Kaplan Mock 4 Am

Front 1

Under suitability, what should be considered when creating an IPS for a client (what do these entail?)

1) client identification

(2) investment objectives

(3) investor constraints

(4) performance measurement benchmarks.

Back 1

1) client identification (type and nature of clients, existence of separate beneficiaries, and approximate portion of total client assets;

(2) investment objectives (return objectives and risk tolerance);

(3) investor constraints (liquidity needs, time horizon, tax considerations, legal and regulatory circumstances, unique needs and preferences); and

(4) performance measurement benchmarks.

Front 2

CFA is the Financial Manager of XYZ corp. He has just learned that Net Income and earnings for the quarter are going to be well below expectations. If he wants to tell specific analysts about this because they have helped him in the past, why is this a violation of fair dealing?

What should he do instead?

Back 2

Notifying any specific analysts first is a violation of Standard III(B) Fair Dealing, regardless of any help they may have provided in the past.

Issuing a press release is the best way to achieve fair public dissemination.

Front 3

CFA writes an economic forecast with several interest rate projections. After submitting the report, the investment committee tweaks some of her interest rate forecast. What must she do now?

Back 3

When Preparing ANALYTICAL REPORTS, group consensus is not required. She does not have to do anything.

Unless she believed that the investment committee did not have reasonable and adequate basis for their changes, in which case she would only need to have her name removed

Front 4

Members beneficially own securities or other investments that they ....

Back 4

or a member of their immediate family own or that are held in trust for them or their immediate family.

Front 5

Alice Morton, CFA, is reviewing a research paper that reaches a conclusion based on two hypothesis tests with p-values of 0.037 and 0.064. Morton should conclude that both of these tests' null hypotheses can be rejected with 90% confidence. Why? Can they be rejected at the 95% interval?

Back 5

The P value is the smallest significance level at which the Null Hypothesis can be rejected at. Or the highest confidence interval. Both P values are below 0.10 (which is 90% confidence) so both null hypothesis can be rejected at the 90% Conf. Int. Only the 0.037 can be rejected at 95% confidence interval

Front 6

CFA has a population of growth stocks, and uses a simple random sample to pull 100 stocks from his pool. He explains that the distribution of the 100 sampled stocks is called a sampling distribution. Why is this incorrect?

Back 6

When he pulls that 100 stock sample, he will get sample statistic, i.e. a sample mean. A sampling distribution is the the probability distribution of that sample statistic that forms after repeated sampling of the original population.

Front 7

Kidra Rao ranks and classifies firms into ten groups based on their interest coverage ratios, lowest to highest. Rao's ranking system is best described as a Ordinal Scale and not a ratio scale... why?

Back 7

Ordinal scale groups data in a way that can be ordered, such as rates of return.

Ratio Scale amounts can be meaningfully manipulated. Ask yourself, does a group 4 firm have exactly twice the interest coverage as a group 2 firm?

Front 8

If the government decides to intervene in a market and subsidize a product, what is the effect on the Supply and demand curves? to producers, consumers, quantity, price?

Marginal benefit vs marginal Cost? Deadweight?

Back 8

Shifts the Supply curve to the right, demand stays constant. Consumers pay less than they would have, producers make more than they would have, and output is above where it would be without the subsidy. in this situation, the Marginal Cost to the economy outweighs the marginal benefit, resulting in a deadweight loss due to overproduction and a surplus of the good.

Front 9

Actual read GDP is equal to potential GDP in the long Run... explain how it can differ in the short run... Hint: Recessionary and inflationary gaps, price levels

Back 9

In the short run, Real GDP can be less than full employment (Recessionary Gap that exerts downward pressure on wages) or above full employment (Inflationary gap that exerts upward pressure on wages)

Long run there is no upwards on downwards pressure on wages, and Real GDP = Potential GDP

Front 10

The difference between GDP and GNP is that GDP measures

Back 10

output produced by factors of production located within the country, while GNP measures output produced by factors supplied by the country's citizens.

Front 11

Percentage of Completion Vs Completed contract method effect on cash Flows, Net Income, Income Volatility, Total Assets, Equity.

Back 11

% of completion

Cash flows - Same

Net Income - Higher

Income Volatility - Lower

Total Assets - Higher

Equity - Higher

Everything is better with % of completion

Front 12

Order of Auditor opinion

1.Best

2.

3.

4.Worst

Back 12

Unqualified - auditor is reasonably assured that the financial statements are free of material errors.

Qualified - if the financial statements include exceptions to applicable accounting standards and will explain the nature and effect of these exceptions.

Adverse - if the financial statements are not presented fairly

Disclaimer of Opinion - Opinion cannot be rendered by auditor because of limitations on extent of examination

Front 13

Information about any conflicts of interest between management, the board of directors, and shareholders can most likely be found in the

Back 13

Proxy Statement

Front 14

Deferred tax assets result from Gains that are recognized on __________________ before they are recognized in the ______________ while deferred tax liabilities result from gains that are recognized in the ____________ before they are recognizes as ___________. Deferred tax ________ result from Losses that are recognized in the income statement before they are tax deductible, while deferred tax _________ result from losses that are tax deductible before they are recognized in the income statement.

Back 14

Deferred tax assets result from gains that are taxable before they are recognized in the income statement, while deferred tax liabilities result from gains that are recognized in the income statement before they are taxable. Deferred tax assets result from losses that are recognized in the income statement before they are tax deductible, while deferred tax liabilities result from losses that are tax deductible before they are recognized in the income statement.

Front 15

fixed charge coverage ratio formula is ?

Back 15

EBIT + lease payments) / (interest payments + lease payments)

Front 16

Jansen Co., a manufacturer of high-end sports equipment, earned $45 million in net income for the year. The company paid out $1.30 per share in dividends. Jansen issued 500,000 shares at the beginning of the year at $20 (1 million shares were outstanding before the issuance). The market value of Jansen's trading securities decreased by $2.4 million. The increase in Jansen's stockholders' equity is closest to:

Back 16

$45,000,000 - [(1,000,000 + 500,000 shares) × $1.3/share] + (500,000 × $20/share) = $53,050,000

Dont factor in the change in value of trading securities because that is already accounted for in Net Income

Front 17

Free cash flow to the Firm

Back 17

CFO + Interest(1-t) - Fixed Capital expenditure

Front 18

Free Cash Flow to Equity

Back 18

CFO - Fixed Capital Expenditure + Net Debt increase

Front 19

Net income of $43.7 million.Depreciation expense of $4.2 million. Increase in accounts receivable of $1.5 million. Decrease in accounts payable of $2.3 million. Increase in capital stock of $50 million. Sold equipment with a book value of $7 million for $15 million after-tax. Purchased equipment for $35 million. Joplin's free cash flow to the firm (FCFF) is closest to:

Back 19

Use Indirect Method

NI + Depexp - AccRec - AccPay - Profit from equipment sale = CFO

CFO - (Equipt Purch - After Tax proceeds for equiptment sale)

16 Million

Front 20

"Prior-period information may only be presented when specifically permitted or required by a standard."

Why is this incorrect under IFRS

Back 20

IAS No. 1 states that firms should present comparative information for prior periods unless a specific standard states otherwise.

Front 21

Under IFRS, are firms free to offset assets against liabilities at their discretion?

Back 21

No, One of the general requirements stated in IAS No. 1 is that firms not offset assets against liabilities unless a specific standard permits or requires it.

Front 22

What financial statement under IFRS is not prepared using accrual accounting

Back 22

Statement of Cash Flows

Front 23

A bond is sold at a discount today.

"The coupon payments will decrease operating cash flow each year and the discount will decrease financing cash flow at maturity."

Explain this statement

Back 23

The interest expense is comprised of the coupon payment (which is an operating cash flow) and the amortization of the discount (which is a non-cash flow). Thus, CFO is affected over the life of the bond, and when Face Value is repaid at maturity, the discount will decrease Financing Cash Flow at maturity, when FV is paid out.

Front 24

Under US GAAP, what Intangible Assets are not capitalized?

Back 24

R & D

Advertising

Software development to establish feasibility

(Soft Dev costs once feasibility is established is capitalized though!!)

Front 25

XYZ Corp recently leased equipment used as an operating lease. CFA, believes that XYZ should have capitalized the lease, and he adjusts XYZ's financial statement to reflect his view. CFA's adjustment will have what effect on

Debt/Capital ... ROE ... Interest coverage ratio

Back 25

finance lease will result in higher interest expense. EBIT stays the same because depreciation still hits income statement. Thus, the interest coverage ratio is lower (higher denominator). A finance lease adds debt to balance sheet = higher debt-to-capital ratio. B/c interest expense is higher in the early years of a finance lease, earlier net income is lower in Over time, interest expense decreases as the liability is reduced through principal payments, resulting in higher net income in the later years of the lease.

Front 26

Under U.S. GAAP, the completed contract method of revenue recognition for a long-term project specifies that the profit or loss from the project is recognized only when the project is completed.

Why is this false?

Back 26

Profit can only be recognized at project completion, but an expected loss on a project must be recognized immediately

Front 27

what is the decision criteria for whether to accept a project based on profitability index

Back 27

If PI > 1, accept project If PI < 1, reject project

Front 28

Commercial paper issuance and revolving credit agreements are typically only available to?

Back 28

typically only available to larger corporations with high credit ratings.

Front 29

The four typical steps in the capital budgeting process are

Back 29

generating ideas, analyzing project proposals, creating the firm-wide capital budget, and monitoring decisions and conducting a post-audit.

Front 30

The asset beta of a firm equals its equity beta if

Back 30

The company has no debt

Front 31

Nagle Company produces a commodity with a market price of $3.25 per unit. Nagle forecasts production and sales of 900,000 units over the next quarter. Nagle's variable cost per unit is $3.75, and fixed operating costs are $400,000. What is her optimal operating Profit/Loss?

Back 31

This is all forecasted, and not set in stone. She will be be operating at a loss if she chooses to run at forecasted production. She would be better served by shutting down temporarily, in which case she could limit her operating loss to only her fixed operating costs of -$400,000

Front 32

A bond that insures against employee theft or dishonesty. What is..

Back 32

What is a surety bond

Front 33

A bond that insures against non-performance by a party to a contract. What is...

Back 33

What is A fidelity bond

Front 34

purchased by insurance companies to transfer their risk. What is...

Back 34

What is Reinsurance

Front 35

Compare the Investment Horizons of Life insurance companies vs property and casualty insurers

Back 35

Insurance companies invest customer premiums with the objective of funding customer claims as they occur. Life insurance companies typically have a long-term investment horizon, while property and casualty (P&C) insurers have a shorter investment horizon because their claims are expected to arise sooner than those of life insurers.

Front 36

Beta is calculated as Covariance of assets return with market returns divided by variance of market returns.

But is can also be calculated using correlation in what way?

Back 36

Beta can also be calculated as thecorrelation of the asset's returns with market returns multiplied by the ratio of the standard deviation of the asset's returns to the standard deviation of the market's returns.

Front 37

New competitors are most likely to enter an industry during the growth stage of the industry life cycle. Why not in the embryonic stage?

Back 37

New entrants are less of a threat in the embryonic stage, when growth is slow and customer acceptance of the new product or service is highly uncertain.

Front 38

must be paid any omitted dividends from prior periods before the firm may pay dividends to common shareholders.

Back 38

What is Cumulative Preferred shares

Front 39

of the following types of index which is least likely to require frequent reconstitution of constituent securities

Equity, commodity, fixed income and why?

Back 39

Reconstitution occurs when the securities that make up an index change or are replaced (no longer meet criteria)

Equity is least likely as only large corporate events cause reconstitution (M&A, Bankrupcy)

Commodity indexs are made up of futures contracts which are constantly expiring and rolling over into new contracts. Bonds maturing causes FI turnover to be high

Front 40

Using the derivative pricing rule, orders on an electronic crossing network are executed when and at what price?

Back 40

fixed times of day at the average of the bid and ask quotes on the exchange where the security primarily trades.

Front 41

What Risk does the OAS represent vs Z spread? (which stands for what)?

What is the implied cost of an embedded call option?

Back 41

OAS is the compensation for credit and liquidity risk above the benchmark. Z spread has both these risk but also accounts for volatility risk that results from having the embedded option.

The difference between the Z spread and the OAS.

Front 42

What is the problem with using G and I spread?

Back 42

They are theoretically correct only if the spot yield curve is flat.... generally this is not the case and is typically upwards sloping

Front 43

What attribute of a bond may qualify it be a candidate for effective duration?

Back 43

If the bond has some type of prepayment characteristics that are similar to a callable bond.

for example, mortgage backed bonds have prepayment risk that makes their price yield relationship similar to callable bonds

Front 44

With respect to fixed income markets, the "grey market" refers to trading

Back 44

bonds that have not yet been issued.

i.e. trading of bonds on a "when issued" basis

Front 45

Based on the constant yield price trajectory, how do you determine if you have had a capital gain or loss as part of your holding period return on a bond bought and sold.

Back 45

Find out the Financial calculator inputs at time of purchase

Using those inputs, holding interest rates constant, calculate what the Present Value of the bond is at the TIME OF SALE

If you sold the Bond at a price higher than the Present Value of the bond at time of sale, then you incurred a capital gain.

Front 46

Immediately after reset, how can a floating rate bond be priced at a discount to par?

Back 46

if the note's credit quality has decreased (which means its required margin is greater than its quoted margin) or if the variable rate has a cap and the reference rate plus the quoted margin exceeds the cap. (variable rate has a ceiling)

Front 47

Effect on Calls of increase in

Asset Price

Exercise Price

Holding Costs

Holding Benefits

Volatility

time to expiration

Back 47

Increase in

Asset Price - Increase

Exercise Price - Decrease

Holding Costs - Increase

Holding Benefits - Decrease

Vol and Time to maturity - Increase (same for puts)

Front 48

Costs and benefits of holding the underlying asset affect the value of a forward contract when?

Back 48

Only before expiration

Front 49

At expiration what is the value of a forward contract?

Back 49

The difference between the forward price and the spot price of the underlying asset

Front 50

What are The two types of LBOs?

Back 50

Management buyouts, in which the existing management team is involved in the purchase,

Management buy-ins, in which an external management team replaces the existing management team.

Front 51

Mezzanine financing in an LBO refers to the issue of securities (Not Mezzanine Stage financing) that have what characteristics

Back 51

that have both debt and equity features so that they are on the balance sheet between debt and equity... often subordinate to high yield debt issued.

Front 52

An investor in a hedge fund that holds some thinly traded securities is wondering about how the net asset value is calculated for the hedge fund's financial statements. He should know that on the financial statements, net asset values are most likely calculated using the average of the bid and ask for traded securities.

Back 52

For financial reporting purposes the value of a position is calculated using either the average of the bid and ask or using the bid for long positions and the ask for short positions. In calculating the value of positions for trading purposes, funds often subtract a discount for illiquidity from accounting NAV, resulting in a lower trading NAV.