CFA 2010 Level I Mock Exam Morning Afternoon Session

2010 Level I Mock Exam: Morning Session The morning session of the 2010 Level I Chartered Financial Analyst® Mock Examination has 120 questions. To best simulate the exam day experience, candidates are advised to allocate an average of 1.5 minutes per question for a total of 180 minutes (3 hours) for this session of the exam.

Questions

Topic

Minutes

1-18

Ethical and Professional Standards

27

19-32

Quantitative Methods

21

33-44

Economics

18

45-68

Financial Statement Analysis

36

69-78

Corporate Finance

15

79-90

Equity Investments

18

91-96

Derivative Investments

9

97-108

Fixed Income Investments

18

109-114

Alternative Investments

9

115-120

Portfolio Management

9

Total:

180

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 1 through 18 relate to Ethical and Professional Standards.

1. 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: A. fire-walls. B. watch lists. C. selective disclosure. 2. William Wong, CFA, is an equity analyst with Hayswick Securities. Based on his fundamental analysis, Wong concludes 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 a lower price. Wong is least likely to have violated the CFA Institute Standards of Professional Conduct related to: A. duty to clients. B. reasonable basis. C. priority of transactions. 3. During an onsite company visit, Marsha Ward, CFA, accidentally overheard the Chief Executive Officer (CEO) of Stargazer, Inc. discussing the company’s tender offer to purchase Dynamica Enterprises, a retailer of Stargazer products. According to the CFA Institute Standards of Professional Conduct, Ward most likely can not use the information because: A. it relates to a tender offer. B. it was overheard and might be considered unreliable. C. she does not have a reasonable and adequate basis for taking investment action.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

4. Ian O’Sullivan, CFA, is the owner and sole employee of two companies, a public relations firm and a financial research firm. The public relations firm entered into a contract with Mallory Enterprises to provide public relations services, with O’Sullivan receiving 40,000 shares of Mallory stock in payment for his services. Over the next 10 days, the public relations firm issued several press releases that discussed Mallory’s excellent growth prospects. O’Sullivan, through his financial research firm, also published a research report recommending Mallory stock as a “buy.” According to the CFA Institute Standards of Professional Conduct, O’Sullivan is most likely required to disclose his ownership of Mallory stock in the: A. press releases only. B. research report only. C. both the press release and the research report. 5. Jefferson Piedmont, CFA, a portfolio manager for Park Investments, plans to manage the portfolios of several family members in exchange for a percentage of each portfolio’s profits. As his family members have extensive portfolios requiring substantial attention, they have requested that Piedmont provide the services outside his employment with Park. Piedmont notifies his employer in writing of his prospective outside employment. Two weeks later, Piedmont begins managing the family members’ portfolios. By managing these portfolios, did Piedmont violate any CFA Institute Standards of Professional Conduct? A. Conflicts of Interest B. Additional Compensation. C. Both Additional Compensation and Conflicts of Interest. 6. The eight major provisions of the Global Investment Performance Standards (GIPS) include all of the following except: A. Input Data, Calculation Methodology, and Real Estate. B. Fundamentals of Compliance, Composite Construction, and Disclosures. C. Calculation Methodology, Composite Construction, and Alternative Assets.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

7. Hui Chen, CFA, develops marketing materials for an investment fund he founded three years ago. The materials show the 3-, 2- and 1-year returns for the fund. He includes a footnote that states in small print “Past performance does not guarantee future returns.” He also includes a separate sheet showing the most recent semiannual and quarterly returns, which notes they have been neither audited nor verified. Has Chen most likely violated any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he included un-audited and unverified results. C. Yes, because he did not adhere to the global investment performance standards. 8. Charlie Mancini, CFA, is the Managing Director for Business Development at SV Financial, (SVF), a large U.S. based mutual fund organization. Mancini has been under pressure recently to increase revenues. In order to secure business from a large hedge fund manager based in Asia, Mancini recently approved flexible terms for the fund’s client agreement. To allow for time zone differences, the agreement permits the hedge fund to trade in all of SVF’s mutual funds six hours after the close of U.S. markets. Did Mancini violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, with regard to Fair Dealing. C. Yes, with regard to Fair Dealing and Material Nonpublic Information. 9. Ron Dunder, CFA, is the CIO for Bling Trust (BT), an investment advisor. Dunder recently assigned one of his portfolio managers, Doug Chetch, to manage several accounts that primarily invest in thinly traded micro-cap stocks. Dunder soon notices that Chetch places many stock trades for these accounts on the last day of the month, towards the market’s close. Dunder finds this trading activity unusual and speaks to Chetch who explains that the trading activity was completed at the client’s request. Dunder does not investigate further. Six months later regulatory authorities sanction BT for manipulating micro-cap stock prices at month end in order to boost account values. Did Dunder violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he failed to reasonably supervise Chetch. C. Yes, because he did not report his findings to regulatory authorities.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

10. Ross Nelson, CFA, manages accounts for high net worth clients including his own family’s account. He has no beneficial ownership in his family’s account. Because Nelson is concerned about the appearance of improper behavior in managing his family’s account, when his firm purchases a block of securities, Nelson allocates to his family’s account only those shares that remain after his other client accounts have their orders filled. The fee for managing his family’s account is based on his firm’s normal fee structure. According to the Standards of Practice Handbook, Nelson’s best course of action with regard to management of his family’s account would be to: A. treat the account like other client accounts. B. arrange for the account to be transferred to another firm. C. transfer the account to another investment manager in his firm. 11. Several years ago, Leo Peek, CFA, co-founded an investment club. The club is fully invested but has not actively traded its account for at least a year and does not plan to resume active trading of the account. Peek’s employer requires an annual disclosure of employee stock ownership. Peek discloses all of his personal trading accounts, but does not disclose his holdings in the investment club. Peek’s actions are least likely to be a violation of which of the CFA Institute Standards of Professional Conduct? A. Misrepresentation. B. Transaction priority. C. Conflicts of interest. 12. 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 Practice Handbook, Smith’s most appropriate course of action would be to: A. require her firm to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct. B. require the employees she supervises to adopt the CFA Institute Code of Ethics and Standards of Professional Conduct. C. decline to accept supervisory responsibility until her firm adopts procedures to allow her to adequately exercise such responsibility.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

13. Darden Crux, CFA, a portfolio manager at SWIFT Asset Management Ltd., (SWIFT) calls a friend to join him for dinner. The friend, a financial analyst at Cyber Kinetics (CK) declines the invitation and explains she is performing due diligence on Orca Electronics, a company CK is about to acquire. After the phone call, Crux searches the Internet for any news of the acquisition but finds nothing. Upon verifying Orca is on SWIFT’s approved stock list, Crux purchases Orca’s common stock and call options for selective SWIFT clients. Two weeks later, CK announces its intention to acquire Orca. The next day, Crux sells all of the Orca securities, giving the fund a profit of $3 million. What action should Crux most likely take to avoid violating any CFA Institute Standards of Professional Conduct? A. Refuse to trade based on the information. B. Purchase the stock and call options for all clients. C. Trade only after analyzing the stock diligently and thoroughly. 14. Justin Blake, CFA, a retired portfolio manager owns 20,000 shares of a small public company that he would like to sell. He posts messages on several Internet bulletin boards. The messages read, "This stock is going up once the pending patents are released so now is the time to buy. You would be crazy to sell anything below $3 in a few months from now. The stock is a buy at anything below $3. I have done some close research on these guys." According to the Standards of Practice Handbook, Blake most likely violated the Standard or Standards associated with: A. Integrity of Capital Markets and Conflicts of Interest. B. Integrity of Capital Markets, but not Conflicts of Interest. C. Neither Integrity of Capital Markets nor Conflicts of Interest. 15. The Global Investment Performance Standards (GIPS) least likely requires: A. non-discretionary portfolios to be included in composites. B. non fee-paying portfolios to be excluded in the returns of appropriate composites. C. composites to be defined according to similar investment objectives and/or strategies.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

16. 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. Pre cleared transactions are approved only for that trading day. As indicated below, Covington received prior clearance. Security A B

Quantity 100 150

Broker Easy Trade Easy Trade

Prior Clearance Yes Yes

Two days after she received prior clearance, the price of Stock B had 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? A. No. B. Yes, relating to diligence and reasonable basis. C. Yes, relating to her employer’s compliance procedures. 17. Miranda Grafton, CFA, purchased at varying prices during the trading session a large block of stock on behalf of specific accounts she managed. The stock realized a significant gain in value before the close of the trading day, so Grafton reviewed her purchase prices to determine what prices should be assigned to each specific account. According to the Standards of Practice Handbook, Grafton’s most appropriate action is to allocate the execution prices: A. by giving longer-term clients more favorable prices. B. to all clients within the block trade at the same execution price. C. on a weighted basis according to the size of the clients’ accounts.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

18. Jiro Sato, CFA, deputy treasurer for May College, manages the Student Scholarship Trust. Sato issued a Request for Proposal (RFP) for domestic equity managers. Pamela Peters, CFA, a good friend of Sato, introduces him to representatives from Capital Investments, who submitted a proposal. Sato selected Capital as a manager based on the firm’s excellent performance record. Shortly after the selection, Peters, who had outstanding performance as an equity manager with another firm, accepted a lucrative job with Capital. Which of the CFA Charterholders violated CFA Institute Standards of Professional Conduct? A. Both violated Standards. B. Peters violated Standards. C. Neither violated Standards.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 19 through 32 relate to Quantitative Methods 19. A random variable with a finite number of equally likely outcomes is best described by a: A. binomial distribution. B. discrete uniform distribution. C. continuous uniform distribution. 20. The bond-equivalent yield for a semi-annual pay bond is most likely: A. equal to the effective annual yield. B. more than the effective annual yield. C. equal to double the semi-annual yield to maturity. 21. An analyst gathered the following information about a stock index: Mean net income for all companies in the index $2.4 million Standard deviation of net income for all companies in the index $3.2 million If the analyst takes a sample of 36 companies from the index, the standard error of the sample mean (in $) is closest to: A. $88,889. B. $400,000. C. $533,333. 22. An analyst collects the following set of ten returns from the past. Year Return (%)

1 2.2

2 6.2

3 8.9

4 9.3

5 10.5

6 11.7

7 12.3

8 14.1

9 15.3

The geometric mean return (%) is closest to: A. 9.62. B. 10.80. C. 10.89.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

10 18.4

23. An investor currently has a portfolio valued at $700,000. The investor’s objective is long-term growth, but the investor will need $30,000 by the end of the year to pay her son’s college tuition and another $10,000 by year-end for her annual vacation. The investor is considering three alternative portfolios: Portfolio 1 2 3

Expected Return 8% 10% 14%

Standard Deviation of Returns 10% 13% 22%

Using Roy’s safety-first criterion, which of the alternative portfolios most likely minimizes the probability that the investor’s portfolio will have a value lower than $700,000 at year-end? A. Portfolio 1 B. Portfolio 2 C. Portfolio 3 24. For an investment portfolio, the coefficient of variation of the returns on the portfolio is best described as measuring: A. risk per unit of mean return. B. mean return per unit of risk. C. mean excess return per unit of risk. 25. A fundamental analyst studying 100 potential companies for inclusion in her stock portfolio uses the following three screening criteria:

Screening Criterion Market-to-Book Ratio > 4 Current Ratio >2 Return on Equity >10%

Number of Companies meeting the screen 20 40 25

Assuming that the screening criteria are independent, the probability (in %) that a given company will meet all three screening criteria is closest to: A. 2.0. B. 8.5. C. 20.0.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

26. When using stock return data, a geometric mean return calculation is most likely preferred over a geometric mean calculation because: A. return data can be negative. B. return data can be less than one. C. the geometric mean return is closer in value to the arithmetic mean. 27. An analyst collects the following set of past stock returns: -2.3%, -5.1%, 7.6%, 8.2%, 9.1%, and 9.8%. Which of the following measures of return is most likely the highest? A. Median return B. Geometric mean return C. Arithmetic mean return 28. A 182-day U.S. Treasury bill has a face value of $100,000 and currently sells for $98,500. Which of the following yields is most likely the lowest? A. Bank discount yield B. Money market yield C. Holding period yield 29. If a probability distribution is very similar to a normal distribution, then the kurtosis is best described as: A. leptokurtic. B. mesokurtic. C. platykurtic. 30. The 95% confidence interval for the sample mean is -4.56 to 3.27. The null hypothesis is that the sample mean is equal to zero. The alternative hypothesis is that the sample mean is not equal to zero (two-tail test). The null hypothesis most appropriately should be: A. rejected at a 2.5% level of significance. B. rejected at a 5.0% level of significance. C. accepted at a 5.0% level of significance. 31. Which of the following is most likely to be considered a momentum indicator? A. Put-call ratio B. Breadth of market C. Mutual fund cash position By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

32. Compared to a normal distribution, a lognormal distribution is least likely to be: A. skewed to the left. B. skewed to the right. C. useful in describing the distribution of stock prices.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 33 through 44 relate to Economics 33. In regard to the relation between output and costs in the short-run, a decline in the marginal cost most likely occurs at what level of production? A. Low output B. High output C. Profit-maximizing output 34. When the supply curve of a factor is perfectly elastic the factor income is most likely: A. entirely economic rent. B. entirely opportunity cost. C. part economic rent and part opportunity cost. 35. The most likely initial (short-run) effect of demand-pull inflation is an increase in: A. the price level and a decrease in real GDP. B. the price level and an increase in real GDP. C. government expenditure followed by a decline in the quantity of money. 36. According to the short-run Phillips curve, when inflation is less than expected, the most likely initial effect is that: A. real wage rates will fall. B. real interest rates will fall. C. unemployment will rise above its natural rate. 37. Which of the following is the least likely outcome when a monopoly adopts perfect price discrimination because of the customers’ differing demand elasticities? A. The monopolist shares the total surplus with consumers. B. The price for marginal unit becomes less than the price for other units. C. The output increases to the point at which price equals the marginal cost. 38. Which of the following is least likely to resolve or reduce the principal-agent problem in organizations? A. Ownership B. Long-term contracts C. Professional management By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

39. The crowding-out effect suggests that government borrowing to finance higher expenditures will most likely increase: A. private investment. B. the real interest rate. C. the supply of loanable funds. 40. The view that the money wage rates are sticky in the short-run is least likely held by which of the following schools of thought? A. Classical B. Keynesian C. Monetarist 41. The Nash equilibrium for a duopoly faced with a “Prisoners’ Dilemma” set of choices is most likely to result in: A. both firms earn economic profits. B. neither firm earns an economic profit. C. one of the firms earns an economic profit but the other firm does not. 42. Limited liability is most likely to be an advantage of which type of business organization? A. Partnership B. Corporation C. Proprietorship 43. In a simple economy containing only two goods – apples and shirts – the prices and quantities in the base period and the current period are: Base Period Apples Shirts

Quantity 25 5

Price ($) 1.00 20.00

Current period Quantity Apples 25 Shirts 5

Price ($) 1.25 20.50

Assuming the base period consumer price index (CPI) = 100, the CPI for the current period is closest to: A. 103.57. B. 107.00. C. 113.75. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

44. A consumer good demonstrates the following changes in price and quantity:

Initial quantity and price Quantity and price following a shift in the demand curve

Quantity 25 30

Price ($) 15 20

The elasticity of supply is closest to: A. 0.60 B. 0.64 C. 0.67

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 45 through 68 relate to Financial Statement Analysis 45. A firm reports sales of €50,000,000 for the year ended December 31, 2009. Its accounts receivable balances were €6,000,000 at January 1, 2009 and €7,500,000 at December 31, 2009. The company’s cash collections from sales (€) for 2009 is closest to: A. 42,500,000. B. 48,500,000. C. 51,500,000. 46. . The table below shows changes to the number of common shares outstanding for a company during 2009: 1 January 1 June 1 August 31 December

180,000 shares outstanding 60,000 shares issued 2 for 1 stock split 480,000 shares outstanding

To calculate earnings per share for 2009, the company’s weighted average number of shares outstanding is closest to: A. 215,000. B. 420,000. C. 430,000. 47. In the statement of cash flows, a company is allowed to classify interest paid: A. in either the operating or financing section under IFRS. B. in either the operating or financing section under U.S. GAAP. C. only in the financing section under both IFRS and U.S. GAAP.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

48. A company entered into a three-year construction project with a total contract price of $5.3 million and an expected total cost of $4.4 million. The following table provides cash flow information relating to the contract: All figures in $ Year 1 Year 2 Year 3 Costs incurred and paid 600,000 3,000,000 800,000 Amounts billed and payments received 1,200,000 2,800,000 1,300,000 If the company uses the percentage-of-completion method, the amount of revenue (in $) recognized in Year 2 will be closest to: A. 2,800,000. B. 3,372,727. C. 3,613,636. 49. An analyst’s examination of the performance of a company is least likely to include an assessment of a company’s: A. profitability. B. cash flow generating ability. C. assets relative to its liabilities. 50. Which of the following is a constraint as defined in the International Financial Reporting Standards (IFRS) Framework for the Preparation and Presentation of Financial Statements? A. Neutrality B. Timeliness C. Going concern 51. A company, with a tax rate of 40%, sold a capital asset with a net book value of $500,000 for $570,000 during the year. Which of the following amounts (in $) will most likely be reported on its income statement for the year related to the asset sale? A. 42,000 B. 70,000 C. 570,000

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

52. Under International Financial Reporting Standards (IFRS) a bank, or other financial institution, would normally use which type of balance sheet format? A. Classified B. Liquidity-based C. Market-value based 53. A company issued shares to acquire a large tract of undeveloped land for future development. The most likely recording of this transaction in the cash flow statement is as a(n): A. disclosure in a note or supplementary schedule. B. outflow from investing activities, and an inflow from financing activities. C. outflow from operating activities, and an inflow from financing activities. 54. The following information is available for a company: December 31, 2009: Total Assets Net income for the year Dividends paid Assets are equally financed with debt and equity 50% of the equity comes from contributed capital

$100,000 $4,000 $0

December 31, 2010: Total Assets Net loss for the year No new debt or equity issued or repurchased

$92,000 $3,000

In 2010, the company most likely: A. paid a dividend of $1,000 B. paid a dividend of $5,000 C. did not pay a dividend because they incurred a loss. 55. A company reported net income of $400,000 for the year. At the end of the year, the company had an unrealized gain of $50,000 on its available-for-sale securities, an unrealized gain of $40,000 on held-to-maturity securities and an unrealized loss of $100,000 on its portfolio of held-for-trading securities. The company’s comprehensive income (in $) for the year is closest to: A. 350,000. B. 390,000. C. 450,000. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

56. The table below contains selected data from the common-size balance sheets for three different industries: utilities, financials and consumer discretionary products. % of Total Assets Industry 1

Industry 2

Industry 3

Inventories

6.9

2.6

19.4

PPE

1.9

57.5

25.4

LT Debt

18.2

31.9

19.1

Total Equity 19.5 23.2 LT = Long Term; PPE = Property, plant and equipment

42.3

Which of the following statements is most accurate? A. Industry 1 is the utility industry and Industry 2 is the financial industry. B. Industry 2 is the utility industry and Industry 3 is the consumer discretionary products industry. C. Industry 1 is the consumer discretionary products industry and Industry 3 is the financial industry. 57. Due to global oversupply in the micro-chip industry a company wrote down its 2009 inventory by €4.0 million from €12.0 million. The following year, due to a change in competitive forces in the industry the market price of these chips rose sharply to 10% above their original 2009 value. If the company prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), its 2010 inventory (in €-millions) will most likely be reported as: A. 8.0. B. 12.0. C. 13.2. 58. An analyst calculates the following ratios for a firm: Sales/Total Assets 2.8

Net Profit Margin (%) 4

Return on Total Assets (%) 11.2

Equity/ Total Assets 0.625

The return on equity (in %) for this firm is closest to: A. 6.4. B. 7.0. C. 17.9. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

59. A capital lease requires annual lease payments of $2,000 at the start of each year. Fair value of the leased equipment at inception of the lease is $10,000 and the implicit interest rate is 12 percent. If the present value of the lease payments equals the fair value of the equipment at the inception of the lease, the interest expense (in $) recorded by the lessee in the second year of the lease is closest to: A. 720. B. 835. C. 960. 60. Two software companies that report their financial statements under U.S. GAAP (generally accepted accounting principles) are identical except as to how soon they judge a project to be technologically feasible. One firm does so very early in the development cycle while the other usually waits until just before the project is released to manufacturing. Compared to the company that judges technological feasibility early, the one that waits until closer to manufacturing will most likely report lower: A. financial leverage. B. total asset turnover. C. cash flow from operations.

61. During the past year, a company’s production facility was operating at 75% of capacity. The firm’s costs were as follows:

Fixed production overhead costs Raw materials costs Labor costs Freight-in costs for raw materials Warehousing costs for finished goods

$ millions 3 6 4 1 2

The firm ended the year with no remaining work-in-process inventory. The total capitalized inventory cost (in $ millions) for the year is closest to: A. 13.25. B. 15.25. C. 16.00.

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62. A company prepares its financial statements in accordance with U.S. GAAP (generally accepted accounting principles). It expected to be the sole supplier for a state-wide school milk program and had production facilities valued at $28.4 million. Recently several other companies were also granted milk-supply contracts throughout the state and the company now estimates that it will only be able to generate cash flows of $3 million per year for the next 7 years with its facilities. The firm has a cost of capital of 10%. The impairment loss (in $-millions) on the production facilities will most likely be reported in the company’s financial statements as a: A. 13.8 reduction in operating cash flows. . B. 13.8 impairment loss in the income statement C. 7.4 reduction in the balance sheet carrying amount. 63. Which of the following events will most likely result in a decrease in a valuation allowance for a deferred tax asset under U.S. GAAP (generally accepted accounting principles)? A(n): A. reduction in tax rates. B. decrease in interest rates. C. increase in the carry forward periods available under the tax law. 64. A company presents its financial statements according to U.S. GAAP (generally accepted accounting principles) and has just issued $5 million of mandatory redeemable preferred shares with a par value of $100 per share and a 7% dividend. The issue matures in 5 years. Which of the following statements is least likely correct? At the time of the issue, the company’s: A. debt-to-total capital ratio will improve B. interest coverage ratio will deteriorate. C. preferred shareholders will rank below debt holders should the company file for bankruptcy.

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65. A pharmaceutical company has been very successful for the past several years, increasing its sales many-fold over that of its competition. It has been able to meet or beat analysts’ optimistic quarterly earnings estimates and consistently registers very high sales towards the end of each quarter. Most of the company’s sales are to two of its major wholesalers. The firm covers the carrying costs for these two wholesalers and guarantees them a return on investment until the wholesalers sell the products. Which of the three risk factors related to fraudulent financial reporting would best explain the behavior of this company? A. Opportunities B. Incentives/Pressures C. Attitudes/Rationalizations 66. Which of the following is most likely a benefit of debt covenants for the borrower? A. Reduction in the cost of borrowing. B. Limitations on the company’s ability to pay dividends. C. Restrictions on how the borrowed money may be invested. 67. Under U.S. GAAP what is the most likely effect of the reversal of a valuation allowance related to a deferred tax asset on net income? A. No effect B. A decrease C. An increase 68. Which of the following accounting warning signs was evident in the Enron accounting scandal? A. Recording revenue from contingent sales. B. Accelerating sales from later periods into the present quarter. C. Classifying financing cash flows as operating cash flows to increase operating cash flows.

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Questions 69 through 78 relate to Corporate Finance 69. A company that sells ice cream is evaluating an expansion of its production facilities to also produce frozen yogurt. A marketing study has concluded that producing frozen yogurt would increase the company’s ice cream sales because of an increase in brand awareness. What impact will the cash flows from the expected increase in ice cream sales most likely have on the NPV of the yogurt project? A. Increase B. Decrease C. No effect 70. The following information is available for a company and the industry in which it competes:

Accounts receivable turnover Inventory turnover Number of days of payables

Company Industry 5.6 times 6.5 times 4.2 times 4.0 times 28 days 36 days

Relative to the industry, the company’s operating cycle: A. and cash conversion cycle are both longer. B. is longer, but its cash conversion cycle is shorter. C. is shorter, but its cash conversion cycle is longer.

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71. An analyst gathered the following information about a company that expects to fund its capital budget without issuing any additional shares of common stock: Source of capital Long-term debt Preferred stock Common equity

Capital structure proportion 50% 10% 40%

Marginal after-tax cost 6% 10% 15%

Net present values of three independent projects: Warehouse project $426 Equipment project $0 Product line project -$185 If no significant size or timing differences exist among the projects and the projects all have the same risk as the company, which project has an internal rate of return that exceeds 10 percent? A. All three projects B. The warehouse project only C. The warehouse project and the equipment project 72. An analyst is developing net present value (NPV) profiles for two investment projects. The only difference between the two projects is that Project 1 is expected to receive larger cash flows early in the life of the project, while Project 2 is expected to receive larger cash flows late in the life of the project. The sensitivities of the projects’ NPVs to changes in the discount rate is best described as: A. equal for the two projects. B. lower for Project 1 than for Project 2. C. greater for Project 1 than for Project 2.

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73. A company wants to determine the cost of equity to use in calculating its weighted average cost of capital. The controller has gathered the following information: Rate of return on 3-month Treasury bills Rate of return on 10-year Treasury bonds Market equity risk premium The company’s estimated beta The company’s after-tax cost of debt Risk premium of equity over debt Corporate tax rate

3.0% 3.5% 6.0% 1.6 8.0% 4.0% 35%

Using the capital asset pricing model (CAPM) approach, the cost of equity (%) for the company is closest to: A. 7.5. B. 12.6. C. 13.1. 74. Which of the following is the most appropriate technique for forecasting cash flow for the short term? A. Statistical models B. Simple projections C. Projection models and averages 75. Given two mutually exclusive projects with normal cash flows, the points at which the net present value profiles intersect the horizontal axis are most likely to be the: A. crossover rate for the projects. B. internal rates of return of the projects. C. the company’s weighted average cost of capital (WACC). 76. An investment fund owns 8 percent of the outstanding voting shares of a public company. There are several larger voting blocks of shares such that the investment fund is not assured of being able to elect representation on the board of directors. Which type of shareholder voting right would be most beneficial in allowing the investment fund to ensure their interests are represented on the board? A. Proxy B. Cumulative C. Confidential By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

77. Information about the 2009 actual results for a company and its projected sales, cost of goods sold and assets for 2010 are presented below: All figures in ₤-000s 2009 actual 2010 projected Sales 9,000 9,900 Cost of goods sold 3,000 3,450 Total assets 4,500 4,725 Current assets 1,800 Current liabilities 1,200 Based on the projected sales increase, the best estimate of 2010 projected current assets (in ₤- 000s) is closest to: A. 1,890. B. 1,980. C. 2,070. 78. Assuming trade credit terms of 2/10 net 40, paying the supplier on the 30th day creates an annualized cost of trade credit (%) closest to: A. 27.9. B. 44.6. C. 109.0.

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Questions 79 through 90 relate to Equity Investments 79. In an efficient market, fundamental analysis most likely requires that the analyst must: A. extrapolate historical data to estimate future values and take investment decisions. B. do a superior job of estimating the relevant variables and predict earnings surprises. C. use trading rules for detecting the price movements that lead to new equilibrium prices. 80. A large manufacturing company is in a competitive industry. It has aboveaverage investment opportunities and its return on investments has been above the required rate of return. The firm retains a large portion of earnings to fund its superior investment projects. The company is best characterized as a: A. growth company. B. cyclical company. C. speculative company. 81. A security market with price continuity is most accurately characterized as a market in which: A. assets can be bought or sold quickly with minimal transaction costs. B. prices change rapidly from one transaction to the next in response to new information. C. prices do not change much from one transaction to the next in the absence of new information.

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82. An analyst gathered the following information for a company whose common stock is currently priced at $40 per share:

Earnings per share ($) Book value per share ($) Return on equity (ROE)

2005 1.16 8.48 14%

2006 0.62 8.92 7%

2007 1.28 16.04 8%

2008 1.60 19.28 8%

2009 (1.30) 16.30

A severe cyclical contraction occurred in 2009 for a major segment of the company’s operations. What is the most accurate estimate of the stock's P/E ratio assuming the analyst uses the average ROE method for normalizing the firm's EPS? A. 26.5 B. 32.8 C. 34.2 83. Which of the following most accurately describes the computation of nearly all bond market indices, U.S. and global? A. Model priced B. Trader priced C. Market priced 84. An analyst gathers the following data about a company and the market: Earnings per share – most recent year Expected growth rate of dividends Dividend payout ratio Stock’s beta Market risk premium Risk-free rate Company’s weighted average cost of capital

$2.00 5.10% 60% 1.50 5.60% 4.20% 12.00%

Using the dividend discount model the company’s price per share (in $) is closest to: A. 16.00. B. 16.82. C. 18.28.

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85. All else equal, a decrease in the expected rate of inflation will most likely result in a decrease in: A. the real risk-free rate. B. the nominal risk-free rate. C. both real and nominal risk-free rates. 86. A security market in which all the bids and asks for a stock are gathered to arrive at a single price that satisfies most of the orders is best described as a: A. call market. B. dealer market. C. primary market. 87. Which of the following statements most accurately describes the weak-form Efficient Market Hypothesis (EMH)? The weak-form EMH assumes that current security prices: A. fully reflect all information from public and private sources. B. fully reflect all security market information, including transactions by exchange specialists. C. adjust rapidly to the release of all public information; that is, security prices fully reflect all public information. 88. An analyst gathered the following information about a company: Current annual earnings per share (E0) reported Current annual dividend per share (D0) paid on the company’s common stock Required rate of return on the company’s common stock Expected constant growth rate in earnings and dividends

$6.00 $2.40 15.0% 8.0%

If markets are in equilibrium, which of the following statements best describes the company’s price-to- earnings (P/E) ratio? The company’s P/E ratio based on the infinite period dividend discount model (DDM) is: A. less than the company’s trailing P/E ratio. B. the same as the company’s trailing P/E ratio. C. greater than the company’s trailing P/E ratio.

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89. An investor borrows the maximum amount allowed by the initial margin requirement of 40 percent to purchase 100 shares of a stock selling at $60 per share. If the investor sells the stock when its price increases to $70 per share, her return (%), before commissions and interest, will be closest to: A. 16.7 B. 27.8 C. 41.7 90. Data that helps to compute expected growth rates of companies are furnished below:

Dividend payout ratio Return on assets Financial leverage

Company 1 37.5% 12% 1.6

Company 2 40.0% 10.0% 2.0

Which of the following best describes the expected growth rate of Company 1? The expected growth rate of Company 1 compared to Company 2 is: A. lower. B. higher. C. the same.

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Questions 91 through 96 relate to Derivative Investments. 91. A company is long an interest rate swap with a current market value of $125,000. The company wants to terminate this swap before the expiration date. From a credit risk perspective, which is the least attractive way to terminate the swap? A. Sell the swap to a third party. B. Short an offsetting swap with a third party. C. Agree to terminate the swap and receive its market value from the counterparty. 92. A European stock index call option has a strike price of $1,160 and a time to expiration of 0.25 years. Given a risk-free rate of 4 percent, if the underlying index is trading at $1,200 and has a multiplier of 1, then the lower bound for the option price is closest to: A. $28.29. B. $40.00. C. $51.32. 93. Which of these is best classified as a forward commitment? A. A swap agreement B. A convertible bond C. An asset-backed security 94. A company borrows €15 million from a bank for 1 year at a rate of LIBOR, currently 4.75%, plus 50 basis points. At the same time, the company enters a 1year, plain vanilla interest rate swap to pay the fixed rate of 5.25% and receive LIBOR. Payments are made on the basis of 180 days in the settlement period. Floating payments are made on the basis of 360 days in a year while fixed payments are made on the basis of 365 days in a year. LIBOR is 5.00% on the first settlement date. The company’s total interest expense for the loan and swap for the first settlement period is closest to: A. €388,400. B. €425,900. C. €444,600.

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95. An investor purchases a 3-month put option on a stock with an exercise price of $35. The risk free rate is 4.50%. At expiration, the stock price is $33.50. The option’s payoff is closest to: A. $0. B. $1.48. C. $1.50. 96. The following information relates to a futures contract: Initial futures price on Day 0 $100 Initial margin requirement $5 Maintenance margin requirement $3 Settlement price on Day 1 $103 Settlement price on Day 2 $96 Settlement price on Day 3 $98 If no funds are withdrawn and margin calls are met at the beginning of the next day, the ending margin account balance on Day 3 for an investor with a short position of 10 contracts is closest to: A. $70. B. $80. C. $100.

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Questions 97 through 108 relate to Fixed Income Investments. 97. Which of the following provides the most protection to a bondholder? A. Call protection. B. Refunding protection. C. Sinking fund protection. 98. Which embedded option is most beneficial to a bond issuer? A. A conversion privilege. B. A floor on a floating rate bond. C. An accelerated sinking fund provision. 99. The most relevant definition for duration is: A. a security’s price sensitivity to changes in yield. B. the first derivative of the security’s price with respect to yield. C. the weighted-average time until receipt of the present value of cash flows. 100. An endowment’s fixed income portfolio comprises three bonds whose market values, par values, coupon rates, and durations are given in the following table:

Market value Par value Coupon rate Duration

Bond 1 $500,000 $580,000 11.0% 6.2

Bond 2 $1,200,000 $1,100,000 6.0% 8.1

Bond 3 $300,000 $320,000 9.0% 2.9

The portfolio’s duration is closest to: A. 5.73. B. 6.31 C. 6.85. 101. Jasper Corporation sold its receivables to a special purpose vehicle, JTL Corporation, created by Jasper for that purpose. If JTL sells securities backed by the receivables, the credit rating associated with those securities will most likely be based on the: A. creditworthiness of JTL. B. creditworthiness of Jasper. C. collateral and credit enhancement mechanisms used. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

102. A bond has a modified duration of 6.5 and convexity of -42.4. If interest rates decrease by 1.0 percent, the percentage change in the value of the bond will be closest to: A. -6.92%. B. +2.76%. C. +6.08%. 103. An investor is considering the purchase of two bonds. One is a 5% coupon taxexempt bond that yields 4.5% while the other is a 7% coupon bond that is taxable and yields 6.0%. If the two bonds are alike in all other characteristics, the marginal tax rate that would make the investor indifferent between the two bonds is closest to: A. 25.0%. B. 28.6%. C. 33.3%. 104. An investor is evaluating a diverse set of bonds from which he will select two issues. The investor’s objective is to find bonds with cash flows that will precisely match a known stream of future cash outflows. The pair of bonds most likely to meet the investor’s objective is a: A. putable bond and a callable bond. B. zero-coupon bond and a Treasury strip. C. mortgage-backed-security and an asset-backed security. 105. An analyst has gathered the following information: Year 1 2 3

3-Year Treasury Rate 3.75% 3.75% 3.75%

Treasury Spot Rate 3.00% 3.50% 4.00%

Based on the arbitrage-free valuation approach, a $1,000 face value bond that pays a 5 percent annual coupon and matures in 3 years has a current market value closest to: A. $1,027.75. B. $1,028.67. C. $1,034.85.

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106. All U.S. Treasury coupon strips are: A. zero-coupon securities. B. issued directly by the U.S. Treasury. C. created from pooled coupon payments of U.S. Treasury securities. 107. A moral obligation bond is also known as: A. a prerefunded bond. B. a general obligation debt. C. an appropriation-backed obligation 108. Corporate debt securities that are offered continuously to investors by an agent of the issuer are best described as: A. range notes. B. structured notes. C. medium-term notes.

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Questions 109 through 114 relate to Alternative Investments. 109. Which classification of hedge funds is least likely to use a short position in stock as a part of its strategy? A. Market-neutral funds. B. Emerging-market funds. C. Distressed securities funds. 110. When comparing investing in exchanged traded funds (ETFs) to investing in open-end mutual funds, which of these is most likely not an advantage of ETFs? ETFs: A. provide lower exposure to taxes related to capital gains distribution. B. trade throughout the entire trading day at market prices that are continuously updated. C. are a more cost effective way for large institutional investors to invest in less liquid markets. 111. A real estate investment has the following characteristics: Annual rental income Annual operating expenses Available mortgage rate Financing percentage Capitalization Rate Estimated holding period Investor’s tax rate

$1,800,000 $1,200,000 6% 90% 15% 5 years 25%

Based on the income approach, the value of the investment is closest to: A. $4,000,000. B. $5,455,000. C. $6,133,000. 112. Venture capital investments used to provide capital for companies initiating commercial manufacturing and sales are most likely to be considered a form of: A. first-stage financing. B. mezzanine financing. C. second-stage financing.

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113. An analyst compared the performance of a hedge fund index with the performance of a major stock index over the past eight years. She noted that the hedge fund index (created from a database) had a higher average return, higher standard deviation, and higher Sharpe ratio than the stock index. All the successful funds that have been in the hedge fund database continued to accept new money over the eight-year period. What biases do the risk and return measures in the database most likely have? Average return: A. and standard deviation are both overstated. B. is overstated and standard deviation is understated. C. is understated and standard deviation is overstated. 114. An analyst estimates that an initial investment of £500,000 in a venture capital project will pay £6 million at the end of five years if the project succeeds and that the probability the project survives to the end of the fifth year is 25 percent. The required rate of return for the project is 19 percent. The expected net present value of the venture capital investment is closest to: A. £128,000. B. £1,125,000. C. £2,014,000.

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Questions 115 through 120 relate to Portfolio Management. 115. Which of the following statements is least accurate? An investor may construct a portfolio located on the capital market line (CML) by: A. investing a portion of his capital in the risk-free asset and the balance in a fully diversified portfolio of all equities. B. investing a portion of his capital in the risk-free asset and the balance in a fully diversified portfolio of all risky assets. C. borrowing capital at the risk-free rate and investing all his capital plus all borrowed capital in a fully diversified portfolio of all risky assets. 116. The least likely reason for constructing an investment policy statement is that it: A. minimizes the costs of portfolio construction. B. helps investors create realistic investment goals. C. establishes a performance benchmark to judge manager performance. 117. An analyst gathered the following information about two common stocks: • • •

Variance of returns for the Libby Company = 15.5 Variance of returns for the Metromedia Company = 22.3 Covariance between returns of Libby Company and Metromedia Company = 8.65

The correlation coefficient between returns for the two common stocks is closest to: A. 0.025. B. 0.388. C. 0.465. 118. According to the Capital Asset Pricing Model (CAPM), the market portfolio: A. includes all risky assets invested in equal amounts. B. is exposed to both unsystematic and systematic risk. C. is perfectly positively correlated with other portfolios on the CML.

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119. An investment strategy that seeks to grow portfolio value over time through capital gains and reinvestment of current income is most likely appropriate if the investment objective is: A. total return. B. current income. C. capital preservation. 120. The standard deviation of returns for shares of Oakmont Corporation and Sunrise Corporation are 14% and 12% respectively. If the correlation between the two stocks is 0.25, a portfolio consisting of 35% invested in Oakmont and 65% in Sunrise has a standard deviation closest to: A. 10.2% B. 12.7% C. 35.0%

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2010 Level I Mock Exam: Afternoon Session The afternoon session of the 2010 Level I Chartered Financial Analyst® Mock Examination has 120 questions. To best simulate the exam day experience, candidates are advised to allocate an average of 1.5 minutes per question for a total of 180 minutes (3 hours) for this session of the exam.

Questions

Topic

Minutes

1-18

Ethical and Professional Standards

27

19-32

Quantitative Methods

21

33-44

Economics

18

45-68

Financial Statement Analysis

36

69-78

Corporate Finance

15

79-90

Equity Investments

18

91-96

Derivative Investments

9

97-108

Fixed Income Investments

18

109-114

Alternative Investments

9

115-120

Portfolio Management

9

Total:

180

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Questions 1 through 18 relate to Ethical and Professional Standards.

1. Alexander Newton, CFA, is the chief compliance officer for Mills Investment Limited. Newton institutes a new policy requiring the pro rata distribution of new security issues to all established discretionary accounts for which the new issues are appropriate. The policy also provides for the distribution of new issues to newly established discretionary accounts where appropriate after their one-month anniversary date. This policy is disclosed to all existing and potential clients. Did Newton violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because the distribution policy should treat all discretionary accounts equally. C. Yes, because disclosure of inequitable allocation methods does not fulfill the duty for fair and equitable trade allocation procedures. 2. 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 the firm, he found the original copy of the model he had developed in a file at his home and presented it to his new employer, who immediately began using the model. According to the Standards of Practice Handbook, did Piedmont violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, because he misappropriated property now belonging to Branch. C. Yes, because he failed to inform his new employer the model was the same one used by his previous employer. 3. Lawrence Hall, CFA, and Nancy Bishop, CFA, began a joint research report on Stamper Corporation. Bishop visited Stamper’s corporate headquarters for several days and met with all company officers. Prior to the completion of the report, Bishop was reassigned to another project. Hall utilized his and Bishop’s research to write the report but did not include Bishop’s name on the report, because she did not agree with Hall’s conclusion included in the final report. According to the CFA Institute Standards of Practice Handbook, did Hall violate any CFA Institute Standards of Professional Conduct? A. No. B. Yes, with respect to misrepresentation. C. Yes, with respect to diligence and reasonable basis.

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4. According to the Global Investment Performance Standards (GIPS), which of the following is not a part of the verification process? Testing whether the: A. firm has complied with all the composite construction requirements. B. verification is undertaken by the compliance department in the absence of a third party. C. firm’s processes and procedures are designed to calculate results in compliance with GIPS standards. 5. Umi Grabbo, CFA, is a highly regarded portfolio manager for Atlantic Advisors (AA), a mid-sized mutual fund firm investing in domestic securities. She has watched the hedge fund boom and on numerous occasions suggested her firm create such a fund. Senior management has refused to commit resources to the area. Attracted by potential higher fees associated with hedge funds, Grabbo and several other employees organize a hedge fund to invest in international securities. Grabbo is careful to work on the fund development only on her own time. Because AA management thinks hedge funds are a fad, she does not inform her supervisor about the hedge fund creation. According to the Standards of Practice Handbook, Grabbo should most likely address which of the Standards immediately? A. Disclosure of Conflicts. B. Priority of Transactions. C. Additional Compensation Arrangements. 6. David Donnigan enrolled to take the Level II CFA examination in the current year, however he did not take the exam. Donnigan advised his employer he passed Level II. Subsequently, he registered to take the Level II exam the next year. Which CFA Institute Standard of Professional Conduct did Donnigan least likely violate? A. Duty to employer. B. Professional misconduct. C. Referencing Candidacy in the CFA Program. 7. 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? A. Jeffrey Jones, CFA (expected 2011). B. Candidate in the CFA Institute CFA Program. C. Passed Level II of the CFA examination in 2009. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

8. Rebecca Wong is enrolled to take the Level I CFA examination. Her friend William Leung had 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 violated the CFA Institute Code of Ethics or any Standards of Professional Conduct? A. Both violated. B. Neither violated. C. Only Leung violated. 9. Nicholas Bennett, CFA, is a trader at a stock exchange. Another trader approached Bennett on the floor of the exchange and verbally harassed him about a poorly executed trade. Bennett in response pushed the trader and knocked him to the ground. The exchange, after investigation, cleared Bennett from any wrongdoing. Which of the following best describes Bennett’s conduct in relation to the CFA Institute Code of Ethics or Standards of Professional Conduct? Bennett: A. did not violate any Code or Standard. B. violated the Professional Misconduct Standard. C. violated both Misconduct and Integrity of Capital Markets Standards. 10. Albert Nyakenda, CFA, was driving to a client’s office where he was expected to close a multi-million dollar deal, when he was pulled over by a traffic policeman 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 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. The lunch would cost significantly more than the ticket. Did Nyakenda violate the CFA Code of Ethics? A. Yes. B. No, because he was wrongly accused. C. No, because the cost of lunch is more than the ticket.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

11. Delaney O’Keefe, a CFA candidate, is a portfolio manager at Bahati Management Company. The company is considering investing offshore for the first time, particularly in North America, on behalf of their clientele, whom are all high net worth individuals. O’Keefe does not have experience in offshore investments so she hires Mark Carlson, CFA of Carlson Consulting on the basis of his CFA Charter, to undertake due diligence exercises on the top ten portfolio managers in North America, ranked by Assets under Management (AUM). To avoid violating any Code and Standards, O’Keefe should most likely undertake: A. a sampling of the suitability of North America for clients. B. a due diligence exercise on Mark Carlson and Carlson Consulting. C. the due diligence exercise on the top ten asset managers herself. 12. Reiko Kimisaki, CFA, is an investment advisor for a national social security fund in a frontier market with a very limited and illiquid capital market and a very young labor force with an investment time horizon of 25 – 30 years. She has been asked to suggest ways to increase the investment return of the overall portfolio. After careful assessment of the Fund’s previous investment history, and available asset classes, she considers investment in private equity. What is Kimisaki’s lowest priority to avoid any Code of Ethics and Standards of Professional Conduct violations prior to making this investment recommendation? A. Assess the risk tolerance of the Fund. B. Analyze the expected returns of private equity in the market. C. Determine if the Investment Policy Statement allows for alternative investments. 13. While waiting in the business class lounge before boarding an airplane, Becca Msafari, CFA, an equity analyst, overhears a conversation by a group of senior managers, including members of the Board, from a large publicly listed bank. The managers discuss staff changes necessary to accommodate their regional expansion plans. Msafari heard several staff names mentioned. Under what circumstances could Msafari most likely use this information when making an investment recommendation to her clients? A. Under no circumstances. B. If she does not breach the confidentiality of names of staff. C. If the discussed changes are unlikely to affect the public perception of the bank.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

14. Norman Bosno,,CFA acts as an outside portfolio manager to a Sovereign Wealth Fund. Raphel Palmeti, a Fund Official, approaches Bosno to interest him in investing in Starlite Construction Company. He tells Bosno if he approves a two million dollars investment in Starlite by the Fund Bosno will receive a “bonus” that will make him wealthy. Palmeti also adds if Bosnoviak decides not to invest, he will lose the Fund account. After doing a quick and simple analysis, Bosno determines the investment is too risky for the Fund. If Bosno agrees to make the investment what Standard is least likely to be violated? A. Loyalty, Prudence and Care B. Diligence and Reasonable Basis. C. Additional Compensation Arrangements. 15. Francesca Ndenda, CFA and Grace Rutabingwa work for New Age Managers where Rutabingwa reports to Ndenda on a daily basis, working in the same department. It has come to the attention of Ndenda that Rutabingwa received a Notice of Enquiry from the Professional Conduct Program at the CFA Institute regarding a potential cheating violation when he sat for the CFA exam in June. As Rutabingwa’s supervisor, Ndenda is afraid the behavior of Rutabingwa will be seen as a violation of the CFA Code and Standards. Does Ndenda have cause for concern? A. Yes. B. No, because her responsibilities do not apply. C. No, not until Rutabingwa is found guilty of cheating. 16. Jean-Luc Schlumberger, CFA, is an independent research analyst providing equity research on companies listed on exchanges in emerging markets. He often incorporates statistical data he obtained from the web sites of the World Bank and the Central Banks of the various countries into the body of his research reports. While not indicated within the reports, whenever his clients ask where he gets his information he informs them the information is in the public domain, so he doesn’t keep his own records. When the clients ask for the specific web site addresses he provides the information. Which Standard has Schlumberger most likely violated? A. Misconduct. B. Record Retention. C. Misrepresentation.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

17. Oni Erobo, CFA, is the General Partner in a real estate development project and is responsible for completing the project within an 18-month period and within budget. Erobo is expected to receive equity of 20% if the project comes within budget. Concerned that project costs would escalate, the Limited Partners require Erobo to cap expenses at 15% above budget. Costs were within expectation up until the last month of construction when costs of imported lighting fixtures (accounting for roughly 5% of total costs) escalated by more than 50%. As a result, the overall return declined below the partners expected 35% ROI. Erobo did not inform the Limited Partners about the increased costs. Did Erobo violate the CFA Code of Ethics and Standards of Professional Conduct? A. No. B. Yes, because returns are lower than expected by the Partners. C. Yes, because he did not disclose the increased costs to his Partners. 18. A Central Bank fines a commercial bank for not following statutory regulations with regard to making specific non-performing loan provisions on three loans. Louis Marie Buffet, CFA, sits on the Board of Directors of the Commercial Bank as a non-executive director, representing minority shareholders. He also chairs the internal audit committee of the bank that determines the provisioning policy of the bank. Mercy Gatabaki, CFA is the bank’s external auditor and follows international auditing standards whereby she tests the loan portfolio by randomly selecting loans to check for compliance in all aspects of Central Bank regulations. Which Charterholder is most likely in violation of the Code and Standard? A. Both. B. Buffet. C. Gatabaki.

By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 19 through 32 relate to Quantitative Methods 19. An increase in which of the following items is most likely to result in a wider confidence interval for the population mean? A. Sample size B. Reliability factor C. Degrees of freedom 20. The joint probability of returns, for securities A and B, are as follows: Joint Probability Function of Security A and Security B Returns (Entries are joint probabilities) Return on security A= 25% Return on security A= 20%

Return on security B=30% 0.60

Return on security B=20% 0

0

0.40

The covariance of the returns between securities A and B is closest to: A. 3. B. 12. C. 24. 21. An analyst determines that approximately 99 percent of the observations of daily sales for a company are within the interval from $230,000 to $480,000 and that daily sales for the company are normally distributed. The standard deviation of daily sales (in $) for the company is closest to: A. 41,667. B. 62,500. C. 83,333. 22. The least accurate statement about measures of dispersion for a distribution is that the: A. range provides no information about the shape of the data distribution. B. arithmetic average of the deviations around the mean will always be equal to one. C. mean absolute deviation will always be less than or equal to the standard deviation. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

23. An analyst gathers the following information ($ millions) about the performance of a portfolio: Value at Beginning Cash Inflow (Outflow) Value at End Quarter of Quarter At Beginning of Quarter of Quarter (prior to inflow or outflow) 1 2.0 0.2 2.4 2 2.4 0.4 2.6 3 2.6 (0.2) 3.2 4 3.2 1.0 4.1

The portfolio’s annual time-weighted rate of return (%) is closest to: A. 8. B. 27. C. 32. 24. A mutual fund manager wants to create a fund based on a high-grade corporate bond index. She first distinguishes between utility bonds and industrial bonds; she then, for each segment, defines maturity intervals of less than 5 years, 5 to 10 years, and greater than 10 years. For each segment and maturity level, she classifies the bonds as callable or non-callable. She then selects bonds from each of the subpopulations she has created. For the manager’s sample, which of the following best describes the sampling approach? A. Systematic B. Simple random C. Stratified random 25. An analyst conducts a significance test to determine if the relation between two variables is real or the result of chance. His null hypothesis is that the population correlation coefficient is equal to zero and his alternative hypothesis is that the population correlation coefficient is different from zero. He gathers the following information: Value of the test statistic 2.8092 Critical value at the 0.05 significance level 1.96 Critical value at the 0.01 significance level 2.58

The analyst most likely conducted a: A. one-tailed test and can reject his null hypothesis. B. two-tailed test and can reject his null hypothesis. C. two-tailed test and cannot reject his null hypothesis. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

26. The null hypothesis is most appropriately rejected when the p-value is: A. negative. B. close to one. C. close to zero. 27. Under which measurement scale is data most likely categorized without being ranked? A. Ordinal B. Nominal C. Interval 28. On 7 January 2008, an investor purchases 100 shares of stock for $32.50 a share. On 7 January 2009, the investor purchases 100 more shares of the same stock for $36.70 a share. On 7 January 2010, the investor sells all 200 shares of the stock for $42.00 a share. The internal rate of return for this investment is best described as an example of a: A. geometric mean return. B. time-weighted rate of return. C. money-weighted rate of return. 29. A 180-day U.S. Treasury bill has a holding period yield (HPY) of 2.375%. The bank discount yield (in %) is closest to : A. 4.640. B. 4.750. C. 4.875. 30. The sample variance based on the following data points: -6.0 percent, 5.8 percent, 8.4 percent, and 9.7 percent is closest to: A. 0.000360. B. 0.003855. C. 0.005140.

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31. An analyst determines that 60 percent of all U.S. pension funds hold hedge funds. In evaluating this probability, a random sample of 10 U.S. pension funds is taken. Using the binomial probability function, , the probability (in %) that exactly 6 of the 10 firms in the sample hold hedge funds is closest to: A. 25.08. B. 27.99. C. 60.00. 32. An energy analyst forecasts that the price per barrel of crude oil five years from now will range between USD$175 and USD$205. Assume oil prices are a continuous uniform distribution. Recall that the cumulative distribution function for a continuous uniform variable is:

F

The probability (in %) that the price will be less than USD$180 five years from now is closest to: A. 5.6. B. 16.7. C. 44.4.

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Questions 33 through 44 relate to Economics 33. For a firm in perfect competition, as the quantity of labor increases, the marginal revenue product most likely diminishes because of a decline in: A. marginal product only. B. marginal revenue only. C. both marginal product and marginal revenue. 34. If a price cut of a product increases total revenue, demand is best described as: A. elastic. B. inelastic. C. unit elastic. 35. Which of the following types of unemployment is most likely to be associated with an economy in which many workers have been made obsolete by changing technology? A. Cyclical B. Frictional C. Structural 36. The free-rider problem, an obstacle to efficiency, is most likely associated with: A. monopolies. B. public goods. C. subsidies and quotas. 37. An expansionary fiscal policy is least likely to include an increase in: A. tax rates. B. government borrowing. C. government expenditures. 38. For markets with perfectly elastic supply, the introduction of a tax will most likely result in: A. a price increase and the seller pays the entire tax. B. a price increase and the buyer pays the entire tax. C. no change in price and the seller pays the entire tax.

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39. A company determines that the quantity demanded of a product increases by 5% when price is reduced by 10%. The product’s price elasticity of demand is best described as: A. elastic. B. inelastic. C. perfectly elastic. 40. In perfectly competitive industries what is the most likely final long-run effect of a permanent decrease in demand? A. Price decreases. B. Economic profit decreases. C. The number of firms decreases. 41. If a regulatory agency sets prices equal to a monopoly’s long-run average cost (LRAC), the monopoly will most likely have economic profit that is: A. zero. B. positive. C. negative. 42. When rent controls limit rents to prices below equilibrium prices, which of the following is most likely to occur? A. New housing construction expands. B. Long-time tenants extract significant benefit from landlords. C. Newcomers are given preferential entry into rent-controlled apartments. 43. Consider the following information regarding consumer price index (CPI) numbers for this year and last year. CPI this year 267.54 CPI last year 261.25 The inflation rate (in %) for the period is closest to: A. 2.35. B. 2.38. C. 2.41.

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44. The quantity theory of money is best described as the proposition that, in the long run, an increase in the quantity of money brings a percentage increase in the price level that is: A. equal. B. lower. C. higher.

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Questions 45 through 68 relate to Financial Statement Analysis 45. According to the International Financial Reporting Standards framework, which of the following qualities of financial information is least likely to improve its reliability? A. Neutrality B. Consistency C. Substance over form 46. The following information is available about a company ($ millions): Year ended 31 December 2009 2008 Sales 322.8 320.1 Net income 27.2 26.8 Cash flow from operations 15.3 38.1 During 2009 the company most likely decreased the: A. proportion of sales made on a cash basis. B. inventory, anticipating lower demand for its products in 2010. C. proportion of interest-bearing debt relative to trade accounts payable. 47. According to International Financial Reporting Standards which of the following is one of the conditions that must be met for revenue recognition to occur? A. Costs can be reliably measured B. Payment has been partially received C. Goods have been delivered to the customer 48. A company accrued wages of $2,000 and collected accounts receivable of $10,000. Which of the following best describes the effect of these two transactions on the company? A. Net income will increase B. Current ratio will decrease C. Cash from operations will decrease

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49. A company had 100,000 common shares outstanding on 1 January 2009. The company has no plans to issue additional shares or purchase treasury shares during the year, but is planning either a two-for-one stock split or a 100 percent stock dividend on 1 July. The number of shares used to determine earnings per share at 31 December 2009, will be closest to: A. 200,000 for both the stock split and the stock dividend. B. 200,000 for the stock split and 150,000 for the stock dividend. C. 150,000 for the stock split and 200,000 for the stock dividend. 50. Under International Financial Reporting Standards (IFRS) the preparation of a complete set of financial statements is best described as a(n): A. objective of financial reporting. B. general requirement for financial statements. C. qualitative characteristic of the IFRS Framework. 51. Which of the following transactions will most likely result in a decrease in a company’s current ratio? The: A. recording of a warranty expense. B. recording of revenue before cash is received. C. payment of a property insurance policy for the following year. 52. A company issued bonds in 2009 that mature in 2019. The measurement basis that will most likely be used on the 2009 balance sheet for the bonds is: A. market value. B. historical cost. C. amortized cost. 53. Which of the following transactions is least likely to increase a company’s reported cash from operations? A. Securitizing accounts receivable B. Delaying payments made to suppliers C. Using short-term debt to reduce an existing account payable

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54. The settlement value for a liability is best described as: A. the amount of proceeds received in exchange for the obligation. B. the discounted value of the future cash flows that are required to satisfy the obligation. C. the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the obligation. 55. A company has just completed the sale of a tract of land for €3.5 million which was originally acquired at a cost of €2.0 million. The purchaser made a downpayment of €200,000 with the remainder to be paid in equal installments over the next 10 years. A short time after the sale, significant doubt arose about the purchaser’s ability to meet the future obligations for the land purchase. When compared to the cost recovery method of revenue recognition, the profit (in €) that the company will recognize in the year of the sale under the installment method is most likely to be higher by: A. 85,714. B. 114,286. C. 150,000.

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56. Presented below are abbreviated balance sheets for two merchandising companies following the format found in each of their annual reports. Company A (in $ U.S. Millions)

Company B (in ¥ Millions)

Assets

Assets

Noncurrent assets

9,640

Current Assets

Current Assets

2,096

Noncurrent assets

19,923

Total Assets

24,256

Total Assets

11,736

Shareholders’ Equity

4,333

Liabilities & Shareholders’ Equity

Issued Capital

2,490

Current liabilities

2,413

Retained Earnings

1,333

Non-Current Liabilities

6,847

Other Reserves

2,926 Minority Interests

1,045

Minority Interests Total Equity

506 7,255

Shareholders’ Equity Non-Current Liabilities

3,313

Issued Capital

5,149

Current liabilities

1,168

Retained Earnings

2,755

Total Liabilities

4,481

Other Reserves

6,047

Total Equity & Liabilities

11,736

Total Equity

13,951

Total Equity & Liabilities

24,256

Which of the companies most likely prepares their financial statements in accordance with U.S. GAAP (generally accepted accounting principles)? A. Both B. Company A only C. Company B only

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57. An analyst makes the appropriate adjustments to the financial statements of retail companies that are lessees using a substantial number of operating leases. Compared to ratios computed from the unadjusted statements, the ones computed from the adjusted statements would most likely be higher for: A. the debt-equity ratio but not the interest coverage ratio. B. the interest coverage ratio but not the debt-equity ratio. C. both the debt-equity ratio and the interest coverage ratio. 58. To gain insight into what portion of a company’s assets is liquid, an analyst will most likely use: A. the cash ratio. B. the current ratio. C. common-size balance sheets. 59. An analyst gathers the following information ($ millions) about three companies operating in the same industry: Company Annual Depreciation Expense Accumulated Depreciation 1 10.8 58.9 2 27.8 80.3 3 33.6 128.8 Although the companies have different levels of sales and assets, they are all experiencing sales growth at about the same rate and use the same type of equipment in the manufacturing process. All three companies also use the same depreciation method. Which company is least likely to require major capital expenditures in the near future? Company: A. 1. B. 2. C. 3.

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60. The following information (U.S. $ millions) for two companies operating in the same industry during the same time period is available:

Net sales Total assets Total liabilities

Company A 120 70 25

Company B 300 140 40

If both companies achieve a return on equity of 15% for the period, which of the following statements is most likely correct? Compared to Company B, Company A has a: A. higher net profit margin. B. higher total asset turnover. C. lower financial leverage multiplier. 61. Is the reversal of an inventory write-down permitted under U.S. GAAP (generally accepted accounting principles) and International Financial Reporting Standards (IFRS)? A. No, under both B. Yes, under both C. Yes under IFRS but not under U.S. GAAP 62. A retail company prepares its financial statements in accordance with U.S. GAAP (generally accepted accounting principles). Its purchases and sales of inventory for its first two years of operations are listed below. First Year Second Year Units Purchased

80,000

100,000

Unit Cost

$8.43

$12.25

Units Sold

73,000

78,000

Unit Selling Price

$15.00

$16.00

In its second year of operation, the company’s ending inventory is $348,003. Which of the following inventory cost flow assumptions is the company was most likely using? A. FIFO B. LIFO C. Weighted average cost

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63. A company issued a $50,000 7-year bond for $47,565. The bonds pay 9 percent per annum and the yield-to-maturity at issue was 10 percent. The company uses the effective interest rate method to amortize any discounts or premiums on bonds. After the first year, the yield to maturity on bonds equivalent in risk and maturity to these bonds is 9 percent. The amount of the bond discount amortization ($) recorded in the second year is closest to: A. 282. B. 348. C. 2,178. 64. The following selected information is from a company’s most recent financial statements:

Sales Cost of Goods Sold Interest Expense

(£ millions) 2009 2008 2,801 2,885 1,969 2,071 123 110

Cash & Marketable Securities Accounts Receivable Inventories

108 318 248

105 286 285

Accounts Payable Notes Payable

361 50

346 99

The 2009 cash conversion cycle, in days, is closest to: A. 23. B. 26. C. 28. 65. In the evaluation of credit ratings, a company will most likely be assigned a higher credit rating if it has a: A. lower EBITDA/Interest ratio. B. lower dividends-to-total-debt ratio. C. higher five year average of its coefficient of variation of its operating margin.

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66. A company purchased a €2,000 million long-term asset in 2009 when the corporate tax rate was 30 percent. Asset year end value for (All figures in € millions.) Accounting purposes Tax purposes

2010

2009

1,800 1,280

1,900 1,600

On January 15, 2010 the government lowered the corporate tax rate to 25 percent for 2010 and beyond. The deferred tax liability (€) as at 31 December 2010 is closest to: A. 130. B. 156. C. 205. 67. Which of the following is least likely a condition present in a “fraud triangle”? A. Constraining debt covenants. B. Adding independent members to the Board of Directors. C. Management’s belief that a decline in performance is due to temporary economic conditions. 68. A company is buying back its stocks to offset the dilution of earnings from its stock option program. Which of the following statements best describes the effect on the financial statements of the amount spent to buy back the stocks? The amount spent reduces: A. net income. B. cash from operating activities. C. cash from financing activities.

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Questions 69 through 78 relate to Corporate Finance 69. A company is determining the cost of debt for use in its weighted average cost of capital. It has recently issued a 10-year, 6 percent semi-annual coupon bond for $864. The bond has a maturity value of $1,000. If the marginal tax rate is 35 percent, the cost of debt (%) they should use in their calculation is closest to: A. 2.6. B. 3.9. C. 5.2. 70. The post-audit performed as part of the capital budgeting process is least likely to: A. improve a firm’s operations. B. produce concrete ideas for future investments. C. force management to revise the original forecast to match actual results. 71. A company is considering building a distribution center on undeveloped land that it acquired more than ten years ago at a cost of $400,000. The company estimates the cost of putting in utilities, sewers, roads and other such costs of preparing the land for the distribution center at $200,000. Alternatively, the undeveloped land could be sold today to another company for $600,000. In evaluating this capital project, the investment outlay associated with the use of the land by the distribution center will most likely be: A. $400,000. B. $600,000. C. $800,000. 72. When considering capital projects, which of the following statements is most accurate? Compared to the NPV method, the IRR method: A. can result in multiple values. B. has the more appropriate reinvestment rate assumption. C. uses more accurate estimates of the project’s cash flows.

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73. A company wants to determine the cost of equity to use in the calculation of its weighted average cost of capital. The CFO has gathered the following information: Rate of return on 3-month Treasury bills Rate of return on 10-year Treasury bonds Market equity risk premium The company’s estimated beta The company’s after-tax cost of debt Risk premium of equity over debt Corporate tax rate

3.0% 3.5% 6.0% 1.6 8.0% 4.0% 35%

Using the bond-yield-plus-risk-premium approach, the cost of equity (%) for the company is closest to: A. 12.0. B. 16.3. C. 18.3. 74. A publicly listed company has a 12-person Board of Directors whose composition is as follows: the Chairman, who is the past president of the company and was named Chairman on his retirement date four years ago, five members of senior management including the current president, and six outside directors. Each member is elected for a two-year term and one-half of the positions stand for election every year. The three members of the Audit Committee are all outside directors and have relevant financial experience. The Remuneration Committee is composed of the Chairman and two outside directors. Which of the following actions would provide the greatest improvement in the corporate governance of this company? A. The Chairman of the Board should be an independent director. B. All members of the Board of Directors should stand for election every year. C. The company’s Vice-President of Finance should be a member of the audit committee. 75. Which of the following methods would be least likely to improve the cash collections of a retail organization? A. Lockbox B. Debit cards C. Electronic checks By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

76. Assuming current assets and current liabilities remain a constant proportion of sales (30 percent and 20 percent respectively), as sales grow 5 percent annually, through time the current ratio will most likely: A. increase. B. decrease. C. remain unchanged. 77. Which is least likely to be a component of a developing country’s equity premium? A. Sovereign yield spread B. Annualized standard deviation of the developing country’s equity index C. Annualized standard deviation of the sovereign bond market in terms of the developing country’s currency 78. A company extends its trade credit terms by four days to all its credit customers. The most likely effect of this change to the company’s credit customers is a four day: A. increase in their operating cycle. B. decrease in their operating cycle. C. decrease in their net operating cycle.

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Questions 79 through 90 relate to Equity Investments 79. The issue of differences in accounting conservatism between companies is best addressed when companies are compared using which of the following ratios? A. Price-to-earnings B. Price-to-cash flow C. Price-to-book value 80. A continuous market most likely exists for a stock when: A. specialists or market makers attempt to derive new equilibrium prices in an orderly manner. B. new information about the company prospects is continuously released to market participants. C. trades occur at any time the market is open wherein stocks are priced either by auction or by dealers. 81. Capital market efficiency is desirable, but there are limitations to achieving full market efficiency. Which of the following is least likely to be a limitation to achieving full capital market efficiency? A. Survivorship bias B. Limits of arbitrage C. Cost of information 82. A price-weighted index series is composed of the following three stocks: Stock

Number of Shares Outstanding Before Stock Split

X Y Z

1,000,000 5,000,000 4,000,000

Market Price Before Split Day 1 $10 $20 $60

Market Price After Split Day 3 $12 $19 $22

If stock Z completes a three-for-one stock split at the end of Day 1, the value of the index after the split (at the end of Day 3) is closest to: A. 29.9. B. 31.7. C. 32.3.

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83. An analyst gathers the following information about a company: Net profit margin Return on assets Financial leverage (total assets/equity) Beta for the company’s stock Expected rate of return on the market index Risk-free rate of return

8.0% 10.0% 2.5 1.5 10.0% 5.0%

The analyst expects the information above to accurately reflect the future. If the company wants to achieve a growth rate of 15% without changing its capital structure or issuing new equity, the company’s maximum dividend payout ratio (in %) is closest to: A. 25. B. 40. C. 60. 84. A company has furnished the following information: Return on equity 20% Earnings retention rate 50% Current dividend per share (Do) paid on the company’s common stock €2.00 Required rate of return on the company’s common stock 15% Current stock price €50 Company’s P/E ratio 30x Industry average P/E ratio 20x Stock’s beta 0.7 According to the dividend discount model and the other data given, the company’s stock is best described as a: A. growth stock. B. cyclical stock. C. speculative stock.

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85. An investor opens a margin account with an initial deposit of $5,000. He then purchases 300 shares of a stock at $30. His margin account has a maintenance margin requirement of 30%. Ignoring commissions and interest, the price (in $) at which the investor receives a margin call is closest to: A. 19.05. B. 23.08. C. 23.81. 86. The following information is from a company’s most recent financial statements: U.S. $ in millions except for shares outstanding and tax rate Preferred stock 40 Common stock 120 Additional paid-in capital 30 Retained earnings 190 Treasury stock (55) Total shareholders’ equity 325 Total number of common shares outstanding 10 million Tax rate 40% The company uses the LIFO inventory method. The footnotes to the financial statements indicate that if the company had used the FIFO method, the inventory balance would have been $45 million higher than the amount reported on the company’s most recent financial statements. If the company’s common stock is currently selling for $59 per share, the company’s adjusted price-to book-value ratio is closest to: A. 1.67. B. 1.79. C. 1.89.

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87. An investor gathers the following data for a company: Net profit margin

2%

Total assets

$200 million

Total liabilities

$120 million

Net income Dividends paid on common stock

$10 million $2 million

The company’s estimated dividend growth rate (in %) is closest to: A. 8.0. B. 10.0 C. 12.5. 88. A company’s $100 par perpetual preferred stock has a dividend rate of 7 percent and a required rate of return of 11 percent. The company’s earnings are expected to grow at a constant rate of 3 percent per year. If the market price per share for the preferred stock is $75, the preferred stock is most appropriately described as being: A. overvalued by $11.36. B. undervalued by $15.13. C. undervalued by $36.36. 89. An equity analyst working for a growth oriented mutual fund has a tendency to misvalue the stocks of popular companies that she has previously recommended and the fund already owns. Her behavior is most likely consistent with which of the following biases? A. Escalation bias B. Prospect theory C. Confirmation bias 90. A company earned $3 a share last year and just paid a dividend of $2 a share. The company’s dividends are expected to grow by 8 percent annually for the next two years. An investor with an 11 percent required rate of return expects to sell the stock at $75 two years from now. The maximum amount the investor should be willing to pay for this company’s stock (in $) today is closest to: A. 58.68. B. 64.71. C. 66.63. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 91 through 96 relate to Derivative Investments. 91. When the underlying stock price is $95, an investor pays $2 for a call option with an exercise price of $95. If the stock price moves to $96, the intrinsic value of the call option would be closest to: A. -$1. B. $0. C. $1. 92. Margin in the futures market is most accurately described as a: A. loan to the futures trader. B. requirement set by federal regulators. C. down payment from the futures trader. 93. A derivative is most accurately defined as a financial instrument that provides: A. a return based on the return of another asset. B. an adjustment to another asset’s level of risk. C. an agreement between two parties to provide something for each other. 94. An investor enters into a 1 X 3 forward rate agreement (FRA) at a LIBOR rate of 1.5 percent. At expiration, the 60-day LIBOR rate is 1.7 percent and the 90-day LIBOR rate is 1.6 percent. Assuming the contract covers a $1 million notional principal, what payment will the investor most likely receive? A. $249.00 B. $332.39 C. $333.33 95. In comparison to a forward contract, a futures contract is most likely to be less: A. liquid. B. publicized. C. customized. 96. In what way is the payoff of a forward rate agreement (FRA) most likely different from the payoff of an interest rate option? A. It is based on a fixed exercise rate. B. It is based on a notional principal amount. C. It is paid immediately when the contract expires. By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

Questions 97 through 108 relate to Fixed Income Investments. 97. An analyst determines that a 5.50 percent coupon option-free bond, maturing in 7 years, would experience a 3 percent decrease in price if market interest rates rise by 50 basis points. If market interest rates instead fall by 50 basis points, the bond’s price would increase by: A. exactly 3%. B. less than 3%. C. more than 3%. 98. Holding all other factors constant, an increase in expected yield volatility will cause the price of a: A. putable bond to increase. B. callable bond to increase. C. putable bond to decrease. 99. The table below summarizes the yields and corresponding prices for a hypothetical 15-year option-free bond that is initially priced to yield 7%: Yield(%) Price($) 6.90 100.9254 7.00 100.0000 7.10 99.0861 Using a 10 basis point rate shock, the duration for this bond is closest to: A. 4.6 years. B. 7.5 years. C. 9.2 years. 100. According to the market segmentation theory, an upward sloping yield curve is most likely due to: A. investor expectations that short-term interest rates will fall in the future. B. different levels of supply and demand for short-term and long-term funds. C. an increasing yield premium required by investors for bearing interest rate risk.

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101. An 8 percent coupon bond with a par value of $100 matures in 2 years and is selling at $98.24 to yield 9 percent. Exactly one year ago this bond sold at a price of $95.03 to yield 10 percent. The bond pays annual interest. The change in price attributable to the change in maturity is closest to: A. $1.50. B. $3.21. C. $4.97. 102. A fixed income portfolio manager owns a $5 million par value non-callable bond. The bond’s duration is 5.6 and the current market value is $5,125,000. The dollar duration of the bond is closest to: A. $280,000. B. $287,000. C. $700,000. 103. Two amortizing bonds have the same maturity date and same yield to maturity. The reinvestment risk for an investor holding the bonds to maturity is greatest for the bond that is: A. a zero-coupon bond. B. a coupon bond selling at a discount to par. C. a coupon bond selling at a premium to par value. 104. If investors expect stable rates of inflation in the future, the pure expectations theory suggests that the yield curve is currently: A. flat. B. inverted. C. upward-sloping. 105. A portfolio of option-free bonds is least likely to be exposed to: A. volatility risk. B. yield curve risk. C. reinvestment risk.

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106. An investor purchases a 5 percent coupon bond maturing in 3 years for $102.80, providing a yield-to-maturity of 4 percent. At what rate must the coupon payments be reinvested to generate the 4 percent yield? A. 0% B. 4% C. 5% 107. The yield of a U.S. bond issue quoted on a bond-equivalent basis is 6.8 percent. The yield-to-maturity on an annual-pay basis is closest to: A. 6.69%. B. 6.92% C. 14.06%. 108. Given the data in the table below, the price of a 3% coupon corporate bond maturing in 2 years is closest to: Period Years to Maturity Spot Rate (%) Corporate Spread (%) 1 0.5 3.00 0.50 2 1.0 3.30 0.50 3 1.5 3.50 0.50 4 2.0 4.00 0.50

A. $97.19. B. $98.12. C. $100.04.

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Questions 109 through 114 relate to Alternative Investments. 109. A variation of which real estate valuation approach is most likely to use slope coefficients derived from a statistical analysis to estimate the value of a property? A. Cost approach. B. Income approach. C. Sales comparison approach. 110. An investor has gathered the following data, presented on an annual basis, for an apartment complex that is being considered for purchase: Potential income (net of vacancy and collection losses ) Insurance and taxes Utilities Repairs and maintenance Depreciation Interest on proposed financing

$180,000 $15,000 $10,000 $18,000 $21,000 $16,000

The annual net operating income (NOI) for the apartment complex is closest to: A. $116,000. B. $121,000. C. $137,000. 111. Hedge funds that contain infrequently traded assets would most likely exhibit a downward bias with respect to: A. measured risk but not correlations with conventional equity investments. B. correlations with conventional equity investments but not measured risk. C. both measured risk and correlations with conventional equity investments. 112. When the spot price of a commodity is above the futures price, the commodity market is said to be in: A. contango. B. full carry. C. backwardation.

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113. When investing in commodities through a collateralized commodity futures position, the return associated with rolling forward the maturity of a futures contract is referred to as the: A. collateral yield. B. spot price return. C. convenience yield. 114. A typical hedge fund fee structure is least likely to include a: A. base fee. B. high water mark. C. negative incentive fee.

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Questions 115 through 120 relate to Portfolio Management. 115. Factors such as fluctuations in interest rates and changes in industrial production contribute to: A. systematic risk. B. unsystematic risk. C. both systematic and unsystematic risk. 116. When assessing the performance of a single investment fund, the asset allocation decision explains: A. a little less than 100% of the level of a fund’s returns. B. about 90% of the fund’s variation in returns across time. C. an average of 40% of the variation in returns of a fund across time. 117. According to the Capital Asset Pricing Model (CAPM) if investors borrow at a rate that exceeds the risk-free lending rate the resulting borrowing portfolios will: A. plot on a flatter line. B. plot on a steeper line. C. no longer plot on a straight line. 118. Which of the following is not an assumption of the Markowitz model? Investors: A. have homogeneous expectations. B. maximize one-period expected utility. C. base decisions solely on expected return and risk. 119. The table below provides a probability distribution of stock returns for shares of Orion Corporation: Rate of Probability Return (%) 0.15 -12 0.60 11 0.25 18 The variance of returns for Orion Corporation stock is closest to: A. 44.36 B. 50.94 C. 88.71 By accessing this mock exam, you agree to the following terms of use: This mock exam is provided to currently-registered CFA candidates. Candidates may view and print the exam for personal exam preparation only. The following activities are strictly prohibited and may result in disciplinary and/or legal action: accessing or permitting access by anyone other than currently-registered CFA candidates; copying, posting to any website, emailing, distributing and/or reprinting the mock exam for any purpose.

120. For a retired 65-year-old investor, with moderate risk tolerance and adequate insurance and cash reserves, the appropriate portfolio will most likely have the following mix of bonds and stocks:

A B C

Bonds 55-65% 30-40% 15-50%

Stocks 35-45% 60-70% 50-85%

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