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EduPristine>Blog>CFA: Questions and Answers

CFA: Questions and Answers

November 15, 2013

Hey everyone! This blog deals with general questions on CFA. There are questions with the answers right here!

To all potential CF Analysts – it is like a treat for you! This will aid your preparation and will also help you gauge what your level of preparation is. That in turn will enable you to judge how much more time and effort you need to put into your #CFA Prep! These answers have aided my preparation enormously and I hope it helps you too.

So without further ado, let’s look at some of these questions with their answers!

These questions have been taken from various sources with answers by EduPristine. Check it out!

Question 1

The question tells you to choose which options are required/must before a firm can use WACC for capital budgeting decisions?

A. Funded solely by internal sources of financing.

B. The firm should not materially change its financing policies as a result of the investments it undertakes.

C. The risk of the project is the same as the existing operations

Answer 1

The answer should be C. The firm can apply WAAC when it is analyzing the project with same risk as existing operations.

Question 2

A European-style Call spread consists of a long position in the 105 strike Call and a short position in the 115 strike call both maturing in 18 months. The options are on a stock index with an annualized dividend yield of 1% per annum. The interest rates are 4% (annual compounding) for 1 year and 5% (annual compounding) for 2 years. Under these circumstances, what is the number nearest the maximum value of this position today?

Choose one answer.

a. 9.5 Correct

b. 10 Incorrect

c. 9.29 Incorrect

Answer 2

Value at end of t=18 months=max(St-105,0)-max(St-115,0) @St>115=>value=St-105-(St-115)=10 105<St<115=>value=St-105 so max value=10 So max payoff that can occur in 18 months is 10. Use discrete compounding it would had been given if continuous been used Discounting factor would be (1+.04)41*(1+.05/2)^.5=1.04*1.0124=1.0529 So discounted profit/payoff=10/1.0529=9.498-9.5

Question 3

Can anyone explain the cost of trade credit formula?

Answer 3

Discount Percent/100 – Discount percent X 365/Days Credit is outstanding – Discount period = Cost of Not Taking the Discount.

Cost Of Trade Credit is called Cost of Not Taking the Discount.

For Example: Let’s say that your company is offered terms of trade of 2/10, net 30.This means that the supplier will offer you a 2 percent discount if you pay your bill in 10 days. Now, we have to imagine a scenario where your company is not able to take that 2 percent discount. What is this going to cost u?

Using our example:

2/100-2 X 365/30 – 10 = 37.2%

Question 4

Opr cycle is the no of days it takes to convert the raw materials into cash proceeds from sales. Cash conversion cycle is the no of days it takes to turn the firm’s investment in raw materials to cash.

What is the difference in these two definitions? I understand the diffr in their formula. I want to know the difference in interpretation of the definitions. Also, is net opr cycle the same as cash conversion cycle?

Answer 4

Cash conversion cycle starts when you pay your supplier and ends when your buyer pays you. The operating cycle starts with acquiring of inventory and raw materials and end with receipt of payment.

Yes, the cash conversion cycle is also known as net operating cycle. They are one and the same thing.

So, if you have any questions write to EduPristine, watch the magic unveil and be satisfied with what you see. You will get all the help you need!

You can post your doubts, queries and comments in the comments section below. You could also visit our forum and post your doubts there.

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