Documentos de Académico
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Block 1: LaCompte
Question
1 of 6
Even if LeCompte discloses the cost of her attendance she may still not be permitted to take the
trip depending upon her company's policies. In addition, the disclosure in this case is not enough
to avoid a potential violation of Standard I(B) relating to independence and objectivity. By
allowing the corporate issuer to pay for her travel expenses her judgment could be compromised.
It is more appropriate for LeCompte to decline the invitation or have her company pay all costs
for the trip in order to avoid any conflict or appearance of conflict.
Question
2 of 6
LeCompte violated Requirement 6, Relationships with Subject Companies, by sharing the full
research report with NanoMem. Sharing any section of a research report that might communicate
the analyst's proposed recommendation, rating, or price target is prohibited by the Research
Objectivity Standards. Sharing historical factual information on the other hand is not a violation.
Question
3 of 6
Question
4 of 6
LeCompte provided all the recommended disclosures relating to potential conflicts of interest
with respect to UniFlash. She should have disclosed the "benefit received" from NanoMem
concerning the trip she took, as well as her small equity position in NanoMem as required by
Research Objectivity Requirement 2, Public Appearances.
Question
5 of 6
The recommended procedures for compliance with the Research Objectivity Requirement 11, Rating
System, states that firms should prohibit covered employees from communicating a rating or
recommendation different from the current published rating or recommendation.
Question
6 of 6
According to the CFA Institute Standards I(B), and V(A), members and candidates must exercise
diligence, independence, objectivity, and thoroughness in analyzing investments, making
investment recommendations, and taking investment actions. Changing a written
recommendation to what a subject company desires is not acting diligently, independently,
objectively, and/or thoroughly and the analyst should immediately revise her recommendation to
express her stated opinion of the company.
Block 2: Scott
Question
1 of 6
Economic income = Change in market value plus the after-tax cash flow.
Question
2 of 6
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3 of 6
Question
4 of 6
Because the schedule for the first year is equivalent to straight-line depreciation (1/5 = 20%), the
after-tax operating cash flow does not change under straight line or MACRS accelerated
depreciation.
Question
5 of 6
Ludlow's suggestion is an example of economic profit: EBIT (1 tax rate) $WACC. EBIT is
earnings before interest and taxes.
Question
6 of 6
The competing projects are mutually exclusive, which means that only one of the two positive
NPV projects can be accepted. The choice of which project to accept is based on choosing the
project with either (1) the highest equivalent annual annuity (EAA) or (2) the highest value based
on the least common multiple of lives (LCML) approach. The three-year project should be
chosen using either approach as shown in the following.
EAA = 183,109/3.3522=54,624
LCML: The least common multiple, given 3 and 5, is 15. Compare the NPV of each project,
assuming each project is repeated for 15 years.
The three-year project is preferred because the NPV over 15 years is higher.
Block 3: Daltonia
Question
1 of 6
The components of growth can be determined using Solows growth accounting equation: Y/Y
= A/A + K/K + (1 )L/L
where:
Y/Y = GDP percentage growth
A/A = percentage growth from total factor productivity (TFP)
K/K = percentage growth in capital
L/L = percentage growth in labor
= share of income paid to capital factor
1 = share of income paid to labor factor, also the elasticity of output with respect to labor
TFP = Labor productivity growth Growth in capital deepening = 1.7 2.3 = 0.6, which is
given in Exhibit 1. Also given, 1 = 0.65 and = 0.35
GDP growth = Y/Y = 3.75 Arising from the total of components below:
A/A = growth due to TFP 0.6
K/K = growth due to capital + 2.13 = (0.35) 6.1
(1 )L/L = growth due to labor + 2.21 = (0.65) 3.4
3.75 GDP growth
Growth due to labor of 2.21% is greater than the growth due to capital or TFP.
Question
2 of 6
Pamuks conclusion is consistent with the endogenous growth model. In the endogenous growth
model, the economy does not reach a steady growth rate equal to the growth of labor plus an
exogenous rate of labor productivity growth. Instead, saving and investment decisions can
generate self-sustaining growth at a permanently higher rate. This situation is in sharp contrast to
the neoclassical model, in which only a transitory increase in growth above the steady state is
possible. The reason for this difference is because of the externalities on R&D, diminishing
marginal returns to capital do not set in.
Question
3 of 6
Question
4 of 6
Question
5 of 6
Determine the interbank implied cross currency quotes for (DRN/EUR) as follows:
Question
6 of 6
To initiate a carry trade, a European investor will borrow in the lowest interest rate currency, the
euro (EUR). The cost will be 0.8%. He will invest in the highest LIBOR rate currency, the DRN
at 2.1%.
Sell
Sell
Block 4: Tremblay
Question
1 of 6
The mid-market for CAD/USD is (1.2138 + 1.2259)/2 = 1.21985. The mid-market forward
premium (discount) is calculated as:
Question
2 of 6
The relative version of PPP states that the percentage change in the spot exchange rate will be
completely determined by the difference between the foreign and domestic inflation rates. In this
case, the difference in the inflation rates is 1.90%2.30% =0.4%. Subtracting 0.4% from the
current bid gives the answer 1.2089. The calculation is 1.2138 (0.004 1.2138) = 1.2089.
Question
3 of 6
It is cheaper to buy Canadian dollars indirectly through Brazilian reals than directly with U.S.
dollars. This creates a triangular arbitrage opportunity:
C$1,251,810/1.2259 = US$1,021,135
Question
4 of 6
Baroque's comments describe the international Fisher effect. The international Fisher effect
states that the foreign-domestic nominal yield spread will be solely determined by the foreign-
domestic expected inflation differential.
Question
5 of 6
Tremblay's first justification describes "club convergence." Her second justification describes a
second source of convergenceimitating or adopting technology already widely used in the
advanced countries. Convergence is consistent with the neoclassical growth model.
Question
6 of 6
The possibility for permanent higher growth in per capita output exists within endogenous
growth theories but not in neoclassical growth theory nor in classical growth theory.
Block 5: Galaxy
Question
1 of 6
The change in revenue recognition to an earlier point, before the product has been produced or
delivered, is an aggressive accounting policy that would lower the company's quality of earnings.
Question
2 of 6
Actual experience has shown that the amount expensed in prior years was too large. The
adjustment would be a reversal of the reserve in 2013: a decrease in the warrant provision and an
increase in net income in 2013. The decrease in the provision (lower current liabilities) would
result in increase in the current ratio.
Question
3 of 6
Increment to gross profit from early recognition policy 53% $12 million = $6.36 million
Question
4 of 6
2013 2012
($ thousands) ($ thousands)
Total assets 131,122 127,000
Cash and investments 21,122 25,000
Operating assets (A) 110,000 102,000
Question
5 of 6
The compensation expense for restricted stock grants is the fair market value of the shares on the
grant date, and this amount is allocated over the service period: $4.2 million/3 = $1.4 million
Question
6 of 6
Only the executive stock option plan is affected by volatility of the companys stock. The
volatility affects the initial valuation of the stock options granted (e.g., through use of the Black
Scholes model to determine the fair value of the options). The initial valuation of the options
determines the expense recognized. Compensation expense for stock grants is based on the fair
market value of the stock on the day of the grant and is not affected by the stocks volatility.
Block 6: Piazo
Question
1 of 6
Question
2 of 6
To be comparable with the European firms, it is necessary to adjust the net income and total asset from
LIFO to FIFO. Under FIFO, total assets increase by the LIFO reserve but decrease by the cash paid for
the cumulative amount of additional income taxes that would arise. Net income will be higher under FIFO
because of lower COGS (i.e., the increase in the LIFO reserve, but it will be reduced by the taxes paid on
the increase in operating profit).
(US$ thousands)
Net Income (LIFO) $178
+ Reduction in COGS + 320 Increase in LIFO reserve: 867 547
Tax on increased operating profit 106.6 33.3% 320 (use 2013 tax rate)
Net Income (FIFO) $391.4
Question
3 of 6
But this arose in part because of the LIFO liquidation, which decreased cost of goods sold by 263 (Exhibit 2, Note 5)
After adjusting for the LIFO liquidation, gross profit margin is lower by 2.30% (8.9% - 11.2%)
Question
4 of 6
The interest coverage ratio is calculated excluding the effects of capitalized interest. Capitalized interest
affects interest expense and depreciation expense.
(US$ thousands)
$389
a
EBIT
Add back capitalized interest included in depreciation expense (Note 11) 34
Adjusted EBIT $423
Question
5 of 6
The expensing of the previously capitalised interest is a non-cash amount (the cash outflow was
in a previous period when the expense was incurred) and therefore does not affect operating cash
flow. Net income is lower as a result of the previously capitalized amount being expensed, but as
it is a non-cash expense it is added back to determine cash from operations. (Lower net income
but higher add back = no change in CFO).
Question
6 of 6
At the end of 2013, a test of impairment is required because events or changes in circumstances indicate
that its carrying amount may not be recoverable.
Block 7: Rhine
Question
1 of 6
Petersen prefers to use the relationship between capital expenditures and total assets by operating
division and thus would use the ratio of capital expenditure proportion to total asset proportion for each
division. This ratio for the recreational products division is less than 1 (see the following table), indicating
that Rhine is allocating a lower proportion of capital expenditures to that division relative to asset
proportions. If this trend continues, the recreational products division will become less significant over
time.
Mock Exam AM Answers
Question
2 of 6
Apply the 2012 operating margin for the childrens products division to the 2013 revenues for the division
to determine what the 2013 overall operating profit margin would have been if the margin had been
maintained, and then compare it with the 2012 overall operating profit margin.
Even if the childrens products division had maintained its operating margin in 2013, the overall company
operating margin would still have decreased slightly (7.7% versus 7.9%).
Question
3 of 6
Analysts should consider the foreign currency effect on sales growth for evaluating
management's historical performance. Foreign currency fluctuations are out of management's
control, so management should not be held accountable for the fluctuations when evaluating their
performance.
Question
4 of 6
The 2013 effective tax rate on earnings is lower than in 2012 (see the following table), implying that more
profits were earned in a lower tax jurisdiction. The foreign operations are in lower tax regimes, therefore,
it is reasonable to conclude that more of the profits were earned internationally.
Question
5 of 6
Petersen interprets that the changes in the cash conversion cycle (CCC) indicate a deterioration in
liquidity. The CCC has increased since 2011, from 84 days to 95 days (see the following table). The
working capital account that had the largest effect on the increase was inventory because the holding
period has increased 6.4 days.
2013 2011
Working Capital Account Turnover Days Turnover Days
(365/Turnover)
Accounts receivable 5.82 62.7 6.11 59.8
Inventory 3.78 96.6 4.09 89.2
Accounts payable 5.71 63.9 5.60 65.2
a
Cash conversion cycle 95.4 83.8
a
CCC = Days in sales + Days in inventory Days in payables.
Question
6 of 6
Concerns about earnings manipulation are best addressed by cash flow ratios, such as operating
cash flow before interest and taxes to operating income.
Block 8: Turner
Question
1 of 6
For fair value through profit or loss investments, the dividends plus the change in fair value are accounted
for in net income. For the investments that are available for sale only, dividends received affect net
income. For associate companies, the equity method recognizes the share of the investees net income.
C$
Investment Classification Income effect
(thousands)
Dividends 1,000
Alton Fair value through profit or loss
+ Unrealized gain (loss) (3,000)
Barker Available for sale Dividends 2,000
Cosmic Available for sale Dividends 3,000
Darnell Equity method % of investees net income 15,000
Total 18,000
Question
2 of 6
Only the equity securities that were designated as available for sale (Barker and Cosmic) could have
been designated at fair value, and the unrecognized gains from those securities would then be included in
income. Because Foster is a manufacturing company and not a venture capital or mutual fund company,
it cannot account for its significant influence in Darnell using fair value.
Income would be equal to the dividends from Alton, Barker, and Cosmic plus the changes in market value
for those same three securities plus the income from Darnell using the equity method.
Question
3 of 6
Associated companies are ones in which the investor (Foster) can exercise significant influence. In
addition to ownership between 2050% (Foster owns 40%), significant influence may be evidenced by
representation on the board of directors (Foster has representation on Darnells board) or by material
transactions between the two companies.
There were transactions between Darnell and Foster, but they were not a material portion of Darnells net
income.
Share of net income from intercompany sales = 187.5/37,500 = 0.005%, which is not material. Thus, the
extent of intercompany transactions least supports the classification of Darnell as an associated
company.
Question
4 of 6
The fair value through profit or loss (Eldon) and available-for-sale (Fizz) securities are carried at market
value on the balance sheet. The two held-to-maturity securities (Gilt and Harp) were purchased at par
value, thus their carrying value will not change during the life of the investment (there is no premium or
discount to amortize).
Question
5 of 6
For fair value through profit or loss investments, the interest income earned plus the change in fair value
are accounted for in net income. For the investment that is available for sale, only the interest income
earned affects net income because the unrealized gain goes to other comprehensive income. For the two
held-to-maturity securities, only the interest income earned affects net income.
Mock Exam AM Answers
Question
6 of 6
Reason 3, that Gilt has suspended the most recent (see "note b" of Exhibit 2) and expected future
interest payments until it restructures, is the best reason to consider the investment in Gilt is
permanently impaired.
Block 9: Hamilton
Question
1 of 6
Hamiltons test confirmed the presence of conditional heteroskedasticity, which means that the
variance of the error term is correlated with the values of the independent variables.
Question
2 of 6
Substituting the assumed values into the estimated model results from Exhibit 1 to determine the
predicted monthly return:
Question
3 of 6
Question
4 of 6
The two-tailed critical t-value (1.972) is taken from the table with p = 0.025.
The confidence interval is 0.3625 (1.972 0.055), or 0.25 to 0.47.
Question
5 of 6
Question
6 of 6
If errors are not serially correlated, the Durbin-Watson statistic will be close to 2. If the
regression residuals are positively correlated, the Durbin-Watson statistic will be less than 2, as it
is here. A Durbin-Watson statistic greater than 2 suggests negative serial correlation.
Question
1 of 6
The value of the apartment building = net operating income / (discount rate growth rate)
Value = $540,000 / (8% - 3%) = $10,800,000.
Question
2 of 6
The cash flow is the difference between the net operating income and the debt service. The
equity is the difference between the market value of the property and the mortgage on the
property. ($700,000 $600,000) / ($10,000,000 $9,000,000) = 10%
Question
3 of 6
Applying a multiple to FFO and AFFO may not capture the intrinsic value of real estate assets
held by the REIT or REOC. Some properties do not produce income and thus would not
contribute to FFO but still have value.
Question
4 of 6
Although buyout investments typically have steady and predictable cash flows, venture capital
investments do not.
Question
5 of 6
Post-money valuation = $20,000,00 / (1 + 0.40)3 = $7,288,630
Pre-money valuation = $7,288,630$5,000,000 = $2,288,630
Ownership fraction = $5,000,000 / $7,288,630 = 68.6%
Question
6 of 6
Statement 1 is incorrect because funds of funds tend to have average performance because of
diversification among strategies and managers.
Statement 3 is incorrect because funds of funds tend to have lower backfill bias.