
B. Long Low High
C. Long High Low

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31. Which of the following is least likely an example of a portfolio constraint?
A. Significant spending requirements in the long run.
B. Higher tax rate on capital gains than on dividend income.
C. Minimum total return requirement of 10%.

32. Returns on asset classes are a function of:

A. exposure to the failure of arbitrage.
B. exposure to sets of systematic factors relevant to those asset classes.
C. exposure to the idiosyncratic risks of those asset classes.

33. Tactical asset allocation is best described as:

A. selecting asset classes with the desired exposures to sources of systematic risk in an
investment portfolio.
B. attempts to exploit arbitrage possibilities among specific securities.
C. the decision to deliberately deviate from the policy portfolio.

34. Sirajuddin Sheikh invests the majority of his portfolio on a passive risk strategy while managing a
minority of the assets aggressively in smaller portfolios. This approach is best described as:
A. a top-down investment policy.
B. the core–satellite approach.
C. a delta-neutral hedge approach.

35. Patrick Dempsey, a portfolio manager, decides to temporarily invest more of a portfolio in equities
than stated in the investment policy statement because he believes that equities are currently
underpriced. This decision is most likely an example of:
A. rebalancing.
B. strategic asset allocation.
C. tactical asset allocation.

36. Which of the following actions is best described as taking place in the execution step of
the portfolio management process?
A. Choosing a target asset allocation
B. Developing an investment policy statement
C. Rebalancing the portfolio

37. Identifying a benchmark for a client portfolio is most likely to be part of the:
A. Feedback step
B. Planning step
C. Execution step

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38. In a defined contribution pension plan, investment risk is borne by the:
A. Plan manager
B. Employer
C. Employee

39. Which of the following is NOT an assumption of capital market theory?

A. The capital markets are in equilibrium
B. Investors can lend at the risk free rate, but borrow at a higher rate
C. Interest rates never change from period to period

40. Analyst 1: The minimum investment required to open a separately managed account (SMA) is
lower than that of a mutual fund.
Analyst 2: In a separately managed account (SMA) transactions can be tailored to the specific
needs of the investor.
Which analyst’s statement is most likely correct?
A. Analyst 1.
B. Analyst 2.
C. Both.

COST OF CAPITAL

41. A firm with a marginal tax rate of 40% has a weighted average cost of capital of 7.11%. The
before-tax cost of debt is 6%, and the cost of equity is 9%. The weight of equity in the firm’s
capital structure is closest to:
A. 79%
B. 65%
C. 37%

42. Which of the following is least likely to be a component of a developing country’s equity
premium?
A. Annualized standard deviation of the developing country’s equity index
B. Sovereign yield spread
C. Annualized standard deviation of the sovereign bond market in terms of the developing
country’s currency

43. A company recently issued a 10-year, 6% semiannual coupon bond for $864. The bond has a
maturity value of $1,000. If the marginal tax rate is 35%, the after-tax cost of debt (%)
is closest to:
A. 3.9%
B. 5.2%
C. 2.6%

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44. A firm’s before-tax costs of debt, preferred stock, and equity are 12%, 17%, and 20%,
respectively. Assuming equal funding from each source and a marginal tax rate of 40%, the
weighted average cost of capital (%) is closest to:
A. 14.7%.
B. 9.8%.
C. 13.9%.

45. The cost of which source of capital most likely requires adjustment for taxes in the calculation
of a firm’s weighted average cost of capital?
A. Common stock
B. Preferred stock
C. Bonds

46. Analyst 1: Using the adjustment for the flotation costs in the cost of capital may be useful if
specific project financing cannot be identified.
Analyst 2: By adjusting the cost of capital for the flotation costs, it is easier to demonstrate
how costs of financing a company change as a company exhausts internally generated equity
(i.e., retained earnings) and switches to externally generated equity.
Which analyst’s statements is (are) most likely correct?
A. Analyst 1.
B. Analyst 2.
C. Both

47. An analyst gathers the following information about the cost and availability of raising various
amounts of new debt and equity capital for a company:
Amount of Cost of debt Cost of new Cost of equity
new debt (After tax) equity
(in millions) (in millions)
≤ $5.0 3% ≤ $6.0 12%
> $5.0 5% >$6.0 14%
The company’s target capital structure is 65% equity and 35% debt. If the company raises
$12.5 million in new financing, the marginal cost of capital is closest to:
A. 9.8%.
B. 11%.
C. 10.15%.

48. An analyst has collected following information about a company and the market:
Current market price per share of common stock $17.00
Latest dividend (D0) paid on common stock $ 1.50
Expected dividend payout rate 80%

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 Expected return on equity (ROE) 17%
Beta 0.75
Expected rate of return on market portfolio 15%
Risk-free rate of return 5.25%
According to the Capital Asset Pricing Model (CAPM) approach, the cost of retained earnings
for the company is closest to:
A. 12.6 percent.
B. 12.2 percent.
C. 13.2 percent.

49. Which of the following statements describe matrix pricing most accurately? Matrix pricing:
A. is used to calculate the coupon rate of a bond.
B. helps to determine the equity risk premium in the market.
C. is used in pricing bonds through the debt-rating approach.

50. Which of the following is the least appropriate method for an external analyst to estimate a
company’s cost of debt?
A. Yield-to-maturity approach.
B. Bond yield plus risk premium approach.
C. Debt rating approach.

ALTERNATIVE INVESTMENT
51. Which of the following factors is most likely to be a characteristic of alternative investments?
A. Narrow manager specialization.
B. High regulation.
C. High transparency.

52. Which of the following is most likely to be correct about return?

A. Beta, a measure of sensitivity, relative to a particular market index, is a measure of
unsystematic risk.
B. Owing to existing inefficiencies, a positive return can be earned through exploitation and after
adjustment of beta risk. This is defined as alpha return.
C. Alpha returns are correlated with beta returns and are presumably the result of managers’
special skills in capturing non-systematic opportunities.

53. Which of the following statements is most likely to be correct about funds of funds?
Statement I: Funds of funds are funds that hold a portfolio of hedge funds.
Statement II: Funds of funds presumably have some expertise in conducting due diligence on hedge
funds.
Statement III: Funds of funds may be able to negotiate better redemption.

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 A. Statements I and II.
B. Statements I and III.
C. Statements I, II, and III.

54. If capital is provided to companies moving towards operations but before commercial production
and sales have occurred, then it is most likely:
A. angel investing.
B. seed-stage financing.
C. early stage financing.

55. If the price of a commodity futures contract is below the spot price, it is most likely that the:
A. roll yield is positive.
B. convenience yield exceeds the cost of carry.
C. storage costs exceeds convenience yield.

56. Investors are least likely to gain exposure to commodities because:

A. they want to trade in a physical product.
B. commodity prices have historically been correlated with inflation.
C. commodity prices are linked to economic growth.

57. Which of the following hedge fund strategies is least likely categorized as an event-driven strategy?
A. Distressed debt.
B. Merger arbitrage.
C. Fixed income arbitrage.

58. Which of the following characteristics of a target company is most likely attractive for a leveraged
buyout?
A. High leverage.
B. Economic environment.
C. Strong and sustainable cash flows.

59. Which of the following is least likely to be a characteristic associated with alternative investments?
A. Asymmetric risk and return profiles.
B. Illiquidity.
C. Unlimited portfolio transparency.

60. Collateralized mortgage obligations are most likely to be an example of:

A. private debt.
B. public debt.
C. public equity.

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61. BMA Hedge Fund and AKD Hedge Fund invest in the same asset class using a similar investment
strategy. A potential investor has gathered the following data from the hedge funds:
Characteristic BMA AKD
Annualized returns 24% 16%
Track Record 3 years 7 years
Fees 1.25 and 12 1.75 and 18
Sharpe Ratio 1.5 1.8
Based on the above information, the investor is most likely to:
A. research how the annualized returns are calculated.
B. invest in BMA because of its higher returns and lower fees.
C. invest in AKD because of its longer track record and higher sharp ratio.

62. AKD private equity fund is considering purchasing a firm that had an EBITDA of PKR 400 billion. In
the past year, three firms from the same industry were sold for 5x EBITDA, 6x EBITDA, and 7x
EBITDA. Based on this information, the maximum value AKD is most likely to assign to the firm is:
A. PKR2,000 billion.
B. PKR2,400 billion.
C. PKR2,800 billion.

63. BMA hedge fund restricts its investment universe to KSE, an actively traded stock exchange of
Pakistan. Its NAV will be calculated using:
A. average quotes.
B. deal prices adjusted for liquidity.
C. average quotes adjusted for liquidity.

64. Lydia Smith wishes to find an apartment building’s worth using the income approach. The gross
potential rental income is $1,750,000, and the net operating income is $362,500. Other bits of
information available include the following:
Financing percentage: 75%
Market capitalization rate: 8%
Cost of equity: 10%
Which of the following is most likely to be appraisal price of the building?
A. $10,750,000.
B. $3,625,000.
C. $4,531,250.

65. An analyst is using an income based approach to value a REIT. Which of the following will he least
likely use as a measure of income?
A. EBITDA.
B. FFO.
C. AFFO.

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66. A private equity fund is considering purchasing a small software company. Similar software
companies have sold 7 x EBITDA, 8 x EBITDA and 9 x EBITDA in the previous 3 months. The target
company’s EBITDA is $100 million. Based on this information, the maximum value of the software
company is:
A. $14.28 million.
B. $1,000 million.
C. $900 million.

67. If the level of broad inflation indices is largely determined by commodity prices, the average
nominal yield on direct commodity investments is most likely:
A. equal to zero.
B. equal to inflation.
C. less than inflation.

68. Cole Hedge Funds had an invested capital of $100 million. It earned a return of 25% in the first
year. Given that it follows a 4 and 20 fee structure, and calculates the incentive and management
fees independently, the net return for the investors is closest to:
A. 8%
B. 15%
C. 20%

69. The management fee for hedge funds is based on:

A. initial investment.
B. committed capital.
C. assets under management.

70. IFT Capital is a hedge fund with PKR 100 million of initial investment capital. IFT charges a 2%
management fee based on assets under management at year end and a 20% incentive fee. The
hurdle rate is 10% and the incentive fee is based on returns in excess of the hurdle rate. The
incentive and management fees are calculated independently. The fund has a return of 30% for the
first year. What is an investor’s net return given this fee structure?
A. 28.50%.
B. 23.40%.
C. 21.4%.

71. A hedge fund had invested capital of 200 million on which it earned a return of 35% in its first
year. It follows a 2 and 20 fee structure and calculates the incentive net of management fees.
The total fee for the hedge fund in the first year is closest to:
A. 44.00 million.
B. 19.40 million.
C. 18.32 million.

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72. The following information is available about a hedge fund:
Initial investment capital £200 million
Return at the end of one year 15%
Management fee based on assets under management 2%
Incentive fee based on the return net of the management fee 10%
Assume management fees are calculated using end-of-period valuation. The investor's net return
given this fee structure is closest to:
A. 11.20%.
B. 11.43%.
C. 13.00%.

73. The following information is available about a hedge fund:

Initial fund assets $200 million
Fund assets at the end of the period (before fees) $225 million
Management fee based on assets under management 1%
Incentive fee based on the return 15%
Soft hurdle rate 12%
No deposits to the fund or withdrawals from the fund occurred during the year. Management fees
are calculated using end-of-period valuation. Management fees and incentive fees are calculated
independently. The net-of-fees return of the investor is closest to:
A. 9.5%
B. 9.67%
C. 11.5%

74. A hedge fund with an initial value of $200 million has a management fee of 2% and an incentive fee
of 20%. Management and incentive fees are calculated independently using end-of-period
valuation. The value must reach the previous high water mark before incentive fees are paid. The
table below provides end-of-period fund values over the next three years.
Fund Value ($ millions)
Year Before Fees After Fees
1 240 227.2
2 220 215.6
3 250 ?
The total amount of fees earned by the hedge fund in Year 3 is closest to:
A. $8.56 million.
B. $9.56 million.
C. $11.00 million.

75. Statement 1: An analyst wanting to assess the downside risk of an alternative investment should
use the Sharp ratio.
Statement 2: An analyst wanting to assess the downside risk of an alternative investment should
use the Sortino ratio.

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 Which statement is most likely correct?
A. Statement 1.
B. Statement 2.
C. Neither of them.

76. The value at risk of an alternative investment is best described as the:

A. Fixed amount of loss expected over a given time period at a given probability level.
B. Maximum amount of loss expected over a given time period at a given probability level.
C. Minimum amount of loss expected over a given time period at a given probability level.

77. A private equity provision that requires managers to return any periodic incentive fees
resulting in investors receiving less than 80% of profits is a:
A. Clawback
B. Drawdown
C. High water mark

78. Social infrastructure assets most likely include:

A. Broadcasting towers.
B. Waste treatment plants
C. Health care facilities

79. Victrix is a hedge fund that has a 3 and 15 fee structure. Compared to hedge funds with
2 and 20 fee structures, Victrix charges higher:
A. Load fees.
B. Incentive fees
C. Management fees

80. An equity hedge fund strategy that focuses primarily on exploiting overvalued securities is
best described as a(n):
A. Fundamental value strategy
B. Short bias strategy
C. Event driven strategy

MARKET ORGANIZATION AND STRUCTURE

81. Which of the following is most likely a limitation of a forward contract?

A. It is difficult to exit from a forward contract, once you have entered into an agreement.
B. A forward contract requires the long party to deposit an initial amount with the short party.
C. If the price of the underlying asset moves adversely from the perspective of the long party,
periodic payments must be made to the short party.

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82. Rossi Inc. is based in Italy and exports machinery parts to the United States. Rossi is expecting to
receive $40 million in three months from a customer. The firm converts all its foreign currency
receipts into euros. The chief financial officer wants to hedge the risk of an adverse FX movement.
What hedging transaction will most likely achieve this objective?
A. Selling dollars in the forward market.
B. Selling euros in the forward market.
C. Buy call options on dollars.

83. Which of the following statements about exchange-traded funds is least likely correct?
A. Exchange-traded funds are not backed by any asset held by the fund.
B. The investment companies that create exchange-traded funds are financial intermediaries.
C. The transaction costs of trading shares of exchange-traded funds are generally lower than the
combined costs of trading the underlying assets of the fund.

84. Which of the following is least likely a pooled investment vehicle?

A. Asset-backed securities.
B. Convertible debt.
C. Hedge funds.

85. The guarantee of contract performance in futures market is most likely provided by:
A. clearing house.
B. futures exchange.
C. Securities and Exchange Commission.

86. Margaret estimates the intrinsic value of a stock to be $37 which is currently selling at $46.
Margaret will most likely:
A. place a stop-order to buy.
B. place a market-order to buy.
C. place a short-sale order.

87. Which of the following statements is least accurate?

A. An investor who has the right under a contract to purchase an asset is said to have a long
position.
B. Simultaneously borrowing and selling securities through a broker is referred to as covering the
short position.
C. In general investors who are long benefit from an increase in the price of an asset

88. Alex has purchased 100 shares of a non-dividend paying firm on margin at a price of $60 per share.
The leverage ratio is 1.5. Six months later, he sells these shares at $70 per share. What was the
return to Alex during the six-month period, considering no transaction cost or interest on
borrowing?
A. 16.67 percent.

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 B. 66.67 percent.
C. 25.00 percent.

89. Susan purchased 600 shares of a company XYZ at $22 per share. The stock was bought on 80
percent margin. One month later, Susan had to pay interest on the amount borrowed at a rate of 4
percent per month. At that time, Susan received a dividend of $0.60 per share. Immediately after
that she sold the shares at $18 per share. She paid commissions of $5 on the purchase and $5 on
the sale of the stock. What was the rate of return on this investment for the one-month period?
A. -19.4 percent.
B. -20.4 percent.
C. -24.9 percent.

90. Rogers believes the price of ABC Corp. stock will go up in the near future. He has decided to buy
100 shares of ABC Corp. at the current market price of €50. The initial margin requirement is 45
percent. Which of the following is the most appropriate statement regarding the margin
requirement that Rogers is subject to on this long position?
A. He will need to contribute €2,250 as margin.
B. He will need to contribute €2,750 as margin.
C. He will only need to leave the proceeds from the long buy as deposit and does not need to
contribute any additional funds.

91. An investor buys a stock on margin. Assume that the interest on the loan and the dividend are both
paid at the end of the holding period. The data related to the transaction are as follows:
Number of shares: 200
Purchase price per share: $15
Leverage ratio: 3
Commission: $0.05 / share
Position holding period: 6 months
Sale price per share: $20
Call money rate: 5% per year
Dividend: $0.50 / share
The investor’s total return on this investment over the margin holding period is closest to:
A. 55%
B. 78%
C. 102%

92. Sean has the following information about a stock.

Price: $48.00
Leverage ratio: 2.00
Price for margin call: $34.29
The maintenance margin is most likely to be:
A. 50%

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 B. 25%
C. 30%

93. Which of the following is most likely to be cancelled if it cannot be filled (in part or in whole) very
quickly?
A. Good-till-cancelled order.
B. Fill-or-kill orders.
C. Good-on-close orders.

94. Derek has sold short 150 shares of Walmart at a price of $52 per share. He also simultaneously
places a “good-till-cancelled, stop 60, limit 65 buy” order. If the stock price starts rising sharply
what is the maximum possible realized loss assuming no transaction costs?
A. $1,200.
B. $1,950.
C. Unlimited.

95. Currently, the market in a stock is “$154.62 bid, offered at $154.71.” Susan places a new buy limit
order at $154.65. This limit order is said to:
A. take the market.
B. make the market.
C. make a new market.

96. Consider an order-driven system that allows hidden orders. The following four sell orders on a
particular stock Y are currently in the system’s limit order book. Based on the commonly used
order precedence hierarchy, which of these orders will have precedence over others?

A. Order I.
B. Order II.
C. Order III.

97. For stock X, market has the following limit orders standing on its book:
Buyer Bid size (# of Limit Price ($) Offer size (# of Seller
shares) shares)
A 900 9.70
B 100 9.84
C 300 9.89
D 200 10.02

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 10.03 700 X
10.11 1000 Y
10.16 300 Z
Dave submits a day order to sell 900 shares, limit $9.83. What would Dave’s average trade
price be, assuming that no more buy orders are submitted on that day after Dave’s
submission?
A. $10.09.
B. $9.93.
C. $9.79.

98. A German company listed on the Frankfurt Stock Exchange, announced the sale of 7,696,565
shares to a small group of qualified investors at EUR 0.075 per share. The sale can be best
described as a(an):
A. Shelf registration sale.
B. Private placement sale.
C. Initial public offering.

99. Which of the following statements is least accurate?

A. In call markets, trades occur at any time the market is open with prices set either by the
auction process or by dealer bid-ask quotes.
B. Quote-driven markets are sometimes also called dealer markets, price-driven markets, or over-
the- counter markets.
C. In order-driven markets, orders are executed using trading rules, which are necessary because
traders are usually anonymous.

100. Which of the following is least likely an objective of market regulation?

A. Prevent fraud.
B. Control Agency problems.
C. Ensure that investors earn at least the risk free rate.

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