CFA Institute Research Challenge 2018
- 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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