@exam_whiz
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Up11
The correct answer is C.
Up8Correct Answer: C
For callable bonds, Z-spread is greater than OAS and option cost is greater than 0. For putable bonds, Z-spread is less than OAS and option cost is less than 0. Only statement I is correct.
Up6Correct Answer: C
Trinity gave the proposal from Diwan to Simon to gain better insights. The information is clearly confidential. By divulging information about the project to her friend, Simon violates Standard III (E), preservation of confidentiality. Jack has sufficient information to determine that the project information is both material and non-public. By acting on inside information, Jack violates Standard II (A) relating to material non-public information.
Up5Spoiler alert! The correct answer is B.
Goodwill is calculated as the difference between purchase price and fair value of the business being purchased. In this case, goodwill = $800 million – ($1.8 billion – $1.2 billion) = $200 million. Amortization of Goodwill is not required whether under U.S. GAAP or IFRS, but is rather subject to an annual impairment test.
Up5The correct answer is B.
According to standard III (B), members must deal fairly with all clients. By giving preferential treatment to his friend, Ronald violates the standard by being unfair to other clients.
The ‘buy’ recommendation is given by his company’s research team. Further, he himself reads the entire research thoroughly and is convinced that the stock is worth buying. Thus, he has a reasonable basis to buy the stock. Standard V (A) is not violated.
Up5Yes A is correct.
Under GAAP, a company will capitalize the issuance costs of debt separately from the bond itself, whereas IFRS will include it as a part of the security’s book value. As such, Security Solutions Corp will need to write-down the issuing costs separately under GAAP but does not need to do so under IFRS.
Up5I will let you change it in my book!
Correct Answer: B
IRR is the discount rate at which the NPV of the project is zero. If the IRR is less than the cost of capital, the project’s NPV will be negative, even though IRR is positive. Thus, both statements 3 and 4 are correct.
If the NPV and IRR methods give conflicting decisions for mutually exclusive projects, the project with greatest positive NPV should be selected. A project cannot have positive NPV if its IRR is less than the cost of capital. Thus, statements 1 and 2 are incorrect.
Up5Correct Answer: Â B
This problem is solved by multiplying the portfolio CML equation by the ratio of the portfolio standard deviation to market standard deviation. The equation is then rearranged and solved for the portfolio standard deviation. The trick is to remember that this market portfolio will have a beta of one, and that a market portfolio is solved for non-systemic risk instead of beta. Similarly, covariance would only be required if we were solving for systemic risk, as would be accomplished for the SML equation rather than the CML.Up5I think it would depend on the person, the length of the break, and the game.
I actually never used video games as a study break, rather as a reward for finishing my daily studying. This kept me efficient in the time I spent studying, but there are certainly other methods to accomplish this.
Up5Sure @hardj! So the dividend in time period 1 is actually 2013. The question has a dividend paid in 2012, but is valuing the company at the end of 2012, so the 3.40 dividend was already paid.
And @simply_complex2 , the 4th and beyond formula is raised to the 3rd instead of the fourth because of the way the formula is designed. The perpetuity valuing formula is set up to value the perpetuity at the beginning of the period. The other dividends are being valued at the end of each period. So the end of period 3 gets the same discount as the beginning of period 4.
Sometimes it helps me to visualize questions by setting them up in excel (also, I am a nerd and enjoy modeling things in excel!}. Attached is an excel workbook that shows the calculation with an actual stream of dividends past year 4.
Up4Statement I is correct, but statement II is incorrect. Hope this helps!
Up4Correct Answer: A
Standard IV (A), Loyalty, requires acting in employer’s best interest until resignation is effective. Soliciting employer’s clients prior to leaving constitutes violation of standard IV (A). However, once an employee has left a firm, simple knowledge of names of the firm’s clients and contacting them for soliciting business is not a violation of the standard, unless there is a non-compete agreement in place.
Up4Correct Answer: A
Mean return = [12% + 9% -2% + 12% + 8%]/5 = 7.8%
Variance of returns = [(12-7.8)^2 + (9-7.8)^2 + (-2-7.8)^2 + (12-7.8)^2 + (8-7.8)2]/5 = 26.56
Standard deviation is the square root of variance = (26.56)^0.5 = 5.15%
Up4Correct Answer: C
Subsidies result in ‘increase’ in equilibrium quantities and lead to dead-weight losses from overproduction. Statement II is incorrect. The remaining two statements are correct.
Up3Correct Answer: C
Weight of debt in the firm’s capital structure = 7/ (7 + 2 + 12) = 33.3%
Weight of preferred stock in the firm’s capital structure = 2/ (7 + 2 + 12) = 9.5%
Weight of common stock in the firm’s capital structure = 12/ (7 + 2 + 12) = 57.1%
After-tax cost of debt = 8*(1-0.35) = 5.2%
WACC = (weight of debt*cost of debt) (weight of preferred stock*cost of preferred stock) (weight of equity*cost of equity) = 0.333*0.052 + 0.095*0.09 + 0.571*0.12 = 9.5%
Up3Correct Answer: C
The sustainable growth rate is calculated as follows:
Retention Rate = 1 – (1/2.75) =63.64%
Sustainable Growth = .6364*.2 = 12.73%
Up2Correct Answer: A
Cash tax payments are operating cash flows so statement I is incorrect. Changes in debt are financing cash flows so statement III is incorrect.
