Exam Flashbacks Sle
Required CFA Institute Disclaimer Due to CFA curriculum changes from year to year. published sample exam questions and guideline answers prior to the current year may not reflect the current curriculum. Source Question 81 from '01, '02, '03 sample exams. An analyst gathered the following data about stocks j, k, and l, which together form a value-weighted index The ending value-weighted index base index 100 is closest to Source Question 125 from 91 actual exam. If the market prices of each of...
Exam Focus Iue
Market efficiency is a key concept. It has been tested extensively and has important implications for investment strategy. You must know the three forms of market efficiency and what the evidence of tests of the three forms has been overall. Know the types of tests that have been used to test the various forms of efficiency. Finally, you must understand the implications of the various forms of market efficiency and market efficiency overall for technical analysis, fundamental analysis, stock...
Why NPV and IRR Methods Can Produce Conflicting Rankings
For independent projects, the IRR and NPV methods always give the same accept or reject decision. To see why, assume A and B are independent and look again at Figure 8. If the cost of capital is less than 14.5 percent, both the NPV method and the IRR method would accept project A. On the other hand, if the cost of capital is greater than 14.5 percent, both methods reject the project. Similar analysis shows that for project B, both methods give similar accept reject decisions. For mutually...
Exam Focus Wyr
This review covers securities markets, explains how and where securities are traded, and introduces much of the terminology of securities trading. It's all testable material and you should pay special attention to the calculations dealing with margin accounts. The other important topic areas here include the difference between primary and secondary markets, the mechanics of short sales, the difference between a dealer market and an exchange market, types of orders, and the different...
Concept Checkers Efficient Capital Markets
1. The two major tests employed to test the weak-form efficient market hypothesis EMH are A. event studies and runs tests. B. autocorrelation tests and runs tests. C. event studies and performance tests. D. time-series tests and cross-sectional tests. 2. Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information D. Both weak and semistrong form. 3. The strong-form EMH asserts that stock prices fully reflect which of the following...
Info Mcv
Thus, the value-weighted percentage return is Let's look at an example of price-weighting versus market value-weighting designed to show how these two indexes are calculated and how they differ. Example Price-weighted vs. market-weighted indexes Assume you have the three identical companies described in Figure 2. Figure 2 Index Portfolio Data If stock A doubles in value, the index value is If stock C doubles in value, the index value is 100 10 2 37.33 The only difference between stocks A and C...
Concept Checkers SecurityMarket Indicator Series
1. Which of the following is NOT a criticism of the Dow Jones Industrial Average A. The index does not track the NYSE. B. There are a limited number of stocks in the index. C. The stocks only represent the biggest NYSE stocks. D. There is a downward bias in the computation of the index. 2. All of the following are factors to be considered when constructing a market index except C. weighting the items in the sample. D. the computational procedure needed to combine the items in the sample. 3....
Concept Checkers The Basics of Capital Budgeting
1. Which of the following statements about the payback period method is FALSE The A. payback period provides a rough measure of a projects liquidity and risk. B. payback method considers all cash flows throughout the entire life of a project. C. cumulative net cash flow is the running total through time of a project's cash flows. D. payback period is the number of years it takes to recover the original cost of the investment. 2. Which of the following statements about net present value NPV and...
Concept Checkers Organization and Functioning of Securities Markets
1. A well-functioning market will B. provide timely and accurate information. C. have good internal and external efficiency. 3. New shares of firms already trading on the exchange are called 4. Which of the following is NOT a characteristic of a well-functioning market D. Lowest possible transaction costs. 5. To be traded on the over-the-counter markets, a stock must have D. 1 million publicly held shares. 6. The sale of shares between two investors is called D. the over-the-counter market. 7....
Answers Concept Checkers Cash Flow Estimation and Other Topics in Capital
1. D Previous expenditures associated with a market test would be a sunk cost and should not be included. 2. A A sunk cost is a cash outlay that has already occurred it has nothing to do with the decision to accept a project. 3. B Capital budgeting analysis for expansion and replacement projects are not the same change in working capital can be positive or negative and replacement projects are mutually exclusive B is the only true statement. 4. A The 10,000 renovation is a sunk cost and should...
Concept Checkers An Introduction to Security Valuation
1. Which of the following describes the flow of the top-down valuation process A. Economic analysis, industry analysis, company analysis. B. Company analysis, industry analysis, economic analysis. C. Economic analysis, company analysis, industry analysis. D. Pick the best stocks regardless of the industry and economic conditions. 2. An analyst used the infinite period valuation model to determine that XYZ Corporation should be valued at 20. The current market price is 30. The analyst should do...
WarmUp Security Valuation
The investment decision process consists of the following components Estimate the dollar amount and timing of expected cash flows. Determine the required rate of return based on the risk uncertainty of cash flows. Using the required return, discount the expected cash flows and add their present values to determine your estimate of the security's value. Compare your estimate of value to the security's market price. Buy undervalued securities and sell, short sell, or don't buy overvalued...
Exam Focus 1
In this review we cover the techniques for estimating project cash flows. The main concept to learn here is that the relevant cash flows for evaluating a capital project are the incremental after-tax cash flows. We need to estimate how the firm's after-tax cash flows change if the project is accepted, compared to if it is not accepted. Pay special attention to the calculation of after-tax salvage values at the end of the project and, for replacement projects, at the time of the initial outlay...
Concept Checkers Capital Structure and Leverage
1. Business risk is NOT affected by 2. Which of the following choices is a key determinant of operating leverage C. The competitive nature of the business. D. The trade-off between fixed and variable costs. 3. Which of the following statements is TRUE The optimal capital structure A. minimizes the weighted average cost of capital WACC and maximizes the share price. B. minimizes the cost of equity and maximizes the WACC. C. minimizes the cost of debt, the cost of equity, and the WACC. D. is...
The Relative Advantages and Disadvantages of the NPV and IRR Methods
A key advantage of NPV is that it is a direct measure of the dollar benefit of the project to shareholders. NPV is considered the best measure. Its main weakness is that it does not measure the size of the project, just the size of the return. For example, an NPV 100 is great for a project costing 100 but very bad for a project costing 1 million. The NPV method is considered the best method since it leads to theoretically correct capital budgeting decisions. A key advantage of IRR is that it...
Key Concepts
1. There are two potential agency problems in the corporation The goals of shareholders share price appreciation may not be the same as those of management. Shareholders may have an incentive to take on more risk in business activities because creditors bond holders bear the downside risk but don't share in the upside. 2. There are four mechanisms that motivate managers to act in the best interests of shareholders. Managerial compensation that includes annual performance bonuses and or...
WeightedAverage Cost of Capital and Marginal Cost of Capital
The marginal cost of capital MCC is the cost of one more dollar of capital. The MCC increases as a firm increases the amount of capital it raises during a given period. The WACC is the firm's average cost of funds. It differs from the marginal cost of capital in that the MCC is the cost of the last dollar raised by the company. As the firm raises more and more capital, the MCC is likely to be higher than the WACC. Referring to Figure 1, you can see that as long as Dexter keeps its capital...
Concept Checkers Dividend Policy
1. Under the residual dividend model, firms would do all of the following EXCEPT A. determine their optimal capital budgets. B. borrow money to maintain the dividend payout schedule. C. determine the amount of equity needed to meet the capital budget. D. pay dividends only if more earnings are available than needed to support the optimal capital budget. 2. Which of the following statements about dividends is TRUE A. Dividend irrelevance means that investors prefer dividends to capital gains. B....
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1 IRR 1 IRR 2 1 IRR 1 IRR 1 IRR 5 IRR-based decision Since IRR 10.1 lt WACC 11.5 , Jayco should reject the project. Remember, the NPV and IRR decision rules always give the same decision for an independent project. The procedure for computing NPV using a TI BAII Plus calculator is presented in Figure 7. Figure 7 Calculating IRR With the TI Business Analyst II Plus Figure 7 Calculating IRR With the TI Business Analyst II Plus Given the projects cash flows, we calculate the payback period as...
Suppose Jayco Wants To Replace An Existing Printer With A New High
Decision Since NPV gt 0, Jayco should accept the expansion project. The procedure for computing NPV using the TI BAII Plus and HP12C calculators is presented in Figures 2 and 3, respectively. Figure 2 Calculating NPV With the TI Business Analyst II Plus Figure 2 Calculating NPV With the TI Business Analyst II Plus Figure 3 Calculating NPV With the HP12C Figure 3 Calculating NPV With the HP12C 52,000 - gt CHS - gt g - CF0 Professor's Note The LOS does not ask you to make a decision based on IRR...
The Pure Play and Accounting Beta Methods
It should be obvious from the preceding discussion that the estimation of a project's beta is an important aspect of risk analysis. Unfortunately, there are many uncertainties associated with the difficult task of estimating a project's beta. There are, however, two approaches that are widely used to estimate the project betas In the pure-play method, the company would look for other companies with single product lines similar to that of the project being evaluated. An average of all the betas...
Concept Checkers Cash Flow Estimation and Other Topics in Capital Budgeting
1. When evaluating a new project, the firm should NOT consider which of the following factors A. Changes in working capital attributable to the project. B. The depreciation expense shield on the new project. C. The current market value of any equipment to be replaced. D. Previous expenditures on market research to determine the feasibility of the project. 2. Which of the following is NOT a cash flow that results from the decision to accept a project D. Shipping and installation costs. 3. Which...
LOS 45 Discuss potential agency problems of stockholders versus 1 managers and
An agency relationship is created when decision-making authority is delegated to an agent without the agent being fully responsible for the decision that is made. An agency relationship occurs in two common corporate scenarios 1 the company's stockholders delegate decision-making authority to the managers agents , but the managers do not receive the full benefit or bear the full cost of their decisions 2 the company's debt holders delegate authority to managers who act on behalf of the...
Concept Checkers The Cost of Capital
1. A company has 5 million in debt outstanding with a coupon rate of 12 percent. Currently the yield to maturity YTM on these bonds is 14 percent. If the firm's tax rate is 40 percent, what is the company's after-tax cost of debt 2. The cost of preferred stock is equal to A. the preferred stock dividend divided by its par value. B. the preferred stock dividend multiplied by the net market price. C. 1 - tax rate times the preferred stock dividend divided by the net price . D. the preferred stock...