CFA MOCK EXAM (A) AFTERNOON
SESSION QUESTIONS WITH CORRECT
ANSWERS
Which ffof ffthe fffollowing ffis ffmost fflikely ffassociated ffwith ffpoor ffcorporate ffgovernance?
A. ffReduction ffin ffexposure ffto ffregulatory ffactions
B. ffIncreased ffcontrol ffand ffcompliance ffmonitoring ffof ffcorporate ffdecisions
C. ffManagement ffof ffa ffcompany ffto ffa fflower ffrisk ffprofile ffrelative ffto ffshareholder
fftolerance ff- ffAnswer ffC ffis ffcorrect. ff
Poor ffgovernance ffcan ffresult ffin ffineffective ffdecision ffmaking. ffManagement ffmay
ffmake ffdecisions ffthat ffbenefit ffthemselves ffat ffthe ffcost ffof ffshareholders, ffsuch ffas
fftaking ffless ffrisk ffthan ffis ffappropriate ffto ffcreate ffa ffmore ffstable ffenvironment.
ffManaging ffthe ffcompany ffat ffa fflower ffrisk ffprofile ffthan ffnecessary ffbased ffon
ffshareholders' fftolerance ffis ffan ffexample ffof ffineffective ffdecision ffmaking. ffIncreased
ffcontrol ffand ffcompliance ffmonitoring ffare ffusually ffthe ffresult ffof ffgood ffcorporate
ffgovernance. ffA ffreduction ffin ffexposure ffto ffregulatory ffactions ffwould ffbe ffthe ffresult
ffof ffgood, ffnot ffpoor, ffcorporate ffgovernance.
When fftwo ffmutually ffexclusive ffprojects ffwith ffconventional ffcash ffflows ffare ffbeing
ffranked, ffthe ffnet ffpresent ffvalue ff(NPV) ffand ffinternal ffrate ffof ffreturn ff(IRR) ffdecision
ffrules ffare ffmost fflikely ffto ffconflict ffwhen ffthe:
A. ffprojects' ffinvestments ffare ffof ffdifferent ffscale.
B. ffprojects ffhave ffmultiple ffIRRs.
C. ffprojects ffhave ffsimilar fftiming ffof ffcash ffflows. ff- ffAnswer ffA ffis ffcorrect. ff
Conflict ffbetween ffthe ffNPV ffand ffIRR ffdecision ffrules ffcan ffarise ffwhen ffevaluating
ffmutually ffexclusive ffprojects ffwith ffconventional ffcash ffflows ffbecause ff1) ffthe ffscale ffof
ffinvestments ffmay ffdiffer ffand/or ff2) ffthe fftiming ffof ffthe ffcash ffflows ffmay ffdiffer.
When ffcomputing ffthe ffcash ffflows fffor ffa ffcapital ffproject, ffwhich ffof ffthe fffollowing ffis
ffleast fflikely ffto ffbe ffincluded?
A. ffFinancing ffcosts
B. ffOpportunity ffcosts
C. ffTax ffeffects ff- ffAnswer ffA ffis ffcorrect. ff
Financing ffcosts ffare ffnot ffincluded ffin ffa ffcash ffflow ffcalculation ffbut ffare ffconsidered ffin
ffthe ffcalculation ffof ffthe ffdiscount ffrate.
, Which ffaction ffis ffmost fflikely ffconsidered ffa ffsecondary ffsource ffof ffliquidity?
A. ffIncreasing ffthe ffefficiency ffof ffcash ffflow ffmanagement
B. ffRenegotiating ffcurrent ffdebt ffcontracts ffto fflower ffinterest ffpayments
C. ffIncreasing ffthe ffavailability ffof ffbank fflines ffof ffcredit ff- ffAnswer ffB ffis ffcorrect. ff
Renegotiating ffdebt ffcontracts ffis ffa ffsecondary ffsource ffof ffliquidity ffbecause ffit ffmay
ffaffect ffthe ffcompany's ffoperating ffand/or fffinancial ffpositions.
A ffis ffincorrect. ffIncreasing ffcash ffflow ffmanagement ffefficiency ffis ffa ffprimary ffsource
ffof ffliquidity.
C ffis ffincorrect. ffIncreasing ffbank fflines ffof ffcredit ffis ffa ffprimary ffsource ffof ffliquidity.
A ffcompany's ffshort-term ffborrowing ffstrategy ffis ffmost fflikely ffinfluenced ffby:
A. ffthe fflender's ffsize ffonly.
B. ffthe ffborrower's ffsize ffonly.
C ffboth ffthe fflender's ffsize ffand ffthe ffborrower's ffsize. ff- ffAnswer ffC ffis ffcorrect ff
because ffa ff"borrower's ffsize ffcan ffdictate ffthe ffoptions ffavailable. ffLarger ffcompanies
ffcan fftake ffadvantage ffof ffeconomies ffof ffscale ffto ffaccess ffcommercial ffpaper,
ffbanker's ffacceptances, ffand ffso ffon. ffThe fflender's ffsize ffis ffalso ffan ffimportant
ffcriterion, ffbecause fflarger ffbanks ffhave ffhigher ffhouse ffor fflegal fflending fflimits."
ffTherefore, ffboth ffthe fflender's ffsize ffand ffthe ffborrower's ffsize ffare ffimportant fffactors
ffthat ffcan ffinfluence ffa ffcompany's ffshort-term ffborrowing ffstrategy.
Which ffof ffthe fffollowing ffis ffmost fflikely ffconsidered ffan ffexample ffof ffmatrix ffpricing
ffwhen ffdetermining ffthe ffcost ffof ffdebt?
A. ffDebt-rating ffapproach ffonly.
B. ffYield-to-maturity ffapproach ffonly.
C. ffBoth ffthe ffyield-to-maturity ffand ffthe ffdebt-rating ffapproaches. ff- ffAnswer ffA ffis
ffcorrect. ff
The ffdebt-rating ffapproach ffis ffan ffexample ffof ffmatrix ffpricing.
All ffelse ffbeing ffequal, fffinancing ffshort-term ffassets ffby ffissuing fflong-term ffdebt ffmost
fflikely ffincreases:
A. ffdefault ffrisk ffonly.
B. ffrollover ffrisk ffonly.
C. ffboth ffdefault ffrisk ffand ffrollover ffrisk. ff- ffAnswer ffA ffis ffcorrect ff
because ff"a ffcompany fffinancing ffshort-term ffassets ffwith fflong-term fffinancing ffbeyond
ffthe ffterm ffneeded fffaces ffthe ffrisk ffthat ffthe ffcompany ffoverpays ffin fffinancing ffcost.
ffAsset ffliability ffmisalignment ffincreases ffthe ffrisk ffof ffdefault ffand ffcost ffof ffcapital fffor
ffcompanies ffas ffcapital ffsuppliers ffdemand ffhigher ffreturns ffin ffcompensation."
Increasing ffthe fffinancial ffleverage ffof ffa ffcompany ffmost fflikely ffresults ffin:
A. ffreduced ffdownside ffrisk fffor ffbondholders.
B. fflimited ffupside ffpotential fffor ffshareholders.
C. ffa ffdeteriorated ffrisk-return ffprofile fffor ffbondholders. ff- ffAnswer ffC ffis ffcorrect ff
SESSION QUESTIONS WITH CORRECT
ANSWERS
Which ffof ffthe fffollowing ffis ffmost fflikely ffassociated ffwith ffpoor ffcorporate ffgovernance?
A. ffReduction ffin ffexposure ffto ffregulatory ffactions
B. ffIncreased ffcontrol ffand ffcompliance ffmonitoring ffof ffcorporate ffdecisions
C. ffManagement ffof ffa ffcompany ffto ffa fflower ffrisk ffprofile ffrelative ffto ffshareholder
fftolerance ff- ffAnswer ffC ffis ffcorrect. ff
Poor ffgovernance ffcan ffresult ffin ffineffective ffdecision ffmaking. ffManagement ffmay
ffmake ffdecisions ffthat ffbenefit ffthemselves ffat ffthe ffcost ffof ffshareholders, ffsuch ffas
fftaking ffless ffrisk ffthan ffis ffappropriate ffto ffcreate ffa ffmore ffstable ffenvironment.
ffManaging ffthe ffcompany ffat ffa fflower ffrisk ffprofile ffthan ffnecessary ffbased ffon
ffshareholders' fftolerance ffis ffan ffexample ffof ffineffective ffdecision ffmaking. ffIncreased
ffcontrol ffand ffcompliance ffmonitoring ffare ffusually ffthe ffresult ffof ffgood ffcorporate
ffgovernance. ffA ffreduction ffin ffexposure ffto ffregulatory ffactions ffwould ffbe ffthe ffresult
ffof ffgood, ffnot ffpoor, ffcorporate ffgovernance.
When fftwo ffmutually ffexclusive ffprojects ffwith ffconventional ffcash ffflows ffare ffbeing
ffranked, ffthe ffnet ffpresent ffvalue ff(NPV) ffand ffinternal ffrate ffof ffreturn ff(IRR) ffdecision
ffrules ffare ffmost fflikely ffto ffconflict ffwhen ffthe:
A. ffprojects' ffinvestments ffare ffof ffdifferent ffscale.
B. ffprojects ffhave ffmultiple ffIRRs.
C. ffprojects ffhave ffsimilar fftiming ffof ffcash ffflows. ff- ffAnswer ffA ffis ffcorrect. ff
Conflict ffbetween ffthe ffNPV ffand ffIRR ffdecision ffrules ffcan ffarise ffwhen ffevaluating
ffmutually ffexclusive ffprojects ffwith ffconventional ffcash ffflows ffbecause ff1) ffthe ffscale ffof
ffinvestments ffmay ffdiffer ffand/or ff2) ffthe fftiming ffof ffthe ffcash ffflows ffmay ffdiffer.
When ffcomputing ffthe ffcash ffflows fffor ffa ffcapital ffproject, ffwhich ffof ffthe fffollowing ffis
ffleast fflikely ffto ffbe ffincluded?
A. ffFinancing ffcosts
B. ffOpportunity ffcosts
C. ffTax ffeffects ff- ffAnswer ffA ffis ffcorrect. ff
Financing ffcosts ffare ffnot ffincluded ffin ffa ffcash ffflow ffcalculation ffbut ffare ffconsidered ffin
ffthe ffcalculation ffof ffthe ffdiscount ffrate.
, Which ffaction ffis ffmost fflikely ffconsidered ffa ffsecondary ffsource ffof ffliquidity?
A. ffIncreasing ffthe ffefficiency ffof ffcash ffflow ffmanagement
B. ffRenegotiating ffcurrent ffdebt ffcontracts ffto fflower ffinterest ffpayments
C. ffIncreasing ffthe ffavailability ffof ffbank fflines ffof ffcredit ff- ffAnswer ffB ffis ffcorrect. ff
Renegotiating ffdebt ffcontracts ffis ffa ffsecondary ffsource ffof ffliquidity ffbecause ffit ffmay
ffaffect ffthe ffcompany's ffoperating ffand/or fffinancial ffpositions.
A ffis ffincorrect. ffIncreasing ffcash ffflow ffmanagement ffefficiency ffis ffa ffprimary ffsource
ffof ffliquidity.
C ffis ffincorrect. ffIncreasing ffbank fflines ffof ffcredit ffis ffa ffprimary ffsource ffof ffliquidity.
A ffcompany's ffshort-term ffborrowing ffstrategy ffis ffmost fflikely ffinfluenced ffby:
A. ffthe fflender's ffsize ffonly.
B. ffthe ffborrower's ffsize ffonly.
C ffboth ffthe fflender's ffsize ffand ffthe ffborrower's ffsize. ff- ffAnswer ffC ffis ffcorrect ff
because ffa ff"borrower's ffsize ffcan ffdictate ffthe ffoptions ffavailable. ffLarger ffcompanies
ffcan fftake ffadvantage ffof ffeconomies ffof ffscale ffto ffaccess ffcommercial ffpaper,
ffbanker's ffacceptances, ffand ffso ffon. ffThe fflender's ffsize ffis ffalso ffan ffimportant
ffcriterion, ffbecause fflarger ffbanks ffhave ffhigher ffhouse ffor fflegal fflending fflimits."
ffTherefore, ffboth ffthe fflender's ffsize ffand ffthe ffborrower's ffsize ffare ffimportant fffactors
ffthat ffcan ffinfluence ffa ffcompany's ffshort-term ffborrowing ffstrategy.
Which ffof ffthe fffollowing ffis ffmost fflikely ffconsidered ffan ffexample ffof ffmatrix ffpricing
ffwhen ffdetermining ffthe ffcost ffof ffdebt?
A. ffDebt-rating ffapproach ffonly.
B. ffYield-to-maturity ffapproach ffonly.
C. ffBoth ffthe ffyield-to-maturity ffand ffthe ffdebt-rating ffapproaches. ff- ffAnswer ffA ffis
ffcorrect. ff
The ffdebt-rating ffapproach ffis ffan ffexample ffof ffmatrix ffpricing.
All ffelse ffbeing ffequal, fffinancing ffshort-term ffassets ffby ffissuing fflong-term ffdebt ffmost
fflikely ffincreases:
A. ffdefault ffrisk ffonly.
B. ffrollover ffrisk ffonly.
C. ffboth ffdefault ffrisk ffand ffrollover ffrisk. ff- ffAnswer ffA ffis ffcorrect ff
because ff"a ffcompany fffinancing ffshort-term ffassets ffwith fflong-term fffinancing ffbeyond
ffthe ffterm ffneeded fffaces ffthe ffrisk ffthat ffthe ffcompany ffoverpays ffin fffinancing ffcost.
ffAsset ffliability ffmisalignment ffincreases ffthe ffrisk ffof ffdefault ffand ffcost ffof ffcapital fffor
ffcompanies ffas ffcapital ffsuppliers ffdemand ffhigher ffreturns ffin ffcompensation."
Increasing ffthe fffinancial ffleverage ffof ffa ffcompany ffmost fflikely ffresults ffin:
A. ffreduced ffdownside ffrisk fffor ffbondholders.
B. fflimited ffupside ffpotential fffor ffshareholders.
C. ffa ffdeteriorated ffrisk-return ffprofile fffor ffbondholders. ff- ffAnswer ffC ffis ffcorrect ff
