CFA LEVEL 1 MOCK EXAM 14: MOCK EXAM
B SESSION 2 QUESTIONS WITH COMPLETE
SOLUTIONS!!
1 of 90
Term
An analyst gathers the following information about a company's
earnings:
*Retention rate = 40%
*Growth rate = 1%
According to the Gordon growth model, if an investor's required return
is 6%, the justified forward P/E is:
A. 8.
,B. 10.
C. 12.
Give this one a try later!
B. 11.3.
(Look at study guide)
Correct because the justified forward P/E can be calculated aswhere p
is the dividend payout ratio, r is the required rate of return and g is
the dividend growth rate. By definition earnings retention rate = (1 -
Dividend payout ratio). It follows that p = 1 - earnings retention rate =
1 - 0.55 = 0.45. The dividend growth rate is: g = earnings retention
rate × ROE = 0.55 × 0.2 = 0.11. Thus, the justified forward P/E is p / (r -
g) = 0.45 / (0.15 - 0.11) = 11.25.
B. 5.6
(Look at study guide)
Correct because the Macaulay and modified durations for the portfolio
are calculated as the weighted average of the statistics for the individual
bonds. The shares of overall portfolio market value are the weights.
Portfolio Dur = (MV1/PMV)xDur1 + (MV2/PMV)xDur2
= (770,000/1,620,000) x 3 + (850,000/1,620,000) x 8
= 1.4259 + 4.1975 = 5.6234 ≈ 5.6.
B. 4.8%.
Correct because the sustainable growth rate = retention rate × ROE,
where retention rate = (1 - payout ratio), and the payout ratio is the
percentage of earnings that the company pays out as dividends to
shareholders, or (EPS - DPS)
/ EPS, and using the DuPont analysis ROE = net profit margin × total
asset turnover × leverage. The retention rate = 1 - (0..15) = 1 - 0.667
= 0.3333. ROE = 8% × 1.5 × 1.2 = 0.144. Substituting into the sustainable
growth rate formula: 0.3333
× 0.144 = 0.04799 ≈ 4.8%.
, C. 12
Correct because the dividend payout ratio = (1 ‒ earnings
retention rate) = (1 - 0.40) = 0.6. The justified forward P/E is:
p/(r - g) where p = dividend payout ratio, r = required rate of return
and g = sustainable growth rate, therefore P/E = 0.6/ (0.06 - 0.01) =
0.6/0.05 = 12.
Equity Valuation: Concepts and Basic Tools
explain the rationale for using price multiples to value equity,
how the price to earnings multiple relates to fundamentals, and
the use of multiples based on comparables
Don't know?
2 of 90
Term
An investor holding a short position in equities is most
likely exposed to:
A. limited gains and unlimited losses.
B.unlimited gains and limited losses.
C. unlimited gains and unlimited losses.
Give this one a try later!
If Investor 1 has a lower risk aversion coefficient than Investor 2, will
Investor 2's optimal portfolio have a higher expected return on the
capital allocation line?
A. Yes
, B.No because Investor 2 has a lower risk tolerance
C. No because Investor 2 has a higher risk tolerance
A. limited gains and unlimited losses.
Correct because short sellers create short positions in securities
by borrowing securities from security lenders who are long
holders. The potential gains on a short position are limited to no
more than 100 percent whereas the potential losses are
unbounded.
A. an initial company research report only.
Correct because it is only part of the company research report element
"Industry Overview & Competitive Positioning" which is not listed
amongst the five elements for the subsequent company research
report: 1.) Front Matter, 2.) Recommendation, 3.) Analysis of New
Information, 4.) Valuation and 5.) Risks.
C. $483.60.
Correct because the value or "payoff to the call buyer" at expiration is cT
= Max(0,ST - X) where X is the strike price, ST is the price of the
underlying at expiration. Given the information in the stem we get
$33.60 = Max(0,ST - $450). Hence, ST = $450 + $33.60 = $483.60.
Forward Commitment and Contingent Claim Features and Instruments
determine the value at expiration and profit from a long or a short
position in a call or put option
Don't know?
3 of 90
Term
B SESSION 2 QUESTIONS WITH COMPLETE
SOLUTIONS!!
1 of 90
Term
An analyst gathers the following information about a company's
earnings:
*Retention rate = 40%
*Growth rate = 1%
According to the Gordon growth model, if an investor's required return
is 6%, the justified forward P/E is:
A. 8.
,B. 10.
C. 12.
Give this one a try later!
B. 11.3.
(Look at study guide)
Correct because the justified forward P/E can be calculated aswhere p
is the dividend payout ratio, r is the required rate of return and g is
the dividend growth rate. By definition earnings retention rate = (1 -
Dividend payout ratio). It follows that p = 1 - earnings retention rate =
1 - 0.55 = 0.45. The dividend growth rate is: g = earnings retention
rate × ROE = 0.55 × 0.2 = 0.11. Thus, the justified forward P/E is p / (r -
g) = 0.45 / (0.15 - 0.11) = 11.25.
B. 5.6
(Look at study guide)
Correct because the Macaulay and modified durations for the portfolio
are calculated as the weighted average of the statistics for the individual
bonds. The shares of overall portfolio market value are the weights.
Portfolio Dur = (MV1/PMV)xDur1 + (MV2/PMV)xDur2
= (770,000/1,620,000) x 3 + (850,000/1,620,000) x 8
= 1.4259 + 4.1975 = 5.6234 ≈ 5.6.
B. 4.8%.
Correct because the sustainable growth rate = retention rate × ROE,
where retention rate = (1 - payout ratio), and the payout ratio is the
percentage of earnings that the company pays out as dividends to
shareholders, or (EPS - DPS)
/ EPS, and using the DuPont analysis ROE = net profit margin × total
asset turnover × leverage. The retention rate = 1 - (0..15) = 1 - 0.667
= 0.3333. ROE = 8% × 1.5 × 1.2 = 0.144. Substituting into the sustainable
growth rate formula: 0.3333
× 0.144 = 0.04799 ≈ 4.8%.
, C. 12
Correct because the dividend payout ratio = (1 ‒ earnings
retention rate) = (1 - 0.40) = 0.6. The justified forward P/E is:
p/(r - g) where p = dividend payout ratio, r = required rate of return
and g = sustainable growth rate, therefore P/E = 0.6/ (0.06 - 0.01) =
0.6/0.05 = 12.
Equity Valuation: Concepts and Basic Tools
explain the rationale for using price multiples to value equity,
how the price to earnings multiple relates to fundamentals, and
the use of multiples based on comparables
Don't know?
2 of 90
Term
An investor holding a short position in equities is most
likely exposed to:
A. limited gains and unlimited losses.
B.unlimited gains and limited losses.
C. unlimited gains and unlimited losses.
Give this one a try later!
If Investor 1 has a lower risk aversion coefficient than Investor 2, will
Investor 2's optimal portfolio have a higher expected return on the
capital allocation line?
A. Yes
, B.No because Investor 2 has a lower risk tolerance
C. No because Investor 2 has a higher risk tolerance
A. limited gains and unlimited losses.
Correct because short sellers create short positions in securities
by borrowing securities from security lenders who are long
holders. The potential gains on a short position are limited to no
more than 100 percent whereas the potential losses are
unbounded.
A. an initial company research report only.
Correct because it is only part of the company research report element
"Industry Overview & Competitive Positioning" which is not listed
amongst the five elements for the subsequent company research
report: 1.) Front Matter, 2.) Recommendation, 3.) Analysis of New
Information, 4.) Valuation and 5.) Risks.
C. $483.60.
Correct because the value or "payoff to the call buyer" at expiration is cT
= Max(0,ST - X) where X is the strike price, ST is the price of the
underlying at expiration. Given the information in the stem we get
$33.60 = Max(0,ST - $450). Hence, ST = $450 + $33.60 = $483.60.
Forward Commitment and Contingent Claim Features and Instruments
determine the value at expiration and profit from a long or a short
position in a call or put option
Don't know?
3 of 90
Term
