CFA Level I Mock Exam A - Afternoon Session
Corporate Issuers
3. A corporate takeover in which shareholders are persuaded to vote for a group seeking a
controlling position on the board of directors best describes a:
A. tender offer
B. proxy contest
C. hostile takeover
B is correct because "[i]n a proxy contest, shareholders are persuaded to vote for a group
seeking a controlling position on a company's board of directors."
A is incorrect because "[m]anagerial teams can also be displaced through a tender offer,
which involves shareholders selling their interests directly to the group seeking to gain
control." A tender offer does not involve a vote.
C is incorrect because "a hostile takeover is an attempt by one entity to acquire a
company without the consent of the company's management." A hostile takeover does not
involve a vote.
Introduction to Corporate Governance and Other ESG Considerations
Describe corporate governance and mechanisms to manage stakeholder relationships and
mitigate associated risks
8. A company borrows $200 million for three years from a syndicate of banks. The
company pledges receivables as collateral and the loan allows the borrower to draw down
and repay amounts periodically. This short-term financing structure best describes a:
A. revolver
B. regular credit line
C. factoring agreement
A is correct because "[t]he main types of short-term bank financing include uncommitted
bank lines of credit, committed bank lines of credit and revolving credit agreements, or
revolvers. The latter two types can be unsecured or secured, depending on the company’s
financial strength and the general credit situation, which can vary from country to
country." "Revolving credit agreements... involve formal legal agreements that define the
aspects of the agreement... Revolvers differ in that they are in effect for multiple years
(e.g., three to five years) and can have optional medium-term loan features. In addition,
they are often used for much larger amounts than a regular line, and these larger amounts
,
are spread out among more than one bank. With revolvers, borrowers draw down and pay
back amounts periodically."
B is incorrect because "[c]ommitted (regular) lines of credit are the form of bank line of
credit that most companies refer to as regular lines of credit...These lines of credit are in
effect for 364 days, less than a full year...Regular lines are unsecured and are pre-payable
without any penalties."
C is incorrect because "in a factoring arrangement, the company shifts the credit granting
and collection process to the lender or factor." In a revolver, the borrower only uses
receivables as collateral for the loan and remains responsible for the management of these
accounts.
Working Capital & Liquidity
Compare methods to finance working capital
9. Which of the following is most likely a characteristic of a prudent short-term borrowing
strategy?
A. Maintaining a sole lending source when the borrowing need is large
B. Scheduling maturities on the same date to ensure repayment efficiency
C. Holding marketable securities for quick sale to supplement funding needs
C is correct because this is one source of short-term funding. "Borrowers should diversify
to have adequate alternatives and not be too reliant on one lender or form of
lending ...Borrowers should not stay too long with just one source or with the lowest rates
...Having marketable securities on hand that can be quickly sold to meet short-term needs
is also helpful."
A is incorrect because "[b]orrowers should diversify to have adequate alternatives and
not be too reliant on one lender or form of lending if the amount of their borrowing is
very large... Borrowers should not stay too long with just one source or with the lowest
rates."
B is incorrect because "there should not be any “big” days, when significant amounts of
loans mature. To effectively manage loan maturities, borrowers need active maturity
management, awareness of the market conditions (e.g., knowing when the market or
certain maturities should be avoided), and the ability to pre-pay loans when unexpected
cash receipts occur."
Working Capital & Liquidity
,
Explain expected relations between working capital, liquidity, and short-term funding
needs (NEW)
16. If a company's variable costs increase relative to its fixed costs, the operating risk:
A. decreases.
B. remains the same.
C. increases
A is correct because variable costs are increasing relative to fixed costs and this makes
the operating income less sensitive to changes in units sold, lowering the operating risk.
"The greater the use of fixed, relative to variable, operating costs, the more sensitive
operating income is to changes in units sold and, therefore, the more operating risk."
B is incorrect because "[t]he greater the use of fixed, relative to variable, operating costs,
the more sensitive operating income is to changes in units sold and, therefore, the more
operating risk."
C is incorrect because "[t]he greater the use of fixed, relative to variable, operating costs,
the more sensitive operating income is to changes in units sold and, therefore, the more
operating risk."
Measures of Leverage
Define and explain leverage, business risk, sales risk, operating risk, and financial risk
and classify a risk
Corporate Issuers
3. A corporate takeover in which shareholders are persuaded to vote for a group seeking a
controlling position on the board of directors best describes a:
A. tender offer
B. proxy contest
C. hostile takeover
B is correct because "[i]n a proxy contest, shareholders are persuaded to vote for a group
seeking a controlling position on a company's board of directors."
A is incorrect because "[m]anagerial teams can also be displaced through a tender offer,
which involves shareholders selling their interests directly to the group seeking to gain
control." A tender offer does not involve a vote.
C is incorrect because "a hostile takeover is an attempt by one entity to acquire a
company without the consent of the company's management." A hostile takeover does not
involve a vote.
Introduction to Corporate Governance and Other ESG Considerations
Describe corporate governance and mechanisms to manage stakeholder relationships and
mitigate associated risks
8. A company borrows $200 million for three years from a syndicate of banks. The
company pledges receivables as collateral and the loan allows the borrower to draw down
and repay amounts periodically. This short-term financing structure best describes a:
A. revolver
B. regular credit line
C. factoring agreement
A is correct because "[t]he main types of short-term bank financing include uncommitted
bank lines of credit, committed bank lines of credit and revolving credit agreements, or
revolvers. The latter two types can be unsecured or secured, depending on the company’s
financial strength and the general credit situation, which can vary from country to
country." "Revolving credit agreements... involve formal legal agreements that define the
aspects of the agreement... Revolvers differ in that they are in effect for multiple years
(e.g., three to five years) and can have optional medium-term loan features. In addition,
they are often used for much larger amounts than a regular line, and these larger amounts
,
are spread out among more than one bank. With revolvers, borrowers draw down and pay
back amounts periodically."
B is incorrect because "[c]ommitted (regular) lines of credit are the form of bank line of
credit that most companies refer to as regular lines of credit...These lines of credit are in
effect for 364 days, less than a full year...Regular lines are unsecured and are pre-payable
without any penalties."
C is incorrect because "in a factoring arrangement, the company shifts the credit granting
and collection process to the lender or factor." In a revolver, the borrower only uses
receivables as collateral for the loan and remains responsible for the management of these
accounts.
Working Capital & Liquidity
Compare methods to finance working capital
9. Which of the following is most likely a characteristic of a prudent short-term borrowing
strategy?
A. Maintaining a sole lending source when the borrowing need is large
B. Scheduling maturities on the same date to ensure repayment efficiency
C. Holding marketable securities for quick sale to supplement funding needs
C is correct because this is one source of short-term funding. "Borrowers should diversify
to have adequate alternatives and not be too reliant on one lender or form of
lending ...Borrowers should not stay too long with just one source or with the lowest rates
...Having marketable securities on hand that can be quickly sold to meet short-term needs
is also helpful."
A is incorrect because "[b]orrowers should diversify to have adequate alternatives and
not be too reliant on one lender or form of lending if the amount of their borrowing is
very large... Borrowers should not stay too long with just one source or with the lowest
rates."
B is incorrect because "there should not be any “big” days, when significant amounts of
loans mature. To effectively manage loan maturities, borrowers need active maturity
management, awareness of the market conditions (e.g., knowing when the market or
certain maturities should be avoided), and the ability to pre-pay loans when unexpected
cash receipts occur."
Working Capital & Liquidity
,
Explain expected relations between working capital, liquidity, and short-term funding
needs (NEW)
16. If a company's variable costs increase relative to its fixed costs, the operating risk:
A. decreases.
B. remains the same.
C. increases
A is correct because variable costs are increasing relative to fixed costs and this makes
the operating income less sensitive to changes in units sold, lowering the operating risk.
"The greater the use of fixed, relative to variable, operating costs, the more sensitive
operating income is to changes in units sold and, therefore, the more operating risk."
B is incorrect because "[t]he greater the use of fixed, relative to variable, operating costs,
the more sensitive operating income is to changes in units sold and, therefore, the more
operating risk."
C is incorrect because "[t]he greater the use of fixed, relative to variable, operating costs,
the more sensitive operating income is to changes in units sold and, therefore, the more
operating risk."
Measures of Leverage
Define and explain leverage, business risk, sales risk, operating risk, and financial risk
and classify a risk
