CFA Exam 108 Questions with Answers 2023
Equity equals: - CORRECT ANSWER Assets - Liabilities = Equity
(4)Shareholders' equity reported on the
... [Show More] balance sheet is most likely to differ from the market value of shareholders' equity because: - CORRECT ANSWER B)Some factors that affect the generation of future cash flows are excluded.
(8)All of the following are current assets except: - CORRECT ANSWER B)goodwill.
(9)The most likely costs included in both the cost of inventory and property, plant, and equipment are: - CORRECT ANSWER C) delivery costs.
(10)Debt due within one year is considered: - CORRECT ANSWER A)current.
(13)The carrying value of inventories reflects: - CORRECT ANSWER C) the lower of historical cost or net realizable value.
(15)Accrued expenses (accrued liabilities) are: - CORRECT ANSWER C) expenses that have been reported on the income statement but not yet paid.
(17)Defining total asset turnover as revenue divided by average total assets, all else equal, impairment write-downs of long-lived assets owned by a company will most likelyresult in an increase for that company in: - CORRECT ANSWER C)both the debt-to-equity ratio and the total asset turnover.
(23)The item "retained earnings" is a component of: - CORRECT ANSWER C)shareholders' equity.
(24)When a company buys shares of its own stock to be held in treasury, it records a reduction in: - CORRECT ANSWER B)both assets and shareholders' equity.
(25)Which of the following would an analyst most likely be able to determine from a common-size analysis of a company's balance sheet over several periods? - CORRECT ANSWER B)An increase or decrease in financial leverage.
(26)An investor concerned whether a company can meet its near-term obligations is most likely to calculate the: - CORRECT ANSWER A)current ratio.
(27)The most stringent test of a company's liquidity is its: - CORRECT ANSWER A)cash ratio.
(28)An investor worried about a company's long-term solvency would most likely examine its: - CORRECT ANSWER C) debt-to-equity ratio.
(31)Based on Exhibit 1, which statement is most likely correct? - CORRECT ANSWER C)Company A has made one or more acquisitions.
(33)Based on Exhibit 1, the financial leverage ratio for Company B is closest to: - CORRECT ANSWER C)2.22.
(34)Based on Exhibit 1, which ratio indicates lower liquidity risk for Company A compared with Company B? - CORRECT ANSWER A)Cash ratio
1. The three factor DuPont Analysis is comprised of - CORRECT ANSWER a. Asset turnover, profit margin, financial leverage
1. Within the Dupont Analysis - CORRECT ANSWER a. An increase in financial leverage is met with an increase in the use of debt.
1. In DuPont Analysis where the financial leverage has consistently increased over the past several years - CORRECT ANSWER a. The ROE will be higher than the ROA.
1. The current ROA of a firm is 13% and it has an Equity Multiplier of 3.0. The resulting ROE will be approximately - CORRECT ANSWER a. 39%
1. The ACME Company has current sales of $2,340,000 and Total Assets of $990,000. It also has earnings of $250,000, and Total Equity of $750,000. The current inventory is $124,000 and accounts payable is $98,000. - CORRECT ANSWER a. The asset turnover and profit margin are 2.36 and 10.68%
1. The price-earnings (P/E) ratio is considered to be a price multiple. Which of the following is a true statement? - CORRECT ANSWER a. An increasing P/E implies that the price of the stock is becoming more expensive.
1. If a stock has a beta of 2.0, which of the following is true? - CORRECT ANSWER a. The stock is considered to be more volatile than the market.
In order to assess a company's ability to fulfill its long-term obligations, an analyst would most likely examine: - CORRECT ANSWER solvency ratios.
Which ratio would a company most likely use to measure its ability to meet short-term obligations? - CORRECT ANSWER Current ratio.
Which of the following ratios would be most useful in determining a company's ability to cover its lease and interest payments? - CORRECT ANSWER Fixed charge coverage.
Based on this data, what is the analyst least likely to conclude? - CORRECT ANSWER Management of receivables has contributed to improved liquidity.
Which of the following would be the analyst's most likely conclusion? - CORRECT ANSWER The company is becoming increasingly less solvent, as evidenced by the increase in its debt-to-equity ratio from 0.35 to 0.50 from FY3 to FY5.
With regard to the data in Problem 6, what would be the most reasonable explanation of the financial data? - CORRECT ANSWER The decline in the company's equity indicates that the company may be incurring losses, paying dividends greater than income, and/or repurchasing shares.
An analyst observes a decrease in a company's inventory turnover. Which of the following would most likely explain this trend? - CORRECT ANSWER The company installed a new inventory management system but experienced some operational difficulties resulting in duplicate orders being placed with suppliers.
Which of the following would best explain an increase in receivables turnover? - CORRECT ANSWER Due to problems with an error in its old credit scoring system, the company had accumulated a substantial amount of uncollectible accounts and wrote off a large amount of its receivables.
Brown Corporation had average days of sales outstanding of 19 days in the most recent fiscal year. Brown wants to improve its credit policies and collection practices and decrease its collection period in the next fiscal year to match the industry average of 15 days. Credit sales in the most recent fiscal year were $300 million, and Brown expects credit sales to increase to $390 million in the next fiscal year. To achieve Brown's goal of decreasing the collection period, the change in the average accounts receivable balance that must occur is closest to: - CORRECT ANSWER +$0.41 million.
Which of the following choices best describes reasonable conclusions that the analyst might make about the two companies' ability to pay their current and long-term obligations? - CORRECT ANSWER Company A's current ratio of 4.0 indicates it is more liquid than Company B, whose current ratio is only 1.2, but Company B is more solvent, as indicated by its lower debt-to-equity ratio.
The company's total assets at year-end FY9 were GBP 3,500 million. Which of the following choices best describes reasonable conclusions an analyst might make about the company's efficiency? - CORRECT ANSWER Comparing FY14 with FY10, the company's efficiency deteriorated due to asset growth faster than turnover revenue growth.
Which of the following choices best describes reasonable conclusions an analyst might make about the company's solvency? - CORRECT ANSWER Comparing FY14 with FY10, the company's solvency deteriorated, as indicated by a decrease in interest coverage from 10.6 to 8.4.
Which of the following choices best describes reasonable conclusions an analyst might make about the company's liquidity? - CORRECT ANSWER Comparing FY14 with FY10, the company's liquidity improved, as indicated by an increase in its current ratio from 0.71 to 0.75.
Which of the following choices best describes reasonable conclusions an analyst might make about the company's profitability? - CORRECT ANSWER Comparing FY14 with FY10, the company's profitability deteriorated, as indicated by a decrease in its net profit margin from 11.0 percent to 5.7 percent.
Assuming no changes in other variables, which of the following would decrease ROA? - CORRECT ANSWER An increase in average assets.
Based only on the information above, the most appropriate conclusion is that, over the period FY13 to FY15, the company's: - CORRECT ANSWER net profit margin has decreased but its financial leverage has increased.
What does the P/E ratio measure? - CORRECT ANSWER The "multiple" that the stock market places on a company's EPS.
A creditor most likely would consider a decrease in which of the following ratios to be positive news? - CORRECT ANSWER Debt-to-total assets.
When developing forecasts, analysts should most likely: - CORRECT ANSWER use the results of financial analysis, analysis of other information, and judgment.
Expenses on the income statement may be grouped by: - CORRECT ANSWER either function or nature.
An example of an expense classification by function is: - CORRECT ANSWER cost of goods sold.
Denali's gross profit is equal to - CORRECT ANSWER $1,000,000.
Under IFRS, income includes increases in economic benefits from: - CORRECT ANSWER enhancements of assets not related to owners' contributions.
Under the accrual basis of accounting, how much net revenue would be reported on Fairplay's 2009 income statement? - CORRECT ANSWER $900,000.
If the outcome of a long-term contract can be measured reliably, the preferred accounting method under both IFRS and US GAAP is: - CORRECT ANSWER the percentage-of-completion method.
Assume that the company estimates percentage complete based on costs incurred as a percentage of total estimated costs. Under the completed contract method, how much revenue will be reported in 2009? - CORRECT ANSWER None
During 2009, Argo Company sold 10 acres of prime commercial zoned land to a builder for $5,000,000. The builder gave Argo a $1,000,000 down payment and will pay the remaining balance of $4,000,000 to Argo in 2010. Argo purchased the land in 2002 for $2,000,000. Using the installment method, how much profit will Argo report for 2009? - CORRECT ANSWER $600,000.
Using the same information as in Question 8, how much profit will Argo report for 2009 using the cost recovery method? - CORRECT ANSWER None.
Under IFRS, revenue from barter transactions should be measured based on the fair value of revenue from: - CORRECT ANSWER similar non-barter transactions with unrelated parties.
How much revenue should Apex report on its 2009 income statement? - CORRECT ANSWER €500,000.
A company previously expensed the incremental costs of obtaining a contract. All else being equal, adopting the May 2014 IASB and FASB converged accounting standards on revenue recognition makes the company's profitability initially appear: - CORRECT ANSWER higher.
During 2009, Accent Toys Plc., which began business in October of that year, purchased 10,000 units of a toy at a cost of ₤10 per unit in October. The toy sold well in October. In anticipation of heavy December sales, Accent purchased 5,000 additional units in November at a cost of ₤11 per unit. During 2009, Accent sold 12,000 units at a price of ₤15 per unit. Under the first in, first out (FIFO) method, what is Accent's cost of goods sold for 2009? - CORRECT ANSWER ₤122,000.
Using the same information as in Question 12, what would Accent's cost of goods sold be under the weighted average cost method? - CORRECT ANSWER ₤124,000.
Which inventory method is least likely to be used under IFRS? - CORRECT ANSWER Last in, first out (LIFO).
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. Under the straight-line method, how much depreciation would Glass take in 2010 for financial reporting purposes? - CORRECT ANSWER $55,000.
Using the same information as in Question 15, how much depreciation would Glass take in 2009 for financial reporting purposes under the double-declining balance method? - CORRECT ANSWER $120,000.
Which combination of depreciation methods and useful lives is most conservative in the year a depreciable asset is acquired? - CORRECT ANSWER Declining balance depreciation with a short useful life.
Under IFRS, a loss from the destruction of property in a fire would most likely be classified as: - CORRECT ANSWER continuing operations.
A company chooses to change an accounting policy. This change requires that, if practical, the company restate its financial statements for: - CORRECT ANSWER prior periods shown in a report.
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? - CORRECT ANSWER $0.95.
For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of $12 million and a weighted average of 2,000,000 common shares outstanding. The company paid $800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of $20. CWC's market price over the year averaged $25 per share. CWC's diluted EPS is closest to: - CORRECT ANSWER $5.54.
A company with no debt or convertible securities issued publicly traded common stock three times during the current fiscal year. Under both IFRS and US GAAP, the company's: - CORRECT ANSWER basic EPS equals its diluted EPS.
Which statement about the calculation of LB's EPS is most accurate? - CORRECT ANSWER LB's diluted EPS is equal to or less than its basic EPS.
Cell Services Inc. (CSI) had 1,000,000 average shares outstanding during all of 2009. During 2009, CSI also had 10,000 options outstanding with exercise prices of $10 each. The average stock price of CSI during 2009 was $15. For purposes of computing diluted earnings per share, how many shares would be used in the denominator? - CORRECT ANSWER 1,003,333.
For its fiscal year-end, Sublyme Corporation reported net income of $200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of $5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to: - CORRECT ANSWER $3.70.
When calculating diluted EPS, which of the following securities in the capital structure increases the weighted average number of common shares outstanding without affecting net income available to common shareholders? - CORRECT ANSWER Stock options
Which statement is most accurate? A common size income statement: - CORRECT ANSWER allows an analyst to conduct cross-sectional analysis by removing the effect of company size.
Workhard's comprehensive income for the year: - CORRECT ANSWER includes $4 million in other comprehensive income.
When preparing an income statement, which of the following items would most likely be classified as other comprehensive income? - CORRECT ANSWER A foreign currency translation adjustment
The cost of equity is equal to the: - CORRECT ANSWER rate of return required by stockholders.
Which of the following statements is correct? - CORRECT ANSWER For a given company, the after-tax cost of debt is generally less than both the cost of preferred equity and the cost of common equity.
Using the dividend discount model, what is the cost of equity capital for Zeller Mining if the company will pay a dividend of C$2.30 next year, has a payout ratio of 30 percent, a return on equity (ROE) of 15 percent, and a stock price of C$45? - CORRECT ANSWER 15.61 percent.
Dot.Com has determined that it could issue $1,000 face value bonds with an 8 percent coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com's marginal tax rate is 38 percent, its after-tax cost of debt is closest to: - CORRECT ANSWER 6.6 percent.
Morgan Insurance Ltd. issued a fixed-rate perpetual preferred stock three years ago and placed it privately with institutional investors. The stock was issued at $25 per share with a $1.75 dividend. If the company were to issue preferred stock today, the yield would be 6.5 percent. The stock's current value is: - CORRECT ANSWER $26.92.
Buckco's WACC is closest to: - CORRECT ANSWER 9 percent.
The Gearing Company has an after-tax cost of debt capital of 4 percent, a cost of preferred stock of 8 percent, a cost of equity capital of 10 percent, and a weighted average cost of capital of 7 percent. Gearing intends to maintain its current capital structure as it raises additional capital. In making its capital-budgeting decisions for the average-risk project, the relevant cost of capital is: - CORRECT ANSWER 7 percent.
The weights that McClure should apply in estimating Frontier's cost of capital for debt and equity are, respectively: - CORRECT ANSWER wd = 0.223; we = 0.777.
Wang Securities had a long-term stable debt-to-equity ratio of 0.65. Recent bank borrowing for expansion into South America raised the ratio to 0.75. The increased leverage has what effect on the asset beta and equity beta of the company? - CORRECT ANSWER The asset beta will remain the same and the equity beta will rise.
Brandon Wiene is a financial analyst covering the beverage industry. He is evaluating the impact of DEF Beverage's new product line of flavored waters. DEF currently has a debt-to-equity ratio of 0.6. The new product line would be financed with $50 million of debt and $100 million of equity. In estimating the valuation impact of this new product line on DEF's value, Wiene has estimated the equity beta and asset beta of comparable companies. In calculating the equity beta for the product line, Wiene is intending to use DEF's existing capital structure when converting the asset beta into a project beta. Which of the following statements is correct? - CORRECT ANSWER Using DEF's debt-to-equity ratio of 0.6 is not appropriate, but rather the debt-to-equity ratio of the new product, 0.5, is appropriate to use in calculating the new product line's equity beta.
Trumpit Resorts Company currently has 1.2 million common shares of stock outstanding and the stock has a beta of 2.2. It also has $10 million face value of bonds that have five years remaining to maturity and 8 percent coupon with semi-annual payments, and are priced to yield 13.65 percent. If Trumpit issues up to $2.5 million of new bonds, the bonds will be priced at par and have a yield of 13.65 percent; if it issues bonds beyond $2.5 million, the expected yield on the entire issuance will be 16 percent. Trumpit has learned that it can issue new common stock at $10 a share. The current risk-free rate of interest is 3 percent and the expected market return is 10 percent. Trumpit's marginal tax rate is 30 percent. If Trumpit raises $7.5 million of new capital while maintaining the same debt-to-equity ratio, its weighted average cost of capital is closest to: - CORRECT ANSWER 15.5 percent.
Using the capital asset pricing model, Kruspa's cost of equity capital for its typical project is closest to: - CORRECT ANSWER 10.52 percent.
Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in the China project. This weighted average cost of capital (WACC) isclosest to: - CORRECT ANSWER 9.23 percent.
In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa as a base in his calculations. The estimated asset beta of Kruspa prior to the China project is closest to: - CORRECT ANSWER 1.053.
Two years ago, a company issued $20 million in long-term bonds at par value with a coupon rate of 9 percent. The company has decided to issue an additional $20 million in bonds and expects the new issue to be priced at par value with a coupon rate of 7 percent. The company has no other debt outstanding and has a tax rate of 40 percent. To compute the company's weighted average cost of capital, the appropriate after-tax cost of debt is closest to: - CORRECT ANSWER 4.2%.
Using the discounted cash flow (DCF) approach, the cost of retained earnings for the company is closest to: - CORRECT ANSWER 16.8%.
Using the Capital Asset Pricing Model (CAPM) approach, the cost of retained earnings for the company is closest to: - CORRECT ANSWER 15.7%.
Using the pure-play method, the estimated equity beta for the private company is closest to: - CORRECT ANSWER 1.877.
Suppose a company has a current ratio of 2.5 times and a quick ratio of 1.5 times. If the company's current liabilities are €100 million, the amount of inventory is closestto: - CORRECT ANSWER €100 million.
The net operating cycle of this company is closest to: - CORRECT ANSWER 3.8 days.
A company increasing its credit terms for customers from 1/10, net 30 to 1/10, net 60 will most likely experience: - CORRECT ANSWER an increase in the average collection period.
Suppose a company uses trade credit with the terms of 2/10, net 50. If the company pays its account on the 50th day, the effective borrowing cost of skipping the discount on day 10 is closest to: - CORRECT ANSWER 20.2%.
Which of the companies had the highest number of days of receivables for the year 20X1? - CORRECT ANSWER Company B.
Which of the companies has the lowest accounts receivable turnover in the year 20X2? - CORRECT ANSWER Company B.
The industry average receivables collection period: - CORRECT ANSWER decreased from 20X1 to 20X2.
Which of the companies reduced the average time it took to collect on accounts receivable from 20X1 to 20X2? - CORRECT ANSWER Company B.
The discounted payback period is: - CORRECT ANSWER 1.01 years longer than the payback period.
An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2, and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to: - CORRECT ANSWER $58.33.
An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return? - CORRECT ANSWER 28.79 percent.
Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. Expressed in years, the project's payback period and discounted payback period, respectively, are closest to: - CORRECT ANSWER 4.3 years and 5.9 years.
How many discount rates produce a zero NPV for this project? - CORRECT ANSWER Two, discount rates of 0 percent and 62 percent.
With regard to the net present value (NPV) profiles of two projects, the crossover rate is best described as the discount rate at which: - CORRECT ANSWER two projects have the same NPV.
With regard to net present value (NPV) profiles, the point at which a profile crosses the vertical axis is best described as: - CORRECT ANSWER the sum of the undiscounted cash flows from a project.
With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as: - CORRECT ANSWER a project's internal rate of return when the project's NPV is equal to zero.
With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include: - CORRECT ANSWER interest costs. [Show Less]