JUN18L1/EP04

QUANTITATIVE METHODS

Question 1
Consider the following statements regarding the properties of the Student's t-distribution.
 I: The t-distribution is defined by degrees of freedom.
 II: The t-distribution has more probability in the tails than the normal distribution.
 III: The t-distribution approaches the standard normal as the degrees of freedom decrease.
Which of the following is true?
a) I and II.
b) II and III.
c) I and III.

Question 2
An analyst is modeling the probability distribution of the values (prices) for the Dow Jones Industrial Average (DJIA).
The analyst will most likely use a:
a) normal distribution, which has no skew.
b) lognormal distribution, which has no skew.
c) lognormal distribution, which is skewed to the right.

Question 3
A positive economic performance for the succeeding year has a 90% chance of happening and a 10% chance if it's
otherwise. If it's the first, ABC Co. will have a 70% chance of obtaining an EPS of $8.00 and 30% chance of getting a
$4.00 EPS. If the economy turns out to have a negative performance for the succeeding year, then ABC Co. has an
85% chance of getting an EPS of $1.50 and 15% chance of obtaining $2.00. How much EPS is expected out of the
given situation?
a) 6.28
b) 6.12
c) 6.16

Question 4
Technical analysis can most likely be applied to identify:
a) Short-term trends only.
b) Long-term trends only.
c) Both short-term and long-term trends.

Question 5
An investment of $3,000 is made at the beginning of each of the next 7 years. Given an interest rate of 0.67%, the
value of this investment 11 years from today is closest to:
a) $21,570
b) $22,154
c) $22,007

Question 6
An investor's trades in a stock over a period of 2 years are given below:
 Purchased 10 shares on July 1, 2007 for $50/share.
 Purchased another 5 shares of the same stock on July 1, 2008 for $100/share.
 Sold all shares on July 1, 2009 at $90/share.
Assuming that the stock doesn't pay any dividends, her money-weighted and time-weighted rates of return are closest
to:
Money-Weighted ROR Time-Weighted ROR
A. 23.23% 34.16%
B. 21.75% 34.16%
C. 23.23% 48.32%
a) Row A
b) Row B
c) Row C
Question 7
An analyst gathered the following information about the required rate of return of different stocks held in a portfolio:
Interval Req. ROR Absolute Frequency
1 5% – 6% 1
2 6% – 7% 3
3 7% – 8% 4
4 8% – 9 % 2
5 9% – 10% 3
The relative frequency and cumulative relative frequency of Interval 4 are closest to:
Relative Frequency Cumulative Relative Frequency
A. 15% 23%
B. 20% 77%
C. 15% 77%
a) Row A
b) Row B
c) Row C

Question 8
The effective annual rate for an automobile loan that has an interest rate of 7%, compounded monthly, is closest to:
a) 7.35%
b) 7.23%
c) 8.12%

Question 9
What will be the worth of an investment of $5,000 at an interest rate of 6% assuming continuous compounding at the
end of four years?
a) $6,200.
b) $6,312.
c) $6,356.

Question 10
An investor owns a $100,000 portfolio invested in three exchange traded funds (ETFs). He allocated $25,000 to
ETF01 with a beta of 1.20; $25,000 to ETF02 with a beta of 0.98; and $50,000 to ETF03 with a beta of 1.05. The beta
of the portfolio is closest to:
a) 1.08
b) 1.07
c) 1.06

ECONOMICS

Question 11
Which of the following is least likely true?
a) A monopoly firm cannot charge a price that equals marginal cost without government subsidy.
b) Firms in an oligopoly market can charge a price that equals marginal cost through collusion.
c) Supply curve for a monopolistic firm is given by the marginal cost curve.

Question 12
If consumers in France were persuaded to buy only locally produced goods, would France's economy improve?
a) Yes, it is cheaper for the country than imposing trade restrictions.
b) Yes, improved corporate profitability could be used to increase wages.
c) No, the value of goods produced would decline if French consumers buy products that are relatively
inefficiently produced domestically.
Question 13
A contractionary fiscal policy would least likely include:
a) payroll tax increases.
b) an increase in government spending.
c) increased budget surplus.

Question 14
When a government issues a trade tariff versus a trade quota, what is its expectation for growth in tax revenue?
a) Goes higher
b) Stays unchanged
c) Goes lower

Question 15
Consider the following statements:
Statement 1: An increase in unit labor cost (ULC) implies that inflationary pressures on the economy are easing.
Statement 2: Demand-pull inflationary pressures on the economy are generally analyzed based on capacity utilization
levels.
Which of the following is most likely?
a) Only Statement 1 is correct.
b) Only Statement 2 is correct.
c) Both statements are incorrect.

Question 16
Activity in which of the following sectors is most sensitive to changes in interest rates?
a) External sector
b) Housing sector
c) Consumer sector

Question 17
Bond market vigilantes are likely to trade actively in the market if:
a) the monetary authority lacks credibility.
b) bond prices have weakened in the last year.
c) real interest rates are at zero.

Question 18
The imposition of export subsidies on a product will, in the exporting country, increase:
a) The producer surplus.
b) The consumer surplus.
c) Government revenues.

Question 19
If price is less than average total cost but greater than average variable cost, in the short run, the firm is most likely to:
a) Shut down immediately.
b) Continue to produce.
c) Make economic profits.

Question 20
If real interest rates are 3% and inflationary expectations are 2.5%, the nominal interest rate in public markets most
likely will be:
a) greater than 5.5%.
b) equal to 5.5%.
c) less than 5.5%.
FINANCIAL REPORTING & ANALYSIS

Question 21
Mike, an analyst, needs to understand the accounting policies, methods, and estimates used in the preparation of
financial statements. Among the complete set of financial statements, which portion should he refer to?
a) Statement of cash flows
b) Financial review by the management
c) Notes to financial statements

Question 22
Sheena Kereta, CFA, is a financial analyst specializing in the valuation of auto companies. She has spent the last
week gathering information two competing auto manufacturers in Malaysia. Each company manufactures a single low
cost model and sells it in a highly competitive market. The sales price and units sold vary due to intense competition in
the low-cost segment. Sheena has summarized the information in the table below.
Penang Langkawi
Number of units produced and sold 300,000 330,000
Standard deviation of unit sales 30,000 19,800
Sales price per unit MYR 25,000 MYR 30,000
Variable cost per unit MYR 10,000 MYR 17,000
Fixed operating cost MYR 2,500,000,000 MYR 2,000,000,000
Interest expense MYR 1,000,000,000 MYR 1,500,000,000
The operating breakeven points for Penang Autos and breakeven point for Langkawi Autos are closest to:
a) 166,667 and 269,231 units, respectively.
b) 166,667 and 233,333 units, respectively.
c) 153,846 and 269,231 units, respectively.

Question 23
An analyst believes that a company has changed its accounting policy with respect to depreciation method used.
The most likely best way to confirm this belief is to review the company's:
a) recent press releases.
b) income statements for the past two years.
c) notes to the most recent financial statements.

Question 24
The payment of dividends to preferred shareholders falls under which element of the financial statements?
a) Expenses.
b) Equity.
c) Liabilities.

Question 25
Which statement would an analyst most likely use to evaluate additional financial performance aspects of a company'
a) Balance sheet.
b) Statement of cash flows.
c) Statement of changes in equity.

Question 26
Which of the following is a suitable method for computing free cash flow to the firm?
a) Sum of operating cash flows and capital expenditures minus after-tax interest payments.
b) Net operating cash flows after deducting after-tax interest payments and capital expenditures.
c) Sum of operating cash flow and after tax interest payments minus capital expenditures.
Question 27
Which of the following statements is least likely true as per U.S. GAAP?
a) Disclosure in the footnotes is not required when a correction of prior-period errors is made by restating all
prior-period financial statements presented in the financial report.
b) A change in an accounting estimate affects financial statements only for current and future.
c) A change in accounting policy is applied retrospectively and justification for the change is provided in the
footnotes to the financial statements.

Question 28
On 1 January 2010 Visionary Toys purchased advanced 3D printers for their design studio at a cost of €820,000. The
printers have an estimated useful life of four years and an estimated salvage value of €60,000. What depreciation
expense would the company report for financial reporting purposes under the double-declining balance method in year
1?
a) €190,000
b) €380,000
c) €410,000

Question 29
Which of the following statements regarding the cash flow statement is least accurate?
a) The cash flow statement provides information on the sources and use of cash.
b) Firms are required to provide a reconciliation between cash flow and income statement items.
c) The total cash flow in a year is equal to the change in cash and cash equivalents recorded in the beginning
and end-year balance sheets.

Question 30
Which of the following is least likely a format for the balance sheet?
a) Report format
b) Multi-step format
c) Account format

Question 31
A company’s balance sheet indicates that it has sufficient cash and short-term investments. However, its payables
turnover ratio remains low. This most likely suggests that:
a) The company has a liquidity crisis.
b) The company’s suppliers offer it lenient credit terms.
c) The company has excellent receivables collection policies.

Question 32
Simple Times Limited purchased 1,000 units throughout the year at an average price of $50. The account manager
has detailed records and the company has an advanced inventory management system in place tracking information
about each unit's purchase price, time in inventory, sales price, etc. At the end of the year, there are 125 units
remaining in inventory. The accounting manager identified the purchase date and price for each unit to calculate
ending inventory. The dates of the purchases span the entire year. Which inventory valuation method does this
company most likely use?
a) First in, first out (FIFO).
b) Weighted average method.
c) Specific identification method.

Question 33
According to IFRS, expenses include decreases in economic benefits from:
a) Decreases in liabilities, other than those related to owners’ equity.
b) Decreases in owners’ equity related to distributions made to them.
c) Incurrence of liabilities, other than those related to owners’ equity.
Question 34
York Distilleries is considering which depreciation method to use for a new machine. Production is expected to be very
high initially, but will decrease over time. If York wants initially to minimize its debt-to-assets ratio, which of the
following methods would York most likely use?
a) Units-of-production method.
b) Double-declining balance method.
c) Straight-line method.

Question 35
A company reports the following data on its fixed assets; it uses the straight-line depreciation method and the salvage
values are zero.
Gross PPE $1,050,000
Net PPE $420,000
Depreciation expense $70,000
The remaining useful life of the PPE is expected to be:
a) 6 years.
b) 9 years.
c) 15 years.

Question 36
What action must be taken in order to avoid falsely relying on a company's financial ratios that were presented to
make it look healthier it actually was?
a) Review the chart of accounts for an increase in uncommonly named and out of the ordinary asset accounts
like “deferred marketing charges” or “deferred customer acquisition costs.”
b) Gather information on the industry average useful life of the assets which the company also uses and check
whether it is comparable with company estimates for the useful lives of its own assets.
c) Go over the balance sheet and notes and identify operating lease items, and then treat these as capital
lease arrangements.

Question 37
ABC Company reports the following amounts on its 2009 income statement and balance sheet:
Net income after tax: $25 million
Total assets: $400 million
Total liabilities: $300 million
Deferred tax assets: $35 million
Deferred tax liabilities: $45 million
A reduction in the statutory tax rate will most likely:
a) Benefit the income statement and have no effect on the balance sheet.
b) Benefit the income statement and improve the balance sheet.
c) Weaken the income statement and improve the balance sheet.
Question 38
The following information relates to Jaunt Products Inc. for the year ended 2012:
Cost of raw materials $ 8,000,000
Direct labor costs 11,000,000
Production overhead costs 3,000,000
Selling costs 500,000
Import taxes 800,000
Abnormal costs 150,000
Finished goods storage costs 400,000
Jaunt Products does not have any work-in-progress inventory at the year-end. What costs should be included in
inventory as per IFRS and U.S. GAAP?
IFRS U.S.GAAP
A. $23,300,000 $22,800,000
B. $22,000,000 $22,000,000
C. $22,800,000 $22,800,000
a) Row A
b) Row B
c) Row C

Question 39
Which of the following statements is true?
a) The plan is overfunded if the fair value of plan assets is greater than the estimated pension obligation.
b) In a defined benefit plan, the firm promises to contribute a specific sum each period to the employee's
retirement account.
c) In a defined contribution plan, the firm contributes variable payments each period to the employee's
retirement account.

Question 40
Mars Technologies uses the LIFO cost flow assumption to value inventory. For the year 2009, it reported the following
information in its financial statements:
 Revenue = $850,000
 Cost of goods sold = $370,000
 Other expenses = $120,000
 Interest expenses = $33,000
 Taxes paid = $24,000
 Beginning inventory = $1,200,000
 Ending inventory = $1,310,000
 Beginning LIFO reserve = $570,000
 Ending LIFO reserve = $720,000
 Ending retained earnings = $120,000
 Tax rate = 40%
Retained earnings if Mars Technologies used the FIFO cost flow assumption would be closest to:
a) $552,000
b) $180,000
c) $408,000

Question 41
A strategy in which an investor invests in companies with P/E's above the industry median P/E is considered a:
a) value strategy.
b) growth strategy.
c) market-oriented strategy.
Question 42

Quarter Units Held/Purchased Unit Cost ($) Total Cost ($)

Opening Inventory 15 30 450
1 15 30 450
2 12 35 420
3 20 25 500
4 30 20 600
Total 92 2,420
Given that Tiara sold 10, 12, 15, and 20 units in the four quarters respectively, answer the following questions:
Ending inventory if the company uses LIFO cost flow assumption is closest to:
a) $725
b) $834
c) $1,075

Question 43
An analyst is comparing two companies' inventory figures.
DATA FOR COMPANIES ACCOUNTING FOR INVENTORY ON DIFFERENT BASES
Company A (FIFO) Company B (LIFO)
Current assets (includes inventory) $150,000 $40,000
LIFO reserve NA $10,000
Current liabilities 0$75,000 $22,500
Based solely on the data above, after the appropriate adjustment is made for inventory, the current ratio for Company
B will be:
a) higher than Company A's.
b) lower than Company A's.
c) the same as Company A's.

Question 44
Aqua Domain Inc. received unearned revenue of $20,000. The revenue is taxed during the period in which it is
received. Assuming a tax rate of 25%, what is the associated deferred tax asset/liability, if any?
a) A deferred tax asset of $5,000.
b) A deferred tax liability of $5,000.
c) There is no deferred tax asset or liability.

Question 45
A company received cash in Year 1 for rent revenue that will be recognized on its financial statements in Year 2.
However, authorities tax the revenue upon receipt of cash. This will most likely result in:
a) A deferred tax asset.
b) A deferred tax liability.
c) Neither a deferred tax asset nor a deferred tax liability.

Question 46
Life Corp. incurred the following costs related to its inventory:
Purchase price: $3,500
Irrecoverable purchase taxes: $750
Additional fee for express shipping: $890
Insurance on shipment: $160
Storage costs of inventory: $320
What is the total cost that Life should capitalize to inventory?
a) $4,410
b) $5,300
c) $5,620
CORPORATE FINANCE

Question 47
A company invests $200,000 in a project that is expected to generate the following cash flows:
Years 1 2 3 4
Cash flows ($) 50,000 65,000 75,000 75,000
Given a discount rate of 10%, the project’s discounted payback period is closest to:
a) 3.13 years.
b) 4 years.
c) 3.9 years.

Question 48
An analyst gathered the following information:
Inventory = $136,000
Cost of goods sold = $721,000
Number of days of receivables = 42 days
Number of days of payables = 33 days
The company’s operating cycle is closest to:
a) 78 days.
b) 47 days.
c) 111 days.

Question 49
In a dual-class structure, the goal is to:
a) allow more shareholders to vote on corporate issues.
b) separate voting power from ownership.
c) give management more participation in setting strategy.

Question 50
A recent offering from Bell Curve Systems, Co. is a seven-year maturity preferred shares with annual dividends of
$15. The par value of the shares is $120. The shareholders require a 9% return from the shared. The market value of
Bell Curve's share is closest to:
a) $170.64
b) $123.08
c) $141.14

Question 51
Penmakers Inc. is producing 500,000 pens per annum and the pens are sold at $10 each. Fixed costs are $1 million,
not including interest payments of $1.5 million. Variable costs are $3 per pen. The degree of financial leverage of
Penmakers Inc. is closest to:
a) 0.3 times.
b) 2.5 times.
c) 3.5 times.
Question 52
ABC Corp. issued nonconvertible, noncallable preferred stock last year at an issue price of $100; it pays a dividend of
$5 per annum. The stock is now trading at $110. The company's marginal tax rate is 40%. The cost of preferred stock
for ABC Corp is closest to:
a) 2.7%.
b) 3.0%.
c) 4.5%.
Question 53
An analyst gathered the following information regarding Alpha Associates:
Source of Capital Book Value ($ millions) Market Value ($ millions)
Common stock 37.5 52.8
Preferred stock 30 31.68
Bonds outstanding 7.5 11.52
Total capital 75 96
The company’s before-tax cost of debt and the cost of common equity are 9% and the cost of preferred equity is 11%.
Given that the company’s marginal tax rate is 30%, its weighted average cost of capital is closest to:
a) 9.66%
b) 9.48%
c) 9.34%

Question 54
Pluto Inc. issues a semiannual pay bond to finance a new project. The bond has a 20-year term, a par value of
$1,000, and offers a 7% coupon rate. Given that the bond is issued at $984.5 and that the company’s marginal tax
rate is 40%, the after-tax cost of debt is closest to:
a) 3.57%
b) 4.29%
c) 7.15%

Question 55
Donald Investments has a target debt-to-equity ratio of 0.8. Given that the after-tax cost of debt is 5.6% and that the
company’s weighted average cost of capital is 10.8%, its cost of equity isclosest to:
a) 14.96%
b) 31.60%
c) 4.62%

Question 56
Recently Pomona Rental noticed that its receivables turnover had gone down from 15 to 12 times. This most likely is
explained by the fact that:
a) Pomona has switched to a more strict credit policy.
b) Pomona's clients are taking longer to pay on their payables due to Pomona.
c) Pomona is collecting its receivables faster.

Question 57
Stanley Wills, CFA, wants to determine the cost of debt of DB-Locke Co. The firm's debt is not publicly traded, so
Stanley uses the debt rating of a comparable bond with a maturity close to that of DB-Locke's debt. Stanley is using
the:
a) Substitution approach.
b) Evaluated pricing approach.
c) Discount pricing.

Question 58
Which stakeholder group is most protected by the legal attributes of their relationship with the company?
a) Shareholders
b) Creditors
c) Senior management
Question 59
An analyst has gathered the following information on a company and the market:
Current market price of company's common shares $10.20
Common stock dividend yield, based on most recent dividend paid 2.45 percent
Expected dividend payout rate 20 percent
Expected return on equity (ROE) 15 percent
Beta for company's common stock 1.4
Asset beta for company's industry 0.9
Expected rate of return for the market portfolio 10 percent
Risk-free rate of return 4 percent
Using the dividend discount model (DDM) approach, the cost of equity is closest to:
a) 14.0 percent.
b) 14.5 percent.
c) 14.7 percent.

Question 60
An analyst is calculating the weighted average cost of capital (WACC) for STR Industries. The analyst has gathered
the following data for his calculation:
Market value of STR's equity $5.6 billion
Common shares outstanding for STR 200 million
Pre-tax cost of new debt for STR 5.5 percent
Market value of STR's debt $12.3 billion
STR's equity beta 1.2
Next year's dividend for STR's shares $1.40 per share
STR's growth rate 3.5 percent
Risk-free rate of interest 2.0 percent
Equity risk premium 4.0 percent
STR's marginal tax rate 30 percent
The company's WACC using the dividend discount model is closest to:
a) 4.8 percent.
b) 5.3 percent.
c) 6.4 percent.

Question 61
The current debt-to-equity ratio of Lonarde Corporation is 1.2. It has a target debt-to-equity ratio of 0.8. Its cost of
equity is 6% up to $120,000 in total equity, after which the weighted average cost of capital (WACC) will increase. The
corresponding break point in Lonarde's marginal cost of capital schedule is closest to:
a) $216,000.
b) $264,000.
c) $270,000.

PORTFOLIO MANAGEMENT

Question 62
If the investor is more likely to bear risk but his ability to bear such risk is low:
a) In the evaluation of assets, the low ability to bear such risk shall have higher priority.
b) The portfolio manager may follow the investor's instructions and invest in risky assets.
c) Then no problem exists.

Question 63
A portfolio consisted of only Treasury securities and AAA rated corporate bonds, but recently the portfolio manager
added a series of BBB+ rated corporate bonds to the portfolio. This action most likely enhances the utility of a:
a) Risk-averse investor.
b) Risk-neutral investor.
c) Risk-seeking investor.
Question 64
Which of the following statements about money weighted return is false?
a) The beginning value and additional deposits are considered inflows.
b) The ending value is not considered as an outflow.
c) The computation of the IRR is based on the portfolio's cash inflows and outflows.

Question 65
Beta is computed by:
a) Dividing the product of the covariance of an asset's return with the market returns and the standard
deviation of asset's return by the standard deviation of market's return.
b) Dividing the covariance of the asset return with the market return by the variance of market return.
c) Both equations give beta.

Question 66
The following information is available regarding the portfolio performance of three investment managers:
Manager Return Standard Deviation Beta
A 19% 27% 0.7
B 14% 22% 1.2
C 16% 19% 0.9
Market (M) 11% 24%
Risk-free rate 5%
Manager C’s Treynor ratio is closest to:
a) 0.2000
b) 0.1222
c) 0.5789

Question 67
Consider the following statements:
Statement 1: The portfolio should achieve returns within 5% of the returns on the S&P 500 Index.
Statement 2: The portfolio should outperform the benchmark index (the S&P 500 Index) by one percentage point
each year.
Which of the following is most accurate?
Statement 1 is a(n): Statement 2 is a(n):
A Relative return objective Absolute return objective
B Relative risk objective Relative return objective
C Absolute return objective Relative return objective
a) Row A
b) Row B
c) Row C

Question 68
If Suzanne allocated to two different asset classes, each of which had a standard deviation of 20% and a correlation of
0.9, what would her portfolio standard deviation be?
a) 20%
b) Higher than 20%
c) Lower than 20%

Question 69
Asset allocation is part of which step in the portfolio management process?
a) The planning step.
b) The feedback step.
c) The execution step.
Question 70
How many stocks does an investor need to practically eliminate diversifiable risk?
a) 6-8 stocks.
b) 25-30 stocks.
c) 100-110 stocks.

Question 71
A portfolio that lies to the left of the market portfolio on the CML is:
a) A borrowing portfolio.
b) A lending portfolio.
c) An efficient portfolio.

Question 72
Nesrin built a portfolio out of an investments universe of 10 stocks. She is considering adding another stock. What can
she do to improve the efficiency of her portfolio?
a) Select a stock that offers an expected return higher than that of the portfolio.
b) Select a stock that has a standard deviation lower than that of the portfolio.
c) Select a stock that has a low correlation with the portfolio.

Question 73
Which of the following statements is false?
a) The strategic asset allocation is required to create the IPS.
b) Investments considered for strategic asset allocation include both traditional and alternative investments.
c) Allocations of the included assets classes are stated in the strategic asset allocation.

Question 74
The optimal risky portfolio is a portfolio:
a) that carries the highest Sharpe ratio among all possible portfolios made of risky assets.
b) that carries the least amount of risk. It is the global minimum variance portfolio.
c) that carries the highest expected rate of return among all portfolios on the Markowitz efficient frontier.

Question 75
Which of the following portfolios will be least preferred by a risk-averse investor?
a) Portfolio A having return on investment as 10% and risk on investment as 2%.
b) Portfolio B having return on investment as 10% and risk on investment as 4%.
c) Portfolio C having return on investment as 14% and risk on investment as 4%.

Question 76
A portfolio manager earned the following annual returns for a mutual fund. Compute the geometric mean return over
the three years.
Year 2010 2011 2012
Return 17% −9% 8%
a) 2.35%
b) 3.47%
c) 4.77%

EQUITY

Question 77
Increasing the cost of borrowing shares most likely:
a) Enhances market efficiency.
b) Has no impact on market efficiency.
c) Hinders market efficiency.
Question 78
Each of the constituents of a float-adjusted market-capitalization-weighted index is weighted by its price and:
a) its trading volume.
b) the number of shares outstanding.
c) the number of its shares available to the investing public.

Question 79
Which of the following rules is most likely to be included in a listing of regulations to implement in order to meet the
objectives of market regulation?
a) Requiring that all companies use the same accounting choices (depreciation methods, revenue recognition,
etc).
b) Setting the minimum amount of reserves that a pension fund must maintain to meet its promises to its
clients.
c) Requiring that a broker-dealer disclose all of the specific information it has that pertains to its information
advantage relative to a client.

Question 80
Which of the following items would not be considered a consumer discretionary good?
a) An automobile.
b) Food away from home.
c) Tobacco.

Question 81
United Oil Corporation is a blue-chip company in the petroleum industry, based in Colorado. Paleo Group Inc.
purchased various products from United Oil and transported them to client locations at a 40% margin for more than
two decades. However, over the past five years, Paleo's performance was dramatically regretful. The auditors of
Paleo had raised serious concerns during the audit for the year 2013, especially on the company's liquidity position.
By the end of the first quarter of 2014, rumors of a takeover of Paleo by United Oil were reported by the financial
media. However, many of these reports started claiming the backing of “unidentified top-level directors” of both
companies from the first week of May. On May 15, in a press conference, officials of United Oil declared that the
company will not acquire Paleo. However, United Oil will provide a substantial cash loan to Paleo on a long-term
basis.
A new legislation, which regulates the oil and petroleum industry, was passed by government during January 2014.
The act necessitated spending large amounts of money on disposal of waste oils and protection of the environment.
The act came into existence in the first week of May, and the share prices of United Oil came down by 25% in a week.
Assuming the market to be highly efficient, the market value of:
a) Paleo's shares will fall significantly during the second half of May.
b) Paleo's shares will remain relatively constant during April.
c) United Oil's shares will rise substantially in January.

Question 82
Aqua World Corporation raised $336 million through an initial public offering (IPO) of 80 million shares at $4.20 per
share. On the first day of trading, the opening and closing prices were $4.40 and $4.52, respectively. Around 7 million
shares were traded and lowest and highest prices for the day were $4.38 and $4.54, respectively. The return of the
IPO subscribers on the first day is closest to:
a) 6.2%.
b) 7.6%.
c) 8.1%.

Question 83
After analyzing the stock of Beta Inc., Megan concludes that the stock is undervalued and its price will soon increase.
Based on her conclusions, she should least likely:
a) Purchase put options for the company’s stock.
b) Purchase call options for the company’s stock.
c) Write put options on the company’s stock.
Question 84
Compared to a forward contract, a futures contract has:
a) less counterparty risk.
b) ability to be customized.
c) more flexibility in terms of maturity date.

Question 85
Real estate investment trust indices can most likely be categorized as:
a) Multi-market indices.
b) Appraisal indices.
c) Price-weighted indices.

Question 86
If a firm pays out 30% of its earnings as dividends, its return on equity is 12%, and its return on capital is 8%, then the
long-term dividend growth rate is closest to:
a) 3.6%.
b) 5.6%.
c) 8.4%.

Question 87
In explaining the justified forward price-to-earnings (P/E) ratio, an analyst stated that the calculated forward P/E will
rise if an assumption is changed, such as assuming a (1) higher dividend growth rate than before; (2) lower payout
ratio than before; or (3) higher required rate of return than before. The analyst is correct with respect to the:
a) higher dividend growth rate, only.
b) higher dividend growth rate and lower payout ratio, only.
c) lower payout ratio and higher required rate of return, only.

Question 88
A trader is considering either selling XYZ's shares short, which are trading at $30.00, or writing call options on the
shares with a strike price of $30.00. The estimated option premium is $6.50 and it expires in 90 days. In comparing
the two potential positions, writing the call option will have a:
a) lower total gain if XYZ's shares drop to $0 in 90 days.
b) higher total loss if XYZ's shares rise to $40 in 90 days.
c) higher total loss if XYZ's shares are trading at $30 in 90 days.

Question 89
Salam Enterprises released its quarterly financial statements on 5 July. The income statement showed a 10 percent
earnings surprise. The stock is actively traded on a leading world stock market. The stock price continued to react
through 20 July. This suggests that the market is:
a) semi-strong form inefficient.
b) irrational.
c) processing additional information as it is being released.

Question 90
Cue 100 is an equity index representing all industries in a market. The stocks are selected based on a ranking system
whereby those stocks with low price-to-book ratios, low price-to-earnings ratios, and high dividend yields are rated
higher. Stocks may need to be reclassified over time based on the changing ratios. Based on the given information,
Cue 100 will most likely be classified as a:
a) Style index.
b) Multimarket index.
c) Broad market index.

Question 91
Which is the riskiest form of equity ownership among the following share types?
a) Common.
b) Callable common.
c) Putable common.
Question 92
In the United States, which sort of capacity will usually take the longest to increase if there is a surge in demand?
Capacity that is dependent on:
a) Human capital.
b) Financial capital.
c) Physical capacity.

Question 93
Two indices contain exactly the same stocks; one is a market-capitalization-weighted index that increased by 12%,
whereas the other is an equal-weighted index that increased by 5% over the same period. This is explained by which
of the following?
a) There were a large number of stock splits over the period.
b) There were a small number of stock splits over the period.
c) Large-capitalization stocks outperformed small-capitalization stocks.

Question 94
Which of the following statements regarding information-motivated traders is most accurate?
a) They trade for the short term.
b) They differ from pure investors with respect to their motives for trading.
c) They expect to obtain superior returns based on inside information.

Question 95
An analyst has estimated the following information for a company:
Expected earnings per share for next year = $9.00
Expected retention rate next year and onward = 33⅓%
Projected dividend growth rate into the future = 4.0%
The required return on the shares = 12.5%
The fundamental forward price-to-earnings (P/E) ratio that the analyst will calculate is closest to:
a) 4.0
b) 5.3
c) 7.8

Question 96
Which of the following statements about barriers to entry is least accurate?
a) Industries with high barriers do not have strong competition among existing firms.
b) In industries with low barriers to entry, competition reduces existing firms' return on capital.
c) Telecommunications companies may be characterized by high barriers to entry and exit.

Question 97
In which sector would a manufacturer of personal care products be classified?
a) Health care.
b) Consumer staples.
c) Consumer discretionary.

Question 98
Which of the following statements regarding dealers is least accurate?
a) They seek the best price for their customers’ orders.
b) They fill their clients’ orders by trading with them.
c) They connect buyers and sellers who arrive in the market at different points in time.

Question 99
Which of the following statements is least accurate?
a) Investors in foreign shares incur foreign exchange losses when the foreign currency appreciates.
b) Companies in mature stages are more likely to pay dividends as they may not have many growth
opportunities.
c) Studies have shown that the compounding effect of reinvested dividends has significantly influenced long-
run returns on equity securities.
Question 100
Which of the following is most likely to lead to a company's P/E multiple being higher than the market P/E multiple?
a) The company has a high beta.
b) The risk of the company's earnings is higher than the market.
c) High earnings growth rates for the company relative to the market.

Question 101
Common shareholders have:
a) The right to vote by proxy if they are absent during the annual shareholders meeting.
b) Preferential claim over the firm's assets in the case of liquidation.
c) The least priority in buying shares when the firm publicly issues new shares.

Question 102
In a thorough industry analysis, the equity analyst would employ:
a) the dividend discount model.
b) the methodology of life cycle stage.
c) a representative security market index.

Question 103
All of the following statements about spreadsheet modeling are correct, except:
a) Analysts need not consider factors that may change over time and how these will affect the firm.
b) Spreadsheet modeling is used to analyze and forecast company fundamentals.
c) Analysts should be able to explain the assumptions used in the model.

Question 104
An analyst is basing the calculation of fundamental equity value on the company's dividend-paying capacity rather
than its expected dividends. This analyst is most likely using the:
a) dividend discount model.
b) free cash flow to equity model.
c) cash flow from operations model.

Question 105
An analyst gathered the following information regarding Global Traders:
Current dividend per share = $3.80
Expected growth rate = 12%
Required return on equity = 8.6%
The analyst expects the price of the stock after 2 years to be $43.20. The value of the company’s stock today
is closest to:
a) $42.34
b) $44.59
c) $46.67

Question 106
When a new issue of bonds is sold by an institution to raise funds, this will be done in the:
a) Primary market.
b) Secondary market.
c) OTC market.

Question 107
Which of the following is best associated with aggregated fixed income index?
a) Comprises corporate and asset-backed securities only
b) Composed of Treasury securities only
c) Are represented by fixed income securities in different classifications
Question 108
Based on the empirical evidence pertaining to efficient markets, which of the following is most likely to earn abnormal
returns?
a) A technical analyst.
b) A securities analyst.
c) A company insider.

Question 109
A company has a low enterprise value (EV)/earnings before interest, taxes, depreciation, and amortization (EBITDA)
ratio and a high P/E ratio compared to its competitors, this might be explained by the company:
a) Paying a higher rate of interest on its debt.
b) Having higher gross margins than their competitors.
c) Having obsolete fixed assets, reducing the depreciation expense.

Question 110
How is a stock's valuation viewed when its price is higher than its intrinsic or fundamental value?
a) Overvalued
b) Fairly valued
c) Undervalued

Question 111
Jayver Industries has specific demand dynamics so strong that they override the significance of broad economic or
other external factors. Jayver most likely belongs to which type of industry?
a) Value b) Growth c) Cyclical

Question 112
Legacy Company expects to pay a dividend at the end of 2016. During 2015, Legacy did not pay any dividend. 2016
EPS is expected to be $8.12. The company will maintain its 65% payout ratio. Assuming a constant dividend growth
rate of 6% and a required rate of return of 13%, estimate the current value of this stock.
a) $30.23 b) $31.14 c) $32.05

Question 113
How does the fundamental weighting address the disadvantages of market-capitalization-weighted index?
a) By reducing the weight of securities that have outperformed and vice versa.
b) By adjusting the market capitalization of each constituent security for its market float.
c) By using measures of a company's size that are independent of the constituent security's price.

Question 114
Which of the following investments is most likely to help diversify a long-only stock portfolio comprising large-cap U.S.
traded equities?
a) Warrants.
b) A S&P 500 index fund.
c) Long/short hedge fund.

Question 115
An exchange traded fund most likely invests in:
a) Real assets.
b) Fixed-income instruments.
c) Shares of other companies.

Question 116
What is the correct order for the following companies in decreasing degree of proximity toward extended periods of
excess capacity and diminished pricing power?
a) Financial consulting firm, reinsurance company, and auto manufacturing plant.
b) Auto manufacturing company, financial consulting firm, and reinsurance company.
c) Reinsurance company, financial consulting firm, and auto manufacturing plant.