CFA Level 1 Practice Question 81
James and Bailey were discussing about Inventory reporting in an inflationary environment. They made the following statements. How is correct? €‹
James: All else remaining the same, the inventory turnover ratio of a company that uses LIFO will be greater than the company that uses FIFO. However when it comes to working capital turn over ratio both FIFO and LIFO company will have same ratio
Bailey: If the taxes are zero then cash flow from operations of FIFO and LIFO company will be the same. However net profit margin for a LIFO company will be lower than FIFO company ir-respective of taxes.
a) Both of them are wrong
b) Both of them are right
c) Only Bailey is right
@Nirmal_Analyst
CFA Level 1 Practice Question 81
James and Bailey were discussing about Inventory reporting in an inflationary environment. They made the following statements. How is correct? €‹
James: All else remaining the same, the inventory turnover ratio of a company that uses LIFO will be greater than the company that uses FIFO. However when it comes to working capital turn over ratio both FIFO and LIFO company will have same ratio
Bailey: If the taxes are zero then cash flow from operations of FIFO and LIFO company will be the same. However net profit margin for a LIFO company will be lower than FIFO company ir-respective of taxes.
a) Both of them are wrong
b) Both of them are right
c) Only Bailey is right
Answer C: James Statement 1: We know that LIFO company's inventory will be lower and COGS will be higher. This makes Statement 1 correct.James Statement 2: WC = CA – CL; CL will not change. CA = Cash + inventory + other CA. LIFO co's cash will be higher (CFO is higher) and inventory will be lower. However they will not compensate each other. The higher cash will be to the extent of tax saving i.e (LIFO COGS – FIFO COGS) * tax rate. So in essence CA will be lower for LIFO co. this would makes net WC lower. WC Turnover ratio = Sales / Net WC. So, LIFO co will have higher WC turnover ratioBailey Statement 1: Is right. Bailey Statement 2: Is right. As COGS for LIFO is higher, the EBIT, EBT and Pat will be lower resulting in lower Net profit margin.
CFA Level 1 Practice Question 82
Agassi and Sampras were discussing about long lived assets and made the following statements. Who is correct?
Agassi: The US GAAP does not allow capitalizing intangible assets if they are created internally, except for software developed for internal use. If the tangible asset is received in exchange for another asset then the asset received should be capitalized ONLY at its fair value
Sampras: Long lived assets that are 'Held for sale' need to be checked for impairment at the time of reclassification. Post this if the fair value of assets increases then both US GAAP and IFRS allows recognizing gain equal to Fair Value – Carrying value.
a) Both are correct
b) Both are wrong
c) Only Sampras ins correct
@Nirmal_Analyst
CFA Level 1 Practice Question 82
Agassi and Sampras were discussing about long lived assets and made the following statements. Who is correct?
Agassi: The US GAAP does not allow capitalizing intangible assets if they are created internally, except for software developed for internal use. If the tangible asset is received in exchange for another asset then the asset received should be capitalized ONLY at its fair value
Sampras: Long lived assets that are 'Held for sale' need to be checked for impairment at the time of reclassification. Post this if the fair value of assets increases then both US GAAP and IFRS allows recognizing gain equal to Fair Value €“ Carrying value.
a) Both are correct
b) Both are wrong
c) Only Sampras ins correct
Answer B:Aggasi S1: Is correctAggasi S2: Is wrong. The asset exchange can be capitalized ta Fair value of the asset received or FV of asset given up or Book value of asset given upSampras S1: Is correctSampras S2: HFS assets gain are allowed only to the extent of loss recognized earlier. 'Any' amount of gain cant be recognized.
CFA Level 1 Practice Question 83
Below are the excerpts from Kuko Ltd. The analyst does an analysis of the statement and finds that the deferred tax asset is because of company's last year loss and he also believes that company is not expected make profits for the foreseeable future to setoff this carry forward. He also notices that there is a deferred tax liability which arose because difference in depreciation rate of a machinery. The machine which has a life of 20 years has completed just 1 year of life. For analytical purpose the Financial leverage that the analyst should calculate is closest to
Share holder equity: 3500
Borrowed Liabilities: 1500
Deferred tax Liabilities: 400
Total Liabilities: 5400
Net Fixed Assets: 4600
Current Assets: 200
Deferred tax assets: 600
Total Assets: 4400
a) 1.54X
b) 1.45X
c) 1.38X
@Nirmal_Analyst
CFA Level 1 Practice Question 83
Below are the excerpts from Kuko Ltd. The analyst does an analysis of the statement and finds that the deferred tax asset is because of company's last year loss and he also believes that company is not expected make profits for the foreseeable future to setoff this carry forward. He also notices that there is a deferred tax liability which arose because difference in depreciation rate of a machinery. The machine which has a life of 20 years has completed just 1 year of life. For analytical purpose the Financial leverage that the analyst should calculate is closest to
Share holder equity: 3500
Borrowed Liabilities: 1500
Deferred tax Liabilities: 400
Total Liabilities: 5400
Net Fixed Assets: 4600
Current Assets: 200
Deferred tax assets: 600
Total Assets: 4400
a) 1.54X
b) 1.45X
c) 1.38X
Answer B: Since the company is loss making DTA cant be recovered and DTL need not be paid back (tax is anyways Zero). So reduce DTA and reduce Share holder equity by the same amount. Reduce DTL and Increase Share holder equity(SHE) by same amount.
DTL Adjustment: SHE = 3500+400 = 3900; DTL =0; total assets+ tot Liabilities = 5400
DTA adjustment: SHE = 3900-600=3300, DTA=0; Tot assets + Total Liabilities = 4800
Fin leverage = 4800/ 3300 = 1.45X
CFA Level 1 Practice Question 84
During the initial years of bond issue which of the following statement(s) would be true for a company that uses effective yield method of amortization for carrying the bonds. All else remaining the same,
i) Debt Equity ratio of the company that issues premium Bond
ii) Financial Leverage of the company that issues premium bond > FL of the the company that issues discount bond
iii) Operating cash flow of the company that issues premium bond
a) All of the above
b) I & II only
c) II & III Only
@Nirmal_Analyst
CFA Level 1 Practice Question 84
During the initial years of bond issue which of the following statement(s) would be true for a company that uses effective yield method of amortization for carrying the bonds. All else remaining the same,
i) Debt Equity ratio of the company that issues premium Bond
ii) Financial Leverage of the company that issues premium bond > FL of the the company that issues discount bond
iii) Operating cash flow of the company that issues premium bond
a) All of the above
b) I & II only
c) II & III Only
Answer C: I is wrong: At inception $ 100 par bond issued at premium will be recorded at more than $ 100, let us say $105. This will increase the liability of the company, while equity remains the same. As a result D/E of Premium Bond Company will be higher
II is Correct: As an extension of previous statement D+E will increase for premium bond while equities remain same for the premium bond. As a result FL will be higher for premium bond. In simple terms debt will be higher hence FL will be higher
III is correct: The operating cash flow of both Premium bond and Discount bond will be same if the taxes are absent (because even though interest expense are different, the actual outflow is only coupon which is same for both bonds). However remember discount bond has to pay higher interest under effective yield method, these results in lower EBT and lower tax. As a result the discount bond company will have higher OCF.
CFA Level 1 Practice Question 85
Dum Ltd sold an asset for Rs.500 crs and reported a gain of Rs.50 crs in the income statement as 'Gain from the disposal of asset'. The carrying value of this asset before sale is
a) 500 crs
b) 450 crs
c) 550 crs
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@Nirmal_Analyst
CFA Level 1 Practice Question 85
Dum Ltd sold an asset for Rs.500 crs and reported a gain of Rs.50 crs in the income statement as 'Gain from the disposal of asset'. The carrying value of this asset before sale is
a) 500 crs
b) 450 crs
c) 550 crs
Ans B:Gain from sale of disposal of asset = Sale value €“ Carrying value
50 = 500-CV
CV=450
CFA Level 1 Practice Question 86
Which of the below statement is NOT correct about Zero coupon bond
a. Zero coupon bonds will never trade above par value
b. Price of Zero coupon bonds are less sensitive to change in interest rates
c. Zero coupon bonds will be issued at a deep discount to the face value
@Nirmal_Analyst
CFA Level 1 Practice Question 86
Which of the below statement is NOT correct about Zero coupon bond
a. Zero coupon bonds will never trade above par value
b. Price of Zero coupon bonds are less sensitive to change in interest rates
c. Zero coupon bonds will be issued at a deep discount to the face value
Answer B: The duration of Zero coupon bond will be equal to its time to maturity, and duration of any other coupon paying bond with similar time to maturity will be less than Zero coupon bond's duration. Higher the duration higher will be the sensitivity
CFA Level 1 question 87
A 5 year semi annual coupon paying bond with a face value of $100 is currently trading at $97.54. The bond pays a coupon of 6.5% p.a. The convexity of this bond is closest to
a) 0.1058
b) 10.58
c) 4.19
@Nirmal_Analyst
CFA Level 1 question 87
A 5 year semi annual coupon paying bond with a face value of $100 is currently trading at $97.54. The bond pays a coupon of 6.5% p.a. The convexity of this bond is closest to
a) 0.1058
b) 10.58
c) 4.19
Answer B: Covexity = (Price(inc)+ Price (dec)- 2* Price)/ (2*price*Del Y^2). Yield of the bond is 7.09%. for 100 bps change in yield Pdec=101.7299, Pinc=93.55, price =97.54. [ 101.7299+93.55-2*97.54] / (2*97.54*.01^2) = 10.58
CFA Level 1 question 88
A 15 year Zero coupon bond is currently trading at 68-24. The bond equivalent yield of this issue is closest to
a) 2.498%
b) 2.529%
c) 2.514%
@Nirmal_Analyst
CFA Level 1 question 88
A 15 year Zero coupon bond is currently trading at 68-24. The bond equivalent yield of this issue is closest to
a) 2.498%
b) 2.529%
c) 2.514%
Answer C: Price of the bond is 68.75. Annualised yield of the bond = [100/68.75] ^ (1/15)=2.529%. Bond equivalent yield is semi-annual yield so,{ [(1+2.529%) ^0.5] *2 } -1 = 2.514.
CFA Level 1 question 89
If the interest rate volatility increases, all else remaining the same the price of a putable bond will
a) Increase
b) Decrease
c) Remain the same
@Nirmal_Analyst
CFA Level 1 question 89
If the interest rate volatility increases, all else remaining the same the price of a putable bond will
a) Increase
b) Decrease
c) Remain the same
Ans A: Price of a Callable bond = Price of an ordinary Bond €“ Call option Premium
Price of a putable bond = Price of an ordinary Bond + Put option Premium
An option premium will be determined by Spot price, Strike price, Volatility of the underlying, Time for expiry and Risk free interest rate. An increase in the last 3 parameters will lead to increase of option premiums of both call option and put option.
So, when volatility of interest rate (the underlying) increases the put option premium will increase. As per the above formula, when put option premium increases the price of the putable bond will increase.
CFA Level 1 question 90
The price yield relationship curve of the bond for prices above the callable price
a) Will have higher convexity compared to an option free bond
b) Will have negative convexity
c) Will have similar convexity as an option free bond