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CFA Mock Exam (a) Afternoon Session correctly answered to pass
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CFA Mock Exam (a) Afternoon SessionWhich of the following is most likely associated with poor corporate governance?
A. Reduction in exposure to regulatory actions
B. Increased control and compliance monitoring of corporate decisions
C. Management of a company to a lower risk profile relative to shareholder tolerance - correct answer
✔✔C is correct.
Poor governance can result in ineffective decision making. Management may make decisions that benefit
themselves at the cost of shareholders, such as taking less risk than is appropriate to create a more
stable environment. Managing the company at a lower risk profile than necessary based on
shareholders' tolerance is an example of ineffective decision making. Increased control and compliance
monitoring are usually the result of good corporate governance. A reduction in exposure to regulatory
actions would be the result of good, not poor, corporate governance.
When two mutually exclusive projects with conventional cash flows are being ranked, the net present
value (NPV) and internal rate of return (IRR) decision rules are most likely to conflict when the:
A. projects' investments are of different scale.
B. projects have multiple IRRs.
C. projects have similar timing of cash flows. - correct answer ✔✔A is correct.
Conflict between the NPV and IRR decision rules can arise when evaluating mutually exclusive projects
with conventional cash flows because 1) the scale of investments may differ and/or 2) the timing of the
cash flows may differ.
When computing the cash flows for a capital project, which of the following is least likely to be included?
A. Financing costs
B. Opportunity costs
C. Tax effects - correct answer ✔✔A is correct.
Financing costs are not included in a cash flow calculation but are considered in the calculation of the
discount rate.
Which action is most likely considered a secondary source of liquidity?
,A. Increasing the efficiency of cash flow management
B. Renegotiating current debt contracts to lower interest payments
C. Increasing the availability of bank lines of credit - correct answer ✔✔B is correct.
Renegotiating debt contracts is a secondary source of liquidity because it may affect the company's
operating and/or financial positions.
A is incorrect. Increasing cash flow management efficiency is a primary source of liquidity.
C is incorrect. Increasing bank lines of credit is a primary source of liquidity.
A company's short-term borrowing strategy is most likely influenced by:
A. the lender's size only.
B. the borrower's size only.
C both the lender's size and the borrower's size. - correct answer ✔✔C is correct
because a "borrower's size can dictate the options available. Larger companies can take advantage of
economies of scale to access commercial paper, banker's acceptances, and so on. The lender's size is also
an important criterion, because larger banks have higher house or legal lending limits." Therefore, both
the lender's size and the borrower's size are important factors that can influence a company's short-term
borrowing strategy.
Which of the following is most likely considered an example of matrix pricing when determining the cost
of debt?
A. Debt-rating approach only.
B. Yield-to-maturity approach only.
C. Both the yield-to-maturity and the debt-rating approaches. - correct answer ✔✔A is correct.
The debt-rating approach is an example of matrix pricing.
All else being equal, financing short-term assets by issuing long-term debt most likely increases:
A. default risk only.
B. rollover risk only.
C. both default risk and rollover risk. - correct answer ✔✔A is correct
, because "a company financing short-term assets with long-term financing beyond the term needed faces
the risk that the company overpays in financing cost. Asset liability misalignment increases the risk of
default and cost of capital for companies as capital suppliers demand higher returns in compensation."
Increasing the financial leverage of a company most likely results in:
A. reduced downside risk for bondholders.
B. limited upside potential for shareholders.
C. a deteriorated risk-return profile for bondholders. - correct answer ✔✔C is correct
because with higher degrees of financial leverage, "for a holder of debt to maturity, the return, or
upside, remains the face value of debt plus the coupon. However, downside risk for a debtholder
increases with higher leverage and the increased probability that the company will be unable to meet its
outstanding debt obligations." The risk-return profile for bondholders deteriorates as more debt is used.
Which of the following types of indexes is most appropriate as a model portfolio for a consumer goods
exchange-traded fund (ETF)?
A. Fundamentally weighted
B. Sector
C. Style - correct answer ✔✔B is correct.
Sector indexes represent and track different economic sectors—such as consumer goods, energy,
finance, health care, and technology—on a national, regional, or global basis. Sector indexes also serve
as model portfolios for sector-specific ETFs (e.g., for a consumer goods ETF).
Which of the following statements about the forms of market efficiency is least accurate? If the form of
market efficiency is:
A. weak, then investment strategies based on fundamental analysis could achieve abnormal returns.
B. semi-strong, then security prices fully reflect all past market data.
C. strong, then prices reflect only private information. - correct answer ✔✔C is correct.
If markets are strong-form efficient, prices reflect not only private information but also past market data
and public information. If markets are weak-form efficient, investment strategies based on fundamental
analysis of public information and past market data could achieve abnormal returns. The semi-strong-
form of market efficiency also encompasses the weak form. Therefore, security prices reflect not only
publicly known and available information but also all past market data.
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