CFA Institute Research Challenge 2018

26 Questions | Total Attempts: 29

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CFA Institute Research Challenge 2018


Questions and Answers
  • 1. 
    Which of the following would most likely result in higher gross profit margin, assuming no fixed cost?
    • A. 

      A 10% increase in the number of units sold.

    • B. 

      A 5% decrease in production cost per unit.

    • C. 

      A 7% decrease in administrative expenses.

  • 2. 
    When a company pays its rent in advance, its balance sheet will reflect a reduction in:
    • A. 

      Assets and liabilities.

    • B. 

      Assets and shareholders’ equity.

    • C. 

      One category of assets and an increase in another.

  • 3. 
    When a company buys shares of its own stock to be held in treasury, it records a reduction in:
    • A. 

      Both assets and liabilities.

    • B. 

      Both assets and shareholders’ equity.

    • C. 

      Assets and an increase in shareholders’ equity.

  • 4. 
    How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are non-refundable?
    • A. 

      Unearned revenue is recognized to the extent that cost have been incurred.

    • B. 

      Revenue is recognized to the extent that costs have been incurred.

    • C. 

      Revenue is deferred until the sporting event is held.

  • 5. 
    Which of the following would least likely to cause a change in investing cash flow?
    • A. 

      The sale of a division of a company.

    • B. 

      The purchase of a new machinery.

    • C. 

      An increase in depreciation expense.

  • 6. 
    Depreciation expense would be classified as:
    • A. 

      Operating cash flows.

    • B. 

      Investing cash flows.

    • C. 

      No cash flow impact.

  • 7. 
    Denali Limited, a manufacturing company, had the following income statement information: Revenue $4,000,000Cost of goods sold  $3,000,000Other operating expenses $500,000Interest expense $100,000Tax expense $120,000   Denali’s gross profit is equal to:
    • A. 

      $280,000.

    • B. 

      $500,000.

    • C. 

      $1,000,000.

  • 8. 
    If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending inventory is $50,000, cost of goods sold is:
    • A. 

      $390,000.

    • B. 

      $370,000.

    • C. 

      $330,000.

    • D. 

      $420,000.

  • 9. 
    At the beginning of 2009, Glass Manufacturing purchased a new machine for its assembly line at a cost of $600,000. The machine has an estimated useful life of 10 years and estimated residual value of $50,000. How much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method?
    • A. 

      $60,000.

    • B. 

      $110,000.

    • C. 

      $120,000.

  • 10. 
    For 2009, Flamingo Products had net income of $1,000,000. At 1 January 2009, there were 1,000,000 shares outstanding. On 1 July 2009, the company issued 100,000 new shares for $20 per share. The company paid $200,000 in dividends to common shareholders. What is Flamingo’s basic earnings per share for 2009?
    • A. 

      $0.80.

    • B. 

      $0.91.

    • C. 

      $0.95.

  • 11. 
    Net income for Monique, Inc. for the year ended December 31, 2007 was $78,000. Its accounts receivable balance at December 31, 2007 was $121,000, and this balance was $69,000 at December 31, 2006. The accounts payable balance at December 31, 2007 was $72,000 and was $43,000 at December 31, 2006. Depreciation for 2007 was $12,000, and there was unrealized gain of $15,000 included in 2007 income from the change in value of trading securities. Which of the following amounts represents Monique’s cash flow from operations 2007?
    • A. 

      $52,000.

    • B. 

      $67,000.

    • C. 

      $82,000.

  • 12. 
    Raptor Inc. has retained earnings of $500,000 and total stockholders’ equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. If Raptor declares a 10% stock dividend on its common stock:
    • A. 

      Net income will decrease by $80,000.

    • B. 

      Retained earnings will decrease by $80,000 and total stockholders’ equity will increase by $80,000.

    • C. 

      Retained will decrease by $300,000 and total stockholders’ equity will increase by $300,000.

    • D. 

      Retained will decrease by $300,000 and total paid-in-capital will increase by $300,000.

  • 13. 
    Beta is a relative measure of:
    • A. 

      Systematic risk.

    • B. 

      Business risk.

    • C. 

      Unsystematic risk.

  • 14. 
    Which of the following statements about correlation is false:
    • A. 

      Diversification reduces risk when correlation is less than +1.

    • B. 

      If the correlation coefficient is 0, a zero variance portfolio can be constructed.

    • C. 

      The lower the correlation coefficient, the greater the potential benefits from diversification.

  • 15. 
    Which of the following statements about NPV and IRR is false:
    • A. 

      The IRR can be positive even if the NPV is negative.

    • B. 

      When the IRR is equal to the cost of capital, the NPV will be zero.

    • C. 

      The NPV will be positive if the IRR is less than the cost of capital.

  • 16. 
    Which of the following about risk-averse investors is most accurate:
    • A. 

      Seeks out the investment with minimum risk, while return is not a major consideration.

    • B. 

      Will take additional investment risk if sufficiently compensated for this risk.

    • C. 

      Avoids participating in global equity markets.

  • 17. 
    A portfolio was created by investing 25% of the funds in asset A (standard deviation  = 15%) and the rest of the funds in asset B (standard deviation = 10%).If the correlation coefficient is 0.75, what is the portfolio’s standard deviation?
    • A. 

      10.6%.

    • B. 

      12.4%.

    • C. 

      15%.

  • 18. 
    A portfolio was created by investing 25% of the funds in asset A (standard deviation  = 15%) and the rest of the funds in asset B (standard deviation = 10%).If the correlation coefficient is − 0.75, what is the portfolio’s standard deviation?
    • A. 

      2.8%.

    • B. 

      4.2%.

    • C. 

      5.3%.

  • 19. 
    Merck’s a leading pharmaceutical company which is facing the following Investment opportunities:InvestmentCost Life Expected ReturnFinancing SourceA$100,00020Yrs7%Debt 6%B$100,00020Yrs12%Equity 12%Which Investment is more profitable to Merck?
    • A. 

      Investment A.

    • B. 

      Investment B.

    • C. 

      Both A and B.

    • D. 

      None is profitable to Merck.

  • 20. 
    Merck’s a leading pharmaceutical company which is facing the following Investment opportunities:InvestmentCost Life Expected ReturnFinancing SourceA$100,00020Yrs7%Debt 6%B$100,00020Yrs12%Equity 12%Consider Using WACC Model 50% debt instead of using only one source of financing, in that case which project would be profitable to Merck?
    • A. 

      Investment A.

    • B. 

      Investment B.

    • C. 

      Both A and B.

    • D. 

      None is profitable to Merck.

  • 21. 
    One Dollar application an Electrical Engineering firm in Australia, has two investment opportunities X, Y.Investment                 Initial Investment                                  Operating Cash Inflow                                                                                    Year 1                    Year 2                     Year 3        X                                 $(10,000)                        $5,000                   $5,000                    $1,000        Y                                 $(10,000)                        $3,000                   $4,000                    $3,000  Now if Mr. Clement the CFO wants to determine which investment is more profitable based on payback period approach:
    • A. 

      Investment X.

    • B. 

      Investment Y.

    • C. 

      Both X and Y.

  • 22. 
    An analyst as gathered the following data about two projects, each with a 12% required rate of return. Project YProject ZInitial Cost$15,000$20,000Life5 years4 yearsCash inflows$5,000/year$7,500/yearIf the projects are mutually exclusive, the company should:
    • A. 

      Reject both projects.

    • B. 

      Accept Project Y and reject Project Z.

    • C. 

      Reject Project Y and accept Project Z.

  • 23. 
    A company has a target capital structure of 60% equity.The company’s bonds with face value of $1,000 pay a 10% coupon rate, mature in 20 years, and sell for $849.54.The company stock beta is 1.2.Risk-free rate is 10% and market risk premium is 5%.The company is a constant growth firm that just paid a dividend of $2, sells for $27 per share, and had a growth rate of 8%.The company’s marginal tax rate is 40%.The company’s after-tax cost of debt is closest to:
    • A. 

      7%.

    • B. 

      8%.

    • C. 

      9.1%.

  • 24. 
    A company has a target capital structure of 60% equity.The company’s bonds with face value of $1,000 pay a 10% coupon rate, mature in 20 years, and sell for $849.54.The company stock beta is 1.2.Risk-free rate is 10% and market risk premium is 5%.The company is a constant growth firm that just paid a dividend of $2, sells for $27 per share, and had a growth rate of 8%.The company’s marginal tax rate is 40%.The company’s cost of equity using CAPM approach is:
    • A. 

      16.0%.

    • B. 

      16.6%.

    • C. 

      16.9%.

  • 25. 
    A company has a target capital structure of 60% equity.The company’s bonds with face value of $1,000 pay a 10% coupon rate, mature in 20 years, and sell for $849.54.The company stock beta is 1.2.Risk-free rate is 10% and market risk premium is 5%.The company is a constant growth firm that just paid a dividend of $2, sells for $27 per share, and had a growth rate of 8%.The company’s marginal tax rate is 40%.The company’s cost of equity using Dividend Discount Model:
    • A. 

      15.4%.

    • B. 

      16.0%.

    • C. 

      16.6%.

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