Questionmark Perception PDF

5/16/2016
Questionmark Perception
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Question
1 of 120
In cases where applicable local laws governing calculation and presentation of investment performance
conflict with the GIPS standards, firms are:
required to comply with local regulations and make full disclosure of the conflict to claim GIPS
compliance.
unable to claim GIPS compliance in cases where local regulations prohibit accurate calculation.
required to calculate and maintain two sets of performance data in order to claim GIPS compliance.
Question not answered
In cases where applicable local laws governing calculation and presentation of investment performance
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conflict with the GIPS standards, firms must comply with local regulations and fully disclose the conflict in
the compliant presentation.
CFA Level I
"Global Investment Performance Standards (GIPS)," CFA Institute
Section 4.A.22
Question
2 of 120
According to the Global Investment Performance Standards (GIPS), which of the following is not a part
of the verification process? Testing whether the:
firm has complied with all the composite construction requirements.
firm's processes and procedures are designed to calculate results in compliance with GIPS standards.
verification is undertaken by the compliance department in the absence of a third party.
Verification tests (Standard V) whether the investment firm has complied with all the composite construction
requirements of GIPS on a firm-wide basis, and whether the firm's processes and procedures are designed
to calculate and present performance results in compliance with the GIPS standards. Verification must be
performed by an independent third party. A firm cannot perform its own verification.
CFA Level I
"Introduction to the Global Investment Performance Standards (GIPS)," CFA Institute, 2011
Question
3 of 120
Which of the following is least likely a requirement of the GIPS standards? Firms are required to:
present a minimum of five years of annual investment performance compliant with the GIPS standards.
include all discretionary, fee-paying portfolios in at least one composite.
have their performance records verified by an independent third party.
It is a recommendation but not a requirement that firms obtain independent third-party verification to claim
GIPS compliance. Firms are required to include all discretionary, fee-paying portfolios in at least one
composite. They must also present a minimum of five years of annual investment performance compliant
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with the GIPS standards.

CFA Level I
"Global Investment Performance Standards (GIPS)," CFA Institute
GIPS Standards
Question
4 of 120
According to the CFA Institute Code of Ethics and Standards of Professional Conduct, trading on
material nonpublic information is least likely to be prevented by establishing:
personal trading limitations.
selective disclosure.
firewalls.
Selective disclosure occurs when companies discriminate in making material nonpublic information public.
Corporations that disclose information on a limited basis create the potential for insider-trading violations.
See Standard II(A).
CFA Level I
"Guidance for Standards I-VII," CFA Institute
Standard II(A)
Question
5 of 120
Madeline Smith, CFA, was recently promoted to senior portfolio manager. In her new position, Smith is
required to supervise three portfolio managers. Smith asks for a copy of her firm's written supervisory
policies and procedures but is advised that no such policies are required by regulatory standards in the
country where Smith works. According to the Standards of PracticeHandbook, Smith's most
appropriate course of action would be to:
require her firm to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct.
decline to accept supervisory responsibility until her firm adopts procedures to allow her to adequately
exercise such responsibility.
require the employees she supervises to adopt the CFA Institute Code of Ethics and Standards of
Professional Conduct.
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According to guidance for Standard (IV(C), if a member cannot fulfill supervisory responsibilities because
of the absence of a compliance system or because of an inadequate compliance system, the member should
decline in writing to accept supervisory responsibility until the firm adopts reasonable procedures to allow
the member to adequately exercise such responsibility.
CFA Level I
Standard IV(C)
Question
6 of 120
When Jefferson Piedmont, CFA, joined Branch Investing, Branch began using a quantitative stock
selection model Piedmont had developed on his own personal time prior to his employment with Branch.
One year later when Piedmont left Branch Investing, he found the original copy of the model he had
developed in a file at his home and presented it to his new employer, which immediately began using the
model. According to the Standards of Practice Handbook, did Piedmont most likely violate any CFA
Institute Standards of Professional Conduct?
Yes, because he misappropriated property now belonging to Branch
Yes, because he failed to inform his new employer the model was the same one used by his previous
employer
No
Although departing employees may not take employer property when departing, as the guidance for
Standard IV(A) Loyalty outlines, the model Piedmont presented to his new employer was not Branch's
property. It was created by Piedmont prior to his employment with Branch. The model was not created for
Branch in the course of his employment, even though it was adopted by Branch.
CFA Level I
Standard IV(A)
Question
7 of 120
Lee Chu, a CFA candidate, develops a new quantitative security selection model exclusively through
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Lee Chu, a CFA candidate, develops a new quantitative security selection model exclusively through
back-testing on the Chinese equity market. Chu is asked to review marketing materials that include an
overview of the conceptual framework for his model, provide back-tested performance results, and list
the top holdings. Chu directs the marketing group to remove the description of his model because of
concerns that competitors may attempt to replicate his investment philosophy. He also instructs the
marketing group to remove the list of the top holdings because it shows that the top holding represents
30% of the back-tested model. Which of the following actions is least likely to result in a violation of the
Code and Standards? Chu's:
failure to disclose that the top holding represents such a large allocation in the model
use of back-tested results in communication with prospective clients
failure to adequately describe the investment process to prospective clients
The use of back-tested results is not prohibited, provided it is appropriately disclosed.
CFA Level I
Standard V(B)
Question
8 of 120
Heidi Katz is a CFA candidate and an analyst at a pension consulting firm. Her father is a major
shareholder and managing director at Saturn Partners, a large hedge fund. When assisting in an alternative
manager search for a pension client, Katz plans to recommend Saturn's market-neutral strategy because
she believes it meets all of the pension plan's criteria. Given this situation, the best course of action for
Katz is to:
disclose the potential conflict to the pension client when discussing this recommendation.
disclose the potential conflict to her employer and follow their guidance regarding disclosure of her
relationship to the client.
not present this strategy to the client and recommend another strategy.
Standard VI (A) requires disclosure of conflicts but does not prohibit members from making
recommendations as long at the potential conflicts are appropriately disclosed.
CFA Level I
Standard IV(A)
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Question
9 of 120
Rebecca Wong is enrolled to take the Level I CFA exam. Her friend William Leung purchased Level I
study materials from a well-known CFA review program the previous year. Leung made a photocopy of
the previous year's copyrighted materials and sold it to Wong to help her study. Who most likely violated
the CFA Institute Code of Ethics or any Standards of Professional Conduct?
Both violated.
Only Leung violated.
Neither violated.
Photocopying copyrighted material, regardless of the year of publication, is a violation of Standard I(A)
because copyrighted materials are protected by law. Candidates and members must comply with all
applicable laws, rules, and regulations and must not knowingly participate or assist in a violation of laws.
CFA Level I
Standard I(A)
Question
10 of 120
Albert Nyakenda, CFA, was driving to a client's office where he was expected to close a multi-milliondollar deal, when he was pulled over by a traffic policeman although he did not believe he had violated
any traffic laws. When Nyakenda realized the policeman planned to wrongly ticket him for speeding, he
offered to buy him "lunch" so that he could quickly get to his client's office. The lunch would cost
significantly more than the ticket. The alternative was to go to the police station and file a complaint of
being wrongly accused that would also involve going to court the next day to present his case. Did
Nyakenda most likely violate the CFA Institute Code of Ethics?
No, because the cost of lunch is more than the ticket
No, because he was wrongly accused
Yes
Nyakenda was effectively trying to bribe the policeman so that he would not issue a speeding ticket. This
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action violates the Code of Ethics. Despite feeling he was wrongly accused, it is only his opinion, and may
not be based on fact or upheld in a court of law. Nyakenda has a responsibility to act with integrity and in
an ethical manner as required by the Code of Ethics.
CFA Level I
Question
11 of 120
Sanctions imposed by CFA Institute for violations of the CFA Institute Code of Ethics or Standards of
Professional Conduct leastlikely include:
revocation of a CFA Charter.
monetary fines.
public censure.
Sanctions available to CFA Institute do not include monetary fines. However, sanctions imposed by CFA
Institute can still have significant consequences, including public censure, suspension of membership and use
of the CFA designation, and revocation of the CFA charter. Candidates enrolled in the CFA Program who
have violated the Code and Standards or testing policies may be suspended or prohibited from further
participation in the CFA Program.
2016 CFA Level 1
"Code of Ethics and Standards of Professional Conduct," CFA Institute
Section: CFA Institute Professional Conduct Program
Question
12 of 120
Amanda Covington, CFA, works for McJan Investment Management. McJan employees must receive
prior clearance of their personal investments in accordance with McJan's compliance procedures. To
obtain prior clearance, McJan employees must provide a written request identifying the security, the
quantity of the security to be purchased, and the name of the broker through which the transaction will be
made. Precleared transactions are approved only for that trading day. As indicated below, Covington
received prior clearance.
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Security Quantity Broker

Prior Clearance
A
100
Easy Trade Yes
B
150
Easy Trade Yes
Two days after she received prior clearance, the price of Stock B decreased, so Covington decided to
purchase 250 shares of Stock B only. In her decision to purchase 250 shares of Stock B only, did
Covington violate any CFA Institute Standards of Professional Conduct?
Yes, relating to diligence and reasonable basis
Yes, relating to her employer's compliance procedures
No
Prior-clearance processes guard against potential and actual conflicts of interest; members are required to
abide by their employer's compliance procedures (Standard VI (B)).
CFA Level I
Standard V(A), Standard VI(B)
Question
13 of 120
Which of the following is not a component of the CFA Institute Code of Ethics?
Practice and encourage others to practice in a professional and ethical manner that will reflect credit on
themselves and the profession.
Promote financial integrity and seek to prevent and punish abuses in the financial markets.
Place the integrity of the investment profession and the interests of clients above your own personal
interests.

Punishing abuse in the financial markets is not one of the six components of the Code of Ethics.
CFA Level I
Code of Ethics, CFA Institute
Section: The Code of Ethics
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Question
14 of 120
Jeffrey Jones passed the Level I CFA examination in 1997 and the Level II examination in 2009. He is
not currently enrolled for the Level III examination. According to the CFA Institute Standards of
Professional Conduct, which of the following is the most appropriate way for Jones to refer to his
participation in the CFA Program?
Passed Level II of the CFA examination in 2009
Candidate in the CFA Institute CFA Program
Jeffrey Jones, CFA (expected 2014)
No designation exists for someone who has passed Level I, Level II, or Level III of the CFA exam, see
Standard VII(B). Persons who have passed a certain level of the exam may state that they have completed
that level. A person can state he is a candidate only if he is currently enrolled in the CFA Program. It is also
an improper reference to use "expected" a part of the designation.
CFA Level I
"Guidance for Standards I-VII", CFA Institute
Standard VII(B)
Question
15 of 120
After a firm presents a minimum required number of years of GIPS- compliant performance, the firm must
present an additional year of performance each year, building up to a minimum of:
10 years of GIPS-compliant performance.
After a firm presents a minimum of five years of GIPS-compliant performance, the firm must present an
additional year of performance each year, building up to a minimum of 10 years of GIPS-compliant
performance.
CFA Level I
"The GIPS Standards," CFA Institute
Section: Historical Performance Record
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Question
16 of 120
William Wong, CFA, is an equity analyst with Hayswick Securities. On the basis of his fundamental
analysis, Wong concludes that the stock of a company he follows, Nolvec Inc., is substantially
undervalued and will experience a large price increase. He delays revising his recommendation on the
stock from "hold" to "buy" to allow his brother to buy shares at the current price. Wong is least likely to
have violated the CFA Institute Standards of Professional Conduct related to:
reasonable basis.
priority of transactions.
duty to clients.
There is nothing to suggest that Wong does not have a reasonable basis for his conclusion related to
Nolvec, as required by Standard V(A).
CFA Level I
Standard III(A), Standard VI(B), Standard V(A)
Question
17 of 120
Verification of compliance with the GIPS standards most likely requires:
verification for each specific composite under review.
an independent third party to carry out the verification.
an assurance that the composite presentations are accurate.
Although a firm is responsible for its own compliance claim, it cannot perform its own verification. An
independent third party must undertake the verification.
CFA Level I
"Introduction to the Global Investment Performance Standards (GIPS)"
Section V
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Question
18 of 120
The Global Investment Performance Standards (GIPS) were developed for the benefit of:
prospective clients.
broker/dealers.
regulators.
The GIPS standards benefit two main groups: investment management firms and prospective clients. GIPScompliant presentations allow prospective clients to know that the track record of a GIPS-compliant fund
manager is complete and fairly presented.
CFA Level I
"Introduction to the Global Investment Performance Standards (GIPS)"
Section III
Question
19 of 120
Monte Carlo simulation is best described as:
an approach to backtest data.
providing a distribution of possible solutions to complex functions.
a restrictive form of scenario analysis.
Monte Carlo simulation provides a distribution of possible solutions to complex functions. The central
tendency and the variance of the distribution of solutions give important clues to decision makers regarding
expected results and risk.
CFA Level I
"Common Probability Distributions," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
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Section 4
Question
20 of 120
Using the following sample results drawn as 25 paired observations from their underlying distributions,
test whether the mean returns of the two portfolios differ from each other at the 1% level of statistical
significance. Assume the underlying distributions of returns for each portfolio are normal and that their
population variances are not known.
Portfolio 1
Portfolio 2
Difference
17.00
21.25
4.25
15.50
15.75
6.25
Mean return
Standard
deviation
t-statistic for 24 degrees of freedom and at the 1% level of statistical significance = 2.807
Null hypothesis (H0): Mean difference of returns = 0
Based on the paired comparisons test of the two portfolios, the most appropriate conclusion is that H0
should be:
accepted because the computed test statistic is less than 2.807.
accepted because the computed test statistic exceeds 2.807.
rejected because the computed test statistic exceeds 2.807.
The test statistic is:
where
is the mean difference, d0 is the hypothesized difference in the
means, sd is the sample standard deviation of differences, and n is the sample size. In this case, the test
statistic equals: (4.25 0)/(6.25/25) = 3.40. Because 3.40 > 2.807, the null hypothesis that the mean
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difference is zero is rejected.

CFA Level I
Hypothesis Testing, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 3.3
Question
21 of 120
The following table shows the discrete uniform probability distribution of gross profits from the purchase
of an option:
Cumulative Distribution
Profit
Function
$0
0.2
$1
0.4
$2
0.6
$3
0.8
$4
1.0
The probability of a profit greater than or equal to $1 and less than or equal to $4 is closest to:
0.8.
0.4.
0.6.
The problem deals with the discrete uniform distribution. This means that the five outcomes are all equally
likely: P(x) = 1/5 = 0.2. There are two ways to find P(1 X 4):
(1) The sum of four probabilities is calculated: P(1), P(2), P(3) and P(4), 0.2 + 0.2 + 0.2 + 0.2 = 0.8,
or
(2) The probability is calculated as the difference between two values of the cumulative distribution
function. In this case, F(4) = P(X 4) = 1.0 and F(0) = P(X = 0) = 0.2. Therefore, P(1 X 4) = F(4)
F(0) = 1.0 0.2 = 0.8.
CFA Level I
David E. Runkle
Section 2.1
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Question
22 of 120
A small-cap growth fund's monthly returns for the past 36 months have been consistently outperforming
its benchmark. An analyst is determining whether the standard deviation of monthly returns is greater than
6%. Which of the following best describes the hypothesis to be tested?

This is a one-tailed hypothesis testing with a "greater than" alternative hypothesis. A squared standard
deviation is being used to obtain a test of variance. The hypotheses are
versus
CFA Level I
"Hypothesis Testing," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 2
Question
23 of 120
Event X and Event Y are independent events. The probability of X is 0.2 [P(X) = 0.2] and the probability
of Y is 0.5 [P(Y) = 0.5]. The joint probability of X and Y, P(XY), is closest to:
0.7.
0.3.
0.1.
Given that X and Y are independent, their joint probability is equal to the product of their individual
probabilities. In this case: P(XY) = P(X)P(Y) = 0.2 0.5 = 0.1.
CFA Level I
"Probability Concepts," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
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Section 2
Question
24 of 120
If two events, A and B, are independent and the probability of A does not equal the probability of B [i.e.,
P(A) P(B)], then the probability of Event A given that Event B has occurred [i.e., P(AB)] is best
described as:
P(BA).
P(B).
P(A).
Two events, A and B, are independent if and only if P(AB) = P(A) or, equivalently, P(BA) = P(B). The
wording of the question precludes P(A) = P(B); therefore, P(B) and P(BA) cannot be correct.
CFA Level I
Section 2
Question
25 of 120
The following table shows the incremental after-tax cash flows (in $ millions) for three independent
investments:
Year
Investment 1
80
60
60
Investment 2
125
35
60
80
20
Investment 3
100
11
11
11
11
11 into perpetuity
The opportunity cost of capital (r) is 12%. A company is most likely to undertake which investment(s)?
Investment 1 only
Investments 2 and 3
Investments 1 and 2
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The net present value (NPV) is calculated as follows:
With an opportunity cost of capital of 12%, Investment 1 is the only investment with positive NPV.
CFA Level I
"Discounted Cash Flow Applications," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 2
"Capital Budgeting," John D. Stowe and Jacques R. Gagn
Section 4.1
Question
26 of 120
Use the following values from a student's t-distribution to establish a 95% confidence interval for the
population mean given a sample size of 10, a sample mean of 6.25, and a sample standard deviation of
12. Assume that the population from which the sample is drawn is normally distributed and the population
variance is not known.
Degrees of
p = 0.10
p = 0.05
p = 0.025
p = 0.01
1.383
1.833
2.262
2.821
10
1.372
1.812
2.228
2.764
11
1.363
1.796
2.201
2.718
Freedom
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The 95% confidence interval is closest to a:

lower bound of 2.20 and an upper bound of 14.70.
With a sample size of 10, there are 9 degrees of freedom. The confidence interval concept is based on a
two-tailed approach. For a 95% confidence interval, 2.5% of the distribution will be in each tail. Thus, the
correct t-statistic to use is 2.262. The confidence interval is calculated as:
where
is the sample mean, s is the sample standard deviation, and n is the sample size. In this case: 6.25
2.262 12/10 = 6.25 8.58369 or 2.33 to 14.83.

CFA Level I
Sampling and Estimation, Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David E. Runkle
Section 4.2
Question
27 of 120
The probability of Event A is 40%. The probability of Event B is 60%. The joint probability of AB is
40%. The probability (P) that A or B occurs, or both occur, is closest to:
84%.
60%.
40%.
P(A or B) = P(A) + P(B) P(AB) = 0.40 + 0.60 0.40 = 0.60 or 60%.
CFA Level I
Section 2
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Question
28 of 120
A discrete uniform distribution consists of the following 12 values:
2.5
5.3
6.7
8.8
4.6
9.2
3.3
8.2
1.4
0.8
5.3
6.9
On a single draw from the distribution, the probability of drawing a value between 2.0 and 2.0 from the
distribution is closest to:
27.59%.
33.33%.
16.67%.
First order the values from smallest to largest.
5.3
4.6
2.5
0.8
1.4
3.3
5.3
6.7
6.9
8.2
8.8
9.2
Then note that 2 of the 12 values (i.e., 0.8 and 1.4) are between 2.0 and 2.0. Thus, the probability of
a draw from the distribution being between 2.0 and 2.0 is 2/12 = 0.16667.
CFA Level I
"Common Probability Distributions," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and David
E. Runkle
Section 2.1
Question
29 of 120
The arithmetic and geometric mean are calculated for the same data. If there is variability in the data,
compared with the arithmetic mean, the geometric mean will most likely be:
smaller.
greater.
equal.
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The geometric mean is always less than or equal to the arithmetic mean. The only time the two means will be
equal is when there is no variability in the observations.
CFA Level I
"Statistical Concepts and Market Returns," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto,
and David E. Runkle
Section 5.4.2
Question
30 of 120
Which of the following most accurately describes how to standardize a random variable X?
Divide X by the difference between the standard deviation of X and the standard deviation of the
standard normal distribution.
Subtract the mean of X from X, and then divide that result by the standard deviation of X.
Subtract the mean of X from X, and then divide that result by the standard deviation of the standard
normal distribution.
There are two steps in standardizing a random variable X: Subtract the mean of X from X, and then divide
that result by the standard deviation of X. This is represented by the following formula: Z = (X )/.
CFA Level I
David E. Runkle
Section 3.2
Question
31 of 120
The quarterly returns on a portfolio are as follows:
Quarter
4
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Return
20%
20%
10%
10%
The time-weighted rate of return of the portfolio is closest to:

1.3%.
0.0%.
5.0%.
The time-weighted rate of return of this portfolio
= (1 + r1)(1 + r2)(1 + r3)(1 + r4) 1,
where r1 = holding period return (HPR) for the first quarter, second quarter, and so on:
= (1 + 0.20)(1 0.20)(1 + 0.10)(1 0.10) 1
= 4.96% (or ~ 5.0%).
CFA Level I
"Discounted Cash Flow Applications," Richard A. DeFusco, Dennis W. McLeavey, Jerald E. Pinto, and
David E. Runkle
Section 3.2
Question
32 of 120
The belief that trends and patterns tend to repeat themselves and are, therefore, somewhat predictable
best describes:
technical analysis.
arbitrage pricing theory.
weak-form efficiency.
Technical analysts believe that trends and patterns tend to repeat themselves and are, therefore, somewhat
predictable.
CFA Level I
"Technical Analysis," Barry M. Sine and Robert A. Strong
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Section 2.1
Question
33 of 120
The diagram to the right shows the
domestic demand and supply curves for a
country which imports a commodity,
where PW is its world price and PT is its
domestic price after the imposition of a
tariff.
The reduction in the net national welfare
of this country as a result of the tariff is
best described by the area(s):
F+H.
E.
G.
The loss in consumer surplus because of higher prices is represented by area E+F+G+H. This exceeds the
gains from producer surplus (E) and government revenues on imports (G). Hence the net welfare effect to the
country is a deadweight loss of [E+F+G+H] [E] [G] = F+H.
CFA Level 1
Demand and Supply Analysis: Introduction, Richard V. Eastin and Gary L. Arbogast, CFA
Sections 3.9, 3.10, 3.13
International Trade and Capital Flows, Usha Nair-Reichert, PhD, and Daniel Robert
Witschi, PhD, CFA
Section 3.1
Question
34 of 120
If the quantity demanded of pears falls by 4% when the price of apples decreases by 3%, then apples and
pears are best described as:
inferior goods.
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substitutes.
complements.
The cross elasticity of demand is defined as the percentage change in quantity demanded divided by the
percentage change in the price of a substitute or complement. If the cross elasticity of demand is positive,
the goods are substitutes. In this case, the 4% decline in quantity of pears is divided by the 3% decline in the
price of apples, which is a positive number: 4/3 = +1.33.
CFA Level I
"Demand and Supply Analysis: Introduction," Richard V. Eastin and Gary L. Arbogast
Section 4.4
Question
35 of 120
A minimum wage above the equilibrium wage is best characterized as a:
price floor.
means of minimizing unemployment.
price ceiling.
A price floor is a minimum price that is imposed by a government (or group) for which a good or service
can be purchased. When applied to labor markets, it is called a minimum wage. To be effective, the price
floor must be above the equilibrium price.
CFA Level I
Section 3.13
Question
36 of 120
Three firms operate under perfect competition, producing 900 units of the same product but using
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different production technologies. Each company's cost structure is indicated in the table:
Company
Total Variable Costs
Total Fixed Costs
Total Costs
$2,700
$3,600
$4,500
2,700
1,800
900
$5,400
$5,400
$5,400
Which of the following statements is most accurate? If the unit selling price is:
$6.00, all firms should exit the market in the long run.
$4.50, all firms should continue to operate in the short run, but exit the market in the long run if these
conditions are expected to persist.
$3.00, Firm X should continue to operate in the short run, but Firms Y and Z should shut down
production.
Revenue-Cost Relationship
Short-Run Decision
Long-Term Decision
TR TC
Stay in market
Stay in market
TR > TVC but TR<TFC+TVC
Stay in market
Exit market
TR < TVC
Shut down production to zero
Exit market
where TR = Total Revenue;

and TC = Total Costs; TVC = Total Variable Costs; TFC = Total Fixed Costs
Hence, if the selling price is $3.00, total revenue for all firms will be $3.00/unit 900 units = $2,700. Only
firm Xs variable costs are covered and it should continue operating, while firms Y and Z should immediately
shutdown production.
CFA Level I
"Demand and Supply Analysis: The Firm," Gary L. Arbogast and Richard V. Eastin
Section 3.1.3
Question
37 of 120
An increase in both aggregate demand and supply occurs, with aggregate supply increasing more than
aggregate demand. The most likely result is a decrease in the:
real GDP.
participation rate.
price level.
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If both aggregate demand (AD) and

aggregate supply (AS) increase, real GDP
will increase but the impact on inflation is
not clear unless we know the magnitude of
the changes because an increase in AD will
increase the price level, whereas an
increase in AS will decrease the price level.
If AD increases more than AS, the price
level will increase. If AS increases more
than AD, as depicted in the graph to the
right, the price level will decline.
CFA Level I
"Aggregate Output, Prices, and Economic Growth," Paul R. Kutasovic and Richard G. Fritz
Section 3.4.5
Question
38 of 120
A production process requires two factors of production: labor, a variable factor, and capital, a fixed
factor.
A production analyst presents a graph of the total production function for the process and decomposes it
into three regions, with characteristics provided in the following table.
Region
Characteristic of Region
I.
Total product increases at an increasing rate
II.
Total product increases at a decreasing rate
III.
Total product decreases.
The analyst will most likely recommend that the company operate in Region:
2.
3.
1.
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The firm should use labor up to a point at which its total product is maximized (i.e., as long as total output is
increasing), to a point just prior to Region 3.
CFA Level I
"Demand and Supply Analysis: The Firm," Gary L. Arbogast and Richard V. Eastin
Sections 3.1.2, 3.2.1, 3.2.2
Question
39 of 120
Which of the following is most likely to cause a shift to the right in the aggregate demand curve?
Boom in the stock market
Decrease in real estate values
Increase in taxes
A boom in the stock market increases the value of financial assets and household wealth. An increase in
household wealth increases consumer spending and shifts the aggregate demand curve to the right.
CFA Level I
Section 3.3.1
Question
40 of 120
The diagram below shows the domestic demand and supply curves for a country which imports a commodity,
where PW is its world price and PT is its
domestic price after the imposition of a tariff.
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The gain in government revenues arising from the imposition of the tariff is best described by area(s):
K + M.
L.
J.
With the imposition of the tariff, domestic supply will increase from Q1 to Q2, but domestic demand will fall
from Q4 to Q3. The net amount imported will be Q3 Q2. The change in government revenues is Area L,
which is the rectangle (Q3 Q2) (PT PW).
CFA Level I
Sections 3.7 and 3.9
"International Trade and Capital Flows," Usha Nair-Reichert and Daniel Robert Witschi
Section 3.1
Question
41 of 120
Over a given period, the price of a commodity falls by 5.0%, and the quantity demanded rises by 7.5%.
The price elasticity of demand for the commodity is best described as:
perfectly elastic.
inelastic.
elastic.
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If demand is elastic, a 1% reduction in price increases the quantity sold by more than 1%.
CFA Level I
Section 4.1
Question
42 of 120
Which of the following is most likely to lead to a recessionary gap?
Declining consumer confidence
Rising stock prices
Easing monetary policy
A recessionary gap arises when equilibrium GDP is below potential GDP. Decreased confidence lowers
aggregate demand, which, in turn, leads to economic contractions. As demand declines, companies reduce
their workforce and the unemployment rate rises.
CFA Level I
Section 3.4.2
Question
43 of 120
Demand for a good is most likely to be more elastic when:
the adjustment to a price change takes a longer time.
the good is a necessity.
a lesser proportion of income is spent on the good.
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The more time that has elapsed since a price change, the more elastic the demand. For example, if gas
prices rise, consumers cannot quickly change their mode of transportation but will likely do so in the longer
run.
CFA Level I
Section 4.2
Question
44 of 120
Which of the following is least likely to be a characteristic of a Giffen good? Its:
substitution effect is negative.
income effect is negative.
demand curve slopes upward.
A Giffen good is an inferior good. All inferior goods have a negative income effect (less is purchased as
income rises). Although the substitution effect is always positive for all goods, for a Giffen good, the income
effect is so strong and so negative that it overpowers the substitution effect. The result is that as its price
declines, less of it is purchased; this relationship results in a positively sloped individual demand curve.
Therefore, it is least likely that the substitution effect is negative.
CFA Level I
"Demand and Supply Analysis: Consumer Demand," Richard V. Eastin and Gary L. Arbogast
Sections 6.3, 6.4
Question
45 of 120
An analyst gathers the following information about a company:
($ millions)
2014
2013
Sales
283.5
234.9
81.4
53.7
Year-end inventory (LIFO inventory method)
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LIFO reserve
Cost of goods sold (LIFO)
36.4
21.8
203.9
167.3
Had the company used the first-in, first-out (FIFO) inventory method instead of last-in, first-out (LIFO),
the company's 2014 gross profit margin would be closest to:
33.2%.
15.2%.
22.9%.
The FIFO cost of goods sold (COGS) is determined from the LIFO COGS less the change in LIFO
reserve:
Change in LIFO Reserve
2014 LIFO reserve 2013 LIFO reserve
= 36.4 21.8 = 14.6
FIFO COGS =
LIFO COGS Change in LIFO reserve
= 203.9 14.6 = 189.3
FIFO gross profit
Sales FIFO COGS = 283.5 189.3 = 94.2
FIFO gross profit margin
Gross profit/Sales= 94.2/283.5 = 33.2%
CFA Level I
"Inventories," Michael A. Broihahn
Section 4.1
"Financial Statement Analysis: Applications," Thomas R. Robinson, Jan Hendrik van Greuning, Elaine
Henry, and Michael A. Broihahn
Section 6.3
Question
46 of 120
Which of the following statements is most accurate about the responsibilities of an auditor for a publicly
traded firm in the United States? The auditor must:
ensure that the financial statements are free from error, fraud, or illegal acts.
state that the financial statements are prepared according to generally accepted accounting principles.
express an opinion about the effectiveness of the company's internal control systems.
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For a publicly traded firm in the United States, the auditor must express an opinion as to whether the
company's internal control system is in accordance with the Public Accounting Oversight Board, under the
SarbanesOxley Act. The opinion is given either in a final paragraph in the auditor's report or as a separate
opinion.
CFA Level I
"Financial Statement Analysis: An Introduction," Elaine Henry and Thomas R. Robinson
Section 3.1.7
Question
47 of 120
An analyst gathers the following information about a company:
LIFO reserve as of 31 December 2013
$420,000
LIFO reserve as of 31 December 2014
$450,000
Marginal tax rate
30%
If the company had used the first-in, first-out (FIFO) method instead of last-in, first-out (LIFO), its 2014
net income would most likely have been:
$30,000 lower.
$9,000 higher.
$21,000 higher.
Change in LIFO reserve
($ thousands)
FIFO cost of goods sold
(COGS) =
2014 LIFO reserve 2013 LIFO reserve
LIFO COGS Change in LIFO reserve
= $450 $420 = $30
LIFO COGS $30
If an increase in the LIFO reserve occurs, LIFO COGS will be higher than FIFO by the amount of the
increase.
With a lower COGS under FIFO, pretax income will be higher by $30,000.
With a lower COGS under FIFO, after-tax income will be higher by $30,000 (1 0.30) = $21,000.
CFA Level I

Section 4.1
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Question
48 of 120
The least likely reason thata security analyst needs to understand the accounting process is to:
make adjustments to reflect items not reported in the financial statements.
aid in the assessment of management's judgment in accruals and valuations.
prevent earnings manipulation by management.
Understanding the accounting process may assist an analyst in identifying earnings manipulation, but it will
not prevent the manipulation of earnings by management. It is important for an analyst to understand the
accounting process so that they can make adjustments for items not reported and aid in the assessment of
management's judgment of accruals and valuations.
CFA Level I
"Financial Reporting Mechanics," Thomas R. Robinson, Jan Hendrik van Greuning, Karen O'Connor
Rubsam, Elaine Henry, and Michael A. Broihahn
Section 7
Question
49 of 120
A company manufactures aluminum cans for the beverage industry and prepares its financial statements in
accordance with International Financial Reporting Standards (IFRS). During its latest full fiscal year, the
company recorded the following:
Inventory Item
Amount
thousands
Raw material aluminum costs

Storage of finished cans
150,000
15,000
Wasted aluminum materials from abnormal production errors during the year
500
Transportation-in costs
640
Tax-related duties
340
Administrative overhead
Trade discounts due to volume purchases throughout the year
7,500
520
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The total costs included in inventory (in thousands) for the year are closest to:
149,820.
150,980.
150,460.
Total inventory costs are as follows:
Inventory Item
Amount
thousands
Raw materials
150,000
Transportation-in
640
Tax-related duties
340
Less: Trade discounts
(520)
Total inventory costs
150,460
Abnormal waste, storage of finished goods and administrative overhead are expensed.
CFA Level I
Inventories, Michael A. Broihahn
Section 2
Question
50 of 120
At the start of the year, a company acquired new equipment at a cost of 50,000, estimated to have a
three-year life and a residual value of 5,000. If the company depreciates the asset using the double
declining balance method, the depreciation expense that the company will report for the third year is
closest to:
3,705.
555.
3,328.
Under the double declining balance method, the depreciation rate is 2 Straight line rate. The straight line rate
is 33.3% (i.e., 1/3 years), so the double declining rate is 66.6%, or two-thirds depreciation rate per year. But the
asset should not be depreciated below its assumed residual value in any year.
Double Declining Balance Method of Depreciation
Year
Net Book Value at
Depreciation
Net Book Value at End of

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Start of Year
Year
50,000
33,333
16,667
16,667
11,111
5,555
5,555*
555**
5,000
Alternative calculation for start of Year 3 net book value:

50,000 (1 0.667) (1 0.667) = 5,555.
**
Depreciation cannot be 2/3 5,555 = 3,705 because that would reduce book
value to less than the estimated 5,000.
CFA Level I
Understanding Income Statements, Elaine Henry and Thomas R. Robinson
Section 4.2.3
Long-Lived Assets, Elaine Henry and Elizabeth A. Gordon
Section 3.1
Question
51 of 120
The convergence of global accounting standards has advanced to a degree that the Securities &
Exchange Commission in the United States now mandates that foreign private issuers who use IFRS may
report under:
U.S. GAAP with voluntary supplemental reporting under IFRS.
U.S. GAAP or under IFRS.
U.S. GAAP or under IFRS with a reconciliation to U.S. GAAP.
Historically, the Securities & Exchange Commission required reconciliation for foreign private issuers that
did not prepare financial statements in accordance with U.S. GAAP. However the reconciliation
requirement was eliminated as of 2008 for companies that prepared their financial statements under IFRS.
CFA Level I
"Financial Reporting Standards," Elaine Henry, Jan Hendrik van Greuning and Thomas R. Robinson
Sections 4, 7
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Question
52 of 120
The following data is available on a company:
Metric
($ millions)
Total assets
145
Total revenues
282
Total expenses
241
Research & development expenses
12
Under a common-size analysis, the value used for research & development expenses is closest to:
4.2%.
8.3%.
5.0%.
The appropriate base for a common-size income statement is revenue. As such, the value used for research
& development expenses is $12 million$282 million x 100 = 4.25%.
CFA Level I
"Understanding Income Statements," Elaine Henry and Thomas R. Robinson
Section 7.1
Question
53 of 120
An analyst has compiled the following information on a company:
thousands
Beginning of the year values
Share capital
Retained earnings
During the year
Revenues
Total expenses
Proceeds from shares issued
End of year values
Total current assets
2,000
8,850
12,000
10,150
500
9,200
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Total non-current assets

12,750
Investments
350
Total liabilities
9,400
The amount of dividends declared ( thousands) during the year is closest to:
650.
300.
150.
Total assets = Current assets + Non-current assets
= 9,200 + 12,750
Assets = Liabilities + Equity
21,950 = 9,400 + Equity
Equity = Share capital + Retained earnings
12,550 = (2,000 +500) + Retained earnings
Retained earnings = Beginning retained earnings + Net income
Dividends
10,050 = 8,850 + (12,000 10,150) Dividends
Total assets = 21,950

thousand
Equity = 12,550
thousand
Retained earnings =
10,050 thousand
Dividends = 650
thousand
CFA Level I
Financial Reporting Mechanics, Thomas R. Robinson, Jan Hendrik van Greuning, Karen OConnor
Sections 3.2, 4.2
Question
54 of 120
Which of the following inventory valuation methods best matches the actual historical cost of the inventory
items sold to their physical flow?
Specific identification
LIFO
FIFO
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Specific identification best matches the physical flow of the inventory items because it tracks the actual units
that are sold.
CFA Level I
Sections 3.1, 3.2, 3.4
Question
55 of 120
The following information is available on a company for the current year.
Net income
$1,000,000
Average number of common shares outstanding
100,000
Details of convertible securities outstanding:

Convertible preferred shares outstanding
2,000
o Dividend/share
$10
o Each preferred share is convertible into five shares of common stock

Convertible bonds, $100 face value per bond
$80,000
o 8% coupon
o Each bond is convertible into 25 shares of common stock
Corporate tax rate
40%
The company's diluted EPS is closest to:

$7.69.
$7.72.
$7.57.
Because both the preferred shares and the bonds are dilutive, they should both be converted to calculate the
diluted EPS. Diluted EPS is the lowest possible value.
Basic EPS
Net income
Preferred dividends
Diluted EPS:
Diluted EPS:
Diluted EPS:
Bond
Preferred
Both
Converted
Converted
Converted
$1,000,000
$1,000,000
$1,000,000
$1,000,000
$20,000
$20,000
After-tax cost of interest

8% $80,000 (1
$3,840
$3,840
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0.40)
Numerator
Average common shares
$980,000
$983,840
$1,000,000
$1,003,840
100,000
100,000
100,000
100,000
10,000
10,000
outstanding
Preferred converted
Bond converted
Denominator
EPS
20,000
20,000
100,000
120,000
110,000
130,000
$9.80
$8.20
$9.09
$7.72
CFA Level I
Understanding Income Statements, Elaine Henry and Thomas R. Robinson
Sections 6.2, 6.3
Question
56 of 120
Which of the following statements best describes a trial balance? A trial balance is a document or
computer file that:
lists all account balances at a particular point in time.
contains all business transactions recorded in the order in which they occur.
shows all business transactions by account.
A trial balance is a document that lists account balances at a particular point in time.
CFA Level I
Section 6
Question
57 of 120
For which of the following inventory valuation methods is the gross profit margin least likely to be the
same under both a perpetual inventory system and a periodic inventory system?
Specific identification
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FIFO
LIFO
The periodic and perpetual systems result in the same inventory and cost of goods sold values (and thus gross
profit margin) using both FIFO and specific identification valuation methods but not always under LIFO.
CFA Level I
Section 3.6
Question
58 of 120
For which of the following assets is it most appropriate to test for impairment at least annually?
Land
A trademark with an indefinite expected life
A patent with a legal life of 20 years
Intangible assets with indefinite lives need to be tested for impairment at least annually. Property, plant, and
equipment (including land) and intangibles with finite lives are only tested if there has been a significant change
or other indication of impairment.
CFA Level I
Understanding Balance Sheets, Elaine Henry and Thomas R. Robinson
Sections 4.1, 4.3
Sections 5.1, 5.2, 5.3
Question
59 of 120
During its first two years of operations, a retailer sold its inventory with a constant gross margin but found
that the cost of the inventory was quite variable. The following table shows the company's purchases and
sales during the past two years.
Year
Inventory Purchased
Inventory Sold
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Units
Unit Cost
Units
Selling Price
80,000
$10
75,000
$15.50
65,000
$8
55,000
$12.40
In Year 2, the company's inventory turnover ratio was 3.67, using end-of-period inventory and cost of
goods sold (COGS). The method that the retailer is using to value its inventory is most likely:
weighted average cost.
last-in, first-out (LIFO).
first-in, first-out (FIFO).
At the end of Year 1, 5,000 units will remain (0 + 80,000 75,000) at a unit cost of $10. All units in the
following tables are in thousands.
Under Weighted Average Cost
Year
Average cost
$10
5 $10 + 65 $8 = $8.14/unit
70 units
Inventory
5 $10 = $50
15 units $8.14/unit = $122
COGS
75 $10 = $750
55 $8.14 = $448
Inventory turnover
COGS/Inv = $448/$122 = 3.67
Because the costs assigned to COGS and inventory are the same, only the units going
to each need to be tracked.
Under LIFO
Year
Inventory
5 $10 = $50
5 $10 + 10 $8 = $130
COGS
75 $10 = $750
55 $8 = $440
Inventory turnover
COGS/Inv = $440/$130 = 3.38
In Year 2, all of the most recent purchases at $8 will go to COGS.

Inventory will consist of the 5 units remaining from Year 1 and the 10 units remaining
from Year 2 purchases.
Under FIFO
Year
Inventory
5 $10 = $50
15 $8 = $120
COGS
75 $10 = $750
5 $10 + 50 $8 = $450
Inventory turnover
COGS/Inv = $450/$120 = 3.75
In Year 2, 5 units of the remaining Year 1 inventory and 50 units of Year 2 purchases will go to
COGS.
Inventory will consist of the remaining 15 units from Year 2 purchases.
CFA Level I
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Section 3.7
Question
60 of 120
At the start of a month, a retailer paid $5,000 in cash for candies. He sold $2,000 worth of candies for
$3,000 during the month. The most likely effect of these transactions on the retailer's accounting equation
for the month is that assets will:
decrease by $2,000.
be unchanged.
increase by $1,000.
Buying $5,000 of candies will decrease cash by $5,000 and increase inventory by $5,000. Selling $2,000
of candies for $3,000 will decrease inventory by $2,000 and increase either cash (if cash is collected in the
same accounting period) or accounts receivable (if sold on credit) by $3,000. The combined effect is an
increase of $1,000 in assets.
CFA Level I
Section 3.2
Question
61 of 120
What is the most likely effect on the accounting equation when a company purchases office equipment
with cash?
Assets decrease and owners' equity decreases
Assets increase and liabilities increase
No effect on the accounting equation
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There would be no effect on the accounting equation because the company has exchanged one asset for
another. Cash has decreased and office equipment, a capital asset, has increased.
CFA Level I
Section 4.2
Question
62 of 120
A manufacturer of jets also enters purchase and leaseback arrangements of used aircraft. The buy and
leaseback arrangements are classified as operating leases, with the lease payments due in advance at the
beginning of each period. The company depreciates these used aircraft on a straight-line basis over the life
of the lease. The most likely effect on the manufacturer's financial statements of entering into one of these
purchase and leaseback arrangements is an increase in its:
capital assets.
EBIT by an amount equal to the lease payments.
lease receivables.
The used aircraft that the manufacturer buys and leases back are classified as operating leases. For the
lessor, these assets under operating leases would be classified in property, plant, and equipment in capital
assets and thus would lead to an increase in capital assets. With payments in advance, there would be no
lease receivable arising from the operating lease; long-term lease receivables arise from financing leases, not
operating leases. Although revenues will increase by the lease payments, the leased assets are depreciated,
and therefore EBIT will increase by the lease payment received minus depreciation expense.
CFA Level I
"Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon
Section 9.2.2
"Non-Current (Long-Term) Liabilities," Elizabeth A. Gordon and Elaine Henry
Section 3.2
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Question
63 of 120
The following information is available for a manufacturing company:
$ Millions
Cost of ending inventory computed using FIFO
4.3
Net realizable value
4.1
Current replacement cost
3.8
If the company is using International Financial Reporting Standards (IFRS) instead of US GAAP, its cost of
goods sold (in millions) is most lik ely:
$0.3 higher.
$0.3 lower.
the same.
Under IFRS, the inventory would be written down to its net realizable value ($4.1 million), whereas under US
GAAP, market value is defined as current replacement cost and thus would be written down to its current
replacement cost ($3.8 million). The smaller write-down under IFRS will reduce the amount charged to the cost
of goods sold compared with US GAAP and result in a lower cost of goods sold of $0.3 million.
CFA Level I
Section 6
Question
64 of 120
Interim reports most likely:
include a full set of financial statements and notes.
are issued semi-annually or quarterly.
are audited.
Interim reports are provided semi-annually or quarterly, depending on applicable regulatory requirements.
CFA Level I
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"Financial Statement Analysis: An Introduction," Elaine Henry and Thomas R. Robinson

Section 3.2
Question
65 of 120
The use of estimates in financial reporting is best described as:
avoidable through sophisticated accounting and auditing techniques.
a factor that reduces the understandability of financial statements.
acceptable despite the risk of manipulation by management.
The use of estimates creates limitations in the accounting model because estimates provide a vehicle for
manipulation by unscrupulous management. However, estimates are considered necessary to the faithful
representation of the economic performace and position of a company.
CFA Level I
Rubsam, Elaine Henry and Michael A. Broihahn
Section 7.1
Question
66 of 120
The notes to the financial statements of a company reporting under US GAAP contains the following
information for the year 2014:
Note 11. Property and Equipment (all figures in $ thousands)
Depreciation expense for 2014 is $362. This amount includes capitalized interest of $143.
Interest is allocated and capitalized to construction in progress by applying the firms cost of borrowing
rate to qualifying assets. Interest capitalized in 2014 is $170.
Ignoring the effects of income taxes, the expensing of previously capitalized interest most likely causes
the company's cash flow from operations to be:
lower.
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higher.
unaffected.
The expensing of the previously capitalized interest is a non-cash amount and does not affect cash flow from
operations. Under US GAAP, cash flow from operations is higher as a result of the initial capitalizing of
interest but not its subsequent expensing. If the interest had not been capitalized, interest expense would
have been greater and net income and cash from operations lower.
CFA Level I
"Long-Lived Assets," Elaine Henry and Elizabeth A. Gordon
Section 2.1
Question
67 of 120
The non-controlling or minority interests found in the equity section of the balance sheet are best
described as the equity interests:
held by the corporation in other entities which it does not control, but has significant influence.
of minority shareholders of the corporation who have significant influence, but not control.
of minority shareholders in subsidiaries that have been consolidated.
Non-controlling interests found in the equity section represent the equity interests of minority shareholders in
non-wholly-owned subsidiaries that have been consolidated.
CFA Level I
"Understanding Balance Sheets," Elaine Henry and Thomas R. Robinson
Section 6.1
Question
68 of 120
A company that prepares its financial statements in accordance with International Financial Reporting
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Standards (IFRS) is attempting to produce lighter and longer-lasting batteries for portable electronic
devices. The most appropriate accounting treatment for the related costs incurred in this project is to:
expense them as incurred.
expense costs until technical feasibility has been established.
capitalize costs directly related to the development.
Under IFRS, research and development costs are expensed until certain criteria including demonstration of
technical feasibility, have been met.
CFA Level I
Section 2.2
Question
69 of 120
A company issues new 20-year $1,000 bonds with a coupon rate of 6.2% payable semiannually at an issue
price of $1,030.34. Assuming a tax rate of 28%, the firms annual after-tax cost of debt (%) is closest to:
4.46.
5.94.
4.28.
The annual after-tax cost of debt is the after tax annual yield to maturity (YTM). Find the YTM by using a
financial calculator as follows:
Present value (PV) = 1,030.34; Future value (FV) = 1,000; N = 40 (20 2); Payment (PMT) = 31 (0.062
1,000 ); compute i.
i = 2.97 semiannually.
Annually, YTM = 2.97 2 = 5.94.
Therefore, the associated after-tax value = 0.0428 = 0.0594 (1 0.28).
CFA Level I
Cost of Capital, Yves Courtois, Gene C. Lai, and Pamela Peterson Drake
Section 3.1.1
Question
70 of 120
A companys asset beta is 1.2 based on a debt-to-equity ratio (D/E) of 50%. If the companys tax rate
increases, the associated equity beta will most lik ely:
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remain unchanged.
increase.
decrease.

Incorrect.
If the tax rate increases, then the bracketed term (1 Tax rate) decreases, thus making the equity beta
decrease because the asset beta is unchanged.
CFA Level I
Section 4.1
Question
71 of 120
The following information is available for a firm:
Revenue
800,000
Variable cost
400,000
Fixed cost
200,000
Operating income
200,000
Interest
Net income
60,000
140,000
The firms degree of total leverage (DTL) is closest to:
2.86.
2.00.
1.43.

DTL = Revenue Variable cost/Net income = 800,000 400,000/140,000 = 2.86.
CFA Level I
Measures of Leverage, Pamela Peterson Drake, Raj Aggarwal, Cynthia Harrington, and Adam Kobor
Section 3.5
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Question
72 of 120
A companys $100 par value preferred stock with a dividend rate of 9.5% per year is currently priced at
$103.26 per share. The companys earnings are expected to grow at an annual rate of 5% for the foreseeable
future. The cost of the companys preferred stock is closest to:
9.5%.
9.7%.
9.2%.
rp = Dp/Pp (or Dividend/Price) = ($100 0.095)/$103.26 = 9.2%.
CFA Level I
Section 3.2
Equity Valuation: Concepts and Basic Tools, John J. Nagorniak and Stephen E. Wilcox
Section 4.1
Question
73 of 120
A company has 100 million shares outstanding. The share price of a company's stock is 15 just prior to
announcing a 100 million expansionary investment in a new plant and estimates that the present value of
future after-tax cash flows will be 150 million. Analysts, however, estimate the new plant's profitability
will be lower than the company's expectations. The company's stock price will most likely:
drop below 15 per share due to the cannibalization of revenue from the new plant.
increase by less than 0.50 per share.
increase by the new plant's net present value per share.
The value of a company is the value of its existing investments plus the net present values of all of its future
investments. The NPV of this new plant is 150 million - 100 million = 50 million. The price per share
should increase by NPV per share or 50 million 100 million shares = 0.50 per share. As the new
plant's profitability is less than expectations, the NPV per share (and hence the increase in the stock price)
should therefore be slightly below 0.50 per share.
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CFA Level I
"Capital Budgeting," John D. Stowe, and Jacques R. Gagn
Section 4.10
Question
74 of 120
The cost of which source of capital most lik ely requires adjustment for taxes in the calculation of a firms
weighted average cost of capital?
Preferred stock
Common Stock
Bonds
Bonds are a form of debt that must be adjusted for taxes when calculating the weighted average cost of capital.
CFA Level I
Section 2.1
Question
75 of 120
The acceptance of which of the following capital budgeting projects is most likely to expose a company
to the highest level of uncertainty?
Newly launched product or services
Replacement of worn out equipment
Expansion projects
Investments related to new products or services expose the company to even more uncertainties than
expansion projects. These decisions are more complex and will involve more people in the decision- making
process.
CFA Level I
"Capital Budgeting," John D. Stowe, and Jacques R. Gagne
Section 2
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Question
76 of 120
A company intends to issue new common stock with floatation costs of 5.0% per share. The expected
dividend next year is $0.32, and the dividend growth rate is expected to be 10% in perpetuity. Assuming the
shares are issued at a price of $14.69, the cost (%) of external equity for the firm is closest to:
12.5.
12.3.
12.2.
Incorrect.
Use the following formula:
where
D1 = Expected dividend
P0 = Current price
f = Flotation costs
g = Growth rate
CFA Level I,
Sections 3.3.2, 4.4
Question
77 of 120
The index weighting that results in portfolio weights shifting away from securities that have increased in
relative value toward securities that have fallen in relative value whenever the portfolio is rebalanced is
most accurately described as:
float-adjusted market-capitalization weighting.
equal weighting.
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fundamental weighting.
Fundamentally weighted indices generally will have a contrarian effect in that the portfolio weights will shift
away from securities that have increased in relative value and toward securities that have fallen in relative value
whenever the portfolio is rebalanced.
CFA Level I
Security Market Indices, Paul D. Kaplan and Dorothy C. Kelly
Section 3.2.4
Question
78 of 120
When parties exchange fixed cash payments for payments that depend on the returns to a stock or a
stock index, they are purchasing a(n):
stock option.
index fund.
equity swap.
Equity swaps consist of parties exchanging fixed cash payments for payments that depend on the returns to
a stock or a stock index.
CFA Level I
"Market Organization and Structure," Larry Harris
Sections 3.1 and 3.4.3
Question
79 of 120
Which of the following statements concerning financial regulatory bodies is least accurate? Financial
regulatory bodies:
act to level the playing field for market participants.
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require that regulated firms maintain optimum levels of capital.

define minimum standards of competence for agents.

Financial regulators impose minimum levels of capital that apply across the board to all regulated firmsnot the
optimum level, which is firm specific.
CFA Level I
Market Organization and Structure, Larry Harris
Section 10
Question
80 of 120
A trader buys a stock at $30 and wants to limit downside risk. Which of the following orders will most lik ely
guarantee that he can sell the stock at $25? (GTC means good till cancelled)
Put option buy market order with a strike price of $25
GTC, stop $25, limit $25 sell order
GTC, stop $25, market sell order
Question
81 of 120
A market has the following limit orders standing on its book for a particular stock:
Bid Size Limit Price
Buyer
Offer Size Limit Price

Seller
(# of
shares)
(# of
($)
shares)
($)
500
18.5
200
20.2
300
18.9
300
20.35
400
19.2
400
20.5
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200
20.1
100
20.65
100
20.15
200
20.7
If a trader submits an immediate-or-cancel limit buy order for 700 shares at a price of $20.50, the
average price the trader would pay is closest to:
$20.50.
$20.58.
$20.35.
The limit buy order will be filled first with the most aggressively priced limit sell order and will be followed by
filling with the higher priced limit sell orders that are needed up to and including the limit buy price until the order
is filled.
Average price = [(200 $20.20) + (300 $20.35) + (200 $20.50)]/700 = $20.35.
CFA Level I
Sections 6.1, 8.2.2.1
Question
82 of 120
A portfolio manager analyzes a market and discovers that it is not possible to achieve consistent and
superior risk-adjusted returns, net of all expenses. This market is most likely characterized by:
restrictions on short selling.
persistent anomalies.
informational efficiency.
In an informationally efficient market, consistent and superior risk-adjusted returns (net of all expenses) are
not achievable.
CFA Level I
"Market Efficiency," W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake
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Section 2.1
Question
83 of 120
A university endowment fund is mandated to hold some of its value in alternative investments. Which of
the following would most likely be included in the fund's alternative investments portfolio?
Convertible preferred shares
Real estate securities
Exchange-traded funds
Real estate securities qualify as alternative investments.
CFA Level I
"Market Organization and Structure," Larry Harris
Section 3.1
Question
84 of 120
Which of the following financial intermediaries is most lik ely to provide liquidity service to its clients?
Exchanges
Brokers
Dealers

The service that dealers provide is liquidity. Liquidity is the ability to buy or sell with low transaction costs when
investors want to trade. By allowing their clients to trade when they want to trade, dealers provide liquidity to
them.
CFA Level I
Sections 4.1, 4.2
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Question
85 of 120
According to behavioral finance, observed overreaction in securities markets most likely occurs because
of:
loss aversion.
disposition effect.
gambler's fallacy.
According to loss aversionrelated arguments in behavioral theories, investors dislike losses more than they like
comparable gains. Thus, such a behavioral bias can explain observed overreaction in markets.
CFA Level I
Market Efficiency, W. Sean Cleary, Howard J. Atkinson, and Pamela Peterson Drake
Section 5.1
Question
86 of 120
An investor buys a stock on margin. Assume that the interest on the loan and the dividend are both paid at
the end of the holding period. The data related to the transaction are as follows:
Number of shares
500
Purchase price per share
$28
Leverage ratio
3.33
Commission
$0.05/share
Position holding period
Six months
Sale price per share

Call money rate
Dividend
$30
5% per year
$0.40 / share
The investors total return on this investment over the margin holding period is closest to:
21.4%.
15.6%.
16.7%.
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Initial investment
[($28 500) (1/3.33)] + ($0.05 500)
$4,229
Purchase commission
$0.05 500
+ Trading gain
($30 $28) 500
1,000
Margin interest paid
$9,800 0.05 6 months
245
+ Dividends received
$0.40 500
200
Sales commission paid
$0.05 500
25
25
= Remaining equity
$5,134
Return on investment
($5,134 $4,229)/$4,229
21.4%
CFA Level I
Section 5.2
Question
87 of 120
Accounting standards and reporting requirements that produce meaningful and timely financial disclosures are
most critical for achieving which of the following efficiencies associated with a well-functioning financial
system?
Informational
Operational
Allocational

Accounting standards and reporting requirements that allow meaningful and timely financial disclosures reduce
the costs of obtaining fundamental information and thereby allow analysts to form more accurate estimates of
fundamental values. They support informationally efficient markets.
CFA Level I
Section 9
Question
88 of 120
A market index contains the following two securities:
Stock
A
Shares in
Start-of-Period Price
End-of-Period Price
Dividend per
Index
($)
($)
Share ($)
600
40
37
2.00
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500
50
52
1.50
The total return on an equal-weighted basis is closest to:

2.25%.
2.78%.
1.75%.
Stock
Shares
Start-of-
End-of-
Dividend
Price Return
Total Return
in Index
Period
Period
per
(%)
(%)
Price
Price
Share
($)
($)
($)
(1)
(2)
(3)
(4)
600
40
37
7.50%
2.50%
500
50
52
1.5
4.00%
7.00%
= (3)/(2) 1
= [(3) + (4)]/(2) 1
Total return = [(-2.5 + 7)/2]
2.25%
CFA Level I
Security Market Indices, Paul D. Kaplan and Dorothy C. Kelly
Section 3.2
Question
89 of 120
Which of the following statements best describes changes in the value of a long forward position during its
life?
As interest rates go down, the value of the position goes up.
As the price of the underlying goes up, the value of the position goes up.
As the time to maturity goes down, the value of the position goes up.
Given the formula for the value of a forward contract:
it follows that the value of the contract goes up as the price of the underlying goes up.
2015 CFA Level 1
Basics of Derivative Pricing and Valuation, Don M. Chance, CFA
Section 3.1.3
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Question
90 of 120
Using put-call parity, a long call can best be replicated by going:
short the put, long the asset and short the bond.
long the put, short the asset and long the bond.
long the put, long the asset and short the bond.
According to put-call parity, a long call is equal to long put, long asset, short bond.
CFA Level I
"Basics of Derivative Pricing and Valuation," Don M. Chance
Section 4.1.9
Question
91 of 120
If the implied volatility for options on a broad-based equity market index goes up, then it is most likely
that:
the general level of market uncertainty has gone up.
the broad-based equity market index has gone up in value.
market interest rates have gone up.
One benefit of derivatives markets is information discovery. Implied volatility reveals information about the risk of
the underlying. Increases in implied volatility are an implication of increased market uncertainty.
CFA Level I
Derivative Markets and Instruments, Don M. Chance
Section 5.2
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Question
92 of 120
For a forward contract with a value of zero, a situation where the spot price is above the forward price is
best explained by high:
storage costs.
convenience yield.
interest rates.
If the convenience yield is high, holding the underlying confers large benefits, thus the spot price can exceed the
forward price for a forward contract with a value of zero. Based on the formula
and an initial value Vt(0) of zero, large benefits g
explain
why the spot price can exceed the forward price.
2015 CFA Level 1
Basics of Derivative Pricing and Valuation, Don M. Chance, CFA
Section 2.2.5
Question
93 of 120
Which of the following is most likely to be a feature common to both forward and futures contracts?
Standardization of the contract's terms and conditions
Their use for hedging or speculation
Daily marking to market of contracts
Both forward and futures contracts can be used for hedging an exposure or speculating on the particular
price direction of the underlying security.
CFA Level I
"Derivative Markets and Instruments," Don M. Chance
Section 4.1.2
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Question
94 of 120
According to put-call-forward parity, the difference between the price of a put and the price of a call is
most likely equal to the difference between:
exercise price and forward price discounted at the risk-free rate.
forward price and spot price discounted at the risk-free rate.
spot price and exercise price discounted at the risk-free rate.
Put-call-forward parity can be written as:
This means that the difference between the price of a put and the price of a call is equal to the difference
between exercise price and forward price discounted at the risk-free rate. .
CFA Level I
Basics of Derivative Pricing and Valuation, Don M. Chance
Section 4.1.9
Question
95 of 120
To obtain the spot yield curve, a bond analyst would most likely use the most:
recently issued and actively traded corporate bonds.
recently issued and actively traded government bonds.
seasoned and actively traded government bonds.
To obtain the spot yield curve a bond analyst would prefer to use the most recently issued and actively
traded government bonds. Such bonds will have similar liquidity as well as fewer tax effects because they
will be priced closer to par value.
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CFA Level I
"Introduction to Fixed-Income Valuation", James F. Adams and Donald J. Smith
Section 4
Question
96 of 120
Which of the following statements is most likely correct regarding the spot and forward curves. The spot
curve:
cannot be calculated from the forward curve, but the forward curve can be calculated from the spot
curve.
can be calculated from the forward curve, but the forward curve cannot be calculated from the spot
curve.
can be calculated from the forward curve, and the forward curve can be calculated from the spot
curve.
The forward and spot curves are interconnected to each other. The spot curve can be calculated from the
forward curve, and the forward curve can be calculated from the spot curve. Either curve can be used to
value fixed-rate bonds.
CFA Level I
Section 4
Question
97 of 120
An investor purchases a 5% coupon bond maturing in 15 years for par value. Immediately after purchase,
the yield required by the market increases. The investor would then most likely have to sell the bond at:
a premium.
a discount.
par.
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The bond would sell below par or at a discount if the yield required by the market rises above the coupon
rate. Because the bond initially was purchased at par, the coupon rate equals the yield required by the
market. Subsequently, if yields rise above the coupon, the bond's market price would fall below par.
CFA Level 1
"Introduction to Fixed-Income Valuation," James F. Adams and Donald J. Smith
Section 2.3
Question
98 of 120
Credit spreads are most likely to narrow during:
economic contractions.
a period of flight to quality.
economic expansions.
Credit spreads narrow during economic expansions and widen during economic contractions. During an
economic expansion, corporate revenues and cash flows rise, making it easier for corporations to service
their debt, and investors purchase corporates instead of Treasuries, thus causing spreads to narrow.
CFA Level I
"Fundamentals of Credit Analysis," Christopher L. Gootkind
Section 6
Question
99 of 120
Which of the following is least likely a component of the "Four Cs of Credit Analysis" framework?
Covenants
Competition
Collateral
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The "Four Cs of Credit Analysis" framework includes capacity, collateral, covenants, and character.
Competition is not one of the components.
CFA Level I
"Fundamentals of Credit Analysis," Christopher L. Gootkind
Section 5.2
Question
100 of 120
For bonds that are otherwise identical, the one exhibiting the highest level of positive convexity is most
likely the one that is:
option-free.
putable.
callable.
When interest rates rise, a putable bond is more likely to be put back to the issuer by the investor, limiting
the loss of value and giving the bond more positive convexity than an option-free bond. In contrast, a
callable bond is likely to be called from the investor when interest rates fall, limiting the gain in value and
giving the bond negative convexity.
CFA Level I
"Understanding Fixed-Income Risk and Return," James F. Adams and Donald J. Smith
Section 3.3
Question
101 of 120
Consider a five-year option-free bond that is priced at a discount to par value. Assuming the discount rate
does not change, one year from now the value of the bond will most likely:
increase.
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stay the same.

decrease.
The bond is priced below its par value but will be worth exactly par value at maturity. Over time, assuming
a stable discount rate, the value of the bond must rise so that it is equal to par at maturity. That is, the price
is "pulled to par."
CFA Level 1
Section 2.3
Question
102 of 120
A credit analyst is least likely to use matrix pricing to estimate the required yield and price of a(n):
newly underwritten bond.
inactively traded investment grade bond.
actively traded speculative grade bond.
Matrix pricing is most suited to pricing inactively traded bonds and newly underwritten bonds. A credit
analyst is least likely to use matrix pricing to price an actively traded bond.
CFA Level I
Section 3.2
Question
103 of 120
Which of the following is least likely a form of internal credit enhancement used in a securitization?
Overcollateralization
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Letter of credit
Subordination
The use of letters of credit is a type external credit enhancement used in a securitization.
CFA Level I
"Introduction to Asset-Backed Securities", Frank J. Fabozzi
Section 3.2
Question
104 of 120
Two years ago, a homeowner took out a $1 million home mortgage from a bank. The current principal on
the loan is $750,000 and the homeowner has defaulted on the loan. Following foreclosure proceedings,
the Bank sells the property for $600,000 and is only entitled to use these funds to satisfy the loan
obligation. The homeowner most likely had a:
recourse loan.
non-recourse loan.
bullet loan.
The bank does not have a claim against the borrower for the shortfall of $150,000 on the mortgage balance
outstanding relative to the proceeds received from the property's sale indicating that the home mortgage is a
non-recourse loan.
CFA Level I
"Introduction to Asset-Backed Securities", Frank J. Fabozzi
Section 4.5
Question
105 of 120
All else being equal, the difference between the nominal spread and the Z-spread for a non-Treasury
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security will most likely be larger when the:

yield curve is steep.
security has a bullet maturity rather than an amortizing structure.
yield curve is flat.
The main factor causing any difference between the nominal spread and the Z-spread is the shape of the
Treasury spot rate curve. The steeper the spot rate curve, the greater the difference.
CFA Level I
Section 5.2
Question
106 of 120
For an option-free, fixed-rate bond the coupon reinvestment risk would most likely dominate market
price risk when the investment horizon is:
greater than the Macaulay duration of the bond.
lower than the Macaulay duration of the bond.
equal to the Macaulay duration of the bond.
For an option-free, fixed-rate bond when the investment horizon is greater than the Macaulay duration the
coupon reinvestment risk will tend to dominate market price risk. In such situations, the investor's risk is to
lower interest rates.
CFA Level I
"Understanding Fixed-Income Risk and Return", James F. Adams and Donald J. Smith
Section 4.2
Question
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107 of 120
Which of the following infrastructure investments would most likely be easiest to value? A:
private equity fund holding brownfield investments.
master limited partnership holding greenfield investments.
master limited partnership holding brownfield investments.
A master limited partnership (MLP) is publicly traded, whereas a private equity fund is not. Therefore the
MLP will have market pricing information to help with valuation. A brownfield investment is an existing asset
that likely has operational and financial history to aid in valuation; whereas a greenfield investment is in new
construction.
CFA Level I
"Introduction to Alternative Investments," Terri Duhon, George Spentzos, and Scott D. Stewart
Section 7
Question
108 of 120
Alternative investments that rely on estimates rather than observable market prices for valuation purposes
are most likely to report:
volatility of returns that is understated.
correlations of returns with the returns of traditional assets that are overstated.
returns that are understated.
The use of estimates tends to smooth the return series. As a consequence, the volatility of returns will be
understated.
CFA Level I
Section 8.2
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Question
109 of 120
Based on the historical record, adding alternative investments to a traditional investment portfolio
consisting of publicly traded debt and equity will most likely decrease the portfolio's:
downside risk.
risk-adjusted return.
liquidity.
Many categories of alternative assets have low liquidity because of the fund structures used (e.g., limited
partnerships for hedge funds and private equity) or high transactions costs for underlying assets (e.g., real
estate). Alternative assets have generally had high downside risks. However, low correlations with
traditional asset classes suggest strong diversifying potential and high returns result in relatively strong
Sharpe ratios (high risk-adjusted returns).
CFA Level I
Section 2
Question
110 of 120
An alternative investments fund that uses leverage and takes long and short positions in securities is most
likely a:
leveraged buyout fund.
venture capital fund.
hedge fund.
Hedge funds invest in securities and may take long and short positions. They may also use leverage.
CFA Level I
Section 2.1
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Question
111 of 120
An investor whose portfolio lies to the right of the market portfolio on the capital market line (CML) has
most likely:
invested all available funds in the risk-free asset.
loaned some funds at the risk-free rate and invested the remaining funds in the market portfolio.
borrowed funds at the risk-free rate and invested all available funds in the market portfolio.
A portfolio lying to the right of the market portfolio on the CML is formed by borrowing funds at the riskfree rate and investing all available funds in the market portfolio.
CFA Level I
"Portfolio Risk and Return: Part II," Vijay Singal
Section 2.2.4
Question
112 of 120
An asset has an annual return of 19.9%, standard deviation of returns of 18.5%, and correlation with the
market of 0.9. If the standard deviation of returns on the market is15.9% and the risk-free rate is 1%, the
beta of this asset is closest to:
1.02.
1.16
1.05.
= (i,mi)/m
= (0.90 0.185)/0.159
= 1.047.
CFA Level I
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Section 3.2.4
Question
113 of 120
The stock of GBK Corporation has a beta of 0.65. If the risk-free rate of return is 3% and the expected
market return is 9%, the expected return for GBK is closest to:
10.8%.
3.9%.
6.9%.
CFA Level I
Section 3.2.6
Question
114 of 120
Which of the following is least likely an assumption underlying the capital asset pricing model (CAPM)?
Investors analyze securities according to their own future cash flow estimates and probability
distributions.
There are no restrictions on short selling assets.
The amount invested in an asset can be as much or as little as the investor wants.
The CAPM requires that there are no restrictions on short selling (which is an assumption underlying
frictionless markets) and that the amount invested in an asset can be as much or as little as the investor
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wants (that is, investments are infinitely divisible). The CAPM also assumes that all investors analyze
securities in the same way using the same inputs for future cash flows and the same probability distributions;
that is, it assumes that investors have homogenous expectations.
CFA Level I
Section 4.1
Question
115 of 120
Stock X and Stock Y have the same level of total risk. Stock X has twice the systematic risk of Stock Y
and half its non-systematic risk. Stock X's expected return will most likely be:
lower than the expected return of Stock Y.
the same as the expected return of Stock Y.
higher than the expected return of Stock Y.
Because Stock X has a higher systematic risk level compared with Stock Y, its expected return will be
higher than that of Stock Y.
CFA Level I
Section 3.1
Question
116 of 120
The risk-free rate is 5% and the market risk premium is 8%. If the beta of TRL Corp. is 1.5, based on
the capital asset pricing model (CAPM), the expected return of TRL's stock is closest to:
17.0%.
9.5%.
15.5%.
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Using the CAPM relationship of E(Ri) = Rf+ [E(Rm) Rf]i, we can estimate the expected return as: E(Ri)
= 0.05+ (0.08)(1.5) = 17.0%.
CFA Level I
Section 4.2
Question
117 of 120
The execution step of the portfolio management process includes:
preparing the investment policy statement.
finalizing the asset allocation.
monitoring the portfolio performance.
Asset allocation occurs in the execution step.
CFA Level I
"Portfolio Management: An Overview," Robert M. Conroy and Alistair Byrne
Section 4
Question
118 of 120
Following its decision to divest its non-core assets, analysts expect HCL Corp's standard deviation of
returns to rise to 30% and its correlation with the market portfolio to remain unchanged at 0.8. The riskfree rate and the market risk premium are expected to remain unchanged at 6% and 8%, respectively.
However, the market portfolio's standard deviation of returns is expected to decrease to 15%. The firm's
expected return after the restructure is closest to:
9.2%.
18.8%.
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17.6%.
We first compute the firms beta using:
The beta is:
computed using:
The expected return is
So,
CFA Level I
Portfolio Risk and Return: Part II, Vijay Singal
Question
119 of 120
An investor with $10,000 decides to borrow an additional $5,000 at the risk-free rate and invest all the
available funds in the market portfolio. This investor's portfolio beta is closest to:
0.5.
1.5.
1.0.
The weight in the market portfolio is 15,000/10,000 = 1.5 and the weight in the risk-free asset is
5,000/10,000 = 0.5. Because the beta of the risk-free asset is 0 and the market portfolio's beta is 1, the
portfolio's beta is: p = 0(0.5) + 1(1.5) = 1.5.
CFA Level I
Question
120 of 120
An asset management firm generated the following annual returns in their US large-cap equity portfolio:
Year
Net Return (%)
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2008
34.8
2009
32.2
2010
11.1
2011
1.4
The 2012 return needed to achieve a trailing five-year geometric mean annualized return of 5% when
calculated at the end of 2012 is closest to:
35.2%.
17.9%.
27.6%.
Holding period total return (cumulative) factor calculation through 2011:

(1 0.348) (1 + 0.322) (1 + 0.111) (1 0.014) = 0.652 1.322 1.111 0.986 = 0.9442.
Compound total return (cumulative) factor at 5% per year of 5% for five years:
1.055 = 1.2763.
Return needed in 2012 to achieve a compound annualized return of 5%:
1.2763/0.9442 = 1.3517 = 35.2%.
Check: 0.944 1.352 = 1.276(1/5) = 1.050 = 5% annualized.
CFA Level I
"Portfolio Risk and Return: Part I," Vijay Singal
Section 2.1.3
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with the GIPS standards.

Question not answered

Security Quantity Broker

Question not answered

Null hypothesis (H0): Mean difference of returns = 0

The test statistic is:

is the mean difference, d0 is the hypothesized difference in the

difference is zero is rejected.

Question not answered

Question not answered

The 95% confidence interval is closest to a:

2.262 12/10 = 6.25 8.58369 or 2.33 to 14.83.

Question not answered

The time-weighted rate of return of the portfolio is closest to:

TR > TVC but TR<TFC+TVC

Shut down production to zero

where TR = Total Revenue;

If both aggregate demand (AD) and

Total product increases at an increasing rate

Total product increases at a decreasing rate

Total product decreases.

Question not answered

Question not answered

Question not answered

Year-end inventory (LIFO inventory method)

2014 LIFO reserve 2013 LIFO reserve

= 36.4 21.8 = 14.6

LIFO COGS Change in LIFO reserve

= 203.9 14.6 = 189.3

FIFO gross profit

Sales FIFO COGS = 283.5 189.3 = 94.2

FIFO gross profit margin

Gross profit/Sales= 94.2/283.5 = 33.2%

LIFO reserve as of 31 December 2014

Marginal tax rate

2014 LIFO reserve 2013 LIFO reserve

LIFO COGS Change in LIFO reserve

= $450 $420 = $30

LIFO COGS $30

"Inventories," Michael A. Broihahn

Raw material aluminum costs

Less: Trade discounts

Total inventory costs

Net Book Value at

Net Book Value at End of

Alternative calculation for start of Year 3 net book value:

Research & development expenses

Total non-current assets

Total assets = 21,950

Average number of common shares outstanding

Details of convertible securities outstanding:

o Each preferred share is convertible into five shares of common stock

The company's diluted EPS is closest to:

After-tax cost of interest

15 units $8.14/unit = $122

COGS/Inv = $448/$122 = 3.67

COGS/Inv = $440/$130 = 3.38

In Year 2, all of the most recent purchases at $8 will go to COGS.

COGS/Inv = $450/$120 = 3.75

"Inventories," Michael A. Broihahn

Net realizable value

Current replacement cost