Mock Questions - Mock Exam 2022 #2 - Second Session

(Corporate Finance, Equity, Fixed Income, Derivatives,

Alternative Investments & Portfolio Management)
Q.1 T urkish Gold is planning a new project. T he cost to build the new mine is $1.1 million (paid at the
end of the first year) and the mine should bring cash inflows of $510,000 over the next four years
(year 2 to 5). T he cost to close down the mine over the following year is going to be $220,000. T he
minimum price for this land if T urkish Gold wishes to sell it now, given a 12% required rate of return
is closest to:

A. $289,447
B. $324,214
C. $400,936

Q.2 A company plans to invest $14.3 million in a project, which is expected to generate $3.7 million
per year in each of the next 7 years. T he company's opportunity cost of capital is 8%. T he project's
NPV is closest to:

A. $4,343,123.10.
B. $4,963,569.20.
C. $19,263,569.22.

Q.3 Company A is launching a new product with a large marketing campaign that will cost $2 million.
To finance the project, the CEO has received the following information from the finance department:

If the CEO decides to sell 25 million dollars in new debt and to issue 14 million dollars in common
stock, the marginal weighted average cost of capital (WACC) should be closest to:

A. 11.30%
B. 13.32%
C. 15.55%

Q.4 Using Company A’s income statement, its degree of operating leverage is closest to:

A. 1.08
B. 1.27
C. 1.36

Q.5 Which of the following is most likely a combination of sales risk and operating risk?

A. Business risk.
B. Financial risk.
C. Operating risk.

Q.6 Which of the following statements is most likely accurate?

A. If the net present value (NPV) is greater than 0, its profitability index (PI) should be 0.
B. If the net present value (NPV) is less than 0, its profitability index (PI) should be less than
1.
C. If the internal rate of return (IRR) of a project is 0%, its NPV, using a discount rate k
greater than 0, will still be

Q.7 A company has the following:

T he degree of financial leverage is closest to:

A. 1
B. 1.25
C. 1.5

Q.8 Sydney Cavaliers’ 7% semi-annual coupon 5-year note is trading at $96.7. If its marginal tax rate
is 40%, then the company’s after-tax cost of debt capital is closest to:

A. 2.34%
B. 4.20%
C. 4.70%

Q.9 Birmu Corporation has the following:

Debt/equity ratio of 0.5

Birmu is a constant growth firm that just paid a dividend of $3.25
Stocks sell for $48.25 per share, and analysts predict a growth rate of 5%
Bonds are currently yielding 7%
Marginal tax rate is 30%

Birmu’s after-tax cost of capital is closest to:

A. 7.27%
B. 9.68%
C. 10.38%

Q.10 Prime Property Limited has one class of preferred stock outstanding, a $2.15 cumulative
preferred stock. T here are 423,415 shares outstanding. Calculate an estimate of the company’s cost
of preferred equity, given that the price of this stock stands at $60.

A. 3.45%
B. 3.58%
C. 4.25%

Q.11 Which of the following is most likely a sign of a bad corporate governance structure?

A. T he chief executive position is also the chair position on the company’s board.
B. Independent board members are allowed to meet shareholders.
C. Independent board members comprise a majority proportion on the company’s board.

Q.12 T he costs of a recently completed marketing study for a new product are best described as:

A. Sunk costs.
B. Opportunity costs.
C. Externalities.

Q.13 A degree of operating leverage (DOL) ratio of 3.34 suggests that a 10% increase in sales will
result in:

A. A 33.4% increase in net income.

B. A 33.4% increase in operating income.
C. A 33.4% decrease in operating income.

Q.14 JavaTech’s capital structure is as follows:

T he company’s weighted average cost of capital is closest

A. 10.96%
B. 11.80%
C. 12.13%

Q.15 T he contribution margin per unit for product A is $20, and the firm’s fixed cost of production
up to 500,000 units is $400,000. T he degree of operating leverage (DOL) at 300,000 units is closest
to:

A. 1.04
B. 1.07
C. 1.10

Q.16 Project Red and Project Blue are two mutually exclusive projects whose projected cash flows
are given in the following table:

Using a required rate of return of 8% on both projects, the project(s) that will most likely increase
value is/are:
A. Project Red.
B. Project Blue.
C. Project Red and Project Blue.

Q.17 Which of the following is most likely a primary source of liquidity for a firm?

A. Lines of credit.
B. Liquidating assets.
C. Negotiating debt contracts.

Q.18 Which of these is least likely a secondary source of liquidity?

A. Filing for bankruptcy.

B. Secondary equity offering.
C. Renegotiating debt contracts.

A. $35.60
B. $111.25
C. $137.43

Q.20 Last year, the S&P 500 has the following returns: 6% in the first quarter, -8% in the second
quarter, 9% in the third, and 2% in the last quarter of the year. What is the S&P 500’s yearly return?

A. 8.42%
B. 27.27%
C. 9.25%

Q.21 A price-weighted index is composed of 4 stocks. Stock A trades at $21, stock B at $142, stock C
at $34, and stock D at $602. One year later, stock A is now worth $24, stock B is $210, stock C is
$12, and stock D is $610. T he total return for this index is closest to:

A. -8.01%
B. 8.01%
C. 7.14%

Q.22 Given this information about Company A:

T he value of the company’s preferred stock is closest to:

A. $44
B. $80
C. $120

Q.23 An investor gathered the following data about Company ABC:

T he value per share of this stock in 2015 is closest to:

A. $45.29
B. $58.81
C. $113.21

Q.24 Arbitrage will most likely happen in security markets:

A. those are efficient.

B. without regulations limiting short selling.
C. with low information acquisition costs.

Q.25 Axis Adventures will not pay dividends until three years from now. Starting in year three,
management believes dividends of $1.50 per share will be paid, the retention ratio will be 35%, and
the return on equity (ROE) will be 12%. If investors want a minimum return of 11% on shares of
Axis Adventures, the value of the stock should be closest to:

A. $11.07
B. $17.90
C. $22.06

Q.26 Given that a company’s common shares do not pay dividends, which of its securities will most
likely offer the lowest expected return to investors?

A. Common shares.
B. Putable preferred shares.
C. Callable preferred shares.

Q.27 Jessica Yang opens a margin account with an initial deposit of €5,000 to buy 500 shares of a bank
stock at €22/share on margin. Her broker stated that her account requires a maintenance margin of
30%. Ignoring commissions and interests, calculate the margin call price.

A. €3.56
B. € 4.86
C. €17.30

Q.28 David Smith owns 100 shares of Sprint Craft Inc., and the firm is going to elect 10 board
directors. Under statutory voting, Smith can most likely cast:

A. 1,000 votes for only one member in any desired proportion.

B. A maximum of 100 votes for each member of the board.
C. 100 votes and can spread them across candidates in any proportion.

Q.29 Which of the following derivatives are least likely traded through an exchange?

A. Futures.
B. Options.
C. Forwards.
Q.30 Here is a comparative analysis of three company’s price-to-earnings ratios:

Which of these companies is most likely undervalued considering that they are all operating in the
same sector?

A. Company A.
B. Company B.
C. Company C.

Q.31 An investor buys 500 shares of a non-dividend-paying stock for $152. T he initial margin
requirement is 30%, and the maintenance margin is 20%. After one year, the investor sells the stock
for $178 per share. T he price at which the investor would receive a margin call is closest to:

A. $133.
B. $152.
C. $156.

Q.32 Which of the following statements is most likely correct regarding the weak-form efficient
market hypothesis?

A. Security prices fully reflect all past market data.

B. Security prices fully reflect all types of information.
C. Security prices reflect all publicly known and available information.

Q.33 A substantial need for investment plus a high risk of failure are most likely characteristics of
which industry lifecycle phase?

A. Growth phase.
B. Shakeout phase.
C. Embryonic phase.

Q.34 An analyst calculates that shares of ABC are trading at a lower price than their intrinsic value.
T his analyst would most likely conclude that ABC is:

A. Overvalued.
B. Fairly Valued.
C. Undervalued.

Q.35 Collin Company’s next year's EPS estimate is €2.5 per share. T he return on equity is 10%. If
the company’s dividend payout ratio is 60% and the investors’ required rate of return is 9%, then the
intrinsic value of Collin Company is closest to:

A. € 30.00
B. € 33.40
C. € 39.65

Q.36 A firm will start paying dividends four years from now, and after that, the dividend is expected to
grow at the rate of 7% into perpetuity. T he expected dividend in year 4 is $6. If the market’s
required rate of return for the stock is 12%, the intrinsic value of the stock is closest to:

A. $80.08
B. $85.41
C. $128.40
Q.37 Company ABC has total assets of $6.2 million with liabilities of $2.2 million. If its shares are
trading for $17.78, and there are 450,000 outstanding shares in the markets, then ABC’s book value is
closest to:

A. $4 million.
B. $8 million.
C. $5million.

Q.38 Leopold Bank is currently trading at $53 after declaring a dividend of $3.10 per share for next
year with an expected growth of 5%. If the investors’ required rate of return is 11%, Leopold Bank
is most likely

A. overvalued.
B. fairly priced.
C. undervalued.

Q.39 A US investor purchases an unsecured bond underwritten by an international syndicate and

denominated in Canadian dollars. T he type of bond described is most likely a: /p>

A. Eurobond.
B. foreign bond.
C. domestic bond.

Q.40 An 8% coupon rate 5-year bond has a maturity (par) value of $1,000. If the discount rate is 5%
and interest is paid semi-annually, then the value of the bond is closest to:

A. $1,129.88
B. $1,131.28
C. $1,481.36

Q.41 Which of these statements is most likely incorrect?

A. In most countries, coupons are taxed at the ordinary income rate.

B. Capital tax is always the same for long-term and short-term investments.
C. An original discount provision is a tax provision related to bonds issued at a discount to par
value.

Q.42 An investor is holding an inverse floating rate note. If interest rates decrease, the periodic
coupons paid to the investor will most likely :

A. increase.
B. decrease.
C. remain the same.

Q.43 A putable bond is a bond that gives:

A. the issuer the right to redeem all or part of the bond before the maturity date.
B. the bondholder the right to exchange the bond for a specific number of common shares.
C. the bondholder the right to sell the bond back to the issuer at a predetermined price
before maturity.

Q.44 A 10-year bond was issued at par with a 6% interest rate, paid yearly. Which of the following is
closest to this bond's present value 5 years later if the required rate of return is now 5.5%?

A. $1,021
B. $1,031
C. $1,038
© 2014-2022 AnalystPrep.
15
Q.45 T he following forward rates were calculated from a yield curve:
T he five-year spot rate is closest to:

A. 0.70%
B. 0.88%
C. 1.06%

Q.46 T he current price of a bond is $1054.When the yield-to-maturity (YT M) increases by 1%, the
price of the bond goes down to $1023.When the yield-to-maturity (YT M) decreases by 1%, the price
of the bond reaches $1084.What is the modified duration of the bond?

A. 0.35
B. 5.78
C. 2.89

Q.47 All else being equal, a callable bond is more beneficial to the:

A. issuer
B. investor.
C. neither the investor nor the issuer.

Q.48 T he bond-equivalent yield (BEY) spot rates for U.S. T reasury yields are as follows:

On a BEY basis, the 6-month forward rate 18 months from now is closest to:

A. 3.84%
B. 4.25%
C. 5.56%

Q.49 Should an investor buy a 10-year bond priced at $1,085 with a 10% semi-annual coupon if the
comparable bond yield is 9%?

A. No, the bond is undervalued by $20.

B. No, the bond is overvalued by $20.
C. Yes, the bond is undervalued by $20.

Q.50 All else being equal, which of these is most likely to have a lower yield?

A. 2-year bond.
B. 5-year bond.
C. 10-year bond.

Q.51 In which of the following bond-issuing mechanisms does an investment bank have the highest
risk?

A. Auction.
B. Best effort offering.
C. Underwritten offering.

Q.52 Which of the following is the highest ranked debt?

A. First lien loan.

B. Senior unsecured.
C. Senior subordinated.

Q.53 A U.S-based firm has a position in a European bond with a par value of €50 million. For a 1 basis
point increase in yield, the market value of the investment changes to €57.85 million, and for a 1
basis point decrease in yield, the investment value changes to €58.75 million. T he price value of
basis point for the investment is closest to:

A. 0.016
B. 0.097
C. 0.450

Q.54 An investor purchases a 2-year zero-coupon bond with a par value of $1,000 at $955. T he
implied interest earned on the bond is closest to:

A. $0
B. $21
C. $45

Q.55 All else being equal, the bond exposed to the greatest level of reinvestment risk is the one
selling at:

A. Par.
B. A discount.
C. A premium.

Q.56 ABC Corp has issued many types of debt over the past couple of years. T he rating on their debt
is A-. Rating agencies have chosen this rating based on:

A. A pro-rata basis.
B. T he latest debt issued.
C. T he senior unsecured debt.

Q.57 All else being equal, an investor will most likely prefer a bond that is

A. Less Convex.
B. More convex.
C. Less or more convex depending on the investor's overall portfolio.

Q.58 A bond investor has an investment horizon of 6 years. He recently calculated that the Macaulay
duration of his portfolio is 9. What is the duration gap?

A. 0.67
B. 1.5
C. 3

Q.59 AlphaC Fund enters into an equity swap with an investment bank. AlphaC agrees to pay the
return on the Emerging index and receive the return on the North American index. T he swap’s
notional principal is $100 million.
T he net amount AlphaC has to receive/pay after 3 months is closest to:

A. Pay $4.53 million.

B. Receive $14.68 million.
C. Pay $19.21 million.

Q.60 Consider an April USD 190 put on the stock of Facebook. If FB is currently worth USD 175,
which of the following statements is most likely correct?

A. T he option is currently in the money.

B. T he option is currently out of the money.
C. T he option is currently at the money.

Q.61 If B.C. Bank buys a swaption, it has:

A. T he obligation to enter into a swap if the option is not exercised.

B. T he right to enter into a swap agreement if the option is exercised.
C. T he obligation to make a payment to the counterparty if the swaption is not exercised.

Q.62 An investor would face the greatest risk of default by buying:

A. A cash-settled forward contract.

B. A cash-settled futures contract on a highly volatile commodity.
C. A future commodity contract with a physical delivery clause.

Q.63 T he intrinsic value of an option is always zero:

A. at the expiration date.

B. when the option is out of the money.
C. when the value of the underlying asset is 0

Q.64 A type of credit derivative in which the credit protection buyer makes a series of regularly
scheduled payments to the credit protection seller while the seller makes no payment until a credit
event occurs is categorized as a

A. Total return swap.

B. Credit linked note.
C. Credit default swap.

Q.65 Over-the-counter options are

A. Exposed to default risk.

B. Standardized transactions.
C. Listed on the NYSE.

Q.66 T he value of a forward contract at expiration is the value of the asset:

A. plus the forward price.

B. minus the forward price.
C. minus the present value of the forward price

Q.67 Derivative prices least likely depend on:

A. T he risk-free rate.
B. T he investor’s risk aversion.
C. Characteristics of the underlying.

Q.68 A synthetic put is most likely equivalent to:

A. A long call, a short underlying asset, and a long bond.

B. A short call, a long underlying asset, and a short bond.
C. A long call, a short underlying asset, and a short bond.

Q.69 A Global macro hedge fund invests into:

A. Start-ups and small- and medium-sized enterprises with strong growth potential.
B. Firms with poor management, high borrowing costs, undervalued stock prices, and
inefficient structures.
C. Various equity, fixed income, currency, and futures markets - primarily on various
countries overall economic and political views.

Q.70 Graco Fund of Funds (FOF) invests $50 million each in the hedge funds, Lexor and Polygon.
Graco FOF quotes a ‘2 and 20’ free structure. T he management fees are calculated based on asset
values at year-end, while incentive fees are calculated independently of management fees. At yearend,
the value of the investment in Lexor and Polygon was $45 million and $62 million, respectively.
T he investor’s net-of-fees return is closest to:

A. 3.46%
B. 3.89%
C. 7.00%

Q.71 Which of the following is least likely a characteristic that makes a firm attractive for a
leveraged buyout?

A. High leverage.
B. Poor management.
C. Strong and consistent cash flows.

Q.72 A county wants to build a state-of-the-art maximum correctional facility. T he county is most
likely engaging in what type of a project?

A. Greenfield project.
B. Brownfield project.
C. Construction project.

Q.73 Which of the following statement is most likely true about the behavior of investors in
bubbles?

A. Overconfident investors lead to an increase in market volatility.

B. Rational investors expect a future crash and know the exact timings.
C. Regret aversion discourages investors from participating in a bubble as they believe the
value of stocks is likely to depreciate, resulting in losses.

Q.74 An investor would least likely invest in commodities to

A. Hedge against unexpected inflation.

B. Increase his portfolio’s return.
C. Diversify his portfolio.

Q.75 Which of the following statements is an advantage of investing in hedge funds through a fund of
funds? A fund of funds provides:

A. Lower management fees.

B. An increase in diversification, resulting in risk reduction.
C. An increase in diversification, resulting in return enhancement.
Q.76 Alternative investments, when compared to traditional investments, have higher:

A. Liquidity.
B. T ransparency.
C. Management fees.

Q.77 Which of the following is least likely a private equity strategy?

A. Venture Capital
B. Leveraged buyouts.
C. Mezzanine financing.

Q.78 During periods of financial crisis, the correlation between hedge funds and financial market
performances most likely

A. Increases.
B. Decreases.
C. Equals 0.

Q.79 T he following table presents information about XYZ hedge fund.

Assuming that the incentive fee is calculated independently of the management fee, and the
management fee is calculated based on the value at the end of the year. An investor’s net-of-fees
return is most likely

A. 12.6%
B. 15.6%
C. 17.6%

Q.80 Alternative data refers to data:

A. with a high degree of organization and commonly stored in databases.

B. used by investors for investment analysis that is not within their traditional sources
C. used for investment analysis arising from external sources, including financial statements
and management presentations of comparable entities.

Q.81 T he beta of a fund is 1.4. If the expected return on T-bills is 3% and the standard deviation of
the market is 9%, then the covariance between the market portfolio and the fund is closest to:

A. 0.0013
B. 0.0113
C. 0.1260

Q.82 As mandated by regulators worldwide, the global investment industry has undertaken major
steps in stress testing and risk assessment that involve the analysis of vast amounts of quantitative
and qualitative risk data. Which of the following statements is most accurate?

A. Big Data cannot help identify weakening market conditions and adverse trends in advance.
B. Required data include information on the firm's liquidity, balance sheet positions and credit
exposures.
C. T here is decreasing interest in monitoring risk in real-time because of the advances in
artificial intelligence (AI).

Q.83 Stock A’s expected return is 5%, and its standard deviation is 12%. Stock B’s expected return is
12%, and its standard deviation is 17%. What is the standard deviation of a portfolio composed of 40%
stock A and 60% stock B, given that the correlation between the two stocks is 0.5?

A. 1.76%
B. 13.27%
C. 39.04%

Q.84 Given the CAPM model, Company A is expected to return 10% to its investors. T he expected
return of the market is 8%, and the risk-free rate is 3%. Company A’s beta is closest to:

A. 0.88
B. 0.71
C. 1.40

Q.85 An analyst has recently read a research paper developed at a renowned university that says that
the prices of derivatives are also sensitive to the changes in interest rates. If the analyst is
interested in measuring such changes, then the best metric he should use is:

A. Rho.
B. Delta.
C. Gamma.

Q.86 A head and shoulders pattern is a:

A. reversal pattern.
B. resulting pattern.
C. continuation pattern.

Q.87 Portfolio ABC has a beta of 1.6 and generated a return of 21%. If the risk-free rate is 2% and
the market premium is 10%, Jensen’s alpha for this portfolio is closest to:

A. 2.
B. 3.
C. 4.

Q.88 T wo stocks in different industries will create a perfectly diversified portfolio if the correlation
coefficient is:

A. -1
B. 0
C. 1

Q.89 Which of the following is not considered a constraint when preparing an investment policy
statement?

A. Risk tolerance.
B. Liquidity needs.
C. Legal and regulatory factors.

Q.90 Which of the following pooled investment share prices is most likely to be significantly
different from its net asset value (NAV) per share?

A. Share price from an open-end fund.

B. Share price from a closed-end fund.
C. Share price from an exchange-traded fund.