Professional Documents
Culture Documents
QUESTION NO: 2
Standard IV (B.7) deals with ________.
A. Priority of Transactions
B. None of these answers
C. Disclosure of Referral Fees
D. Performance Presentation
E. Prohibition against Misrepresentation
F. Disclosure of Conflicts to Clients and Prospects
G. Preservation of Confidentiality
H. Prohibition against Use of Material Nonpublic Information
Answer: F
Explanation:
Standard IV (B.7) states that members shall disclose to their clients all matters that could become
potential conflicts. These include beneficial ownership of securities or otherinvestments, that
reasonably could be expected to impair the member's ability to make unbiased and objective
recommendations.
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QUESTION NO: 4
Another name for "access" person is ________.
A. none of these answers
B. supervisor
C. ombudsman
D. guardian
E. fiduciary
F. covered person
Answer: F
Explanation:
Access or covered persons have knowledge of pending or actual investment recommendations or
action. The firm's definition of access (covered) person should be broad enough to cover all
people with that knowledge.
QUESTION NO: 5
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QUESTION NO: 6
If a firm uses non-discretionary leverage, it must present performance using:
A. both actual returns and all-cash basis.
B. all-cash basis i.e. removing leverage effects.
C. actual returns.
D. none of these answers.
Answer: B
Explanation:
According to Section B of the PPS standards - "Calculation of Returns" - for non-discretionary
leverage, performance must be presented on an all-cash returns basis.
QUESTION NO: 7
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QUESTION NO: 8
Standard IV (B.8), Disclosure of Referral Fees, includes ________.
A. referral fees paid in cash
B. referral fees paid "in kind"
C. soft dollar referral fees
D. all of these answers
Answer: D
Explanation:
Under Standard IV (B.8), appropriate disclosure involves disclosing the nature of the consideration
or benefit given or received for the recommending of services. Consideration includes all fees,
whether paid in cash, in soft dollars, or in kind.
QUESTION NO: 9
Which of the following relating to compliance procedures for complying with Standard III (E) is
false? The compliance procedures should:
A. none of these answers.
B. outline permissible conduct.
C. delineate procedures for reporting violations and sanctions.
D. designate a team of outside colleagues to form a review board.
E. outline the scope of the procedures.
F. be easy to understand.
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QUESTION NO: 10
According to the AIMR-PPS for venture and private placements, ________ internal rate of return
must be presented since inception of the fund and be net of fees, expenses and carry to the
limited partner.
A. limited
B. extended
C. cumulative
D. general
Answer: C
Explanation:
Cumulative internal rate of return must be presented since inception of the fund and be net of fees,
expenses and carry to the limited partner. Irr must be calculated based on cash-on-cash returns
plus residual value.
QUESTION NO: 11
Which of the following AIMR Standards states that referral fees must be disclosed in writing to
clients or customers?
A. V
B. VI (A)
C. IV (B.8)
D. IV
Answer: C
Explanation:
Standard IV (B.8) - Disclosure of Referral Fees states: "Members shall disclose to clients and
prospects any consideration or benefit received by the member or delivered to others for the
recommendation of any services to the client or prospect."
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QUESTION NO: 13
Which of the following statements clearly conflicts with the recommended procedures for
compliance presented in AIMR's Standards of Practice Handbook?
A. Investment recommendations may be changed by an analyst without prior approval of a
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QUESTION NO: 14
Trust Fund is a reasonably successful investment management firm that has as its clients a few
pension plans. Trust Fund executes all of its trades with Prime Brokerage, an average brokerage
firm. Prime Brokerage charges higher commissions than comparable players in the market but in
return, provides investment research on the stocks which are part of the pension plan assets
under Trust Fund's management. Portfolio managers at Trust Fund know about the close
relationship on the golf links between Prime Brokerage's chief broker, Ralph Fiennes, and Trust
Fund's CEO, Armis Arvanitis. They also believe that the research provided by Prime Brokerage,
while not superlative, is quite useful and justifies the excess expense in brokerage. This "softdollars" practice is disclosed in Trust Fund's official documents and contracts but Sisko, a freshly
minted CFA charterholder, thinks that Trust Fund managers are in violation of the AIMR code of
Ethics. Which of the following is true?
A. Trust Fund's managers are violating Standard IV (B.8) - Disclosure of Referral Fees by not
revealing the arrangement to pension plan beneficiaries.
B. Trust Fund's managers are violating Standard IV (B.1) - Fiduciary Duties by not executing the
trades at the lowest price available.
C. Sisko is not applying the AIMR code correctly. Trust Fund's managers are not violating any
AIMR standards.
D. Trust Fund's managers are violating Standard IV (B.3) - Fair Dealing by unfairly diverting funds
from the plan assets to Prime Brokerage through higher fees.
Answer: C
Explanation:
The practice of using "soft dollars" (i.e., the usage of brokerage for purchase of research services)
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QUESTION NO: 15
A financial analyst should conduct himself with ________, competence and dignity and act in an
ethical manner in his dealings with the public, clients, customers, employers, employees and
fellow analysts.
A. integrity
B. morality
C. none of these answers
D. honor
E. principal
That answer is correct!
Answer: A
Explanation:
The Code of Ethics: "Members of AIMR shall act with integrity, competence, dignity and in an
ethical manner when dealing with the public, clients, prospects, employers, employees and fellow
members."
QUESTION NO: 16
Everly Smith has passed Level II of the CFA examination. While studying for Level III, he
circulates his resume stating that he has "completed Charter Financial Analyst II" and his resume
lists his name as "Everly Smith, CFA II." Which of these following statements is correct?
A. Everly Smith is not in compliance with the standards regarding use of the CFA designation. He
may state he "completed Chartered Financial Analyst II," but cannot put "CFA II" after his name.
B. Everly Smith is not in compliance with the standards regarding use of the CFA designation. He
can neither state he "completed Chartered Financial Analyst II" nor "Everly Smith, CFA II."
C. Everly Smith is not in compliance with the standards regarding use of the CFA designation.
Since he is registered for Level III he should state "Everly Smith, CFA III."
D. Everly Smith is in compliance with the standards regarding use of the CFA designation.
Answer: B
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QUESTION NO: 17
For ________ of five or fewer portfolios, the disclosure "five or fewer portfolios" may be made
rather than a disclosure of the exact number of portfolios.
A. returns
B. investments
C. segments
D. composites
Answer: D
Explanation:
This is an exception allowed by AIMR when disclosing the list of composites.
QUESTION NO: 18
Standard I deals with ________.
A. Use of Professional Designation
B. Duty to Employer
C. Obligation to Inform Employer of Code and Standards
D. Professional Misconduct
E. Plagiarism
F. Fundamental Responsibilities
G. Disclosure of Conflicts to Employer
H. None of these answers
Answer: F
Explanation:
Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional
Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with
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QUESTION NO: 19
According to the AIMR-PPS, terminated portfolios are included in the composite for how long after
termination?
A. Composites must include terminated portfolios after the last full performance measurement
period the portfolios were under management.
B. Composites should include the terminated portfolio only until the date of termination.
C. Composites should include the terminated portfolio for the last full performance measurement
period under which the portfolios were managed.
D. Composites should include the terminated portfolio for the full ten years required by the
Standards for performance reporting.
Answer: C
Explanation:
Composites must exclude terminated portfolios after the last full performance measurement period
the portfolios were under management, but composites must continue to include terminated
portfolios for all periods prior to termination. This is a requirement for creation and maintenance of
composites.
QUESTION NO: 20
Edward Witten works for Princeton Investments and has registered to take Level III exam next
year. He had taken the Level III exam 3 years ago but was not successful. In his firm's promotional
material, he has stated that he is a candidate in the CFA program and has successfully passed
Level II. Edward has:
A. violated Standard II (A) - Use of Professional Designation. He cannot claim to be in the CFA
program without having completed Level III exam.
B. violated Standard II (A) - Use of Professional Designation. He cannot claim to be in the CFA
program since he failed the Level III exam.
C. not violated any standards.
D. violated Standard II (A) - Use of Professional Designation. He cannot claim to be CFA - Level II.
Answer: C
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QUESTION NO: 21
Standard V (A) deals with ________.
A. Prohibition against Use of Material Nonpublic Information
B. Disclosure of Conflicts to Clients and Prospects
C. Prohibition against Misrepresentation
D. Disclosure of Referral Fees
E. Performance Presentation
F. Priority of Transactions
G. Preservation of Confidentiality
That answer is correct!
Answer: A
Explanation:
Standard V (A) prohibits members who possess material nonpublic information related to the value
of a security from trading in that security if such trading would breach a duty or if the information
was misappropriated or relates to a tender offer.
QUESTION NO: 22
Andy Pilling is a bond trading specialist who recently started a special fund, the "Structured Bond
Fund." The strategy behind this fund is quite complex, involving a mix of highly speculative, highyield bonds and various tax-free municipal bonds for some stability. Andy has a strong view that
the economy will remain vibrant and bullish over the next two years and hence, is not worried
about the risky bonds. Assuming a falling rate scenario in this case allows the fund to project an
expected return 130 basis points above the S&P 500 return. In his special report, Pilling does not
disclose such assumptions nor does he reveal any details about the bond strategy. He does
analyze the state of the economy and the future outlook in the report. Based on his reputation and
his association with some big name academics, Pilling is able to obtain capital of close to 75
million dollars on this fund alone. Andy has:
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QUESTION NO: 23
According to Standard IV (A.2), members should consider including the following information in
research reports, except:
A. the methodology that drove the investment decisions.
B. yield-to-maturity.
C. annual amount of income expected.
D. degree of uncertainty associated with the cash flows.
E. business, financial, political, sovereign and market risks.
F. none of these answers.
G. degree of marketability / liquidity.
H. expected annual rate of return.
That answer is correct!
Answer: A
Explanation:
All the information has to be included in the research reports except the methodology that drove
the investment decision, which is part of the 'maintaining files' compliance procedure for Standard
IV (A.1).
QUESTION NO: 24
The disclosures for retroactive compliance apply to composites formulated prior to ________.
A. January, 1989
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QUESTION NO: 25
With regard to real estate, all properties must be included in at least one ________.
A. account
B. investment type
C. composite
D. sector
E. portfolios
Answer: C
Explanation:
Consistent with the general requirements for all composites, all properties with discretionary feepaying investors must be included in at least one account. Because of the unique nature of
individual real estate investments, however, composites containing single properties are
appropriate in many cases.
QUESTION NO: 26
Each ________ needs to comprise portfolios or asset classes that represent a similar investment
goal.
A. return
B. composite
C. value
D. benchmark
E. mix
Answer: B
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QUESTION NO: 27
ERISA fiduciaries must adhere to the following prudent procedures:
- establish a written investment policy for the plan
- diversify plan assets
- make investment decisions with the skill and care of a ________
- monitor investment performance
- control investment expenses
- avoid prohibited transactions
A. member
B. supervisor
C. prudent expert
D. none of these answers
E. trader
Answer: C
Explanation:
These procedures are stipulated under the detailing of ERISA fiduciary duties, to ensure that the
fiduciary complies with the duty to act with prudence. Under ERISA, the fiduciary is held to a
higher standard than the Prudent Man Rule. The ERISA fiduciary needs to be as prudent as the
average expert, not simply as prudent as the average person.
QUESTION NO: 28
________ establishes the fiduciary principles for U.S. corporate pension plans.
A. AIMR
B. PSPC
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QUESTION NO: 29
Under what conditions is Standard II (B)- Professional Misconduct violated?
I. The member is convicted of a misdemeanor.
II. The member regularly engages in unprofessional but legal behavior.
III. The member engages in dishonest activities that do not result in criminal conviction. IV. The
member is convicted of a felony.
A. II, III & IV.
B. I, II & IV.
C. I, II, III & IV.
D. IV only.
That answer is correct!
Answer: A
Explanation:
This question pertains to Standard II (B) - Professional Misconduct. A misdemeanor conviction is
only considered grounds for a violation of II (B) if it occurs repeatedly, or involves "moral turpitude"
(lying, cheating, stealing, or other dishonest conduct). Unprofessional and dishonest behavior or a
felony conviction are violations of Standard II (B).
QUESTION NO: 30
Complete the following: According to The Code of Ethics, members of AIMR shall: "Act with
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QUESTION NO: 31
Standard IV of the Standards of Professional Conduct deals with Relationships with and
Responsibilities to ________.
A. None of these answers
B. Clients and Prospects
C. AIMR
D. Supervisors
E. the Employer
Answer: B
Explanation:
Standard IV of the Standards of Professional Conduct deals with Relationships with and
Responsibilities to Clients and Prospects.
QUESTION NO: 32
Each of the following is true regarding Standard II (A), except:
A. You must be registered for the next CFA exam in order to call yourself a candidate.
B. This standard relates to business cards and letterheads.
C. This standard does not relate to oral statements.
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QUESTION NO: 33
Standard ________ pertains to fair dealing with customers and clients.
A. III (B)
B. IV (B.3)
C. IV (A)
D. I (D)
E. None of these answers
Answer: B
Explanation:
Standard IV (B.3) states: "Members shall deal fairly and objectively with all clients and prospects
when disseminating investment recommendations, disseminating material changes in prior
investment recommendations and taking investment action."
QUESTION NO: 34
Social investments:
A. should never be used in pension fund investing.
B. in pensions must be well thought-out, making sure that such investments are legal and do not
impair the integrity of the funds in questions or the financial security of the participants or
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QUESTION NO: 35
Which of the following are considered basic characteristics of a security and must be included in
research reports?
A. business risk
B. degree of uncertainty
C. annual expected income
D. yield-to-maturity
E. all of these answers
F. both degree of liquidity and yield-to-maturity
G. expected annual rate of return
Answer: E
Explanation:
Members should include the following information in research reports:
- expected annual rate of return
- annual amount of income expected (current and future)
- current rate of income return of yield to maturity
- degree of uncertainty associated with cash flows
- degree of marketability/liquidity
- business, financial, political, sovereign and market risks
QUESTION NO: 36
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QUESTION NO: 37
Corporate directors are governed by the ________. Trustees are governed by the ________.
A. none of these answers
B. "common sense doctrine"; business judgment rule
C. business judgment rule; Prudent Man Rule
D. business judgment rule; "common sense doctrine"
E. "common sense doctrine"; Prudent Man Rule
F. Prudent Man Rule; business judgment rule
G. Prudent Man Rule; "common sense doctrine"
Answer: C
Explanation:
This question is trying to highlight the different standards of business care fiduciaries must uphold
in charitable organizations and trusts respectively. Thus, fiduciaries at charities are bound by the
business judgment rule, since they are comparable to directors of business corporations. In
contrast, trustees are governed by the Prudent Man Rule. This distinction in the standard duties
applicable to fiduciaries in different situations should be recognized.
QUESTION NO: 38
Maria Golino is a financially savvy client of Hector Gomez, a portfolio manager with a small
investment firm. Maria recently directed Hector to execute all trades on her behalf with Omega
Brokerage. Omega charges higher commissions than most other brokerage firms but in this case,
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QUESTION NO: 39
Another name for "covered" person is ________.
A. guardian
B. none of these answers
C. ombudsman
D. access person
E. fiduciary
F. supervisor
Answer: D
Explanation:
Access or covered persons have knowledge of pending or actual investment recommendations or
action. The firm's definition of access (covered) person should be broad enough to cover all
people with that knowledge.
QUESTION NO: 40
Which of the following can be found in Standard IV?
A. Members must use the CFA designation in a dignified manner.
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QUESTION NO: 41
If a firm uses discretionary leverage, it must present performance using:
A. all-cash basis i.e. removing leverage effects.
B. both actual returns and all-cash basis.
C. none of these answers.
D. actual returns.
Answer: B
Explanation:
For discretionary leverage, both actual returns and all-cash returns must be presented.
QUESTION NO: 42
Kruskal Meriwether is a senior research analyst with Bellwether Advisors. He has been following
Crystals & Candles a publicly traded firm which makes high-quality diamond jewelry. Kruskal, after
extensive interviews with senior management at Crystals, has inferred that the firm is about to take
over a diamond- mining firm in South Africa at a rock-bottom price. The Crystal management has
refused to explicitly confirm or deny this but Kruskal firmly believes that such a deal is in the
works. He has not used any inside information; just pieced together information from various
avenues to come to this conclusion. In his reports, he states, "All my research seems to indicate
that Crystal & Candles is likely to buy a South African diamond producer at a bargain price.
Clearly, now is the time to buy Crystal and Candles' stock." 2 weeks after his report is released,
Crystal's management announces that it has no intentions of making any acquisitions in the near
future. This leads to a 7% decline in Crystal's stock, causing a large decline in the account's of
Kruskal's clients. Kruskal has
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QUESTION NO: 43
Standard II (C) deals with ________.
A. None of these answers
B. Obligation to Inform Employer of Code and Standards
C. Disclosure of Conflicts to Employer
D. Duty to Employer
E. Fundamental Responsibilities
F. Plagiarism
G. Use of Professional Designation
H. Professional Misconduct
Answer: F
Explanation:
Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional
Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with
Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards.
Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts
to Employer.
QUESTION NO: 44
Which of the following AIMR Standards states that client transactions must have priority over
transactions in which the analyst is a beneficial owner?
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QUESTION NO: 45
Cariella is a junior analyst who is currently preparing a report on a diamond producing firm, Dense
Carbon, Inc. Dense Carbon recently announced that the results of a mining survey in its South
African diamond mines were in, which revealed substantial amounts of diamond reserves for the
first time. It has offered to take a few industry analysts for a tour of the facilities and take stock of
the situation first hand. During this tour, all expenses, including air-fare and basic
accommodations, were provided for by Dense Carbon. Since the visit spanned a weekend, Dense
Carbon also arranged for a Safari tour for all the analysts. Cariella did not consider the safari to be
an undue entertainment, given the fact that the analysts had to be in the middle of nowhere for 5
days. She was quite assiduous in her appraisal of the mining reserves and in the final analysis, the
tour proved extremely valuable to her analysis. However, she did not reveal the fact about the
Safari trip to her employer. Cariella has
I. violated Standard III (C) - Disclosure of Conflicts to Employer.
II. violated Standard IV (A.1) - Reasonable Basis and Representations.
III. violated Standard IV (A.3) - Independence and Objectivity.
IV. not violated the AIMR code of ethics.
A. I only
B. I and III only
C. I, II and III only
D. IV only
Answer: B
Explanation:
Standard IV (A.3) - Independence and Objectivity requires members to use reasonable care and
judgment while making investment recommendations. In particular, it requires that members avoid
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QUESTION NO: 46
Arbaaz, an AIMR member, works for an investment advisory firm, Leon Investments. His friend,
Shahzad, recently asked him for some investment recommendations. Arbaaz analyzed Shahzad's
portfolio over a weekend and suggested some changes. While he did not accept any
remuneration, Shahzad promised him some gifts if his portfolio "performed well." Arbaaz did not
inform his employer since he thought he was helping a friend and in any case, the Shahzad's
account was extremely small and there were no financial payments. Arbaaz has:
A. violated Standard III (B), Duty to Employer.
B. has not violated Standard III (B), Duty to Employer, because there was no financial
remuneration.
C. has not violated Standard III (B), Duty to Employer, because Shahzad's account was too small
to be deemed lost business for Leon Investments.
D. has not violated Standard III (B), Duty to Employer, because Arbaaz is free to do what he wants
on his time as long as it doesn't affect Leon Investments.
That answer is correct!
Answer: A
Explanation:
While Arbaaz did not receive any monetary compensation, there is a possibility of gifts in the
future. Standard III (B) applies even when there is no actual receipt of compensation; what is
important is the possibility of future payments in cash or kind. By not obtaining a written
permission from his employer before advising Shahzad, Arbaaz violated Standard III (B).
QUESTION NO: 47
"Restricted Periods" are discussed in Standard IV (B.4), Priority of Transactions. Another name for
restricted periods is ________ periods.
A. blackout
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QUESTION NO: 48
Liz Hurley is an investment advisor who has recently started advising a client, Zeta, regarding
investment decisions. Zeta lives in Imphal, where investment laws are quite lax, almost nonexistent. Hurley is domiciled in Britania, where investment laws clearly specify that the laws
governing finance professionals in any given case are the laws that govern their clients. Britania
laws, in general, are far stricter than the AIMR code of ethics. In her dealings with Zeta, Hurley
must follow
A. Imphal's laws.
B. Britania's laws.
C. AIMR's code of ethics.
D. a combination of Britania's laws and AIMR code which results in a stricter set of laws.
Answer: C
Explanation:
In her dealings with Zeta, Hurley is governed by Imphal's laws, as specified by Britania's laws.
Since Imphal laws are almost non-existent, the code of ethics sets a stricter standard and hence,
as an AIMR member, Hurley must follow the AIMR code. Standard I.
QUESTION NO: 49
In order to inform your employer that as a member of AIMR, you must abide by the code of ethics,
you must:
A. inform the legal department in writing.
B. inform senior management in writing.
C. inform your immediate supervisor in writing or by email.
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QUESTION NO: 50
Spassky was assigned the task of managing the portfolio of Fisher three days ago when Anand,
who was managing Fisher's portfolio, retired. Fisher's portfolio consists of some deep-in-themoney put options, which will be exercised today, resulting in a cash flow of about $40,000.
Spassky has not yet had a chance to meet Fisher in person to determine his needs, investment
objectives and risk appetite. He did get a briefing from Anand about the portfolio and has a general
idea about Fisher's investment attitude. In fact, over the past two years, Fisher's portfolio has
generated handsome returns due to high-risk investments which Fisher prefers. Spassky's
problem is determining what he should do with the $40,000. According to the AIMR Code of
Ethics, he should:
A. keep the money in cash form and not risk it till he can meet Fisher to discuss the situation.
B. "roll over" the put positions for another week or two till he can meet Fisher and discuss the
reinvestment of the funds.
C. invest the funds in a diversified portfolio with a risk profile similar to what Anand and Fisher
have been maintaining over the past 3 months.
D. invest the funds in highly liquid, cash equivalent assets till he can meet Fisher and determine
his needs, investment objectives and risk appetite.
Answer: D
Explanation:
In most cases, a portfolio manager must manage a portfolio based on the investment needs and
objectives of the portfolio owner consistent with the willingness to bear risk. One exception to this
rule is when a new portfolio manager takes over and has the task of reinvesting funds arising from
theexisting portfolio investments. Since these funds should not be kept idle, a prompt investment
of the money in liquid, risk-free securities is prescribed by the AIMR code of Ethics.
QUESTION NO: 51
Willier is the research analyst responsible for following Company X. All the information he has
accumulated and documented suggest that the outlook for the firm's new products is poor, so the
stock should be rated a weak hold. During lunch, however, Willier overhears a financial analyst
from another firm offer opinions that conflict with Willier's forecasts and expectations. Upon
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QUESTION NO: 52
Under AIMR Rules of Procedure for the Proceeding Related to Professional Conduct, membership
in AIMR and/or the right to hold and to use the CFA designation may be summarily suspended by
AIMR's Designated Officer for the following misconduct:
I. Conviction for a crime that is defined as a felony or its equivalent.
II. Indefinite bar from registration under the securities laws (even though reapplication may be
made after a specific period of time).
III. Failure to complete and return a professional conduct statement for each of two successive
years.
A. I only.
B. I and II only.
C. IV only.
D. II only.
E. III only.
F. II and III only.
G. I, II and III.
Answer: G
Explanation:
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QUESTION NO: 53
Grey recommends the purchase of a mutual fund that invests solely in long-term U.S. Treasury
bonds. He makes the following statements to his clients:
I. "The payment of the bond is guaranteed by the U.S. government; therefore, the default risk of
the bonds is virtually zero."
II. "If you invest in the mutual fund, you will earn a 15 percent rate of return each year for the next
several years." Did Grey's statements violated AIMR's Code and Standards?
A. Neither statement violated the Code and Standards.
B. Statement I and II violated the code and Standards.
C. Only statement I violated the Code and Standards.
D. Only statement II violated the Code and Standards.
Answer: D
Explanation:
This question deals with Standard IV (B.6), Prohibition against Misrepresentation. Statement I is a
factual statement that discloses to clients and prospects accurate information about the terms of
the investment instrument. Statement II, which guarantees a specific rate of return, is an opinion
stated as a fact and therefore violates Standard IV (B.6).
QUESTION NO: 54
Standard III (D) is ________.
A. None of these answers
B. Disclosure of Additional Compensation Arrangements
C. Disclosure of Conflicts to Employer
D. Obligation to Inform Employer of Code and Standards
E. Duty to Employer
F. Responsibilities of Supervisors
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QUESTION NO: 55
Level I verification requires independent attestation that the requirements of the AIMR-PPS have
been met on a(n) ________ basis.
A. international
B. attainable
C. nationwide
D. firmwide
Answer: D
Explanation:
This is a requirement under Level I verification procedures.
QUESTION NO: 56
Carmina Aburana is a sales assistant to Drew Door, a sales manager at Hicost Brokerage. Hicost
has a policy of requiring at least 20% margin on stocks that are deemed illiquid or extremely risky.
For these purposes, it creates and updates a list of such stocks on a weekly basis. Yoddly Yoo,
Inc. is an up and coming internet firm whose stock has been on this list for some time now. One of
Carmina's "blue chip" clients, Amadeus, has been speculating on Yoddly's stock for the past two
weeks, repeatedly going in and out of the market. In this process, he has unfortunately generated
significant losses and his margin on the account has fallen to 12%. To make up for the shortfall,
Amadeus calls up Carmina and requests a "borrowing on the account" of 10% for the next 2
weeks, promising to pay a hefty interest rate of 38%on an annualized basis. Since Amadeus has
never been in default, Carmina agrees to the arrangement and moves some funds from another
client's account. There is no explicit rule at Hicost that prohibits such an arrangement, though it is
clearly an oversight on part of the Compliance department. Drew notices this transaction and calls
Carmina for an explanation. On hearing the explanation, he tells Carmina that such arrangements
are in violation of the company rules and should not be repeated. After 2 weeks, Amadeus
supplies the necessary margin for his account.
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QUESTION NO: 57
Susan Jackson, with HRS Investments, is appearing in court as an expert witness. She will have
to use research done at HRS, to which she did not contribute directly, during her testimony. Which
of the following is true, in relation to Jackson's need to comply with Standard II (C)?
A. Jackson is representing herself and may or may not attribute any of HRS's research.
B. Jackson is representing HRS and must attribute any of HRS's research.
C. Jackson is representing herself and must attribute any of HRS's research.
D. There is not enough information given to answer this question.
E. Jackson is representing HRS and may or may not attribute any of HRS's research.
Answer: C
Explanation:
Expert witnesses represent themselves, not organizations. Thus, Susan must attribute any of
HRS's research to HRS and the team that conducted the research.
QUESTION NO: 58
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QUESTION NO: 59
When an analyst reaches conclusions about a firm's impending announcements before the actual
release of information, using non-material, non-public information in conjunction with public
information, insider trading charges cannot be leveled against her. This arises from a legal
defense against insider trading charges known as:
A. the Shingles Theory.
B. the question is based on false premise. The analyst can be held responsible for insider trading
if she uses any inside information in her conclusions.
C. the Insider Legal Statute.
D. the Mosaic Theory.
Answer: D
Explanation:
Insider trading charges arise only when the inside information used is material and non-public.
Analysts who use non-material inside information in conjunction with publicly available data to
draw conclusions which happen to be the same as those that would be derived given material
inside information are shielded from insider trading charges under the "Mosaic Theory." The logic
behind the defense is that investment analysts are exposed to a wide variety of public information
(i.e., a "mosaic of information") and already have a good idea about what the information means.
Further, the inside information, when non-material, cannot (by definition) have been the primary
shaper of the final conclusions. Hence, the possession of the inside information makes only
marginal contribution to the conclusions and as such, should not trigger insider trading violations.
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QUESTION NO: 61
Mirabelle is an experienced analyst who has worked for the investment research arm of Clifford &
Clifford, Inc. for the past 7 years. Recently, TransOmega retained Clifford & Clifford to conduct a
study on possible takeover candidates in the aviation industry. Mirabelle has been given the
project and two assistants to conduct the research. During their review, Mirabelle's assistants
located a research report created recently by Donaldson, a freelance analyst. Mirabelle found the
report thorough, though she did not agree with many of Donaldson's conclusions. She carried out
further inquiry along those lines and modified the report with new conclusions. She showed the
completed report, with proper attributions to Donaldson in places where she had used his results,
to a senior partner, John Cliff of Clifford & Clifford. The report was approved and released to
TransOmega. In this case,
A. both Mirabelle and John Cliff violated the standards.
B. only Mirabelle violated the plagiarism standard by using Donaldson's report.
C. only John Cliff violated the Standard of Reasonable Care (IVA.1) by not adequately monitoring
Mirabelle.
D. neither Mirabelle nor John Cliff violated any of the standards.
Answer: D
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QUESTION NO: 62
According to the AIMR-PPS when presenting results, annual returns for all years must be
presented. Performance for periods of less than one year
A. must be treated as all of the other performance results.
B. must not be included in the presentation.
C. must not be annualized.
D. must be prorated and appropriate disclosures made.
Answer: C
Explanation:
Annual returns for all years must be presented. Performance for periods of less than one year
must not be annualized. This is a requirement for presentation of results.
QUESTION NO: 63
________ accounting is mandatory for fixed-income securities.
A. Accrual
B. Cash
C. Flexible
D. Equal
E. Risk-free
F. Total
That answer is correct!
Answer: A
Explanation:
Accrual accounting must be used for fixed-income securities and all other securities that accrue
income. Accrued income must be included in the market value calculation of the denominator and
numerator.
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QUESTION NO: 65
Which of the following is/are required by AIMR-PPS with regards to calculation of returns?
I. Total return - realized and unrealized gains plus income - should be used.
II. Returns must be based on arithmetic mean calculations.
III. Accrual accounting must be used for fixed-income securities.
A. I, II and III
B. I only
C. I and III only
D. II and III only
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QUESTION NO: 66
What is the effective date for compliance with the AIMR-PPS for U.S. and Canadian investments?
A. January 1, 1995
B. January 1, 1992
C. January 1, 1993
D. January 1, 1994
Answer: C
Explanation:
From January 1, 1993, going forward, all of the firm's actual discretionary fee-paying nontaxable
portfolios solely invested in U.S. and/or Canadian investments ("North American Portfolios") must
be presented in composites that adhere to the Standards.
QUESTION NO: 67
Standard II (C) - Prohibition against Plagiarism - addresses all of the following forms of
communication, except:
A. internet communications
B. oral presentations
C. electronic data transfer
D. written presentations
E. audio/visual presentations
F. none of these answers
G. group meetings
Answer: F
Explanation:
Standard II (C) does not concern the form of communication of information to clients, prospects,
employees, or the general public. Rather, it concerns the need to acknowledge the source of
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QUESTION NO: 68
________ and other hybrid securities must be treated consistently across and within composites.
A. Bonds
B. Assets
C. Convertibles
D. Portfolios
Answer: C
Explanation:
This is one of the requirements which is mandatory in order to be in compliance with the PPS.
QUESTION NO: 69
Sterling Drachma is a senior investment consultant currently researching a few high-risk internet
stock companies which recently started trading on NASDAQ. Sterling manages 5 large and private
investment accounts for which he has discretionary investment authority. Sterling is about 3 years
away from retirement and his retirement portfolio is managed by Franc Escudo. Sterling has
concluded from his research that two of the internet stocks he has been following are great buys
and instructs Franc todivert part of the retirement investments into these stocks. Franc executes
the orders as soon as he receives them. Sterling then instructs his brokers to buy the stocks for
the two discretionary accounts that he knows are inclined toward high-risk investments. He does
not buy any for the remaining three accounts since those are income-oriented, low-risk accounts.
In this sequence of events, which of the following is/are true?
I. Franc has violated Standard IV (B.1) - Fiduciary Duties - by investing retirement account funds in
the high-risk stocks.
II. Sterling has violated Standard IV (B.3) - Fair Dealing - by not treating all his accounts equally.
III. Sterling has violated Standard IV (B.4) - Priority of Transactions - by trading for his retirement
account before trading for his client accounts.
A. I, II and III
B. I and III only
C. II and III only
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QUESTION NO: 70
Jorgenson is a senior bond analyst with Morgan Co., a large investment banking firm. Over the
past quarter, Morgan's corporate bond department has been betting on the credit spreads in the
market narrowing and in anticipation, has invested a large amount of capital in the bonds of two
firms, High Tech and Amerizone.com. Unfortunately, the credit spreads have not displayed much
activity and as the quarter end is approaching, the department wants to unload the bonds. For this,
it puts pressure on Jorgenson to push the bonds on some of his larger clients. Jorgenson believes
that both the bonds are good investments since High tech and Amerizone have been doing very
well and their prospects look rosy. So he goes ahead and convinces his clients to purchase as
much as a third of Morgan's bond holdings in these companies. Morgan has
A. not violated the AIMR code of ethics.
B. violated Standard IV (A.1) - Reasonable Basis and Representations.
C. violated Standard IV (B.7) - Disclosure of conflicts to Clients and Prospects.
D. violated Standard IV (A.3) - Independence and Objectivity.
That answer is correct!
Answer: A
Explanation:
There is no evidence that Jorgenson has bowed to any external pressure in recommending the
bonds to his clients. If his analysis indicates, in his judgment, that a security is a good investment
and suits the needs of a client, then he should recommend it, regardless of whether there is any
external pressure for or against that course of action.
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QUESTION NO: 71
Emmy Noether is a senior division manager at Harding & Harding, a money management firm.
Emmy is quite fastidious about following the rules of the investment industry and has established
specific procedures and guidelines designed to prevent any violations. Recently, it surfaced that
one of theemployees reporting to Emmy, William Bathwater, had been secretly using inside
information on a computer maker to generate profits in his portfolio. William had been extremely
clever at hiding these profits and only a serendipitous audit by the Compliance Department
revealed the pattern. Emmy, in her capacity as William's supervisor, has:
A. has not violated any standard in the AIMR code of ethics.
B. none of these answers.
C. violated Standard III (E) - Responsibilities of Supervisors - by failing to check William's
behavior.
D. violated Standard III (B) - Duty to the Employer - by failing to check William's behavior.
That answer is correct!
Answer: A
Explanation:
Under Standard III (E) - Responsibilities of Supervisors, members must take reasonable care to
ensure that their subordinates do not violate any laws or the code of conduct. This includes
designing effective procedures to deter fraudulent activity. However, no amount of scrutiny can
prevent the cleverest of frauds. What is expected of the members is that they be diligent enough in
carrying out their duties. In the present case, given the facts, Emmy cannot be faulted for William's
criminal activity since she hasn't been found to be negligent in any way. Hence, she has not
violated Standard III (E) - Responsibilities of Supervisors nor any other standards.
QUESTION NO: 72
NL is a country with no securities laws. LS is a country that has securities laws that are less strict
than the AIMR code of ethics while MS has securities laws that are stricter than the code of ethics.
Which of the following is/are true?
I. A member who lives in NL must always follow the AIMR code.
II. A member who lives in MS is governed by the AIMR code.
III. A member lives in NL but does business in MS. If MS laws apply to her business transactions,
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QUESTION NO: 73
Because it is not the preferred method recommended by the PPS, the use of ________ valuation
needs to be disclosed.
A. new-date
B. settlement-date
C. trade-date
D. old-date
E. survivor-date
Answer: B
Explanation:
Trade-date valuation is recommended when calculating performance, although settlement-date
valuation is acceptable if disclosed.
QUESTION NO: 74
A critical part of Standard IV (A.2) is to distinguish between:
A. research reports and investment memoranda.
B. insider trading and appropriate trading.
C. CFA charterholders and non-CFA charterholders.
D. none of these answers.
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QUESTION NO: 75
When a manager is responsible for the portfolios of pension plans or trusts, the duty of loyalty is
owed to the ________.
A. beneficiaries
B. none of these answers
C. stockholders of the firm
D. investing public
E. entity who hires the manager
F. corporation
G. board of directors
H. manager's supervisor(s)
That answer is correct!
Answer: A
Explanation:
The first step in fulfilling a fiduciary duty is to determine what the responsibility is and to who it is
owed. Members should take particular care in determining the identity of the "client" to whom the
duty of loyalty is owed. In the context of an investment manager managing the portfolios of
pension plans or trusts, the client is not the person or entity who hires the manager but, rather, the
beneficiaries of the plan or trust. The duty of loyalty is owed to the beneficiaries.
QUESTION NO: 76
Brokers who knowingly or recklessly engage in excessive trading in customers' accounts are
known to be ________.
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QUESTION NO: 77
According to the AIMR-PPS, systems incompatibilities
A. causes distortion of performance presentation and needs to be disclosed.
B. are one reason for which a firm may not claim compliance for all assets.
C. cannot be used as a reason for not claiming compliance for all assets.
D. render a firm unable to claim compliance with the PPS, thus the firm should ensure
compatibility.
Answer: C
Explanation:
Systems incompatibilities cannot be used as a reason for not claiming compliance for all assets
(i.e., a firm cannot make the claim of compliance for only those assets that are measured and
monitored on compatible systems).
QUESTION NO: 78
Argus is a large-accounts money manager with a high-profile hedge fund. He manages all his
accounts in a very efficient manner and all his clients are satisfied with his performance. Argus has
one character flaw, though. He is given to making sexually inappropriate comments in mixed
company, touching female employees in inappropriate ways and cracking adult jokes loudly. This
makes many of the other employees uncomfortable in his presence. Argus
A. none of these answers.
B. has violated AIMR standard on professional incompetence.
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QUESTION NO: 79
When dealing with charitable organizations, the fiduciary must consider all of the following, except:
A. general economic conditions.
B. the charity's present and anticipated financial requirements.
C. investigation of supervisory activities once violation is known to have occurred.
D. long and short-term institutional needs in carrying out the charitable purpose.
E. expected total return on its investments.
F. trends in security price levels.
Answer: C
Explanation:
As fiduciaries for charitable organizations, members must consider: long and short-term
institutional needs in carrying out the charitable purpose, the charity's present and anticipated
financial requirements, expected total return on its investments, trends in security price levels and
general economic conditions. Investigation of violations involving supervisors is a compliance
procedure under Standard III (E), not under Standard IV (B.1), which deals with Fiduciary Duties.
QUESTION NO: 80
According to the Prudent Investor Rule, the trustee must:
- adhere to loyalty, impartiality and ________
- maintain overall portfolio risk at a reasonable level
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QUESTION NO: 81
Standard III includes which of the following?
A. Reasonable Basis and Representations
B. Preservation of Confidentiality
C. All of these answers
D. Performance Presentation
E. Use of Professional Designation
F. None of these answers
Answer: F
Explanation:
Standard III deals with Obligation to Inform Employer of Code and Standards, Duty to Employer,
Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and
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QUESTION NO: 82
The Prudent Man Rule states that the trustee must achieve an equitable balance between current
income and the ________ of principal in ________.
A. prudent management; in money markets
B. preservation; real terms
C. steady growth; nominal terms
D. preservation; nominal terms
E. prudent management; in fixed-income securities
F. steady growth; real terms
Answer: B
Explanation:
Under the Prudent Man Rule, trustees must be impartial between income beneficiaries and
remaindermen and must achieve an equitable balance between current income and the
preservation of principal in real terms.
QUESTION NO: 83
Standard IV (B.5), Preservation of Confidentiality states:
A. all of these answers.
B. none of these answers.
C. members must release information to AIMR when the Professional Conduct Program is holding
an investigation, unless there is a settlement agreement between the parties that stipulates
confidentiality.
D. if the information is confidential, even illegal activity may not be reported, because there is the
issue of trust between parties.
E. members should avoid disclosing any information received from a client except toauthorized
fellow employees who are also working for the client.
Answer: E
Explanation:
Under Standard IV (B.5), members shall preserve the confidentiality of information communicated
by clients within the scope of client-member or employer-member relationship, except when the
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QUESTION NO: 84
Since return results must be calculated on a basis that includes the effect of leverage, return
results must be restated to a(n) ________ basis.
A. margin
B. total asset
C. cash flow
D. all cash
E. multiple cash
Answer: D
Explanation:
Return results must be calculated on a basis that includes the effect of leverage, return results
must be restated to an all-cash basis when the portfolio used leverage and the same securities
could have been purchased at the same prices if the portfolio has the cash to do so. Results
should be restated to an allcash basis only when the necessary restatement can be based entirely
on actual transactions and can be verified in accordance with applicable account standards.
QUESTION NO: 85
Standard II (A) deals with ________.
A. Obligation to Inform Employer of Code and Standards
B. None of these answers
C. Professional Misconduct
D. Plagiarism
E. Use of Professional Designation
F. Duty to Employer
G. Disclosure of Conflicts to Employer
H. Fundamental Responsibilities
Answer: E
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QUESTION NO: 86
Which of the following is/are true about the PPS?
I. Accounts of clients that are not currently under the firm's management should not be included in
the presentation of the historical performance results.
II. Compliance with PPS cannot be met on a composite-by-composite basis, only on a firm-wide
basis.
III. The PPS require that firms report, at a minimum, at least the most recent 5 years (or since
inception, if less than 5 years) of performance results.
A. III only
B. I only
C. I and III only
D. II only
E. I, II and III
F. I and II only
G. II and III only
Answer: D
Explanation:
The PPS require that firms report, at a minimum, at least the most recent 10 years (or since
inception, if less than 10 years) of performance results. If this requirement cannot be met, exact
reasons for this should be disclosed. Historical results should be presented as is to give a fair
representation of past performance. Dropping portfolios selectively can bias the results. Also,
Compliance with PPS cannot be met on a composite-by-composite basis, only on a firm-wide
basis.
QUESTION NO: 87
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QUESTION NO: 88
When formulating an investment policy for a client, a member should take each of the following
into consideration, except:
A. investor constraints.
B. investor objectives.
C. disclose beneficial ownerships.
D. client identification.
Explanation: C
Disclosure of beneficial relationships is a procedural compliance under Standard IV (A.3).
Formulating an investment policy, however, is a priority according to Standard IV (B.2), under
which client identification, investor objectives and investor constraints must be considered.
QUESTION NO: 89
Which of the following can be found in Standard II?
A. Members shall make reasonable and diligent efforts to avoid any material misrepresentation in
any research report or investment recommendation.
B. Members must use the CFA designation in a dignified manner.
C. Members shall comply with any prohibitions on activities imposed by their employer if a conflict
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QUESTION NO: 90
Which of the following is/are forms of plagiarism as defined by AIMR code of conduct?
I. Using material from a seminar in research reports without proper acknowledgment.
II. Presenting statistical estimates prepared by others without the associated caveats and
qualifiers.
III. Using of information obtained in a teleconference without identifying the original source.
IV. Using Standard & Poor's estimates of stock betas without attribution.
A. I, II and IV only
B. I, II and III only
C. II, III and IV only
D. II and III only
Answer: B
Explanation:
Standard II (C) - Prohibition against Plagiarism - considers a use of factual information published
by recognized financial and statistical services without attribution acceptable. All of the others are
forms of plagiarism and violations of Standard II (C).
QUESTION NO: 91
Which of the following AIMR standards pertains to the responsibilities of supervisors?
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QUESTION NO: 92
Firms with records or performance calculations for periods prior to the applicable effective date(s)
that are not in conformance with the AIMR Performance Presentation Standards can still claim
compliance with the standards if certain conditions are met. Which of the following is an option
available to such a firm?
A. None of these answers are options available to such a firm.
B. All of these answers are options available to such a firm.
C. The firm can restate its historical performance in accordance with the Relaxed Retroactive
Standards for retroactive compliance.
D. The firm can use its nonconforming historical performance and disclose specifically when and
how the performance is not in compliance.
E. The firm can restate its historical performance numbers in accordance with the Standards.
Answer: B
Explanation:
Firms with records or performance calculations for periods prior to the applicable effective date(s)
that are not in conformance with the Standards can choose any of the options listed.
QUESTION NO: 93
When formulating an investment policy for a client, all of the following fall under "investor
constraints," except ________.
A. liquidity needs
B. regulatory and legal circumstances
C. risk tolerance
D. tax considerations
E. expected cash flows
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QUESTION NO: 94
Which of the following can be found in Standard I?
A. Members shall deliver a copy of the Code to their employer.
B. Members shall not participate in any professional conduct involving dishonesty, fraud, deceit,
etc.
C. Members shall not knowingly participate or assist in any violation of laws, rules or regulations.
D. Members shall exercise diligence and thoroughness in making investment recommendations or
in taking investment actions.
E. Members shall not misrepresent investment performance.
Answer: C
Explanation:
Standard I states that members shall: "A. Maintain knowledge of and comply with all applicable
laws of any governing agency or professional association governing the member's professional
activities, and B. Not knowingly participate or assist in any violation of laws, rules or regulations."
QUESTION NO: 95
AIMR Standard ________ prohibits plagiarism.
A. I (D)
B. IV (A)
C. None of these answers
D. II (C)
E. III (B)
Answer: D
Explanation:
Standard II (C) - Prohibition against Plagiarism states: "Members shall not copy or use, in
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QUESTION NO: 96
Fiduciaries are obligated to vote proxies:
A. none of these answers.
B. on an "as needed" basis, depending on the issue at hand.
C. only when there is a nonroutine governance issue.
D. only when there is a change in firm capitalization.
E. in an informed and responsible manner.
F. only when management requests the fiduciary to vote, in writing.
Answer: E
Explanation:
As part of a fiduciary's duty of loyalty, they are obligated to vote proxies in an informed and
responsible manner. A fiduciary who fails to vote, casts a vote without considering the impact of
the question or votes blindly with management on nongovernance issues may violate this duty of
loyalty.
QUESTION NO: 97
Standard III (E) is ________.
A. Obligation to Inform Employer of Code and Standards
B. Duty to Employer
C. Responsibilities of Supervisors
D. Disclosure of Conflicts to Employer
E. None of these answers
F. Disclosure of Additional Compensation Arrangements
Answer: C
Explanation:
Standard III (A) deals with the Obligation to Inform Employer of Code and Standards. Standard III
(B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to
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QUESTION NO: 98
Each ________ needs to comprise portfolios or asset classes that represent a similar investment
goal.
A. benchmark
B. value
C. return
D. composite
E. mix
Answer: D
Explanation:
All actual fee-paying discretionary portfolios must be included in at least one composite defined
according to similar strategy or investment objective.
QUESTION NO: 99
Chan and Chung are two of the five Managing Directors of Alfalfa, a mid-size hedge fund. In a
recent court case involving a securities lawsuit, Chan was called on to testify as an expert on
securities research. During his testimony, Chan had to invoke several results from a proprietary
research carried out by his staff at Alfalfa. He did so without specifically attributing the results to
them. At around the same time, Chung had to meet with a few prospective clients for a business
presentation. During this presentation, he showed them some of the results obtained by Chan's
team, without specifically acknowledging the research team. Instead, he referred to them with
phrases like, "our studies indicate that..." In this set of events, as it relates to Standard II(C) Prohibition against Plagiarism,
A. neither Chan nor Chung has violated the standard.
B. Chan has not violated the standard while Chung has.
C. both Chan and Chung have violated the standard.
D. Chan has violated the standard while Chung has not.
Answer: D
Explanation:
In the interactions with clients, senior management members represent the firm and as such, do
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A. I only
B. I & III
C. I, II & III
D. II only
E. III only
F. II & III
Answer: A
Explanation:
Adding a constant to each value in a sample increases the mean by the same constant. III is
incorrect. As the number of observations increases, it is the expected difference between the
sample mean and the population mean that decreases.
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Topic 3, Economics
QUESTION NO: 1215
The current exchange rate for French francs is $0.20. For a U.S. bank this is an example of:
A. An indirect quote in European terms
B. An indirect quote in American terms
C. A direct quote in American terms
D. A direct quote in European terms
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I. Free trade with low-wage countries will cause the wages of U.S. workers to fall because high
hourly wages mean higher per-unit labor cost while low hourly wages yield lower per-unit labor
costs.
II. Trade restrictions on the importation of goods produced by cheap foreign labor are a major
source of the high standard of living enjoyed by most U.S. workers
A. Both statements are false.
B. Both statements are true.
C. I is false, II is true.
D. I is true, II is false.
That answer is correct!
Explanation:
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A. the presence of legislated high minimum wages that price unskilled workers out of the market.
B. discouraged workers who quit looking for a job after extended periods of unsuccessful job
search.
C. inaccurate and costly information about job opportunities.
D. high unemployment benefits that reduce the incentive of unemployed workers to search for
employment.
Answer: C
Explanation:
Frictional unemployment results from a scarcity of information and the search activities of both
employers and employees for information that will help them make better employment choices.
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Topic 4
4,Financial Reporting and Analysis
QUESTION NO: 1514
Cash outflows for payment of cash dividends is an example of:
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919
In the above example, the firm's return on total equity equals ________.
A. 8.31%
B. 4.22%
C. 6.57%
D. 5.91%
Answer: C
Explanation:
Return on total equity = Net income/average total equity. In the above example, Net Income =
Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 573)*(1 - 0.35) = 2,459. Therefore, Return on total equity = 2,459/37,432 = 6.57%.
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A. $240,000
B. $190,000
C. $320,000
D. $165,000
E. $200,000
That answer is correct!
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1077
No estimates were changed during the life of the asset. The 1994 depreciation expense using the
sum-of-years'-digits (SYD) method was ________.
A. $13,333
B. $8,000
C. $10,667
D. $10,000
E. $6,000
Answer: B
Explanation:
SYD depreciation is calculated on a constant depreciable base equal to $40,000 ($50,000 original
cost -10,000 salvage value), multiplied by the SYD fraction. The denominator is the sum of the
digits of the total years of the expected useful life (1+2+3+4+5=15). The SYD fraction's numerator
equals the remaining years. For 1994, the fraction is 3/15, and depreciation expense is $8,000
($40,000 X 3/15).
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A. 7.262%
B. 6.231%
C. None of these answers
D. 12.461%
E. This problem has more than one MIRR
F. 14.606%
That answer is correct!
Answer: A
Explanation:
In this example, you are asked to calculate the Modified Internal Rate of Return for a project. In
calculating the MIRR for this project, the rent cost of $10,500 is ignored because this expense
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A. Project A NPV: $88,596.13, Project B NPV: $110,900.51, Project A has a steeper NPV profile
B. Project A NPV: $114,078.88, Project B NPV: $100,669.59, Project has B has a steeper NPV
profile
C. Project A NPV: $234,270.95, Project B NPV: $100,669.59 , Project A has a steeper NPV profile
D. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project B has a steeper NPV profile
E. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project A has a steeper NPV profile
Answer: D
Explanation:
Due to the fact that project B has the majority of its cash inflows coming in later periods, it is more
sensitive to changes in the cost of capital than is project A, which has the majority of its cash flows
coming in earlier periods. This is exemplified by a steeper NPV profile.
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A. 13.19%
B. 9.88%
C. 12.66%
D. 14.61%
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A. 0.58
B. 0.15
C. 0.23
D. 0.39
E. 1.00
That answer is correct!
Answer: A
Explanation:
Calculate coefficient of variation
Expected EPS conservative:
E(EPS) = 0.6($1.00) + 0.4($0.20) = $0.68.
Standard deviation
SD(EPS-Conservative) = [0.6($1.00 - $0.68)^2 + 0.4($0.20 - $0.68)^2]^1/2 = [0.0614 +
0.0922]^1/2 = 0.3919.
CV(Conservative) = 0.3919/0.68 = 0.576.
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A. 5.72%
B. 17.2%
C. 10.2%
D. 12.0%
E. 12.68%
F. 5.2%
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From the data provided, the expected standard deviation of returns for Kokomo is closest to:
A. 1.3%.
B. 2.5%.
C. 7.1%.
Answer: C
Explanation:
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Using the capital asset pricing model, determine which of the following statements is least likely
correct.
A. Cayman is overvalued.
B. Bonaire is undervalued.
C. Lucia is overvalued.
Answer: A
Explanation:
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A. Stock A
B. Stock B
C. Stock C
Answer: A
Explanation:
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= 20%
= 15%
= .0032
= 70%
= 30%
A. .1472.
B. .1832.
C. .0217.
D. .0096.
Answer: C
Explanation: Variance of two-stock portfolio =[++ 2=[(.7(.2+ (.3(.15+ (2)(.7)(.3)(.2)(.15)(.0032)] =
.0217
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Using the graph above and the information provided, determine which of the following statements
is TRUE.
A. Portfolio Y is undervalued.
B. The correct label for the x-axis is total risk.
C. Portfolio X's required return is greater than the market expected return.
D. The expected return (or holding period return) for Portfolio Z equals 14.8%.
Answer: D
Explanation: At first, it appears that we are not given the information needed to calculate the
holding period, or expected return (beginning price, ending price, or annual dividend). However,
we are given the information required to calculate the required return (CAPM) and since Portfolio Z
is on the SML, we know that the required return (RR) equals the expected return (ER). So, ER =
RR = Rf+ (ERM Rf) * Beta = 7.0% + (13.0% - 7.0%) * 1.3 = 14.8%.
The SML plots beta (orsystematic risk) versus expected return, the CML plots total risk (systematic
plus unsystematic risk) versus expected return. Portfolio Y is overvalued any portfolio located
below the SML has an RR > ER and is thus overpriced. Since Portfolio X plots above the SML, it
is undervalued and the statement should read, Portfolio Xs required return islessthan the market
expected return.
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A. undervalued by 1.1%.
B. overvalued by 3.7%.
C. overvalued by 1.1%.
D. undervalued by 3.7%.
Answer: C
Explanation: To determine whether a stock is overvalued or undervalued, we need to compare
the expected return (or holding period return) and the required return (from Capital Asset Pricing
Model, or CAPM).
Step 1: Calculate Expected Return (Holding period return):
The formula for the (one-year) holding period return is:
HPR = (D1+ S1 S0) / S0, where D = dividend and S = stock price.
Here, HPR = (0 + 55 45) / 45 = 22.2%
Step 2: Calculate Required Return:
The formula for the required return is from the CAPM:
RR = Rf+ (ERM Rf) * Beta
Here, we are given the information we need except for Beta. Remember that Beta can be
calculated with: Betastock= [covS,M] / [2M]. Here we are given the standard deviation of the
market, so the calculation is: 1.30 / 0.752= 2.31.
RR = 4.25% + (12.5 4.25%) * 2.31 = 23.3%.
Step 3: Determine over/under valuation:
The required return is greater than the expected return, so the security is overvalued. The amount
= 23.3% - 22.2% = 1.1%.
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Using the graph (along with the list of assumptions), determine which of the following statements
is CORRECT.
A. The expected return on Portfolio Y could be 15.00%.
B. The expected return on Portfolio Z is greater than the required return.
C. The required return on Portfolio X is 10.25%.
D. Portfolio X is overvalued.
Answer: C
Explanation: Note: RR = required return, ER = expected return.Remember that the SML graph
plots systematic, or beta, risk versus expected return. Thus, the numbers on the x-axis represent
beta. Using the Capital Asset Pricing Model (CAPM) equation, RR = Rf+ (ERM Rf) * Beta = 5.0%
+ (7.5%) * 0.7 = 10.25%.
Portfolio Y lies below the SML and is thus overvalued and the expected return must be less than
the required return. Using the CAPM, RR = Rf+ (ERM Rf) * Beta = 5.0% + (7.5%) * 1.0 = 12.50%.
(On the exam, you can quickly determine the RR for a portfolio/asset with a beta of 1.0 by adding
the risk-free rate and the market premium.) Since the ER must be less than the RR, the ER must
be less than 12.50% and cannot be 15.00%. Since Portfolio Z is on the SML, it is fairly valued and
RR = ER. Since Portfolio X lies above the SML, it isundervalued.
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R= 34%
S= 16%
rR,S= .67
WR= 80%
WS= 20%
A. 0.0056.
B. 0.0867.
C. 0.2944.
D. 0.0208.
Answer: C
Explanation: Standard deviation of a two-stock portfolio = [W1212+ W2222+
2W1W212r1,2]1/2=[(.8)2(.34)2+ (.2)2(.16)2+ 2(.8)(.2)(.34)(.16)(.67)]1/2= 0.29439
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As shown above, the beta for Country A is less than the beta for Country B. Country A is most
likely the emerging market because of its lower correlation with the U.S, the lower Beta, and the
higher risk (standard deviation).
Because of the low correlations with the U.S. market, adding either asset to a domestically-only
diversified portfolio will reduce risk. The principle of diversification holds even for risky assets.
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A. office building.
B. none of these answers.
C. condominium.
D. shopping center.
E. apartment complex.
Answer: B
Explanation:
All of the answers are income properties.
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A. Cost approach
B. Income approach
C. Current pricing approach
D. Comparative sales approach
Answer: A
Explanation:
Cost approach determines value by assessing how much it would cost to rebuild it at today's
prices for land, labor and construction methods.
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A. a low-load fund
B. an open-end fund
C. a no-load fund
D. a closed-end fund
Answer: D
Explanation:
The NAV and the market price of a closed-end fund are almost never the same, because closedend funds typically have market prices that has historically been a 5 to 20 percent discount to
NAV.
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Open-end investment funds or mutual funds continue to sell and repurchase shares after their
initial public offering. The total number of outstanding fund shares can change with time.
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A mutual fund is an open-end investment company. A closed-end investment company is the other
type of investment company. Its stock trades on a secondary exchange, and the stock price is
determined by market supply and demand. The company's asset is the portfolio that it invests in
securities.
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Some open-end funds charge sales fees for sales shares. The fees are typically 3.0 to 8.0% of
NAV. These load funds generally do not charge redemption fees. No-load funds sell shares at
their NAV, but some of them have small redemption fees of about 0.5% of NAV.
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Market index funds are closely matched in composition to specified market indexes such as the
S&P 500. For this reason, a market index fund typically has correlation rates in excess of 0.99 with
its chosen index. Because it only attempts to replicate the index, its management costs are very
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A. 10.40%
B. 14.79%
C. None of these answers is correct.
D. 12.14%
E. 11.73%
Answer: C
Explanation:
The anticipated rate of return for this stock market series is found as 13.68%. Thus, none of these
answers is correct.
To calculate the expected rate of return for a stock market series, the following information must
be known: The beginning value for the series, the anticipated ending value for the series, and the
amount of any dividends and/or distributions during the period.
Once this information has been determined, the expected return on a stock market index can be
found by employing the following equation: {E(R) = [(EV - BV + Div) / BV]}. Where E(R) = the
expected return on the stock market series, EV = the anticipated ending value for the series, BV =
the observed beginning value for the series, and Div = the amount of any dividends paid during
the period.
In this example, all of the necessary information has been provided and the calculation of the
expected return on this stock market series is found as follows: {E(R) = [$1890 - $1677 + $16.36] /
1677} = 13.68%.
This is significantly less than the required rate of return. Assuming that both the ending value and
dividend figure is accurate, investment in this stock market series is likely not warranted.
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A. Popularity of trading rules will eventually eliminate the value of the technique.
B. No one can consistently get new information and process it correctly and quickly.
C. All of these answers.
D. Fundamental analysts can only achieve superior returns if they obtain information before other
investors.
Answer: C
Explanation:
Under the heading 'advantages of technical analysis': there is a discussion on how technical
analysis relies more on tracking market movement than assimilating intrinsic market data, which is
advantageous perhaps because there is too much data accumulating too fast too be any help in
proficient forecasting. But technicians also recognize that new market tracking techniques have
short shelf lives.
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A. Earnings
B. Nominal GNP
C. None of these answers
D. Revenues
Answer: B
Explanation:
Regressing change in sales with change in GNP basically to find a relationship between GNP and
sales, so that GNP growth rate can be used to estimate future sales changes.
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A. $40.01
B. $27.25
C. none of these answers
D. $38.89
Answer: C
Explanation:
g = .10 k = .13 Dividend = 1.10 x $1.00
V = 1.10/(.13 - .10) = $36.67
A. $611.20
B. $584.20
C. $591.20
D. $604.20
E. Not enough information
Answer: B
Explanation:
Expected dividends equal 50 x 0.4 = $20. In order for a stock to be a good investment, its rate of
return should be equal to or greater than the required rate of return. The minimum ending value
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A. is not affected
B. increases
C. decreases
D. insufficient information given
Answer: B
Explanation:
Intuitively, it should be clear that the stock price rises since the profit margin has gone up and at
the same time, the percentage of equity holders has gone down. To see this mathematically, note
that the duPont system gives ROE = Profit margin * Total Asset Turnover * Financial Leverage. In
the present case, the ROE increases since profit margin and Financial Leverage have both
increased. The dividend growth rate, g, equals ROE*(1 - payout ratio). Hence, as ROE increases,
the dividend growth rate increases with a constant payout ratio. In the Dividend Discount Model,
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A. $65.81
B. $561.13
C. $56.67
D. $650.34
E. The answer cannot be calculated from the information provided.
F. None of these answers is correct.
Answer: B
Explanation:
When determining the value of a common stock using the free cash flow to equity model, it is
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A. II only
B. III only
C. I only
D. III & IV
E. I & IV
F. I & II
G. IV only
Answer: C
Explanation:
Dividend Discount Model assumes a constant growth in dividends but does not require the payout
ratio to be constant. Also, it is applicable only when the constant growth rate is lower than the
expected rate of return (It does not preclude the growth rate from exceeding the expected rate of
return over some periods. However, in that case, the formula that arises from the assumption of
constant growth rate cannot be used).
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A. is not affected.
B. decreases.
C. is not affected or increases.
D. increases.
Answer: D
Explanation:
In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). When k - g decreases, all
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A. Return on Equity
B. Debt to Equity Ratio
C. Dividend Yield
D. Return on Assets
E. Payout Ratio
Answer: C
Explanation:
The dividend yield = Dividends for the Year/Stock Price at the Beginning of the Year; It is one of
the two important measures of a stock investor's return, with the other being capital gain.
1656
A. decrease by 50%.
B. decrease by 15%.
C. increase by 30%.
D. decrease by 35%.
Answer: D
Explanation:
Use g = ROE * retention ratio and
ROE = profit margin * asset turnover * financial leverage.
If profit margin falls by 50% and asset turnover increases by 30%, the change in ROE is (10.5)*(1+0.3) - 1 = -0.35. With retention ratio constant, a 35% fall in ROE translates into a 35% fall
in dividend growth rate.
1657
A. $18.99
B. $45.54
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1658
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1659
1660
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1661
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1662
A. the number of downticks in the stock market divided by the number of upticks.
B. the total volume of increasing stocks plus half the volume of unchanged stocks, divided by the
total volume of decreasing stocks.
C. the number of stocks increasing divided by the number of stocks decreasing.
D. the total volume of increasing stocks divided by the total volume of decreasing stocks.
Answer: D
Explanation:
Technical analysts may use the ratio of upside-downside volume as an indicator of short-term
momentum for the market. They feel that a ratio value of 1.50 or more indicates that the market is
overbought, while a ratio of 0.70 or less indicates that the market is oversold.
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1663
1664
A. mature growth
B. pioneering development
C. rapid accelerating growth
D. deceleration of growth and decline
E. stabilization and market maturity
Answer: C
Explanation:
In this stage, there are a limited of number of firms for the product/service and demand is very
high enabling the firm to experience high markups.
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1665
A. The price/earnings figure experiences a tax leveraging effect that is not passed on to the EPS
figure.
B. The EPS figure is less volatile due to accounting manipulations and the malleability of
international and domestic accounting standards including GAAP.
C. The earnings multiplier is more sensitive to changes in dividend policies than is the EPS figure.
D. None of these answers is correct.
E. The price/earnings ratio is more sensitive to changes in the spread between the required rate of
return and the anticipated future growth rate.
F. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS
figure; i.e. the earnings multiplier is "forward looking."
Answer: E
Explanation:
The greater relative volatility of the earnings multiplier versus the EPS figure is primarily
attributable to an increased sensitivity to changes in the spread between the required rate of return
"k" and the anticipated growth rate "g." Remember that the equation used to determine the
appropriate earnings multiplier for a stock market series is the following:
P/E = [D/E / (k - g)]
Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at
t1, k = the required rate of return, and g = the anticipated growth rate of dividends.
As you can see, changes in the spread between the required rate of return and the anticipated
growth rate can have a dramatic effect on the earnings multiplier for a stock market series. While
the earnings multiplier is sensitive to changes in the dividend payout ratio, volatility in this figure is
not cause for the increased volatility of the earnings multiplier versus the EPS figure.
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1666
A. 6%
B. 5.7%
C. 5%
D. -8.3%
E. Not enough information.
Answer: C
Explanation:
The dividend payout ratio is equal to one minus the retention rate (1 - 0.6 = 0.4). Dividends are
equal to the dividend payout ratio multiplied by earnings (0.4 x 40 = $16). The rate of return is
equal to the ending price plus the dividend payments, divided by the beginning price, minus one.
In this question, the rate of return is [(110 + 16)/ 120] - 1 = 0.05 = 5%.
1667
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1668
A. Correlation analysis
B. Microanalysis
C. The bottom-up approach
D. Macroanalysis
E. Time series analysis
Answer: D
Explanation:
The answer called for in this example is macroanalysis. This method involves an examination of
the relationship between the earnings multiplier of a stock market series and the earnings
multiplier of the overall market. For example, an individual projecting an earnings multiplier for a
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1669
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1670
A. a bullish sign.
B. a bearish sign.
C. the result of low mutual fund cash positions.
D. a sign indicating a short-term, transient bull market.
Answer: B
Explanation:
A credit balance results when an investor sells stocks and deposits the proceeds with his broker.
Technical analysts view a decline in credit balances as a decrease in a pool of potential buying
power. For this reason, such a decline is viewed as a bearish sign.
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1671
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1672
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1673
A. The firm will enjoy above-average rates of return only if its price premium based on its
differentiation exceeds the extra cost of being unique.
B. None of these answers.
C. All of these answers.
D. The firm seeks to differentiate itself based on its distribution system, through some unique
marketing approach, or by providing an important service to its customers.
E. The firm seeks to identify itself as unique in its industry in an area that is important to buyers.
Answer: C
Explanation:
The above are all true for a company that has adopted the differentiation strategy. With the lowcost strategy, the firm is determined to become the low-cost producer and, hence, the cost leader
in the industry. Cost advantage might include economies of scale, proprietary technology, or
preferential access to raw materials. The objective is to charge less for the product or service but
still enjoy higher profit margins and returns on capital.
1674
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1675
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1676
1677
A. $2.01
B. $1.89
C. $1.75
D. $1.83
Answer: C
Explanation:
The dividend yield, defined as the expected dividend next period divided by current price, equals
D1/Po, in standard notation. Using the Dividend Discount Model, this is equal to k - g. With k =
9%, we get 3.2% = 9% - g. Therefore, g = 5.8%. The expected dividend next year is then equal to
1.65 * 1.058 = $1.75.
1678
A. 12.46
B. 10.26
C. 53.10
D. 15.59
E. 47.20
F. None of these answers is correct.
Answer: B
Explanation:
To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company,
use the following formula:
P/E = [(d1 / e1) / (k - g)]
Where: P/E = the earnings multiplier, d1 / e1 = the dividend payout ratio at t1, k = the required rate
of return, and g = the anticipated future growth rate.
In this example, all of the necessary information has been provided, but some rearranging is
necessary.
Specifically, the dividend payout ratio must be determined. This figure is found as follows:
Dividend payout ratio = [$1.18 / $4.60] = 0.256522, or 25.65%
Now that the dividend payout ratio has been determined, we can solve for the appropriate
earnings multiplier. The calculation of this figure is found as follows:
P/E = [0.2565 / (0.15 - 0.125)] = 10.26
In generally favorable economic conditions, this is a pretty realistic multiple for an average natural
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1679
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1680
A. $150.00
B. $187.50
C. Not enough information
D. $123.49
E. 230.54
Answer: B
Explanation:
The value of a preferred stock is the present value of its dividends, which is equal to the annual
dividend divided by the required rate of return. In this question, the annual dividend is equal to 150
x .15 = $22.5, and the preferred stock is worth $22.5/0.12 = $187.50
A. causes differences in the required rate of return among alternate types of investments.
B. causes differences in required rates of return among alternate types of investments and among
investments of the same type.
C. can be less than zero.
D. causes differences in the required rate of return among investments of the same type.
Answer: B
Explanation:
Every investment has its own risk premium, which may change over time. The required rate of
return on any security is equal to the risk-free rate of return plus the risk premium on that security.
Because the lowest possible required rate of return on any investment is the risk-free rate of
return, the risk premium cannot be less than zero.
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1681
A. III, VI
B. I, II, III, IV, V
C. I, II, IV
D. I, II, III
E. II, III, IV
Answer: C
Explanation:
The earnings multiplier, under the microanalysis approach, is estimated based on its three
components: the dividend payout ratio, the required rate of return, and the rate of growth. Under
the Macroanalysis approach, it is estimated from the relationships among the firm, its industry and
the market. The estimates derived from each approach are resolved to settle on one estimate.
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1682
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1683
A. $23.10
B. $20.26
C. $22
D. not enough information to calculate it
Answer: B
Explanation:
Bring both dividend and expected sale price to present value and sum the two: V = $1.10/1.14 +
$22.00/1.14 = $20.26
1684
1685
A. $16.44
B. The answer cannot be calculated from the information provided.
C. $18.20
D. None of these answers is correct.
E. $18.72
F. $21.14
Answer: E
Explanation:
Assuming that the quarterly dividend is to remain unchanged forever allows us to use the standard
perpetuity model, which is illustrated as follows:
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1686
1687
A. 19%
B. 11%
C. 6%
D. 4%
E. Not enough information
F. 13%
Answer: B
Explanation:
The expected growth rate of the firm is equal to the expected retention rate multiplied by the
expected return on equity. The return on equity is equal to the expected net profit margin
multiplied by theexpected total asset turnover multiplied by the expected financial leverage
multiplier (0.16 x 0.94 x 1.13 = 0.17). The expected retention rate is equal to 1 minus the expected
dividend payout ratio (1 - 0.34 = 0.66). In this question, the expected growth rate is equal to 0.66 x
0.17 = 0.11 = 11%
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1688
A. 12.8%
B. 12.2%
C. 13.7%
D. 14.0%
E. 11.9%
Answer: C
Explanation:
Expected industry return = (Index estimate - Current index + Dividend) / Current index = (330 292.95 + $3.00) / 292.95 = 13.7%
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1689
A. $5,733
B. $4,173
C. $5,929
D. $6,841
E. $7,126
F. Not enough information
Answer: B
Explanation:
The value of a zero-coupon bond is equal to the present value of its principal payment. The
required rate of return on a riskless bond is the risk-free rate of return. Usingappendix C in the
book by Reilly & Brown, the present value of the bond is $10,000 x0.4173 = $4,173, or
$10,000/(1.06^15).
A. 8.5%
B. 9.0%
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1690
A. The price/earnings ratio is less insulated from accounting distortions than is the EPS figure.; i.e.
it is harder to "normalize."
B. None of these answers is correct.
C. The EPS figure is subject to a deleveraging effect caused by changes in the capital structure.
D. The earnings multiplier is more sensitive to changes in the spread between the required return
and growth.
E. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS
figure; i.e. the earnings multiplier is "forward looking."
F. The price/earnings ratio is more sensitive to increases in a companies dividends.
Answer: D
Explanation:
The greater relative volatility of the earnings multiplier versus the EPS figure is primarily
attributable to an increased sensitivity to changes in the spread between the required rate of return
"k" and the anticipated growth rate "g." Remember that the equation used to determine the
appropriate earnings multiplier for a stock market series is the following:
P/E = [D/E / (k - g)]
Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at
t1, k = the required rate of return, and g = the anticipated growth rate of dividends.
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1691
A. 13.4%
B. 9%
C. 12.8%
D. Not enough information
E. 15%
Answer: E
Explanation:
The infinite period Dividend Discount Model claims that the current price of a common stock is
equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required
rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step
further by dividing both sides of the infinite period Dividend Discount Model equation by expected
earnings during the next 12 months, yielding P/E = (D1/E) / (k - g). Rearranging this results in g =
k - (D1/E) / (P/E). In this question, the dividend growth rate is equal to 0.19 - 0.6/15 = 0.15 = 15%
1692
1693
A. 0.43
B. Not enough information
C. 0.46
D. 0.79
E. 0.68
Answer: E
Explanation:
The infinite period Dividend Discount Model claims that the current price of a common stock is
equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required
rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step
further by dividing both sides of the infinite period Dividend Discount Model equation by expected
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1694
A. $35.68
B. Not enough information
C. $37.74
D. $29.41
E. $33.32
F. $34.95
Answer: E
Explanation:
In order for the stock to be correctly priced, the present value of next year's dividend plus the
present value of the stock price right after the dividend must equal the current price. In this
question, 29.34 = (1.3 / 1.18) + (next year's price / 1.18). Rearranging this yields next year's price
= [29.34 - (1.3/1.18)] x 1.18 = $33.32.
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1695
A. the current day's closing price is higher than the previous day's closing price.
B. the current day's opening price is higher than the previous day's opening price.
C. the current day's closing price is higher than or equal to the previous day's closing price. * the
current day's opening price is higher than or equal to the previous day's opening price.
D. the current transaction price is higher than the last transaction price.
Answer: D
Explanation:
An uptick is simply when the current transaction price is higher than the last transaction price.
1696
A. $725.40
B. $742.40
C. Not enough information
D. $726.40
E. $758.40
Answer: D
Explanation:
The dividend payout ratio is equal to one minus the retention rate (1 - 0.4 = 0.6). Expected
dividends are equal to the dividend payout ratio multiplied by expected earnings (0.6 x 80 = $48).
In order for a stock to be a good investment, its rate of return should be equal or greater than the
required rate of return.The minimum ending value that would make the stock investment in this
question profitable is given by the equation (P2 + D) / P1 = 1 + k, where P2 is the ending value, P1
is the beginning value, D is the expected dividend, and k is the required rate return. Rearranging
this yield P2 = ((k + 1) x P1) - D. In this question, the minimum ending value is (1.21 x 640) - 48 =
$726.40.
A. 19%
B. Not enough information
C. 26%
D. 31%
E. 14%
Answer: C
Explanation:
The value of a preferred stock is the present value of its dividends, which is equal to the annual
dividend divided by the required rate of return. Rearranging this, the required rate of return is
equal to the dividend divided by the stock price. In this question, the required rate of return is
equal to 6/23 = 0.26 = 26%.
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1697
1698
A. Correlation analysis
B. Microanalysis
C. The bottom-up approach
D. Time series analysis
E. Macroanalysis
Answer: E
Explanation:
The answer called for in this example is macroanalysis. This method involves an examination of
the relationship between the earnings multiplier of a stock market series and the earnings
multiplier of the overall market. For example, an individual projecting an earnings multiplier for a
software index using macroanalysis would begin by examining the relationship between the P/E
ratio of the software index and the P/E ratio of a broad market index such as the Standard & Poors
500. Both historical trends and point estimates would be examined, and from this information, a
projection of the earnings multiplier for the stock market series is deduced. This is precisely the
process illustrated in this example.
This is contrasted by microanalysis, which involves an examination of the components of the
earnings multiplier, including the anticipated growth rate of dividends, the required rate of return,
and the dividend payout ratio. Once these variables have been examined, both from the
perspective of trend analysis and point estimation, a value for the earnings multiplier is deduced.
The bottom-up approach is used in the investment selection process, and involves identifying
superior investments by first examining companies, rather than beginning with an examination of
macroeconomic cycles and influence. Time series analysis, while materially correct, does not
represent the best possible answer.
L1 SS 13
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1699
A. 19.24%
B. None of these answers is correct.
C. 12.23%
D. 24.41%
E. 22.60%
Answer: E
Explanation:
To calculate the expected rate of return for a stock market series, the following information must
be known:
The beginning value for the series, the anticipated ending value for the series, and the amount of
any dividends and/or distributions during the period.
Once this information has been determined, the expected return on a stock market index can be
found by employing the following equation: {E(R) = [(EV - BV + Div) / BV]}. Where: E(R) = the
expected return on the stock market series, EV = the anticipated ending value for the series BV =
the observed beginning value for the series, and Div = the amount of any dividends paid during
the period.
In this example, all of the necessary information has been provided and the calculation of the
expected return on this stock market series is found as follows: {E(R) = [$11,800 - $10,050.14 +
$521]/10,050} = 22.60%. This figure is significantly higher than the required rate of return.
Assuming that the anticipated ending value and expected dividends prove accurate, investment in
this stock market series is likely advisable.
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1700
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1701
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1702
A. $130
B. The Infinite Period DDM will produce a nonsensical answer in this case.
C. $146
D. $110
E. $89
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1703
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1704
A. Inflation
B. Unit labor costs
C. Capacity utilization rates
D. Foreign competition
Answer: C
Explanation:
Higher capacity utilization rates intuitively improves operating margin because of economies of
scale, though up to certain volume whereby typically there will be some diminishing returns.
1705
1706
1707
A. $24.64
B. $83.44
C. None of these answers is correct.
D. $54.60
E. The answer cannot be calculated from the information provided.
F. $99.34
Answer: C
Explanation:
When determining the value of a common stock using the free cash flow to equity model, it is
necessary to determine three things:
1. The required rate of return on equity investments.
2. The estimated free cash flow to equity multiple at time "k."
3. The estimated free cash flows figures for the time periods leading up to "k."
In this example, the calculation must begin with the discounting the free cash flow to equity figures
for each of the four years provided. These figures are discounted each period by the required
return on equity investments, and the final answer is converted to a per-share basis. This process
is illustrated below:
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1708
1709
A. holds that superior returns can be gained from the use of fundamental economic and company
variables.
B. holds that past stock performance has no influence on future performance.
C. holds that past market price and volume data can be used to predict future performance.
D. is supported by the efficient market hypothesis.
Answer: C
Explanation:
Technical analysis, in contrast to the efficient market hypothesis and fundamental analysis, holds
that past price and volume data can be used to discover market trends that can predict future
market behavior. Technical analysts believe that "the market is its own best predictor."
A. $10.00
B. $12.00
C. $120.00
D. $15.00
E. $55.00
F. $150.00
Answer: E
Explanation:
The infinite period Dividend Discount Model indicates that:
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1710
A. The price-to-earnings ratio is less insulated from accounting distortions than is the EPS figure;
i.e. it is harder to "normalize."
B. The earnings multiplier is more sensitive to fluctuations in the equity markets than is the EPS
figure; i.e. the earnings multiplier is "forward looking."
C. The EPS figure is subject to a deleveraging effect caused by changes in the capital structure. *
None of these answers is correct.
D. The P/E ratio is more sensitive to increases in a company's dividends.
E. The earnings multiplier is more sensitive to changes in the spread between "k" and "g."
Answer: E
Explanation:
The greater relative volatility of the earnings multiplier versus the EPS figure is primarily
attributable to an increased sensitivity to changes in the spread between the required rate of return
"k" and the anticipated growth rate "g." Remember that the equation used to determine the
appropriate earnings multiplier for a stock market series is the following:
{P/E = [D/E / (k - g)]}
Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at
t1, k = the required rate of return, and g = the anticipated growth rate of dividends.
As you can see, changes in the spread between the required rate of return and the anticipated
growth rate can have a dramatic effect on the earnings multiplier figure for a stock market series.
While the earnings multiplier is sensitive to changes in the dividend payout ratio, volatility in this
figure is not cause for the increased volatility of the earnings multiplier versus the EPS figure.
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1711
A. Given a small decrease in the real risk-free rate, a large increase in the risk premium for a
stock, and a large decrease in the return on equity, one would expect the required rate of return on
the stock to increase, the growth rate to decrease, and the earnings multiplier to increase.
B. Given a large decrease in the rate of inflation and the risk premium for a stock, and a large
increase in the return on equity, one would expect the required rate of return on the stock to
decrease, the growth rate to increase, and the earnings multiplier to increase.
C. Given a large increase in the rate of inflation, a small decrease in the risk premium for a stock,
and a large decrease in the return on equity, one would expect the required rate of return on the
stock to decrease, the growth rate to decrease, and the earnings multiplier to decrease.
D. Given a small increase in the rate of inflation, a small increase in risk premium for a stock, and
a larger decrease in the return on equity, one would expect the required rate of return on the stock
to increase, the growth rate to decrease, and the earnings multiplier to increase.
Answer: B
Explanation:
The direction of change approach to estimating an earnings multiplier begins with the current
earnings multiplier and estimates the direction of change for the dividend payout ratio and the
variables that influence the required rate of return and growth rate. The required rate of return is
positively correlated with the real risk-free rate, the rate of inflation, and the risk premium. The
growth rate is positively correlated with the return on equity and earnings retention rate. The
earnings multiplier is positively correlated with the growth rate, and negatively correlated with the
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1712
A. $3,165
B. $1,895
C. $2,675
D. $2,440
Answer: C
Explanation:
You should be careful in solving such a problem.
Suppose the firm invests $1,000 today in a project. This first project generates a constant stream
of perpetuity with an annual payment of $1,000 * 0.17 = $170. The present value of this stream is
170/0.13 = $1,307.6. The NPV of the project is then $1,307.6 - $1,000 = $307.6. Since the firm
does this every year, it has a perpetuity of $307.6 (the NPVs of projects 2 and on, at the time the
projects are started).The present value of these NPVs is $307.6/0.13 = $2,367. Thus, the total
value of the firm is $2,367 + $307.6 (first project) = $2,675.
1713
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1714
A. 18.22
B. 23.16
C. 11.59
D. 13.62
Answer: B
Explanation:
The Dividend Discount Model implies that the firm's price-to-earnings ratio is given by Po/E1 =
(D1/E1)/(k-g) = (dividend payout ratio)/(k-g), using standard notation.
The dividend growth rate is given by g = ROE*(1-dividend payout ratio).
ROE = net income/common equity = (net income/sales)*(sales/assets)*(assets/equity) = profit
margin * asset turnover*(1 + debt / equity) = 0.15 * 1.3*(1+0.2) = 23.4%.
Therefore, g = 23.4%*(1-63%) = 8.66%.
The CAPM expected rate of return on the stock is equal to the risk-free rate plus beta times the
market premium. So the expected return on the stock is 6.4% + 0.79 * 6.3% = 11.38%. Therefore,
the price-to-earnings ratio equals 0.63/(11.38 - 8.66)% = 23.16.
1715
A. the question is based on a false premise. Dow Jones is an index and does not have an
associated "earnings per share."
B. will increase in value.
C. will decrease in value.
D. may increase or decrease in value.
Answer: D
Explanation:
The index value = earnings multiplier * earnings per share.
Even if the earnings per share fall, the earnings multiplier can increase if the outlook for future
earnings improves. Hence, a decrease in the earnings itself does not automatically imply that the
Dow Jones will fall.
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1716
1717
A. high inflation.
B. low inflation.
C. international stability.
D. high consumption levels.
E. international crisis.
Answer: E
Explanation:
The T-bill - Eurodollar yield spread can be used as a measure of global investor confidence.
During periods of international crisis, it is believed that the spread will widen as money flows back
into safe U.S. T-bills.
A. 50
B. Not able to compute with the above data.
C. 12.5
D. 125
Answer: C
Explanation:
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1718
A. $16.43
B. The answer cannot be determined from the information provided.
C. $6.25
D. $17.03
E. $6.94
Answer: E
Explanation:
To determine the value of a common stock using the Infinite Period Dividend Discount Model, use
the following equation:
{V = [d1 / (k - g)]}
Where: V = the value of the common stock at t0, d1 = the annual dividend at t1 (which is found by
multiplying d0 by (1 + g), k = the investor's required rate of return, and g = the anticipated annual
growth rate.
In this example, all of the necessary information has been provided, and incorporating this
information will lead to the following:
{V = [($0.25 * 1.11) / (0.15 - 0.11)] = $6.94
This value is significantly less than the price of the shares in the open market. While at first it may
be appealing to assume that the common stock is overvalued, this may be a dangerous
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1719
A. the total number of share prices on an exchange increasing divided by the number of share
prices decreasing. Technical analysts consider ratio values of 2.00 or greater to be indicative of an
oversold market.
B. the total volume of shares increasing on an exchange divided by the total volume of shares
decreasing. Technical analysts consider ratio values of 1.25 or greater to be bullish.
C. the total volume of shares increasing on an exchange divided by the total volume of shares
decreasing. Technical analysts consider ratio values of 0.70 or less to be indicative of an oversold
market.
D. the total number of share prices on an exchange increasing divided by the number of share
prices decreasing. Technical analysts consider ratio values of 1.25 or greater to be indicative of
excessive market speculation.
E. the total number of share prices on an exchange increasing divided by the number of share
prices decreasing. Technical analysts consider ratio values of 2.00 or greater to be indicative of
excessive market speculation.
Answer: C
Explanation:
Technicians use the upside-downside volume ratio as an indicator of short-term momentum for the
market. The ratio typically ranges between 0.50 and 2.00. Ratio values of 1.25 or greater are
viewed as bearish, while values of 0.70 or less are viewed as bullish.
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1720
A. $13.93
B. The answer cannot be calculated from the information provided.
C. $15.23
D. $10.86
E. $10.02
F. None of these answers is correct.
Answer: D
Explanation:
In this example, the growth rate of dividends is assumed to remain stable, allowing the use of the
Gordon Model. The Gordon Model is also known as the "constant growth dividend discount model"
and takes the following form:
P0 = [D1 / (r - g)]
Where
P0 = the price of common stock X at time 0
D1 = the expected dividend at t1
r = the required rate of return on equity investments and g = the expected growth rate of dividends.
Since the dividend at t1 is not provided, we must calculate it manually by multiplying the dividend
at t0 by (1 + g). This will produce an answer of $0.3857 at t1.
Now that the dividend at t1 has been determined, the given information can be put into the
equation provided, leading to the following series of calculations:
P0 = [$0.3857 / (.1375 - .1020)] = $10.86.
When using the Gordon model, remember that the required rate of return "r" must be greater than
the expected growth rate "g." Otherwise, the equation will produce a nonsensical answer.
1721
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1722
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1723
1724
A. +12.14%
B. + 18.98%
C. -34.43%
D. -23.5%
Answer: C
Explanation:
Use g = ROE * retention ratio
ROE = profit margin * asset turnover * financial leverage.
The change in ROE equals (1-25%)*(1-15%)*(1+20%) - 1 = -23.5%. The retention ratio decreases
from 70% to 60%. Therefore, the change in the growth rate equals (1-23.5%)*60/70 - 1 = -34.43%.
Thus, the growth rate falls by 34.43%.
1725
A. A; 8.8%
B. A; 9.35%
C. B; 9.0%
D. none of these answers
Answer: C
Explanation:
With fund A, a deposit of $100 will give you shares worth $93 after the load charge is taken into
account. This amount is expected to grow to 93*(1+0.17) = $108.81. Thus, the net return with fund
A is expected to be 8.8%. Hence, for a 1-year horizon, you should select fund B, which is
expected to return 9%.
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1726
A. $44.74
B. $46.29
C. None of these answers is correct.
D. $35.69
E. The answer cannot be calculated from the information provided.
F. $39.02
Answer: F
Explanation:
When determining the value of a common stock using the free cash flow to equity model, it is
necessary to determine three things:
1. The required rate of return on equity investments.
2. The estimated free cash flow to equity multiple at time "k."
3. The estimated free cash flows figures for the time periods leading up to "k."
In this example, the calculation must begin with the discounting the free cash flow to equity figures
for each of the four years provided. These figures are discounted each period by the required
return on equity investments, and the final answer is converted to a per-share basis. This process
is illustrated below:
Year 1: ($2,000,000 / 1.1625) / 2,500,000 shares outstanding = $0.69
Year 2: [$3,500,000 / (1.1625)(1.1625)] / 2,500,000 shares outstanding = $1.04
Year 3: [$4,500,000 / (1.1625)(1.1625)(1.1625)] / 2,500,000 shares outstanding = $1.15
Year 4: [$5,000,000 / (1.1625)(1.1625)(1.1625)(1.1625)] / 2,500,000 shares outstanding = $1.10
Now that the free cash-flow-to-equity figures have been discounted and converted to a per-share
basis, the next step in the valuation process is to determine the value of the final cash flow, which
is defined as:
[(Free cash flow to equity multiple * Final free cash flow) / (1 + r)(1+r)...(1 + k)]
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1727
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1728
A. $50
B. none of these answers
C. $99
D. $75
Answer: B
Explanation:
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1729
A. $34.54
B. $28.28
C. $46.90
D. The answer cannot be determined from the information provided.
E. $49.90
F. None of these answers is correct.
Answer: E
Explanation:
To determine the value of a common stock experiencing temporary supernormal growth, use the
following equation:
{V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k
- g)}/ (1 + k)^n}}
Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn =
the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the
time period "n", and k = the required rate of return.
In this example, there is a transitional growth period of two years, during which the growth rate of
this stock is expected to grow at 15% annually. This period will follow the two-year supernormal
growth period, and would be denoted as "g subset t" if we were to reproduce the equation
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1730
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1731
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1732
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1733
1734
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1735
A. 8%
B. 12%
C. 11.2%
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1736
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1737
1738
A. $28.32
B. $40.00
C. $35.93
D. Not enough information
E. $34.71
Answer: E
Explanation:
The dividend discount model (Dividend Discount Model) assumes that the value of a share of
common stock is the present value of all future dividends. In this question, the value of a share of
common stock is equal to 20/(1 +0.10) + 20 /[(1 + 0.10)^2] = $34.71.
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1739
A. 7.19
B. information about earnings and dividends is missing
C. 6.66
D. 4.32
Answer: C
Explanation:
According to the Dividend Discount Model, P/E = payout ratio/(k-g) in standard notation. A no
growth firm has a retention ratio of zero and a payout ratio of 1. Further, g = 0 for no growth.
Therefore, the P/Eratio of a no-growth firm is simply equal to the reciprocal of its required rate of
return. the firm's CAPM required rate = 5% + 1.3 * 7.7% = 15%. The earnings multiplier is
therefore equal to 1/0.15 = 6.66.
1740
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1741
A. 1.75%
B. 4.0%
C. 10%
D. 2.5%
Answer: B
Explanation:
In the usual notation, Po = D1/(k-g) and D1 = Do*(1+g). Hence, Po = Do*(1+g)/(k-g).
The dividend growth rate of A equals 2 * 2% = 4%. We have been given PoA = PoB. Therefore,
DoA*(1 + 4%)/(kA - 4%) = DoB*(1 + 2%)/(kB - 2%). Also, DoA = 0.5* DoB and kA = 5%. Thence,
0.5 * 1.04/(5% - 4%) = 1.02/(kB - 2%). Solving for kB gives the expected return on B equal to
3.96%
A. international
B. none of these answers
C. micro
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1742
A. a bullish sign.
B. impossible.
C. an unimportant sign.
D. a bearish sign.
Answer: B
Explanation:
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1743
A. 18.22%
B. None of these answers is correct.
C. 15.42%
D. The answer cannot be calculated from the information provided.
E. 15.07%
F. 17.70%
Answer: B
Explanation:
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its
answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this
name is commonly used within the field of investment management. In the determination of the
dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each
period. This process is illustrated as follows:
t0: {-[1,000 shares purchased * $40 per share] = [$40,000.00]
t1: {-[ 400 shares purchased * $49.75 per share] + [$0.78 per share dividend * 1,000 shares] =
[$19,120]
t2: {-[400 shares purchased * $55.90 per share] + [$0.78 per share dividend * 1,400 shares]} =
[$21,268]
t3: {[1000 shares sold * $59.50 per share] + [800 shares sold * $60.25 per share] = $107,700.00
Now that the cash flows have been determined, incorporating this information into your calculator's
cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 13.70% for
this investment, which is none of the answers provided.
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1744
1745
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1746
A. 6.9%
B. Not enough information
C. 18.3%
D. 14.8%
E. 12.9%
Answer: E
Explanation:
The infinite period Dividend Discount Model postulates that the current value of a common stock is
equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is
the growth rate of dividends. Rearranging this yields k = D1/(current value) + g. In this question,
the required rate of return is (2 / 29) + 0.06 = 0.129 = 12.9%.
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1747
A. 1.39
B. 0.939
C. 1.02
D. Not enough information
E. 0.839
Answer: B
Explanation:
The growth rate of a firm is equal to expected retention rate of earnings multiplied by its expected
ROE. The retention rate is equal to 1 - dividend payout ratio (1 - 0.25 = 0.75). The ROE is thereby
equal to the growth rate divided by the retention rate (0.08 / 0.75 = 0.107). The ROE can be set
equal the profit margin multiplied by the total asset turnover multiplied by financial leverage.
Rearranging this yields that the total asset turnover is equal to the ROE divided by the profit
margin and the financial leverage: 0.107 / (0.12 x
0.95) = 0.939.
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1748
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1749
1750
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1751
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1752
A. real premium
B. risk rate
C. bond rate
D. risk premium
Answer: D
Explanation:
Investors demand higher return for riskier investments and thus require a higher rate of return on
them.
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1753
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1754
1755
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1756
A. $28.51
B. $23.94
C. $34.91
D. $41.84
E. Not enough information
Answer: E
Explanation:
In order to estimate the value of the stock using the earnings multiplier model, one will eventually
have to multiply the P/E ratio by next year's earnings (E). The P/E ratio can be determined with the
information presented in this problem, but E cannot be.
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1757
A. is determined by the expected dividend payout ratio, the return on capital, and the expected
growth rate of dividends for that stock. The earnings multiplier tends to be rather stable between
stocks and industries, and does not vary significantly over time.
B. is determined by the expected dividend payout ratio, the required rate of return, and the
expected growth rate of dividends for that stock. The earnings multiplier tends to vary considerably
between stocks and industries, and over time.
C. is determined by the expected earnings, the required rate of return, and the expected growth
rate of dividends for that stock. The earnings multiplier tends to vary between stocks and
industries, but is rather stable over time.
D. is determined by the expected dividends, the required rate of return, and the expected growth
rate of dividends for that stock. The earnings multiplier tends to vary considerably between stocks
and industries, and over time.
Answer: B
Explanation:
The earnings multiplier (or price/earnings ratio) is equal to the expected dividend payout ratio,
divided by the spread between the required rate of return and growth rate of dividends on the
stock. Estimation of the earnings multiplier is important because it varies between stocks and
industries as well as over time. It, along with future earnings, is used to estimate the future market
value of stocks or stock market series.
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1758
A. 12.5
B. None of these answers
C. 8.5
D. 10
Answer: D
Explanation:
The price/earnings ratio can be computed by dividing the expected dividend payout ratio
(dividends divided by earnings) by the required rate of return (k) minus the expected growth rate of
dividends (g).
In this case, P/E = .50/(.14-.09) = 10
1759
1760
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1761
A. stable
B. costly
C. volatile
D. inaccurate
Answer: C
Explanation:
Net profit margin for a market series is difficult to estimate because it is highly volatile, a result of
changes in depreciation, interest and tax rate over time.
A. $43.00
B. Not enough information
C. $32.48
D. $39.18
E. $29.66
F. $14.12
Answer: C
Explanation:
According to the earnings multiplier model, the price/earnings ratio is equal to the dividend payout
ratio divided by the spread between the required rate of return and the expected growth rate. The
dividend payout ratio is equal to 1 - the retention rate of earnings (everything the firm does not
retain is paid out in dividends). In this question, it is 1 - 0.30 = 0.70. The P/E ratio is thus equal to
0.70 / (0.17 - 0.12) = 14. Multiplying the P/E ratio by earnings per share yields the current market
price. In this question, it is 14 x
2.32 = $32.48.
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1762
A. -12.62%
B. +14.45%
C. -3.67%
D. +3.81%
Answer: D
Explanation:
Stock price = earnings multiplier * earnings per share. Therefore, the earnings multiplier will have
to increase by 1.09/1.05 - 1 = 3.81%.
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1763
A. a bearish signal.
B. none of these answers.
C. a hold signal.
D. a bullish signal.
Answer: D
Explanation:
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1764
1765
A. Gauss-Markowitz
B. market driven
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1766
1767
A. imitation of the trading patterns of astute investors will lead to superior returns.
B. technical analysis is false.
C. the majority of investors are wrong as the market approaches peaks and troughs.
D. it is always best to trade against the general market sentiment.
Answer: C
Explanation:
Contrary-opinion rules are technical trading rules that work on the assumption that the majority of
investors are wrong as the market approaches peaks and troughs. Technical analysts try to
determine when the majority of investors are either very bullish or bearish, and then trade in the
opposite direction.
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1768
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1769
A. 4.29; $21.43
B. 6.00; $30.00
C. 6.00; $120.00
D. The answer cannot completely be determined from the information provided.
E. None of these answers is correct.
F. 4.29; $53.63
Answer: D
Explanation:
The answer cannot completely be determined from the information provided. Specifically, while the
appropriate earnings multiplier can be found from the given information (and it is found as 4.29),
the correct value for the series cannot be determined without an estimation of EPS at t1. The
following explains the derivation of the earnings multiplier for a stock market series.
Estimating the earnings multiplier for a stock market series requires the estimation of each of the
following components:
1. The dividend payout ratio.
2. The required rate of return on common stock in the country/region/industry/sector being
analyzed.
3. The expected growth rate of dividends for the stocks in the country/region/industry/sector being
analyzed.
Once values for each of these components have been determined, they are imputed into the
following formula:
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1770
A. base; ceiling
B. support; resistance
C. sell; buy
D. bottom; top
Answer: B
Explanation:
Increase demand will resist price falls, so when a price falls to a level which triggers strong
demand - the price will not fall below this support level. Resistance level is a price range where
trade activity in that stock will tend to reverse the price trend - this is usually due to investors
having set a target price range for trade execution.
1771
A. $8.64
B. $75.45
C. $85.71
D. Not able to compute with the above data.
Answer: C
Explanation:
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1772
A. opportunity costs
B. required rate of return
C. all of these answers
D. risk-return preferences
Answer: B
Explanation:
Typically one invests in order to get a series of returns in the future, to discount these future
returns to net present value (NPV), one must use a discount rate, which is the rate one requires
the investment to yield.
Using this discount rate, one can then compare the NPV with the market price to determine if the
investment is attractive.
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1773
A. 8.5
B. 12.5
C. 10
D. None of these answers
Answer: B
Explanation:
The P/E ratio is calculated as: P/E = (D/E)/(k - g). In this case P/E = 0.5/(0.13 - 0.09) = 12.5
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1774
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1775
A. Porter method
B. Microanalysis
C. Macroanalysis
D. Sensitivity analysis
E. Simulation analysis
F. None of these answer is correct.
Answer: B
Explanation:
The method profiled in this example is "microanalysis," which is one of two methods for estimating
the earnings multiplier of an industry. Microanalysis involves examining the variables underlying
theearnings multiplier - the required rate of return, the growth forecast, and the dividend payout
ratio. In microanalysis, these variables are examined for the industry and then compare them with
the values of these variables for the entire market.
The microanalysis method is contrasted by the macroanalysis method, which involves examining
the historical relationship between the earnings multiplier of an industry with that of the overall
market. Macroanalysis forecasts often use a time series.
When examining and forecasting an industry earnings multiplier, it is recommended that both
macroanalysis and microanalysis be used. This should produce a more reliable answer.
"Simulation analysis," and "scenario analysis," are methods of measuring stand-alone risk, and the
"Porter Method" is used to measure industry competition.
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1776
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1777
A. Minority
B. Selling
C. Short
D. None of these answers
Answer: C
Explanation:
The short interest is the cumulative number of shares that have been sold short by investors and
not covered. Technicians consider a high short-interest ratio bullish because it indicates potential
demand when those who previously sold short must cover their sales.
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1778
A. 1.68%
B. 3.44%
C. None of these answers is correct.
D. 5.44%
E. The answer cannot be calculated from the information provided.
F. (3.34%)
Answer: B
Explanation:
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its
answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this
nomenclature is commonly used within the field of investment management. So said, the required
rate of return is not explicitly factored into the calculation of the dollar-weighted rate of return,
rather what is being determined
is the rate which equates the present value of the cash inflows to the present value of the cash
outflows. In the determination of the dollar-weighted rate of return calculation, the first step should
be to identify the cash flows for each period. In this example, the cash flows have been stated, and
little calculation is necessary. The cash flows associated with this series of investments are
illustrated as follows:
t0: ($5,545.00)
t1: [($3,229.50 paid for the bonds) + $300.00 coupon payment] = ($2,929.50)
t2: [($3,185.00 paid for the bonds) + $480.00 coupon payment] = ($2,705.00)
t3: $660 coupon payment
t4: $11,780
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1779
A. Compute the expected value of the stock discounted to the present and compare it to the
prevailing market price. If the present value of the expected price exceeds the market price, the
particular stock is an attractive investment.
B. All of these answers
C. Compute an expected long-run rate of return based on the expected dividend yield plus the
expected growth rate. If this expected return exceeds the required rate of return, the particular
stock is an attractive investment.
D. Compute the expected rate of return during the holding period on the basis of the expected
value of the stock and the expected dividend. If this expected rate of return exceeds the required
rate of return, the particular stock is an attractive investment.
E. None of these answers
Answer: B
Explanation:
The investment decision, i.e., whether or not a particular stock is an attractive investment, is based
on all three of these comparisons.
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1780
A. 27.79%
B. 33.00%
C. None of these answers is correct.
D. 25.31%
E. 21.31%
Answer: B
Explanation:
To calculate the expected rate of return for a stock market series, the following information must
be known:
The beginning value for the series
The anticipated ending value for the series, and
The amount of any dividends and/or shareholder distributions during the period
Once this information has been determined, the expected return on a stock market index can be
found by employing the following equation:
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1781
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1782
1783
1784
1785
A. $10.00
B. $120.00
C. $55.00
D. $550.00
E. $15.00
F. $12.00
Answer: C
Explanation:
The infinite period Dividend Discount Model indicates that:
Value = (Dividend for period 1)/(k-g) where k is the required rate of return and g is the growth rate.
In this case, Value = ($1.10)/(.12-.10) = $1.10/.02 = $55.
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1786
A. $2.28
B. $2.79
C. Not enough information
D. $2.50
E. $3.16
Answer: D
Explanation:
The infinite period Dividend Discount Model postulates that the current value of a common stock is
equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is
the growth rate of dividends. Rearranging this yields D1 = current value x (k - g). In this question,
next period's dividend is equal to 25 x (0.15 - 0.05) = $2.50.
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1787
1788
1789
A. -4.73%
B. +3.94%
C. -5.68%
D. +4.22%
Answer: C
Explanation:
In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). When k - g = 11.5% 3.2% = 8.3%, the price is given by Po = D1/0.083. When the spread increases by 50 basis points
and all else stays constant, the price becomes P1 = D1/(0.083 + 0.005) = D1/0.088. The
percentage change in the price equals (P1 - Po)/Po = (1/0.088 - 1/0.083)*0.083 = 8.3/8.8 - 1 = 5.68%. Thus, the stock price falls by 5.68% when the spread between k and g increases by 50
basis points, all else equal.
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1790
A. 50
B. 31
C. 26
D. 19
E. 16
F. None of these answers is correct.
Answer: F
Explanation:
The earnings multiplier for this company is found as 22.45, thus none of the answers is correct.
To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company,
use the following formula:
P/E = [(d1 / e1) / (k - g)]
Where: P/E = the earnings multiplier,d1 / e1 = the dividend payout ratio at t1, k = the required rate
of return, and g = the anticipated future growth rate.
In this example, all of the necessary information has been provided, and the calculation of the
earnings multiplier is as follows:
In this example, all of the necessary information has been provided, but some rearranging is
necessary. Specifically, the dividend payout ratio must be determined. This figure is found as
follows:
Dividend payout ratio = [$1.10 / $2.45] = 0.44898, or 44.90%
Now that the dividend payout ratio has been determined, we can solve for the appropriate
earnings multiplier. The calculation of this figure is found as follows:
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1791
A. $72.15
B. The answer cannot be calculated from the information provided.
C. $24.70
D. $33.80
E. $83.80
F. None of these answers is correct.
Answer: D
Explanation:
The estimation of EPS for a stock market series involves five steps. Specifically, to determine an
estimate of EPS for a stock market series, it is necessary to:
Estimate the sales per share
Estimate next year's operating profit (EBIDT), or operating profit margin Estimate next year's
depreciation per share
Estimate next year's interest expense per share
Estimate next year's corporate tax rate
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1792
1793
1794
A. 12
B. 6.5
C. None of these answers
D. 10
Answer: B
Explanation:
The price/earnings ratio can be computed by dividing the expected dividend payout ratio
(dividends divided by earnings) by the required rate of return (k) minus the expected growth rate of
dividends (g).
In this case, P/E = .3/(.1-.05) = 6.5
A. a bullish signal.
B. none of these answers.
C. a hold signal.
D. a bearish signal.
Answer: D
Explanation:
As part of their market-making activities, specialists regular indulge in short-selling activity.
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1795
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1796
A. 25.89
B. The answer cannot be determined from the information provided.
C. 51.53
D. 2.59
E. 45.11
F. None of these answers is correct.
Answer: B
Explanation:
In this example, not all of the necessary information has been provided. Specifically, the EPS
figure must be known in order for the P/E ratio to be determined.
If the EPS figure is known, however, the infinite period dividend discount equation can be
manipulated to solve for the P/E multiple. Specifically, by dividing each side of the infinite period
dividend discount equation by the EPS figure, it is possible to determine the P/E ratio. This is
illustrated as follows:
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1797
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1798
1799
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1800
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1801
A. 14.5%
B. 14%
C. 12%
D. Not enough information.
E. 12.4%
Answer: E
Explanation:
The nominal risk-free rate is equal to (1 + RFR) x (1 + I) - I, where RFR is the real risk-free rate
and I is the inflation rate. In this question, the nominal risk-free rate is (1.05) x (1.07) - 1 = 0.124 =
12.4%.
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1802
A. I & III
B. II only
C. III only
D. I only
Answer: C
Explanation:
Technicians believe that new information seeps into prices only gradually whereas efficient market
theorists believe that this adjustment is extremely rapid; too rapid to allow consistent and
systematic exploitation of particular kinds of information like dividend changes.
As in any other market, prices in security markets are determined by supply and demand; this is
not in dispute between technicians and non-technicians. What is in dispute is the source and
nature of demand for securities; technicians believe that demand adjusts slowly to new information
while non-technicians consider the process to be almost instantaneous.
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1803
1804
A. II only
B. I & II
C. I & III
D. II & III
E. III only
F. I only
G. I, II & III
Answer: D
Explanation:
Open ended funds are mutual funds which buy and sell shares as and when demanded by
investors. These funds may or may not have sales and redemption charges.
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1805
A. a bearish indicator
B. an under-bought market
C. a bullish indicator
D. a trend reversal
Answer: C
Explanation:
Since a 50-day average reflects more recent events than the 200-day average, its rise above the
200-day average is interpreted as a bullish signal. However, if the gap gets too large, then the
technician might consider the stock to be over-bought and infer that the stock price is about to fall.
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1806
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1807
A. In an increasing market, a stock price has to increase faster than the general market for its
relative strength ratio to increase. Relative strength ratios, however, do not work during stagnant
or declining markets.
B. In an increasing market, a stock price has to increase faster than the general market for its
relative strength ratio to increase. In a declining market, a stock price only has to increase in order
for that ratio to increase.
C. A high relative strength index that has not changed much over time would be interpreted as a
bullish sign by technical analysts. A high ratio value that has started declining would be viewed
with caution, however.
D. In an increasing market, a stock price has to increase faster than the general market for its
relative strength ratio to increase. In a declining market, a stock price only has to decline slower
than the general market in order for that ratio to increase.
Answer: D
Explanation:
Technical analysts believe that a stock or industry that is outperforming the market will continue to
do so. Relative strength ratios are computed to find such trends. The ratios are equal to the price
of the stock, or stocks in the industry group, relative to the value of some stock market series. If
the ratio increases over time, the stock or industry has beenoutperforming the market.
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1808
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1809
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1810
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1811
A. experience dividend growth that is consistently higher than their required rates of return.
B. experience sales growth that is consistently higher than their required rates of return.
C. earn rates of return on their investments that are consistently above their required rates of
return.
D. keep their leverage ratios low.
Answer: C
Explanation:
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1812
A. $18.90
B. None of these answers is correct.
C. $21.12
D. $26.65
E. $31.34
F. The answer cannot be calculated from the information provided.
Answer: B
Explanation:
Since the growth rate of dividends is not expected to change in the future, the Gordon Model can
be applied. The Gordon Model is commonly referred to as the "constant growth dividend discount
model." This model of common stock valuation is illustrated as follows:
P0 = [D1 / (r - g)]
Where
P0 = the price of common stock X at time 0
D1 = the expected dividend at t1
r = the required rate of return on equity investments and g = the expected growth rate of dividends.
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1813
A. A; 11.00%
B. B; 10.9%
C. A; 10.75%
D. B; 11.15%
Answer: D
Explanation:
Fund A's rate of return over 1 year equals 1.13 *0.98 - 1 = 10.74%. Fund B's return equals 0.95 *
1.17 - 1 = 11.15%. Hence, select fund B for a 1-year horizon.
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1814
A. 9.3%
B. Not enough information
C. 17.4%
D. 12.5%
E. 11.8%
Answer: E
Explanation:
The infinite period Dividend Discount Model claims that the current price of a common stock is
equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required
rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step
further by dividing both sides of the infinite period Dividend Discount Model equation by expected
earnings during the next 12 months,
yielding P/E = (D1/E) / (k - g). Rearranging this results in k = (D1/E) / (P/E) + g. In this question the
required rate of return is equal to 0.7/12 + 0.06 = 0.118 = 11.8%.
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1815
A. 8.96
B. 7.75
C. 13.78
D. 17.71
E. None of these answers is correct.
F. The answer cannot be determined from the information provided.
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1816
A. earnings; sales
B. earnings growth; dividend policy
C. stock price; dividend policy
D. sales price; earnings
Answer: B
Explanation:
The exact estimate of future dividends depends on the outlook for earnings growth and the firm's
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1817
A. $29.37
B. $29.25
C. $31.22
D. none of these answers
Answer: C
Explanation:
The price at which you can redeem an open-ended fund equals its NAV (in the absence of any
redemption charges).
1818
A. $22.27
B. $25.34
C. None of these answers is correct.
D. $35.82
E. $17.89
F. $31.92
Answer: C
Explanation:
None of these answers is correct.
To determine the value of a common stock experiencing temporary supernormal growth, use the
following equation:
{V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k
- g)}/ (1 + k)^n}}
Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn =
the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the
time period "n", and k = the required rate of return.
In this example, the supernormal growth period is followed by a transitional growth period of one
year, during which the growth rate of this stock is expected to grow at 15% annually. This period
will follow the two-year supernormal growth period, and would be denoted as "g subset t" if we
were to rewrite the basic equation listed above. The calculation of the value of this common stock
is illustrated as follows:
{V = {[$1.80 * (1.20)^1] / (1.17)} + {[$1.80 * (1.20)^2] / (1.17)^2} + {[$1.80 * (1.20)^2 * (1.15)^1] /
(1.17)^3} + {{[$1.80 * (1.20)^2 * (1.15)^1 * (1.12)^1]/ (0.17 - 0.12)}/ (1.17)^3}
Which can be deduced to the following:
{V = [$1.846154 + $1.893491 + $1.861124 + $24.814983] = $30.415752}
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1819
A. II & III
B. II only
C. I only
D. I, II & III
E. I & III
F. III only
G. I & II
Answer: G
Explanation:
Most of the studies on mutual fund performance show I and II. On average, mutual funds have
been shown to be unable to outperform a buy-and-hold policy after fund expenses are accounted
for.
1820
A. 16.9%
B. 15.4%
C. 17.3%
D. 16.6%
Answer: C
Explanation:
You should remember that the Dividend Discount Model is applicable to individual stocks as well
as stock indices. Indeed, that and estimation of the variables involved in the Dividend Discount
Model are the thrust of Reilly & Brown, chapter 18.
In standard notation, Po = D1/(k-g). In this case, g = 3%. The expected dividend per share next
year = $3.7 * 35%*(1+3%) = $1.33. Therefore, 9.3 = 1.33/(k-3%). Solving for k gives k = 3% +
1.33/9.3 = 17.3%. This is the expected return on the index.
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1821
A. Short sales by specialists making up more than 50 percent of total short sales on an exchange
is viewed as a bearish sign by technical analysts who try to follow the "smart money." Such an
occurrence would be viewed as a long-range indicator of market performance.
B. Short sales by specialists making up more than 50 percent of total short sales on an exchange
is viewed as a sign of an approaching market peak by technical analysts who try to follow the
"smart money." Such an occurrence would be viewed only as a short-range indicator of market
performance.
C. Short sales by specialists making up less than 30 percent of total short sales on an exchange is
viewed as a sign of an approaching market trough by technical analysts who try to follow the
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1822
A. -8.08%
B. -5.29%
C. +5.03%
D. +1.94%
Answer: D
Explanation:
The 2% decline in GNP will cause a decline of 2/5 * 8 = 3.2% S&P sales. This will cause a decline
in earnings per share of 3.2%, too (NOT 8.2% * 3.2%). Since index value = earnings multiplier *
earnings per share, the change in S&P 500 equals (1-0.032)*11.9/11.3 - 1 = +1.94%.
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1823
A. the cumulative number of shares that have been sold short, divided by outstanding short
interest.
B. outstanding short interest divided by total daily volume on the exchange.
C. total daily volume on the exchange divided by outstanding short interest.
D. the cumulative number of shares that have been sold short by investors and not covered.
Answer: B
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1824
1825
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1826
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1827
A. is bearish.
B. indicates that the market is overbought.
C. indicates that the market is oversold.
D. is neither particularly bullish nor bearish.
Answer: D
Explanation:
Technical analysts may use the ratio of upside-downside volume as an indicator of short-term
momentum for the market. They feel that a ratio value of 1.50 or more indicates that the market is
overbought, while a ratio of 0.70 or less indicates that the market is oversold.
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1828
A. expected
B. current
C. interim
D. finite
Answer: D
Explanation:
During years of temporary supernormal growth, where growth exceeds the required rate of return,
the analyst must use the finite version of the dividend discount model to value a stock. This is also
known as the variable growth version of the dividend discount model.
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1829
1830
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1831
A. begin with profit before interest and taxes and then estimate interest.
B. begin with profit after taxes and deduct dividends paid.
C. begin with the operating profit margin and then estimate depreciation expense, interest
expense, and the tax rate.
D. calculate the average earnings per share.
Answer: C
Explanation:
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1832
A. 50X
B. 14X
C. 5X
D. 13X
E. 20X
Answer: E
Explanation:
The earnings multiplier or P/E ratio = Dividend payout ratio/Required rate of return-Expected
growth rate. Analyzing these inputs and the underlying factors, and comparing these to the
indications of the macroanalysis, the analyst forecasts an earnings multiplier for the firm. In this
example, P/E = .3/(.15-.135) = 20 times.
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1833
A. $90
B. $180
C. not enough information to calculate it
D. $80
Answer: D
Explanation:
Value of preferred stock is Dividend/Required return or $8/0.1 = $80.
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1834
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1835
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1836
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1837
A. little correlation with sales per share for stock series such as the S&P 400.
B. a relatively high correlation with EBIT for stock series such as the S&P 400.
C. a relatively high correlation with sales per share for stock series such as the S&P 400.
D. a relatively high correlation with net profits for stock series such as the S&P 400.
Answer: C
Explanation:
Studies have found that about 40% of the variance in percentage changes in S&P 400 sales can
be explained by percentage changes in nominal GNP. Estimating GNP is thus used to help
estimate earnings per share for stock series such as the S&P 400.
1838
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1839
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1840
A. an unimportant sign.
B. indicative of an approaching trough.
C. a bullish sign.
D. a bearish sign.
E. indicative of a flat trend channel.
Answer: D
Explanation:
The percentage of stock index futures speculators who are bullish is a measure used by contraryopinion technical analysts. If a majority over some decision rule (70%, for example) were bullish,
this would be interpreted as a bearish sign.
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1841
1842
A. bearish sign.
B. sign of an approaching period of instability.
C. sign of an approaching market peak.
D. bullish sign.
Answer: D
Explanation:
Technical analysts use moving averages of past stock prices as indicators of long-term trends.
When the current stock price breaks through its moving average from below on heavy volume, this
is viewed as a bullish sign possibly signaling a reversal in the declining price trend.
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1843
A. inferring the direction of change in the multiplier based on derivations of the specific estimates
for its ten major components.
B. inferring the direction of change in the multiplier based on predictions for changes in its three
major components.
C. inferring the direction of change in the multiplier based on derivations of specific estimates for
its three major components.
D. inferring the direction of change in the multiplier based on predictions for change in its ten major
components.
Answer: B
Explanation:
The direction of change approach begins with the current earnings multiplier and estimates the
direction and extent of change for the dividend payout ratio and the variables that influence the
required rate of return and the growth rate of dividends and earnings.
1844
A. Confidence Index.
B. CBOE Put/Call Ratio.
C. None of these answers is correct.
D. Block Uptick/Downtick Ratio.
E. Advance/Decline Line.
Answer: C
Explanation:
The technical indicator profiled in this example is the diffusion index, which is a measure of market
breadth. While "Advance/Decline Line" is an esthetically appealing choice, it is nonetheless
incorrect. The Advance/Decline Line is found by subtracting the volume of declining issues by the
volume of advancing issues, with no regard to the volume of issues unchanged.
1845
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1846
A. is the price range below the current price at which the technical analyst would expect the stock
to get an added boost of demand, keeping its price from falling below that range. The support level
is usually near the 12-week low.
B. is the price range below the current price at which the technical analyst would expect the stock
to get an added boost of demand, keeping its price from falling below that range. A support level
usually develops after the stock has had a meaningful price increase, and has begun to
experience some profit taking.
C. is the price range above the current price at which the technical analyst would expect the stock
to get an added boost of demand, pushing it to even higher prices. The support level is usually
near the 52-week high. Investors tend to expect a stock that has broken through its 52-week high
to continue increasing.
D. is the price range below the current price at which the technical analyst would expect the stock
supply to increase, pushing down its price below that range. A stock nearing that range would be a
good candidate for short selling because of the negative price support that it would receive.
Answer: B
Explanation:
A support level is viewed as something of a safety net by technical analysts. They believe that at
some price range there will be an increase in demand by investors who did not purchase the stock
prior to its price increase and who have been waiting for a small reversal to invest. When the stock
price falls within that range, there will be a surge in demand as they purchase the stock.
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1847
A. GDP
B. growth rate of labor productivity
C. average P/E ratio
D. rate of inflation
Answer: D
Explanation:
Inflation is risky and needs to be discounted to obtain a true risk-free rate.
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1848
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1849
1850
1851
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1852
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1853
A. no
B. a negative
C. a positive
Answer: C
Explanation:
P/E ratio = (Payout ratio)/(k - g); i.e. the relationship is positive.
A. pioneering development
B. rapid accelerating growth
C. rapid decline and market exit
D. mature growth
E. deceleration of growth and decline
Answer: C
Explanation:
Stabilization and market maturity would be the other correct stage.
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1854
A. $3.50
B. $2.81
C. The answer cannot be determined from the information provided.
D. $0.20
E. None of these answers is correct.
F. $0.36
Answer: F
Explanation:
All of the necessary information has been provided in this example. To determine the EPS for a
stock market series, the following steps are necessary:
Step 1: Estimate sales-per-share for the series:
Step 2: Estimate operating profit margin for the series
Step 3: Estimate the depreciation-per-share for next year
Step 4: Estimate the interest-expense-per-share for the next year
Step 5: Estimate next year's corporate tax rate
Once these five steps have been completed, the calculation of EPS for a stock market series is
found by the following:
EPS = [(Sales per share * Operating profit margin) - Depreciation-per-share - Interest Expense] *
(1 -Corporate Tax Rate)
The calculation of EPS for this stock market series is shown as follows:
EPS = [($16.50 * 0.21) - $2.45 - $0.45] * (1 - 0.36) = $0.3616
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1855
1856
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1857
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1858
1859
A. 6.55%
B. The answer cannot be determined from the information provided.
C. 18.07%
D. 13.09%
E. 12.15%
Answer: D
Explanation:
A popular model for determining the growth rate of dividends is the following: g = RR * ROE
Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 dividend payout ratio), and ROE = the return on equity.
Although it may at first appear otherwise, all of the necessary information has been provided.
Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into
the following:
ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)
Mathematically, this will break down into (Net Income / Common Equity), the ROE figure. The
calculation of the return on equity for this company is as follows:
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1860
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1861
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1862
A. 13.65%
B. 10.23%
C. 2.00%
D. 11.82%
Answer: C
Explanation:
If the expected return on the stock is K, then the Dividend Discount Model gives
P/E = (dividend payout ratio)/(K - g). Therefore, K = g + (div. payout ratio)/(P/E) = 0.0411 +
0.23/8.9 = 6.69%. Now, CAPM implies that the expected return on a stock equals the risk-free rate
plus beta times the market premium. Hence, 6.69% = 6.15% + 0.27 * market premium, giving
market premium = (6.69% - 6.15%)/0.27 = 2.00%.
1863
A. 42.8%
B. 74.4%
C. 25.6%
D. 31.7%
Answer: B
Explanation:
In standard notation, the Dividend Discount Model gives P/E = (dividend payout ratio)/(K - g).
Therefore, dividend payout ratio = 6.4*(8% - 4%) = 25.6%. The earnings retention ratio equals 1
minus the dividend payout ratio. In this case, the earnings retention ratio equals 1 - 25.6% =
74.4%.
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1864
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1865
1866
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1867
A. 11.15%
B. 14.60%
C. 12.89%
D. The answer cannot be calculated from the information provided.
E. None of these answers is correct.
F. 12.32%
Answer: C
Explanation:
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its
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1868
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1869
A. $41.62
B. $29.28
C. $37.22
D. $38.94
Answer: C
Explanation:
The CAPM expected rate of return on the stock is equal to the risk-free rate plus beta times the
market premium. The beta of the stock equals 0.045/(0.194 * 0.23) = 1.01. So the expected return
on Mermen's stock is 4.9% + 1.01*(12.9 - 4.9)% = 12.98%.
The Dividend Discount Model implies that Mermen's share price is given by Po = D1/(k-g), using
standard notation. We have D1 = 0.33 * 9.2 = $3.036. The dividend growth rate is given by g =
ROE*(1-dividend payout ratio) = 7.2% * 0.67 = 4.824%. The price of the stock then equals
3.036/(12.98% - 4.824%) = $37.22.
1870
1871
A. are the results of three factors: changes in wages per hour, changes in hours worked, and
changes in worker productivity. Increased wages and hours worked increase unit labor costs,
while increased productivity decreases unit labor costs. One would expect a logarithmically
negative relationship between unit labor costs and the aggregate profit margin.
B. are the results of three factors: changes in wages per hour, changes in hours worked, and
changes in worker productivity. Increased wages, hours worked, and productivity all increase unit
labor costs. One would expect a bell-shaped relationship between unit labor costs and the
aggregate profit margin.
C. are the results of two factors: changes in wages per hour, and changes in worker productivity.
Increased wages increase unit labor costs, while increased productivity decreases unit labor costs.
One would expect a negative relationship between unit labor costs and the aggregate profit
margin.
D. are the results of two factors: changes in wages per hour, and changes in worker productivity.
Increased wages increase unit labor costs, while increased productivity decreases unit labor costs.
One would expect a negative relationship between unit labor costs and the aggregate profit
margin.
Answer: C
Explanation:
Increases in the hourly wage increase unit labor costs, while productivity growth decreases unit
labor costs. Because unit labor costs are a major variable cost of a firm, one would expect a
negative relationship between unit labor costs and the aggregate profit margin.
1872
A. $28.57
B. Not enough information
C. $44.44
D. $31.50
E. $29.84
Answer: C
Explanation:
The infinite period Dividend Discount Model postulates that the current value of a common stock is
equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is
the growth rate of dividends. In this question, the common stock is worth 4 / (0.14 - 0.05) = $44.44.
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1873
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1874
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1875
A. $13.81
B. $8.36
C. $19.05
D. $11.15
E. $7.25
Answer: D
Explanation:
To determine the value of a common stock experiencing temporary supernormal growth, use the
following equation:
{V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k
- g)}/ (1 + k)^n}}
Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn =
the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the
time period "n", and k = the required rate of return.
where
In this example, there is a transitional growth period of two years, during which the growth rate is
expected to grow at 25% annually. This period will follow the two-year supernormal growth period,
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1876
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1877
A. $23.95
B. $30.88
C. Not enough information
D. $25.52
E. $27.72
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1878
A. a neutral sign.
B. a bearish sign.
C. a bullish sign.
D. a sign that the market is oversold.
E. a sign that the market is overbought.
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1879
A. local; overweighted
B. global; underweighted
C. local; underweighted
D. global; overweighted
Answer: B
Explanation:
Monetary and fiscal policies enacted by national governments influence the countries' aggregate
economies, which, in turn, influence all industries and companies within the economies. Some
examples are government spending's multiplier effect and the raising of firms' costs due to
restrictive monetary policies. Taking a global perspective, the asset allocation for a country within
a global portfolio will be affected by its economic outlook - countries approaching a recession will
be underweighted, while optimistic economic outlooks would cause an investor to overweight the
country.
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1880
A. II only
B. I only
C. IV only
D. III only
E. I & III
Answer: B
Explanation:
An increase in the stock's expected rate of return decreases the price of the stock. This will
happen if the stock's systematic risk increases so I is a correct choice. Note that the systematic
risk decreases when the security's covariance with the market decreases. Hence, III is excluded.
An increase in the variance of the stock does not necessarily change its expected return. Only if
the systematic component of the stock's variance changes will the expected return change,
causing a price change. Therefore II is not a correct choice.
Finally, an increase in the growth rate of dividends will increase the stock price, so IV is also not a
correct choice.
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1881
A. 51.75, (72.69)
B. 0.225, 72.69
C. The answer cannot be calculated from the information provided.
D. None of these answers is correct.
E. 0.225, (72.69)
F. 51.75, 72.69
Answer: F
Explanation:
The book value of a common stock is found by dividing the net worth of a company by the number
of outstanding shares. While there exists several different methods for calculating net worth, the
most simplistic involves subtracting total liabilities from total assets, giving us the shareholder's
equity figure. The book value is often seen by investment professionals as a "floor" for common
stock prices, and the price-to-book ratio is quite popular in the field of investment management.
The calculation of the price-to-book ratio involves the following equation:
Price-to-book ratio = {P0 / (Net worth / # of common shares outstanding)}
In this example, all of the necessary information has been provided. Imputing these figures into the
priceto-book value equation will yield the following:
Price-to-book value = {$11.63 / ($2,000,000 / 8,900,000)} = 51.75.
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1882
1883
A. $99
B. none of these answers
C. $75
D. $50
Answer: D
Explanation:
First recognize that the appropriate discount rate to use is half of 20% or 10% because the
dividend is paid out twice a year. Next calculate the value of the stock as Dividend/Required rate
or $5/0.1 = $50.
A. a bearish sign.
B. a sign of a market peak.
C. a bullish sign.
D. an unimportant statistic.
E. a sign of a flat market.
Answer: C
Explanation:
A high put/call ratio indicates that a relatively large number of investors are betting that the market
will go down by holding put options. Contrary-opinion traders believe that such sentiment is the
opposite of the truth; they view it as a bullish sign.
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1884
1885
A. Current rivalry
B. Potential substitutes
C. Bargaining power of buyers
D. Threat of new entrants
E. Bargaining power of suppliers
F. Governmental regulations
Answer: F
Explanation:
Once the competitive structure of an industry has been determined, the specific competitive
strategy used by each firm in the industry should be determined and these strategies evaluated in
terms of the overall competitive structure for the industry.
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1886
A. 8.94%
B. None of these answers is correct.
C. 5.48%
D. 11.51%
E. 6.14%
F. The answer cannot be determined from the information provided.
Answer: C
Explanation:
A popular model for determining the growth rate of dividends is the following: g = RR * ROE
Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 dividend payout ratio), and ROE = the return on equity.
Although it may at first appear otherwise, all of the necessary information has been provided.
Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into
the following:
ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)
Mathematically, this will reduce further into (Net Income / Common Equity)--- the ROE figure. The
calculation of the return on equity for this company is as follows:
ROE = [0.11 * 0.69 * 1.90] = 0.14421, or 14.42%.
Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as
follows:
g = [(0.38) * 0.1442] = 0.054796, or 5.48%
A. Dow-Barron
B. Risk
C. Confidence
D. Bond Rating
Answer: C
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1887
A. Risk-free rate
B. growth rate
C. firm
D. P/E
Answer: D
Explanation:
The spread between k and g is the primary determinant of the size of the P/E.
A. 8%
B. Not able to compute with the above data.
C. 7%
D. 4%
Answer: D
Explanation:
g=(RR)(ROE)=0.4*0.10.
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1888
A. $158.59
B. $45.32
C. Not enough information
D. $181.82
E. $20
Answer: D
Explanation:
The value of a preferred stock is the present value of its dividends, which is equal to the annual
dividend divided by the required rate of return. In this question, the preferred stock is worth 20/.11
= $181.82
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1889
A. is the price range below the current price at which the technical analyst would expect the stock
supply to increase, pushing down its price below that range. A stock nearing that range would be a
good candidate for short selling because of the negative price support that it would receive.
B. is the price range above the current price at which the technical analyst would expect the stock
supply to increase, abruptly reversing any price increase. A resistance level tends to develop after
the stock has experienced a decline from a higher price level.
C. is the price range above the current price at which the technical analyst would expect the stock
price to get an added boost of demand, pushing its price even higher. If the stock price makes it to
the resistance level, future gains are expected.
D. is the price range below the current price at which the technical analyst would expect the stock
to get an added boost of demand, keeping its price from falling below that range. The resistance
level is usually near the 12-week low.
Answer: B
Explanation:
Technical analysts believe that investors who have acquired a stock at a higher price will look for
an opportunity to sell it near their break-even points. A resistance level is the target price range
that these investors look for to sell their stock at minimum or no loss. Such a price range tends to
develop after the stock has experienced a decline from a higher price level.
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1890
A. $22
B. $23.10
C. $20.26
D. not enough information to calculate it
Answer: D
Explanation:
To determine the value of a stock held for one year, it is necessary to estimate the dividend to be
received during the period, the expected sale price at the end of the period and its required rate of
return. The required rate of return in this case is not given.
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1891
A. $40.61
B. $36.36
C. $30.35
D. Not able to compute with the above data.
Answer: B
Explanation:
Value = $40/1.10=$36.36.
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1892
A. 12.23%
B. 22.60%
C. 24.41%
D. None of these answers is correct.
E. 19.24%
Answer: B
Explanation:
To calculate the expected rate of return for a stock market series, the following information must
be known:
The beginning value for the series
The anticipated ending value for the series, and
The amount of any dividends and/or distributions during the period
Once this information has been determined, the expected return on a stock market index can be
found by employing the following equation:
E(R) = [(EV - BV + Div) / BV]
Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value
for the series, BV = the observed beginning value for the series, and Div = the amount of any
dividends paid during the period.
In this example, all of the necessary information has been provided and the calculation of the
expected return on this stock market series is found as follows:
E(R) = [$11,800 - $10,050.14 + $521] = 22.60%
This figure is significantly higher than the required rate of return. Assuming that the anticipated
ending value and expected dividends prove accurate, investment in this stock market series is
likely advisable.
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1893
A. $18.12
B. $37.80
C. Not able to compute with the above data.
D. $378.00
Answer: D
Explanation:
Value = $18.9/(0.10-0.05)=$378.00
1894
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1895
A. II, III IV
B. II, IV, V
C. All of these answers
D. I, II, III
E. I, II, IV
Answer: E
Explanation:
Developing benchmark values for these ratios is important because, similar to P/Es and P/BV
ratios, they are relative measures of value.
1896
1897
A. Microsimulation
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1898
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1899
1900
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1901
1902
1903
A. 5.709, yes
B. 0.949, no
C. 0.949, yes
D. 5.709, no
E. 0.244, yes
F. None of these answers is correct.
Answer: C
Explanation:
The book value of a common stock is found by dividing the net worth of a company by the number
of outstanding shares. While there exists several different methods for calculating net worth, the
most simplistic involves subtracting total liabilities from total assets, giving us the shareholder's
equity figure.
Investment professionals often see the book value as a "floor" for common stock prices, and the
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1904
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1905
1906
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1907
A. 55.26
B. 54.98
C. none of these answers
D. 59.24
Answer: C
Explanation:
The offer price i.e. the price at which you can buy a share equals
NAV/(1-load charge) = 16.88/(1-0.072) = $18.19. Therefore, the number of shares you receive
equals 1000/18.19 = 54.98
Be careful NOT to calculate the offer price as NAV*(1 + load charge). The sales charge is
expressed as an percentage of the amount you deposit. In this example, you deposit $1,000 and
get shares worth $1,000 * (1-0.072) = $928. Note that the 54.98 shares are worth 54.98 * 16.88 =
$928 i.e. this is the amount you would get if you were to sell the shares immediately.
A. the required rate of return minus the dividend growth rate, divided by the expected dividend
payout ratio.
B. next year's dividend divided by the spread between the required rate of return and the dividend
growth rate.
C. the spread between the required rate of return and the dividend growth rate, divided by next
year's dividend.
D. the expected dividend payout ratio, divided by the required rate of return minus the dividend
growth rate.
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1908
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1909
A. $38.52
B. Not enough information
C. $62.50
D. $22.73
E. $18.94
Answer: B
Explanation:
The infinite period Dividend Discount Model postulates that the current value of a common stock is
equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is
the growth rate of dividends. In order to solve for the current value, the required rate of return on
the common stock must be known. But only the risk premium is known, which, without the risk-free
rate, cannot be used to derive the required rate of return
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1910
A. I, III, IV, V, VI
B. I, II, IV, V,
C. I, III, IV, V
D. I, III, IV
E. I, II, III, IV, V, VI
Answer: C
Explanation:
Of the choices listed, only II and VI are not criticisms of technical analysis. While VI appears
correct, it is not. In fact, both fundamental and technical analysis recognize the importance of
supply and demand fluctuations. The difference is that technical analysis assumes that supply and
demand are influenced by both rational and irrational factors, whereas the EMH assumes that
investors are rational. Had choice VI been phrased as "technical analysis assumes that supplydemand fluctuations, which are caused in part
by irrational forces, are the only determinants of shifts in securities prices," then it would be correct
in this example.
1911
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1912
1913
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1914
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1915
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1916
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1917
A. The earnings multiplier would decrease; the earnings multiplier would decrease.
B. The earnings multiplier would increase; the earnings multiplier would increase.
C. The earnings multiplier would increase; the earnings multiplier would decrease.
D. The earnings multiplier would decrease; the earnings multiplier would increase.
E. The earnings multiplier would increase; the earnings multiplier would either increase or
decrease depending on the firm's return on equity compared to its cost of capital.
Answer: B
Explanation:
Remember that the equation used to determine the appropriate earnings multiplier for a stock
market series is the following:
P/E = [D/E / (k - g)]
Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at
t1, k = the required rate of return, and g = the anticipated growth rate of dividends.
As the spread between k and g narrows, the earnings multiplier figure will increase. Indeed, the
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1918
1919
A. Media; debt
B. Fiber optics networking; equity
C. Fiber optics networking; debt
D. Media; equity
E. Computer manufacturing; debt
F. Computer manufacturing; equity
Answer: B
Explanation:
Of the industries listed, fiber optics networking would be expected to have the highest earnings
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1920
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1921
A. $123.22
B. $87.34
C. $79.11
D. $84.96
Answer: B
Explanation:
operating profits = Earnings before depreciation, interest & taxes = EBDIT and operating profit
margin = EBDIT/net sales. Therefore, net income/sales = (EBDIT/sales - depreciation/sales interest/sales)*(1-tax rate) = (16.6% - 4.7% - 1.3%)*(1-40%) = 6.36%.
Thus, earnings = 6.36% * 723 = $45.98 per share.
In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). In this case, g = 2.8% and
the expected dividend per share next year = 45.98 * 17%*(1+2.8%) = $8.04 per share. Therefore,
Po = 8.04/(12% - 2.8%) = $87.34 per share.
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1922
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1923
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1924
A. $102.61
B. not enough information to calculate it
C. $89.65
D. $93.24
Answer: B
Explanation:
The missing information is the required rate of return in order to discount the dividend payout.
1925
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1926
A. 4.50%
B. The answer cannot be determined from the information provided.
C. 14.90%
D. 8.03%
E. None of these answers is correct.
F. 30.42%
Answer: C
Explanation:
A popular model for determining the growth rate of dividends is the following: g = RR * ROE
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1927
A. Reversal level.
B. Support level.
C. Resistance level.
D. More than one of these answers is correct.
E. Rotation price.
Answer: B
Explanation:
Technical analysts frequently examine historical price information to determine important "support"
and "resistance" levels. A support level is a price range at which the demand for a stock is
expected to increase, i.e. buying pressure will increase forcing the stock price upward, or will
prevent it from moving down. A resistance level is a price range at which the supply of a stock is
expected to increase significantly, forcing the price of the stock down, or preventing it from
advancing.
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1928
A. $80.62
B. The answer cannot be determined from the information provided.
C. $81.44
D. $115.12
E. None of these answers is correct.
F. $64.16
Answer: F
Explanation:
The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies
that pay dividends. With this model, it is necessary to estimate the above-average, or
"supernormal," rate of growth, as well as the long-term rate of growth. Once these growth rates
have been determined, they are used to calculate the anticipated annual dividends leading up to
the point at which the growth rate decelerates to the long-run rate of growth.
Incorporating the given information into the two-stage dividend discount model will yield the
following
P = {[$0.75 * 1.18) / 1.145] + [($0.885 * 1.18) / 1.31103] + [($1.04312 * 1.18) / 1.50112] +
[($1.23088 *
1.13) / (.145 - .13)]/1.50112} which can further be developed into:
P = {$0.77293 + $0.79655 + $0.81998 + $61.77} = $64.16
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1929
A. $45.50
B. not enough information to calculate it
C. $43
D. $40.63
Answer: D
Explanation:
Calculation = $2.50/(1+.12) + $43.00/(1+.12) = $40.63.
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1930
A. Expected value
B. Extra value
C. Excess present value
D. Past value
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1931
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1932
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1933
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1934
1935
A. $34.02
B. None of these answers is correct.
C. $23.78
D. $29.60
E. $21.34
F. The answer cannot be calculated from the information provided.
Answer: D
Explanation:
When determining the value of a common stock using the free cash flow to equity model, it is
necessary to determine three things:
1. The required rate of return on equity investments.
2. The estimated free cash flow to equity multiple at time "k."
3. The estimated free cash flows figures for the time periods leading up to "k."
In this example, the calculation must begin with the discounting the free cash flow to equity figures
for each of the four years provided. These figures are discounted each period by the required
return on equity investments, and the final answer is converted to a per-share basis. This process
is illustrated below:
Year 1: ($3.500,000 / 1.135) / 2,000,000 shares outstanding = $1.54
Year 2: [$3,750,000 / (1.135)(1.135)] / 2,000,000 shares outstanding = $1.46
Year 3: [$3,400,000 / (1.135)(1.135)(1.135)] / 2,000,000 shares outstanding = $1.16
Year 4: [$4,000,000 / (1.135)(1.135)(1.135)(1.135)] / 2,000,000 shares outstanding = $1.21
Year 5: [$4,150,000 / (1.135)(1.135)(1.135)(1.135)(1.135)] / 2,000,000 shares outstanding = $1.10
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1936
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1937
A. II, V, VI
B. II, IV, V
C. I, II, VI
D. II, IV, V, VI, VII
E. II, IV, VI, VII
Answer: B
Explanation:
Of the financial figures listed, only the Internal Rate of Return, which is also known as the "Dollarweighted Rate of Return," and the Time-Weighted Rate of Return, can be calculated without
knowing the required rate of return.
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1938
A. $20.77
B. The answer cannot completely be calculated from the information provided.
C. None of these answers is correct.
D. $16.91
E. $11.65
F. $21.23
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1939
A. has been found to vary inversely with the aggregate profit margin.
B. has been found to vary positively with the aggregate profit margin.
C. has an unresolved affect on aggregate profit margin.
D. has been found not to affect aggregate profit margin.
Answer: C
Explanation:
Finkel and Tuttle found that the capacity utilization rate, unit labor costs, rate of inflation, and
foreign competition were the four major variables that affected the aggregate profit margin. They
postulated that the rate of inflation was positively related to profit, while others have postulated the
opposite.
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1940
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1941
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1942
A. $2353.95
B. $1054.48
C. Not enough information
D. $1868.27
E. $1246.22
Answer: E
Explanation:
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1943
A. have been increasing more or less continuously. That increase was especially pronounced
during the 1980s, when firms increased their debt financing and financial risk. Interest rate
expenses as a percentage of sales have also been very volatile.
B. have increased up to 1989, and have since been decreasing. That decrease is the result of an
interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a
percentage of sales have also been very volatile.
C. have been increasing more or less continuously. That increase was especially pronounced
during the 1980s, when firms increased their debt financing and financial risk. Interest rate
expenses as a percentage of sales have increased from 2.44% in 1977 to 7.47% in 1996.
D. have increased up to 1989, and have since been decreasing. That decrease is the result of an
interest rate decline and of corporations reducing their debt levels. Interest rate expenses as a
percentage of sales have increased from 1.44% in 1977 to 3.47% in 1996.
Answer: B
Explanation:
Interest rate expenses had increased up to 1989, rising from 1.44% of sales in 1977 to 3.47% in
1989. That increase was especially pronounced during the 1980s, when firms increased their debt
financing and financial risk. That trend started reversing during the 1989-1990 recession because
of an interest rate decline, and because of corporations reducing their debt levels. Interest rate
expenses are generally fixed, and have therefore varied considerably as a percentage of sales,
which are quite volatile.
A. Historical trends
B. Security markets
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1944
A. 5%
B. 4.2%
C. Not able to compute with the above data.
D. 6%
Answer: B
Explanation:
g=(RR)(ROE)=0.35*0.12=4.2%.
1945
1946
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1947
A. The EPS figure is subject to cash flow adjustments, which "normalize" the EPS figure over time.
B. The earnings multiplier is subject to a tax-deleveraging effect.
C. The earnings multiplier is more sensitive to changes in the payout ratio.
D. The earnings multiplier is more sensitive to changes in the spread between k and g.
E. None of these answers is correct.
Answer: D
Explanation:
The greater relative volatility of the earnings multiplier versus the EPS figure is primarily
attributable to an increased sensitivity to changes in the spread between the required rate of return
"k" and the anticipated growth rate "g." Remember that the equation used to determine the
appropriate earnings multiplier for a stock market series is the following:
{P/E = [D/E / (k - g)]}
Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at
t1, k = the required rate of return, and g = the anticipated growth rate of dividends.
As you can see, changes in the spread between the required rate of return and the anticipated
growth rate can have a dramatic effect on the earnings multiplier for a stock market series. While
the earningsmultiplier is sensitive to changes in the dividend payout ratio, volatility in this figure is
not cause for the increased volatility of the earnings multiplier versus the EPS figure.
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1948
A. growth
B. SP
C. Dividend Discount Model
D. valuation
Answer: C
Explanation:
The infinite period Dividend Discount Model has the following assumptions:
1. Dividends grow at a constant rate
2. The constant growth rate will continue for an infinite period
3. The required rate of return (k) is greater than the infinite growth rate (g). If it is not, the model
gives meaningless results because the denominator becomes negative.
1949
A. $1,532.69
B. $2,320.56
C. $1,818.40
D. Not enough information
E. $1,285.38
Answer: C
Explanation:
The value of bond is equal to the present value of the stream of coupon payments (which can be
thought of as an annuity for a certain number of years) plus the present value of the final payment.
The required rate of return on the bond is equal to the risk-free rate of return plus the risk-premium
(7+5=12% for the year, 6% for six months). Using appendix C in the book by Reilly & Brown, the
present value of the coupons is $100 x 10.106 = $1,010.60. The present value of the final
payment is $2,000 x 0.4039 = $807.80, or $2,000/(1.06^16). The value of the bond is 1010.60 +
807.80 = $1818.40. Note that many textbooks recommend using the six-month interest rate and
doubling the number of yearly periods in making this calculation. Using 6% for 16 periods, the
value of the final payment is $787.40 and the total value of the bond is 1010.60 + 787.40 =
$1,798.
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1950
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1951
1952
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1953
1954
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1955
A. are used to estimate aggregate net sales for the firms in a stock market series such as the S&P
400. About 90% of the variance in percentage changes in S&P 400 net profits can be attributed to
percentage changes in the GNP. Net sales are more volatile than GNP.
B. are used to estimate aggregate net profits for the firms in a stock market series such as the
S&P 400. About 30% of the variance in percentage changes in S&P 400 net profits can be
attributed to percentage changes in the GNP. The GNP is more volatile than net profits.
C. are used to estimate aggregate net sales for the firms in a stock market series such as the S&P
400. About 40% of the variance in percentage changes in S&P 400 net profits can be attributed to
percentage changes in the GNP. Net sales are more volatile than GNP.
D. are used to estimate aggregate net profits for the firms in a stock market series such as the
S&P 400. About 80% of the variance in percentage changes in S&P 400 net profits can be
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1956
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1957
1958
1959
A. 1.23
B. 0.70
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1960
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1961
A. $17.98
B. $21.26
C. $19.68
D. $23.46
Answer: B
Explanation:
Since the dividends do not grow at a constant rate, you cannot directly apply the Dividend
Discount Model valuation formula. However, note that 2 years from now, looking into the future,
you will see a constant growth rate of 4% and the dividend 3 years from now will be $2 * 1.1^2 *
1.04 = $2.517. Therefore, the stock price 2 years from now, using the required rate of return of
14%, will equal P = 2.517/(14% - 4%) =
$25.17. Thus, the current stock price equals 1.1/1.14 + (1.1/1.14)^2 + 25.17/1.14^2 = $21.26.
Note that you must be very careful about the time line. In the Dividend Discount Model valuation
formula, the price at time t uses the dividend paid at time (t+1). That's the reason we had to use
the dividend paid in year 3 to calculate the price at the end of year 2.
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1962
A. interest
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1963
A. $17.50
B. $167.12
C. $175.00
D. Not able to compute with the above data.
Answer: C
Explanation:
Value = $5.25/(0.08-0.05) = $175.00
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1964
A. analyze specific company performance. One undertakes such analysis to find the best
performing companies in a particular industry. After finding industry favorites, one would then
examine which industries look promising.
B. analyze the general economic influences affecting a national or regional economy. Such
analysis includes research on fiscal policy, monetary policy (with its multiplier effect), inflation, and
other events such as wars or political upheavals.
C. analyze the general economic influences affecting a national or regional economy. There is a
particular focus on inflation because of the important multiplier effect that inflation has on the rest
of the economy, particularly aggregate demand.
D. analyze the general economic influences affecting a national or regional economy. There is a
particular focus on government monetary policy because of the important multiplier effect that
monetary policy has on the rest of the economy.
E. analyze the general economic influences affecting a national or regional economy. Such
analysis includes research on fiscal policy (with its multiplier effect), monetary policy, inflation, and
other events such as wars or political upheavals.
Answer: E
Explanation:
The first step in the top-down, three-step approach to valuation is analysis of alternative
economies and securities markets in order to decide how to allocate investment among different
countries and securities. That includes analysis of fiscal and monetary policies, inflation, and other
events such as wars and political upheavals that might affect these decisions.
1965
A. $104.73
B. $32.83
C. $33.80
D. $128.80
E. The answer cannot be calculated from the information provided.
F. None of these answers is correct.
Answer: C
Explanation:
The estimation of EPS for a stock market series involves five steps. Specifically, to determine an
estimate of EPS for a stock market series, it is necessary to:
Estimate the sales per share
Estimate next year's operating profit (EBIDT), or operating profit margin
Estimate next year's depreciation per share
Estimate next year's interest expense per share
Estimate next year's corporate tax rate
Once estimates for these components have been determined, they are put into the following
equation:
EPS for a stock market series = {[(Sales per share * operating profit margin) - depreciation per
share - interest expense per share] * (1 - corporate tax rate).
Imputing the given information into this equation will yield the following:
EPS for a stock market series = {[($600 * 0.38) - $95 - $81] * (1 - 0.35)} = $33.80
If you chose $128.80, remember that the depreciation figure is not added back to the EPS
calculation. What we are looking at is an operating earnings after tax figure, not a cash-based
figure.
If you chose $32.83, remember that common stock dividends are not incorporated into the EPS
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1966
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1967
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1968
1969
A. pioneering development
B. mature growth
C. deceleration of growth and decline
D. rapid accelerating growth
E. stabilization and market maturity
Answer: E
Explanation:
During this stage, the industry growth rate matches the growth rate of the segment of the economy
of which the industry is a part. Sales are highly correlated with an economic series.
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1970
1971
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1972
1973
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1974
A. trough; narrowing
B. peak; widening
C. peak; narrowing
D. trough; widening
Answer: D
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1975
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1976
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1977
A. firm's historical sales levels; relationship between sales and various relevant economic and
industry series
B. firm's internal performance; problems that might affect its future performance
C. firm's competitive strategy; the firm's relationship with the industry
D. sales forecast; estimated profit margin
E. historical earnings per share; historical earnings multiplier
Answer: D
Explanation:
The future value of a stock is derived by predicting the stock's earnings per share and expected
earnings multiplier. Expected earnings per share is a function of the sales forecast and the
estimated profit margin.
1978
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1979
A. 24.90%
B. 28.65%
C. 25.65%
D. 27.90%
Answer: B
Explanation:
In the usual notation, the Dividend Discount Model gives Po = D1/(k-g). In this case, g = 3%, D1 =
Do*(1+g) = 3.1 * 1.03 = $3.193, Po = $12.45. Therefore, k = 28.65%
1980
A. $28.62
B. $35.00
C. $37.45
D. None of these answers
Answer: B
Explanation:
Value = 12.5 x ($2.50 * 1.12) = $35
A. Microanalysis
B. Macroanalysis
C. Linear regression
D. Forbes method
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1981
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1982
A. 80%
B. 20%
C. 1.6%
D. 16%
E. 33%
F. 8%
Answer: D
Explanation:
The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = 1 (.3/1.5) x ($10 million/$50 million) = (1 - .2) x (.2) = .16 or 16%.
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1983
A. 23.63%
B. 1.77%
C. The answer cannot be determined from the information provided.
D. None of these answers is correct.
E. 28.71%
F. 19.71%
Answer: F
Explanation:
A popular model for determining the growth rate of dividends is the following: g = RR * ROE
Where: g = the expected growth rate of dividends, RR = the retention rate (this is equal to 1 dividend payout ratio), and ROE = the return on equity.
Although it may at first appear otherwise, all of the necessary information has been provided.
Remember the Du Pont decomposition process for ROE, which breaks down the ROE figure into
the following:
ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets * Common Equity)
Mathematically, this will break down into (Net Income / Common Equity), the ROE figure. The
calculation of the return on equity for this company is as follows:
ROE = [0.21 * 0.33 * 3.125] = 0.216563, or 21.66%.
Now that the ROE figure has been determined, the calculation of the growth rate of dividends is as
follows:
BrainDumps.com
1984
A. 4% increase
B. 8% increase
C. 4% decrease
D. 12% increase
E. There is no change
Answer: E
Explanation:
Per-unit labor cost is a function of the percentage change in hourly wages minus the percentage
change in productivity during some period of time. In this question, the increase in worker
productivity exactly offsets the increase in hourly wages.
1985
A. $284
B. $517
C. $426
D. $639
Answer: C
Explanation:
When the stock split, the investor was left with 50 * 3 / 2 = 75 shares. Hence, the year-end
portfolio value equaled 75 * 38 = $2,850. The original amount invested was equal to 50 * 56 =
$2,800. Since the investor realized a return of 17%, his total value inclusive of dividends at yearend was 2,800 * 1.17 = $3,276.
Therefore, the dividend income during the year was 3,276 - 2,850 = $426.
A. $4,759
B. $4,522
C. $5,628
D. Not enough information
E. $3,624
Answer: D
Explanation:
In order to take the present value of the coupon and principal payments, one must know the
BrainDumps.com
1986
BrainDumps.com
1987
A. Wages decrease.
B. Profit margin increases.
C. Capacity utilization increases significantly.
D. Unit labor costs increase substantially.
Answer: D
Explanation:
During the peak of the business cycle, firms are already operating near full capacity, leading to
very small increases or declines in capacity utilization. Inflation tends to be high, resulting in
workers' demands for higher wages. Because firms now tend to be using marginal labor and
production facilities, productivity increases only slowly. These factors result in substantial
increases in unit labor costs, which along with the otherfactors, also help push profit margins
lower.
BrainDumps.com
1988
1989
A. country risk
B. expected growth rate
C. required return on equity
D. aggregate business risk
Answer: B
Explanation:
Assuming that the dividend payout ratio is to remain constant, growth in earnings can be related to
the firm's growth. It then logically follows that a faster growing firm, with faster increase in
dividends will be higher priced (i.e. high earnings multiple).
1990
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1991
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1992
A. $30.94
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1993
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1994
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1995
A. are valued very highly using the infinite period Dividend Discount Model.
B. cannot be valued using the infinite period Dividend Discount Model.
C. are prime candidates for valuation using the infinite period Dividend Discount Model.
D. tend to underperform the market.
Answer: B
Explanation:
The infinite period Dividend Discount Model postulates that the current value of a common stock is
equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is
the growth rate of dividends. If the growth rate of dividends exceeds the required rate of return, the
value of the stock is shown to be negative, which is impossible. The infinite period Dividend
Discount Model cannot be used to value such stocks.
BrainDumps.com
1996
A. inconsequential.
B. a sign of a flat trend.
C. a bullish sign.
D. a bearish sign.
Answer: C
Explanation:
Technical analysts use moving averages of past stock prices as indicators of long-term trends.
When the 50-day moving average crosses the 150-day moving average from below on heavy
volume, this is viewed as a bullish sign possibly signaling a reversal in the declining price trend. In
order for such a crossing to occur, the stock price must be going though a recent uptrend, which is
pulling up the 50-day moving average faster than the 150-day moving average.
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1997
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1998
1999
A. +16%
B. -9%
C. +26.44%
D. +5.56%
Answer: D
Explanation:
The index value = earnings multiplier * earnings per share. Therefore, the change in index value
equals 1.16 * 0.91 - 1 = 5.56%
BrainDumps.com
2000
A. does not conflict with the efficient market hypothesis. Technical analysis claims that the market
moves in trends that can be predicted before they occur. The key to profiting from technical
analysis involves a consistent ability to use past and present market data to predict future trends.
B. does not conflict with the efficient market hypothesis. Technical analysts believe that
information is disseminated slowly, first to the professionals, and later to the great bulk of
investors. This causes stock prices to move in trends.
C. conflicts with the efficient market hypothesis. Technical analysis claims that the market moves
in trends that can be predicted before they occur. These trends are caused by the fact that
information is disseminated relatively quickly.
D. conflicts with the efficient market hypothesis. Technical analysts believe that information is
disseminated relatively slowly, first to the professionals, and later to the great bulk of investors. In
contrast, advocates of the efficient market hypothesis believe that information is spreads very
quickly and is reflected in stock prices soon after it is available.
Answer: D
Explanation:
Technical analysts believe that information is disseminated relatively slowly, causing the market to
move in trends. They key to profiting from technical analysis lies in finding existing trends and
exploiting them. The efficient market hypothesis holds that past market data (which is used to find
trends) is already reflected in current prices, making effective technical analysis impossible.
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2001
A. 12.14%
B. 14.79%
C. 10.40%
D. None of these answers is correct.
E. 11.73%
Answer: D
Explanation:
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2002
A. most technical analysts would sell the stock on the presumption that it will next enter a declining
trend channel. A declining trend channel is a general pattern of price decline, while a flat trend
channel is a pattern of unpredictable price fluctuation.
B. some technical analysts would sell the stock in case it will enter a declining trend channel. Most
analysts will keep the stock and see what occurs. A flat trend channel is a pattern of price stability.
C. most technical analysts would buy the stock on the presumption that it will soon re-enter the
BrainDumps.com
2003
A. $63.78
B. $58.23
C. $71.92
D. $65.82
E. None of these answers is correct.
F. $72.10
Answer: D
Explanation:
To determine the value of a common stock experiencing temporary supernormal growth, use the
following equation:
{V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k
- g)}/ (1 + k)^n}}
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2004
A. $96.00
B. $75.00
C. $14.25
D. $48.00
E. $162.00
F. $72.00
Answer: E
Explanation:
The infinite period DDM indicates that:
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2005
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2006
A. The earnings multiplier would decrease; the earnings multiplier would produce a nonsensical
(negative) answer.
B. The earnings multiplier would decrease; the earnings multiplier would increase.
C. The earnings multiplier would increase; the earnings multiplier would decrease.
D. The earnings multiplier would increase; the earnings multiplier would produce a nonsensical
(very large) answer.
E. The earnings multiplier would increase; the earnings multiplier would produce a nonsensical
(negative) answer.
Answer: E
Explanation:
Remember that the equation used to determine the appropriate earnings multiplier for a stock
market series is the following:
{P/E = [D/E / (k - g)]}
Where: P/E = the earnings multiplier, or Price-to-Earnings ratio, D/E = the dividend payout ratio at
t1, k = the required rate of return, and g = the anticipated growth rate of dividends.
According to this equation, an increase in the dividend payout ratio will lead to an increase in the
earnings multiplier, assuming that both the required rate of return and the anticipated growth rate
remain unchanged. In reality, this assumption is nonsensical in this case. Specifically, the dividend
payout ratio is anticipated to increase because the industry is becoming more mature. In other
words, companies comprising the series are expected to pay out more of their earnings as
dividends due to diminishing positive NPV investment opportunities. By definition this would
decrease the anticipated growth rate, which would in turn lead to a decline in the earnings
multiplier.
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2007
A. $16.15
B. $14.22
C. $17.77
D. $19.86
Answer: C
Explanation:
Since the dividends do not grow at a constant rate, you cannot directly apply the Dividend
Discount Model valuation formula. However, note that 2 years from now, looking into the future,
you will see a constant growth rate of 5% and the dividend 3 years from now will be $1 * 1.15^2 *
1.05 = $1.39. Therefore, the stock price 2 years from now, using the required rate of return of
12%, will equal P = 1.39/(12% - 5%) = $19.86. Thus, the current stock price equals 1.15/1.12 +
(1.15/1.12)^2 + 19.86/1.12^2 = $17.77.
Note that you must be very careful about the time line. In the Dividend Discount Model valuation
formula, the price at time t uses the dividend paid at time (t+1). That's the reason we had to use
the dividend paid in year 3 to calculate the price at the end of year 2.
A. mid-points
B. troughs
C. none of these answers
D. peaks
Answer: D
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2008
A. 40%
B. 16%
C. 6.4%
D. 10.0%
E. 12%
F. 9.6%
Answer: F
Explanation:
The estimated growth rate of dividends = (Retention Rate) x (Return on Equity). In this case, the
estimated growth rate of dividends = 60% x 16% = 9.6%.
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2009
2010
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2011
A. III only
B. I & III
C. II & III
D. I & II
E. II only
F. I only
Answer: B
Explanation:
The offer price i.e. the price at which you can buy a share equals
NAV/(1-load charge) while the redemption price, in the absence of a redemption fee, equals the
NAV. The load charge, if any, typically declines as the size of the order increases.
BrainDumps.com
2012
A. 5.2
B. 4.9
C. 6.1
D. 5.5
Answer: D
Explanation:
Using CAPM, the expected return on the stock equals 5% + 0.9 * 8% = 12.2%. Using the Dividend
Discount Model, P/E = (dividend payout ratio)/(K - g). This gives P/E = 0.55/(12.2% - 2.2%) = 5.5
2013
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2014
A. $7,864
B. $3,591
C. $6,415
D. $9,249
E. Not enough information
F. $11,358
Answer: B
Explanation:
The value of a zero-coupon bond is the present value of its principal payments. The required rate
of return is the risk-free rate of return plus the risk premium (5 + 5 = 10%). Using appendix C in the
book by Reilly & Brown, the present value of the bond is $15,000 x 0.2394 = $3,591, or
$15,000/(1.1^15).
BrainDumps.com
2015
A. III only
B. I, II & III
C. II only
D. II & III
E. I only
Answer: B
Explanation:
Recall the Dividend Discount Model formula: P/E = payout ratio/(k - g) in standard notation. From
this formula, you may be misled into believing that increasing the payout ratio increases P/E.
However, remember that g = ROE*(1-payout ratio). The more the firm pays out, the lower its
growth rate is. Thus, it is not always necessary that P/E ratio will increase with increasing payout
ratio. Indeed, in Walgreen's case, a low payout ratio was associated with low P/E.
If a firm has high financial risk, its required rate of return (k) is higher, depressing P/E.
2016
A. $18.00
B. The answer cannot be determined from the information provided.
C. $17.70
D. $31.40
E. The DDM will produce a nonsensical answer in this case.
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2017
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2018
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2019
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2020
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2021
A. The value of the bond would be $15,024. The present value of the coupons would be $10,833,
and that of the principal would be $4,191.
B. The value of the bond would be $13,860. The present value of the coupons would be $11,457,
and that of the principal would be $2,403.
C. The value of the bond would be $17,239. The present value of the coupons would be $14,828,
and that of the principal would be $2,411.
D. Not enough information.
E. The value of the bond would be $13,140. The present value of the coupons would be $11,169,
and that of the principal would be $1,971.
Answer: E
Explanation:
The semiannual coupon payment would be 0.06 x 15000 = $900. Using Appendix C of
"Investment Analysis and Portfolio Management," by Reilly and Brown, one sees that the present
value of annuity of $1 for 30 periods at a required rate of 7% (half of 14%) would be 12.410. The
present value of the coupon payments is therefore 900 x 12.410 = $11,169. Using the same
appendix, one sees that the present value of $1 after 30 periods at a required rate or 7% is
0.1314. The present value of the principal payment is therefore 15000 x 0.1314 = $1,971. The
total value of the bond to you would be 11169 + 1971 = $13,140.
2022
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2023
A. Industry; economic
B. Company; industry
C. Industry; company
D. Company; economic
Answer: C
Explanation:
In general, an industry's prospects within the global business environment determine how well or
poorly an individual firm will fare, so industry analysis should precede company analysis.
A. Micro
B. Macro
C. Fundamental
D. Technical
Answer: B
Explanation:
Analysis of both economies and securities markets are macro-techniques to aid investment
decision which includes deciding if certain asset classes or industries could be performing better
BrainDumps.com
2024
A. 63; $229.95
B. 21; $76.65
C. 12.33; $45
D. 37; $135.05
E. None of these answers is correct.
F. The answer cannot be determined from the information provided.
Answer: C
Explanation:
The earnings multiplier is found as 12.33 for this series, and the value of the series is computed as
$45.
Estimating the earnings multiplier for a stock market series requires the estimation of each of the
following components:
1. The dividend payout ratio.
2. The required rate of return on common stock in the country/region/industry/sector being
analyzed.
3. The expected growth rate of dividends for the stocks in the country/region/industry/sector being
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2025
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2026
A. income adjustments
B. none of these answers
C. return adjustments
D. price adjustments
Answer: D
Explanation:
Technicians do not expect the price adjustment to be as abrupt as fundamental analysts and
efficient market supporters do, but expect a gradual adjustment to reflect the gradual flow of
information.
BrainDumps.com
2027
A. III & V
B. II & IV
C. I, II, III, IV & V
D. I, II, III & IV
E. III & IV
F. IV & V
G. I & II
Answer: C
Explanation:
The risk premium is comprised of each of these components which are influenced by differences
in the general economic and political environment as well differences in trade relations and
operating leverage employed within a country. After each of these components is analyzed, a
unique risk premium may be assigned to a country.
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2028
2029
A. II only
B. III only
C. I only
D. II & III
E. III only
F. II only
G. I, II & III
Answer: B
Explanation:
Empirical evidence convincingly shows that mutual funds do not have a consistent ability to time
the market downturns. Further, based on most empirical research, it is unlikely that mutual funds
can consistently produce superior results, though evidence exists that consistency was achieved
over some historical periods.
2030
2031
A. three factors: the real risk-free rate of return, the expected rate of inflation, and the risk
premium. The real risk-free rate of return and the expected rate of inflation are used to arrive at
the nominal risk-free rate. The risk premium of a security is a function of its variance, and may well
fluctuate over time.
B. two factors: the real risk-free rate of return and the risk premium. The risk-free rate of return
may be influenced in the short-term by tightness or ease in the capital markets. The risk premium
of a security is a function of its variance, and tends to be stable over time.
C. two factors: the real risk-free rate of return, and the risk premium. The risk-free rate of return
should depend on the real growth rate of the economy because capital should grow at least as fast
as the economy. The risk premium of a security is a function of its risk relative to the market, and
tends to be stable over time.
D. three factors: the real risk-free rate of return, the expected rate of inflation, and the risk
premium. The risk-free rate of return (which along with inflation determines the nominal risk-free
rate) may be influenced in the short-term by tightness or ease in the capital markets. The risk
premium of a security is a function of its risk relative to the market, and may well fluctuate over
time.
Answer: D
Explanation:
Although the long-term risk-free rate of return should depend on the real growth rate of the
economy, it may be influenced in the short-term by tightness or ease in the capital markets. The
nominal risk-free rate is equal to (1 + real risk-free rate) x (1 + inflation rate) - 1. The risk premium
is the extra yield that a security requires over the nominal risk-free rate to be attractive to
investors.
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2032
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2033
A. Business risk
B. Exchange rate risk
C. Financial risk
D. Country risk
E. Liquidity risk
F. Government risk
Answer: F
Explanation:
In addition to the consideration of fundamental factors, one should consider market-determined
risk (beta) based on the CAPM. A low beta combined with below-average fundamental risk, for
example, would indicate that the firm's risk is quite low compared to the aggregate market. This
means that the risk premium and the required rate of return for this firm should be lower than the
market. By itself, this lower required rate of return would suggest an earnings multiplier above the
market multiplier.
2034
A. (3.77%)
B. (1.20%)
C. 4.02%
D. The answer cannot be calculated from the information provided.
E. 4.94%
F. None of these answers is correct.
Answer: C
Explanation:
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its
answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this
nomenclature is commonly used within the field of investment management. The logic behind this
characterization is the fact that the IRR equation takes into account both the timing and scale of all
project cash flows. In the determination of the dollar-weighted rate of return calculation, the first
step should be to identify the cash flows for each period. This process is illustrated as follows:
t0: -[20,000 shares purchased * $0.90 per share] = [$18,000]
t1: -[50,000 shares purchased * $1.13 per share] ] = [$56,500]
t2: -[50,000 shares purchased * $1.20 per share] = [$60,000]
t3: [(20,000 shares sold * $1.22 per share) + (80,000 shares sold * $1.20) + (20,000 shares sold *
$1.17 per share)] = $143,800
Now that the cash flows have been determined, incorporating this information into your calculator's
cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 4.02% for this
investment.
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2035
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2036
2037
A. I only
B. II only
C. I & III
D. III only
E. I, II & III
F. II & III
G. I & II
Answer: E
Explanation:
Shares of a closed-end fund trade on an exchange like those of any other firm, with the share
price determined by the laws of supply and demand. The fund issues new shares only
infrequently, when it needs additional capital.
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2038
A. is not affected
B. decreases
C. increases
D. can be all of these answers.
Answer: B
Explanation:
If the premium on the market portfolio increases, the expected return on the stock goes up, too. All
else equal, this can happen only if the price of the stock decreases.
2039
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2040
A. $32.44
B. $30.60
C. $28.12
D. $25.83
Answer: B
Explanation:
The earnings next year are expected to be 7.22 * 1.06 = $7.65 per share. So the dividend
expected next year equals 0.12 * 7.65 = $0.918 per share. The growth rate of dividend also equals
6%. Therefore the price of a stock using the Dividend Discount Model equals P = 0.918/(9% - 6%)
= $30.60.
A. a high AMEX volume to NYSE volume ratio to be a sign that the market is approaching a
trough. This ratio is a measure of investor confidence in the economy. A high value indicates that
investors have enough confidence to invest in the relatively volatile AMEX. Recovering confidence
indicates the approach of a market trough.
B. a high AMEX volume to NYSE volume ratio to be a sign that the market is overbought. This
ratio is a measure of speculative trading activity. A high value indicates a high level of speculation,
which itself is thought to indicate a market peak.
C. a high NASDAQ volume to NYSE volume ratio to be a sign that the market is overbought. This
ratio is a measure of speculative trading activity. A high value indicates a high level of speculation,
which itself is thought to indicate a market peak.
D. a high NASDAQ volume to NYSE volume ratio to be a sign that the market is approaching a
trough. This ratio is a measure of investor confidence in the economy. A high value indicates that
investors have enough confidence to invest in the relatively volatile NASDAQ. Recovering
confidence indicates the approach of a market trough.
Answer: C
Explanation:
Prior to the 1970s, the measure of speculative activity was typically the ratio of AMEX volume to
NYSE volume. But because of the decline in importance of the AMEX, this ratio is no longer a
useful measure. The new measure of speculative activity is the ratio of NASDAQ volume to NYSE
volume. A high ratio is indicative of a high level of speculative activity, which is believed by
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2041
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2042
A. Transactional
B. Historical
C. Regression
D. Technical
Answer: D
Explanation:
As opposed to fundamental analysis, technical analysis focuses on market trends rather than
BrainDumps.com
2043
A. there is a heavy demand for T-bills due to the economic strength of the U.S.
B. investors are ready to take on higher credit risks and there is reduced demand for t-bills relative
to Eurodollar futures.
C. none of these answers.
D. investors are bearish on a global basis.
Answer: B
Explanation:
Eurodollar rate is the rate of interest paid on inter-banking U.S. Dollar loans and deposits outside
the U.S. Since the U.S. Treasury has the best credit in the world, the yield on U.S. Treasury bills is
lower than the Eurodollar rate. The "spread" or the difference between the two rates is a measure
of the additional credit risk involved in inter-bank loans compared to loans to the U.S. Treasury. If
the demand for Eurodollar lending increases relative to the purchase of t-bills, the ED-T-bill spread
will narrow. Thus, the behavior of the spread reflects the risk attitude of investors in the lending
markets.
2044
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2045
2046
A. $129
B. $112
C. $101
D. None of these answers is correct.
E. $103
F. The answer cannot be determined from the information provided.
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2047
A. $159.22
B. $148.83
C. $143.24
D. $154.60
Answer: D
Explanation:
It is important to remember that the P/E ratio is the ratio of the current stock price and next year's
expected earnings. Therefore, current stock price = 12.3 * 12.1 * 1.039 = $154.6
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2048
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2049
A. 12.41
B. Manipulating the Infinite Period DDM will produce a nonsensical answer in this case.
C. 18.51
D. 11.71
E. 13.51
Answer: D
Explanation:
To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company,
use the following formula:
P/E = [(d1 / e1) / (k - g)]
Where: P/E = the earnings multiplier, d1 / e1 = the dividend payout ratio at t1, k = the required rate
of return, and g = the anticipated future growth rate.
In this example, all of the necessary information has been provided, but some rearranging is
necessary. Specifically, the dividend payout ratio must be determined. This figure is found as
follows:
Dividend payout ratio = [$4.11 / $7.02] = 0.58547, or 58.55%
Now that the dividend payout ratio has been determined, we can solve for the appropriate
earnings multiplier. The calculation of this figure is found as follows:
P/E = [0.5855 / (0.11 - 0.06) = 11.71
In generally favorable economic conditions, this is a realistic earnings multiple for an average
automobile manufacturer.
BrainDumps.com
2050
A. I only
B. II only
C. I & III
D. III only
E. I & II
F. I, II & III
Answer: B
Explanation:
You have to be careful in distinguishing between a growth stock and a growth firm. A growth stock
need not represent a growth firm. Rather, it is defined as a stock that has consistently generated
returns higher than those justified by the risks. Such a situation arises either because the company
BrainDumps.com
2051
A. country risk
B. business risk
C. all of these are correct
D. financial risk
E. liquidity risk
F. the industry required rate of return
G. exchange rate risk
Answer: C
Explanation:
Alternatively, you can estimate the risk premium based on the CAPM, which implies that the risk
premium is a function of the systematic risk of the asset.
BrainDumps.com
2052
A. IV only
B. I & III
C. III only
D. I only
E. I, II & III
F. II only
G. I & II
Answer: D
Explanation:
Even if a company is good, the market could temporarily elevate the price above that consistent
with its risk. In that case, the stock is overpriced and it may not make sense to buy it, though that
decision still must be based on a portfolio diversification context.
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2053
2054
2055
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2056
2057
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2058
2059
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2060
2061
2062
A. specific estimate
B. current earnings
C. direction of change
D. gross magnitude
Answer: C
Explanation:
There are two ways to estimate the earnings multiplier: (1) Direction of change approach and (2)
Specific estimate approach. The first focuses on change and change direction, while the other
focuses on scenario-based estimates.
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2063
A. short
B. cumulative
C. contrarian
D. diffusion
Answer: D
Explanation:
By definition: The diffusion index shows the number of stocks advancing plus one-half the number
unchanged, divided by the total number of issues traded. Such an index gives an idea of how
many individual stocks are advancing as a percentage of all the individual stocks in a composite
index.
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2064
A. the stock price must have experienced an overall upturn. If the current price slide reverses
itself, and the stock price moves above its 200-day moving average on heavy volume, technical
analysts would view this as a very positive sign.
B. the stock price must have experienced an overall downturn. If the current price slide reverses
itself, and the stock price moves above its 200-day moving average on heavy volume, technical
analysts would consider this to be a sign that the stock is overbought.
C. the stock price must have experienced an overall downturn. If the 50-day moving average is
also below the 200-day moving average, but then moves up above the 200-day moving average,
technical analysts would consider this a sign that the market is overbought.
D. the stock price must have experienced an overall downturn. If the 50-day moving average is
also below the 200-day moving average, but then moves up above the 200-day moving average
on heavy volume, technical analysts would consider this to be a bullish sign.
Answer: D
Explanation:
In order for a moving average of a stock price to be below the current price, the stock price must
have experienced an overall decline. Technicians believe that the current price breaking through
the moving average from below on heavy volume is a very positive sign, and may well signal the
reversal of the declining trend. If the current price breaks through the moving average from above
on heavy volume, this would be taken as a very negative sign. The same is true of changes in the
relative positions of a longer moving average and a shorter moving average.
A. you first estimate the industry growth rate (g) which is determined by the retention rate and the
return on equity.
B. you examine the relationship between the multiplier for the industry and the market.
C. you first estimate the industry required rate of return (k) because this is influenced by the riskfree rate and the expected inflation rate.
D. you compute an average multiplier for the industry.
E. you examine the specific variables that influence the earnings multiplier.
Answer: B
Explanation:
The two alternative techniques to estimate an industry earnings multiplier aremacroanalysis,
where you examine the relationship between the multiplier for the industry and the market, and
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A. 66.11%
B. None of these answers is correct.
C. The answer cannot be calculated from the information provided.
D. 46.76%
E. 58.27%
Answer: C
Explanation:
Remember that the dollar-weighted rate of return uses the IRR equation in the determination of
the answer. In fact, the dollar-weighted rate of return is another name for the IRR equation, and
this nomenclature is commonly used within the field of investment management. So said, in the
determination of the dollar-weighted rate of return calculation, the first step should be to identify
the cash flows for each period, beginning with t0: the initial investment outlay. In this example, the
initial cash outlay is not specified, and therefore the calculation of the dollar-weighted rate of return
cannot accurately be determined.
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A. dividends must be discounted in favor of earnings to arrive at the correct valuation for common
stock.
B. the value of a share of common stock is the present value of all future earnings.
C. the value of a share of common stock is the present value of all future dividends.
D. dividends are worth more in the future than in the present.
Answer: C
Explanation:
The dividend discount model (Dividend Discount Model) assumes that the value of a share of
common stock is the present value of all future dividends, not earnings. The Dividend Discount
Model assumes that a dollar today is worth more than a dollar tomorrow.
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A. III only
B. I, II & IV
C. I only
D. II & IV
E. IV only
F. I, III & IV
G. I & III
H. II only
Answer: G
Explanation:
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A. $600
B. $283
C. $129
D. $300
E. Not enough information
Answer: E
Explanation:
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A. a hold signal.
B. a bearish signal.
C. none of these answers.
D. a bullish signal.
Answer: B
Explanation:
Credit balances with brokerages result when investors sell their stock holdings and leave the cash
balances with their brokers, expecting to reinvest them shortly. Technical analysts view these
balances as pools of potential purchasing power overhanging the market and hence believe that
the market is bullish. Contrarians, on the other hand, believe that most market participants make
wrong investment decisions as the market approaches the peak or trough in a cycle. Hence,
contrarians consider a large increase in credit balances as a bearish signal.
Topic 4
4,Financial Reporting and Analysis
QUESTION NO: 3721
Rocky Johnson, CFA, manages a large capitalization equity mutual fund. His superiors have
requested that he provide them the appropriate benchmarks to compare future performance
against. Johnson makes the following statements:
Statement 1:We should use an unweighted index because it would best reflect the large company
bias in the portfolio.
Statement 2:Stocks in the portfolio frequently split the number of shares outstanding. Therefore,
in the long run, the Dow Jones Industrial Average would best reflect these events.
Are Johnson's two statements correct?
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Kramer expects the Emerging Market Fund to earn 12% per year.
Select the class of Emerging Market Fund shares that are most appropriate for Kramer's clients.
- Class A.
- Class B
A. C Class C
Answer: A
Explanation:
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Based on the price to cash flow multiple, state whether Delmar or Bell United is more attractive for
purchase
A. Delmar is more attractive.
B. Bell United is more attractive.
C. Delmar and Bell United are equally attractive.
Answer: A
Explanation:
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If after three months, the price of BSI stock is $54.60 and the price of HPC stock is $8.13, which of
the following strategies would have yielded Green the greatest profits?
A. Short BSI put with a $45.00 strike; Short HPC call with a S7.50 strike.
B. Long BSI put with a $45.00 strike; Long HPC call with a $7.50 strike.
C. Short BSI call with a $55.00 strike; Long HPC put with a $10.00 strike.
Answer: C
Explanation:
The market cap rate that Hart would be willing to pay for the apartment building is closest to:
A. 0.125
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The appraised value for the proposed property using the income approach is closest to:
A. $1,268,125
B. $1,504,375
C. $1,623,200
Answer: B
Explanation:
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Current and future Target capital structure: 50% debt and 50% equity.
After-tax cost of debt (kd)* (1-t) = 7.00%.
Cost of internal equity = 13.00%.
Cost of external equity = 17.50%.
Earnings are estimated at $100 million
The dividend payout ratio is 45.0%.
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Using the information in the table, determine which of the following statements is FALSE?
A. The geometric return is less than 11.7%.
B. If the three stocks comprise an index, a change in Stock Payton would have the biggest impact
if the index was market-value weighted.
C. An investor creating a price-weighted index of these three stocks would need to change his
holdings at year-end to reflect the price changes.
D. If the three stocks comprise an index, a change in Stock Strand would have the biggest impact
if the index was price-weighted.
Answer: C
Explanation: Aprice-weighted indexassumes that the investor holds an equal number of shares of
each stock in the index. Since the number of stocks did not change, the investor wouldnotneed to
change his holdings.
The other statements are true. A price-weighted index is most influenced by the stock with the
highest per-share price (Strand). A market-value weighted index is most influenced by the stock
with the largest market capitalization (Payton). The geometric return is always less than the
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Note: 1Future values are entered in a financial calculator as negatives to ensure that the PV result
is positive. It does not mean that the cash flows are negative.
Also, your calculations may differ slightly due to rounding. Remember that the question asks you
to select the closest answer.
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Which of the following choices is closest to the correct answer? The per share value of Meerkat
Publishing is:
A. $31.52.
B. $45.39.
C. $32.86.
D. $24.06.
Answer: C
Explanation: The FCFE is calculated as follows (all amounts in million of $ except per share
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Joel recognizes that his software only includes the valuation information for European style
options. He wants to know how the premium of an American style option compares with its
European counterpart. Which of the following is TRUE? The premium of the American option:
A. the same or lower.
B. strictly higher.
C. the same or higher.
D. strictly lower.
Answer: C
Explanation: The owner of a European option may exercise it only at expiration whereas an
American option can be exercised at any time before or at expiration. Therefore, an American
option cannot be worth less than a European option.
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A. For mutually exclusive projects, the decision rule is to pick the project that has the highest net
present value (NPV).
B. If the change in current liabilities is greater than the change in current assets, it means that
additional financing was needed and there is a cash outflow.
C. An analyst can ignore inflation since price level expectations are built into the weighted average
cost of capital (WACC).
D. Replacement decisions involve mutually exclusive projects.
Answer: D
Explanation: Because replacement decisions involve either keeping the old asset or replacing the
old asset, the projects are mutually exclusive.
The decision rule for NPV is to pick the project with the highest positive NPV. Only projects with
positive NPV add to the companys value. If a neither project has a positive NPV, neither project
should be chosen. The statement about net working capital (NWC) is stated in the reverse of how
we usually think of it:in NWC =Current Assets Current Liabilities. Here, the change in current
liabilities exceeds the change in current assets and the result is negative, meaning the project
frees up cash, creating a cash inflow. Because the WACC is adjusted for inflation, the analyst
must adjust project cash flows upward to reflect inflation. If the cash flows are not adjusted for
inflation, the NPV will be biased downward. (Reverse the preceding logic for deflation.)
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Notes:1Repeats color laser project beginning in year 3; year 3 cash flow equals the net initial
investment cost of $40,000 and $20,000 inflow from the last year of the first printer.
Following are examples of how to use financial calculator to solve this problem. (Note, the
example is for the unadjusted NPV, IRR, and EAA of the color laser printer. Use a similar
methodology to determine the NPV, IRR, and EVA for the other cash flows streams.
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jjoachim_SS15_1_B_e_FVCoupon
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jjoachim_SS15_1_B_e_RealizedR
Here, Realized ReturnAnnualized Basis= [ (1,272.15 / 906.70)1/81] * 2 = 0.08648, or
8.65%.
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jjoachim_SS15_1_C_j_duration
Where:
V= Call price/price ceiling
V+
= estimated price if yield increases by a given amount,y
V0
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Which of the following statements about the graph and the covered call strategy is INCORRECT?
A. If Minogue goes ahead with the covered call, she will limit her gain to $11.
B. The distance between points C and D is $5.
C. The call writer will have unlimited upside potential.
D. Line Y represents the covered call's profit line.
Answer: C
Explanation: The call buyer has unlimited upside potential. If the stock price exceeds $39, the
buyer will exercise the option and will realize all gains (once the cost of the premium is recovered).
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Using the information in the table, calculate the value of a price-weighted index at year-end and
the one- year return on the market weighted index. At the beginning of the year, the value of the
market weighted index was 100. (Note: The choices are listed in the order price-weighted index
value, market value-weighted index percent return, respectively.) Which of the following choices is
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First, we will calculate the value of the price-weighted index at year-end, and then we will calculate
the return on the market-weighted index.
Step 1: Calculate value of the price-weighted index at year-end:
Value of price-weighted index = (sum of stock per share prices) / (number of stocks)
= (15 + 50 + 85) / 3 =50.0
Step 2: Calculate the one-year return on the market-weighted index:
First, we will calculate the year-end market-weighted index value, then we will calculate the return
percentage.
Value of market-weighted index =
[(market capitalizationyear-end) / (market capitalizationbeginning of year)]* Beginning index value
= (442,500 / 400,000) * 100 = 110.625
One-Year Return = [(Index valueyear-end/ Index valuebeginning of year) -1]* 100
= [ (110.625 / 100) 1] * 100 =10.625, or approximately 10.6%.
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Question-LI-SS14-LOS1-A-a-answer-1
Question-LI-SS14-LOS1-A-a-answer-2
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A. $104,000.
B. $98,600.
C. $114,600.
D. $120,000.
Answer: D
Explanation:
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A. $17.30.
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Assuming that Korotkin remains most interested in covering the booth cost (which has increased
to $840), how many more or fewer blankets (new style) does she need to sell to cover the booth
cost? To cover this years booth costs, Korotkin needs to sell:
A. 42 more blankets than last year.
B. 42 fewer blankets than last year.
C. 30 fewer blankets than last year.
D. the same amount of blankets as last year.
Answer: C
Explanation: To obtain this result, we need to calculate Last Years Breakeven Quantity, This
Years Breakeven Quantity, and calculate the difference.
Step 1: Determine Last Years (Basic Blanket) breakeven quantity:
QBE= (Fixed Costs) / (Sales Price per unit Variable Cost per unit) = 750 / (25 20) = 150
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Using the information in the table, calculate the value of a market-value weighted index at yearend and the one-year return on the price-weighted index. The beginning value for the market index
is 100. (Note: The choices are listed in the order market-value weighted index value and priceweighted index percent return, respectively). Which of the following choices is closest to the
correct answer?
A. 10.6, 6.3.
B. 110.6, -6.3.
C. 110.6, 50.0.
D. 10.6, 8.4.
Answer: B
Explanation: Calculations are as follows:
First, we will calculate the value of the market-value weighted index at year-end, and then we will
calculate the return on the price-weighted index.
Step 1: Calculate value of the market-weighted index at year-end:
Value of market-weighted index =
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ke
= nominal risk free rate + [beta * (expected market return nominal risk free rate)]
Note: Nominal risk-free rate = (1 + real risk free rate) * (1 + expected inflation) 1
g
=
= (200,000/1,000,000)*(1,000,000/750,000)*(750,000/500,000) = 0.40
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Consider the purchase of an existing bond selling for $1,150. This bond has 28 years to maturity,
pays a 12 percent annual coupon, and is callable in 8 years for $1,100.
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A. $13.26.
B. $27.03.
C. $15.96.
D. $27.03.
Answer: C
Explanation:
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