CFA LEVEL - 1 MOCK PAPER

SOLUTIONS

Time:- 150 mins. Full Marks:- 100

EQUITY VALUATION

1. Answer: C
Current stock price 35
Trailing P/E ratio    5.83
Currenct earnings per share 6
Trailing P/E ratio=Current stock priceCurrent earnings per share=356=5.83
P/E ratio based on the Gordon growth dividend discount model
D 1 /E 1  2.4  1.08  /  6  1.08 
   5.71
r g 0.15  0.08
P/E ratio based on the Gordon growth dividend discount
model=D1/E1r−g=(2.4×1.08)/(6×1.08)0.15−0.08=5.71
A is incorrect because P/E ratio based on the Gordon growth dividend discount model is greater
than trailing P/E ratio.
B is incorrect because it uses earnings for next year to calculate the trailing P/E ratio.
Current stock price 35
Trailing P/E ratio    5.40
Current earnings per share 6  1.08
P/E ratio based on the Gordon growth dividend discount model
D 1 /E 1  2.4  1.08  /  6  1.08 
   5.71
r g 0.15  0.08

2. Answer: B
Because the current market value is well below the retraction price, retraction is likely, and the
preferred share will be priced on the basis of its retraction feature.

Quarterly dividend =
 $50  0.08  = $1 a share
4
12%
Quarterly required return = = 3%
4
 $1 $1 $1 $1 $1 $50 
V0      ....      $45.02
 1.03 1.03 1.03 1.03 1.03 1.0312 
2 3 11 12

Using a financial calculator:

PMT = $1; N = 12; FV = $50; I = 3%; Compute PV = $45.02.

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 A is incorrect because it is simply the perpetual cash flow model to find a preferred stock’s
$4
intrinsic value: Annual dividend/required return =  $33.33
0.12
C is incorrect because it incorrectly applies constant growth model to preferred stock valuation.
4(1.04)
V0   $52.00
( 0.12  0.04)

3. Answer: B
Dividend per share (2013) = $2.50(0.6) = $1.50.
1.50(1.25) 1.50(1.25)2 1.50(1.25)2 (1.05) 1
V =   
1.12 1.12 2
(0.12  0.05) 1.122
$1.67+$1.87+$28.03=$31.57$1.67+$1.87+$28.03=$3
=
1.57
C is incorrect because the terminal value is discounted for 3 years instead of 2 years.
1.50(1.25)2 (1.05)
V = 1.50(1.25) 1.50(1.25)2 (0.12  0.05)
V  
1.12 1.12 2
1.123
= $1.67+$1.87+$25.03=$28.57$1.67+$1.87+$25.03=$28.57

A is incorrect because the terminal value is not discounted to the present.

1.50(1.25)2 (1.05)
V = 1.50(1.25) 1.50(1.25) 2
(0.12  0.05)
V  2

1.12 1.12 1.122
= $1.67+$1.87+$35.16=$38.70$1.67+$1.87+$35.16=$38.70

4. Answer: A
because P0/E1 = p/(r − g)
Earnings growth rate (g) over the period of 2011–2014 = 2.50(1 + g)3 = 3.20; g = 8.6%.
Payout ratio (p) computation: for example, 2014: 1.92/3.20 = 0.60.
Average payout ratio = (0.60 + 0.50 + 0.70 + 0.64)/4 = 0.61.
P0/E1 = p/(r − g); = 0.61/(0.115 − 0.086) = 0.61/0.029 = 21.0.
B is incorrect because uses dividend growth rate, not earnings growth rate.
Dividend growth rate over the period 2008–2011 = 1.92(1 + g)3 = 1.60; g = 6.3%
P/E1 = p/(r − g); = 0.61/(0.124 − 0.063) = 0.61/0.061 = 10.0
C is incorrect because it uses n = 4, not 3, for computing earnings growth rate.
Earnings growth rate = 2.50(1 + g)4 = 3.20; g = 6.4%
P/E1 = p/(r − g); = 0.61/(0.115 − 0.064) = 0.61/0.051 = 12.0

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5. Answer: A
Using the two-stage dividend discount model:
D1 Dn Pn
V0   .....  
1  r  1  r  1  r 
1 n n

V0 = intrinsic value of a stock

Dt = expected dividend in year t
r = required rate of return on the stock
Dt = Current dividend per share = $2.40
2.40(1.20) 2.40(1.20)2 2.40(1.20)2 (1.04) 1
V0 =  2
 
1.15 1.15 (0.15  0.04) 1.152
= $2.50+$2.61+$24.71=$29.82
B is incorrect because it uses incorrect computations for D1, D2, and D3 by making mistakes in
accounting for time periods.
2.40 2.40(1.20) 2.40 1.20 1.04  1
V =   
1.15 1.15 2
 0.15  0.04  1.152
= $2.09+$2.18+$20.59=$24.86
C is incorrect because D1, D2, and D3 are correctly computed, but the terminal value at the end
of Year 2 is incorrectly discounted with n = 3 instead of n = 2
2.40(1.20) 2.40(1.20)2 2.40(1.20)2 (1.04) 1
V =  2
 
1.15 1.15 (0.15  0.04) 1.153

= $2.50+$2.61+$21.48=$26.59

6. Answer: A
Enterprise Value (EV) = Market capitalization + MV of debt + MV of preferred stock − Cash and
short-term investments.
EV = 45 + 10 − 2.5 = 52.5
EV 52.5
=  3.5
EBITDA 15
B is incorrect because EV is correctly computed, but the EBITDA is on after-tax basis:
EBITDA = 15(1−0.40)=915(1−0.40)=9
EV 52.5
=  5.8
EBITDA 9
C is incorrect because it does the opposite of the adjustments for the MV of debt and cash and
short-term investments:

EV = 45+2.5−10=37.5

EV 37.5
=  2.5
EBITDA 15

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7. Answer: C
The intrinsic value of the preferred issue is calculated as:
D0 = 5% × £100 = £5
V0 = D0/r
V0 = £5/0.04
V0 = £125
A is incorrect because the required rate of return is incorrectly used to calculate the dividend
(£4 = 0.04 × £100) and the coupon rate (5%) is incorrectly used as the required rate of return:
V0 = £4/0.05
V0 = £80
B is incorrect because, while the coupon rate (5%) is properly used to calculate the dividend (£5
= 0.05 × £100), it is incorrectly used as the required rate of return:
V0 = £5/0.05
V0 = £100

8. Answer: C
The value of the shares can be estimated using the Gordon growth model as follows:
€1.25(1.08) €1.35
V0  
0.14  0.08 0.06
V0 = €22.50
A is incorrect because €16.88 is derived using the growth rate in the denominator of the
formula instead of the difference between the required rate of return and the growth rate:
V0 = €1.35/0.08 = €16.88
B is incorrect because €20.83 results from incorrectly using D0 (instead of D1) as the next period
dividend:
V0 = €1.25/0.06 = €20.83

9. Answer: C
An asset with an estimated intrinsic value less than the market price is considered overvalued.
A is incorrect because an asset with a current market price above its estimated intrinsic value
would be considered overvalued (not undervalued). An asset is undervalued when its estimated
intrinsic value is higher than its market price.
B is incorrect because an asset with a current market price above its estimated intrinsic value
would be considered overvalued (not fairly valued). An asset is fairly valued when its estimated
intrinsic value equals its market price.

10. Answer: B
For most publicly traded companies (that is, companies beyond the startup stage),
practitioners assume that growth will ultimately fall into three stages: (1) growth, (2)
transition, and (3) maturity. This assumption supports the use of a three-stage DDM.

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 A is incorrect because a two-stage DDM would be appropriate to estimate the value of an
older company that has already moved through its growth phase and is currently in the
transition phase (a period with a growth rate higher than the sustainable growth rate) prior to
moving to the maturity phase (the period with a lower, sustainable growth rate).
C is incorrect because the Gordon growth model is a single-stage model that assumes that the
dividend growth rate is perpetual and unchanging. This model is appropriate for a fully mature
company with long-term sustainable prospects.

11. Answer: C
Asset-based valuations work well for companies that do not have a high proportion of
intangible or “off the books” assets and that do have a high proportion of current assets and
current liabilities.
A is incorrect because when a company has significant intangibles, the analyst should prefer a
forward-looking cash flow valuation to an asset-based valuation model.
B is incorrect because companies with assets that do not have easily determinable market
(fair) values—such as those with significant property, plant, and equipment—are very difficult
to analyze using asset-based valuation methods.

12. Answer: C
The intrinsic value of a security is independent of the investor’s holding period.

13. Answer: A
FCFE is a measure of a firm’s dividend-paying capacity rather than expected dividends.

14. Answer: C
The investor will pay less for this share because of the risk that it might be called by the issuer.

15. Answer: C
D0 0.06
V0   100   $63.16
r 0.095

16. Answer: C
Dividend
Value of preferred stock 
Re quired rate of return
Dividend
56 
0.134
Dividend  7.504
Dividend 7.504
Dividend rate    7.50%
Par value 100

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17. Answer: B
Gamma:
New Growth rate  1  payout ratio   ROE   1  0.55   0.135  6.075%
P0 P 0.55
New    11.17x
E 1 r  g 0.11  0.06075
Therefore P/E ratio has decreased for Gamma from 12.59x to 11.17x.
Theta:
New Growth rate =  1  payout ratio   ROE   1  0.40   0.15  9%
P0 P 0.40
New    20x
E 1 r  g 0.11  0.09
Therefore P/E ratio of Theta has increased from 14.29x to 20x.

18. Answer: A
Net earnings
Net profit m arg in 
Sales
Net earnings  Net profit m arg in  Sales;
Net earnings  Payout ratio
Dividends per share  "D n "  ;
# of outs tan ding shares
$150 million  0.10  0.40
Therefore, D 1   $0.80
7.5 million
D 2  $0.80   1  0.15   $0.92

D 3  $0.80   1  0.15   $1.06

2

D 4  $0.80   1  0.15    1  0.05   $1.11

2

1.11
V3   15.86
0.12  0.05
0.8 0.92 1.06 15.86
V0   2
   $13.49
1.12 1.12 1.12 3 1.12 4

19. Answer: C
Compounded annual growth rate over the period can be calculated using the following
formula:
Ending Value  Beginning Value   1  growth rate   N

2.6  2.42   1  g 
4

g = 1.81%
Sustainable growth rate for 2013:
g = ROE * Retention rate = 0.14 * 0.38 = 5.32%
Average growth rate  5.32%  1.81%  0.5  3.565%
D1
Stock’s intrinsic value by Gordon growth model 
r g

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 2.6  1.03565

0.12  0.03565
= $31.92

20. Answer: B
72
A 's Trailing P /E   13.38
5.38
32
B's Trailing P /E   4.86
6.58
72
A 's current exp ected P /E   15.7
4.58
32
B's current exp ected P /E   9.94
3.22

PORTFOLIO MANAGEMENT

21. Answer: B
A written IPS is best seen as a communication instrument allowing clients and portfolio
managers to mutually establish investment objectives and constraints.

22. Answer: B
Measuring willingness to take risk (risk tolerance, risk aversion) is an exercise in applied
psychology. Instruments attempting to measure risk attitudes exist, but they are clearly
less objective than measurements of the ability to take risk. Ability to take risk is based
on relatively objective traits such as expected income, time horizon, and existing wealth
relative to liabilities.

23. Answer: A
When a client has a restriction on trading, such as this obligation to refrain from trading, the
IPS “should note this constraint so that the portfolio manager does not inadvertently
trade the stock on the client’s behalf.”

24. Answer: A
Appendices contain information on strategic (baseline) asset allocation and permitted
deviations from policy portfolio allocations, as well as how and when the portfolio allocations
should be rebalanced. Procedures to update IPS are a major component of the IPS that is not a
part of the appendices.

25. Answer: C
The risk objective is expressed relative to a benchmark.

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26. Answer: A
The client is in a strong financial situation (stable job, no debt), has a reasonably long time
horizon before needing any liquidity (10 years), and reasonable retirement spending
needs relative to total assets. These factors indicate a high ability to take risk. In
addition, the client’s knowledge of financial markets, experience, and focus on the long term
also indicates a high willingness to take risk.

27. Answer: C
On one hand, the client has a stable, high income and no dependents. On the other
hand, he exhibits above average risk aversion. His ability to take risk is high, but his
willingness to take risk is low.

28. Answer: B
An individual’s willingness to take risk is impacted by factors as personality type. Wealth
and time horizon are most likely to impact an individual’s ability to take risk.

29. Answer: B
An individual’s ability to take risk is impacted by such factors as time horizon and expected
income. Personality type is most likely to impact an individual’s willingness to take risk.

30. Answer: B
Endowments are meant to provide financial support for specific purposes on an ongoing basis.
Thus they have a long time horizon, low liquidity needs and the level of risk tolerance is high.

31. Answer: C
Return objectives are part of a policy statement's objectives, not constraints.

32. Answer: B
Strategic asset allocation depends on several principles. As stated in the reading, “One
principle is that a portfolio’s systematic risk accounts for most of its change in value
over the long run.” A second principle is that, “the returns to groups of like assets predictably
reflect exposures to certain sets of systematic factors.” This latter principle establishes
that returns on asset classes primarily reflect the systematic risks of the classes.

33. Answer: C
Tactical asset allocation allows actual asset allocation to deviate from that of the strategic
asset allocation (policy portfolio) based on short-term market expectations.

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34. Answer: B
The core–satellite approach to constructing portfolios is defined as “investing the
majority of the portfolio on a passive or low active risk basis while a minority of the
assets is managed aggressively in smaller portfolios.”

35. Answer: C
Tactical asset allocation is the decision to deliberately deviate from the policy exposures
to systematic risk factors with the intent to add value based on forecasts of the near-
term returns of those asset classes.

36. Answer: A
The three major steps in the portfolio management process are (1) planning, (2) execution,
and (3) feedback. The planning step includes evaluating the investor's needs and
preparing an investment policy statement. The execution step includes choosing a target
asset allocation, evaluating potential investments based on top down or bottom up
analysis, and constructing the portfolio. The feedback step includes measuring and
reporting performance and monitoring and rebalancing the portfolio.

37. Answer: B
Identification of the client's benchmark would be established in the planning step, to allow
assessment of performance in the feedback step.

38. Answer: C
In a defined contribution plan, the employee makes the investment decision and assumes
the investment risk.

39. Answer: B
Capital market theory assumes that investors can borrow or lend at the risk free rate.
The other statements are basic assumptions of capital market theory.

40. Answer: B
The minimum investment required to open a SMA is usually much higher than that of a
mutual fund. In a SMA transactions can be tailored to the specific needs of the
investor.

COST OF CAPITAL

41. Answer: B
WACC  wd rd 1  t   we re , where wd  we  1
.  1  we   6  1  0.4  we  9
711

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 we  65%
A is incorrect because it is calculated by dividing 7.11 by 9.
C is incorrect because it fails to adjust debt for taxes.

42. Answer: C
The annualized standard deviation of the sovereign bond market in terms of the developing
country’s currency is not part of the equity premium calculation.
Country equity premium = Sovereign yield spread × (Annualized standard deviation of equity
index/Annualized standard deviation of the sovereign bond market in terms of the developed
market currency)
A is incorrect because the annualized standard deviation on a developing country’s index is
part of the country’s equity premium.
B is incorrect because the sovereign yield spread is part of the country equity premium.

43. Answer: B
The pre-tax cost of debt is the yield to maturity (YTM) of the bond. The bond’s YTM can be
calculated by solving the following equation for i:
 20 30  1000
864    t

 t 1 1  i   1  i 
20

Using a financial calculator, enter N = 20 (semiannual periods), w = −864, PMT = 30, and FV =
1,000.
Compute I/YR. The six-month yield (or calculated I/YR) is 4%. The YTM is obtained by doubling
the six-month yield to get 8%. Multiplying the pre-tax cost of debt by (1 − Tax rate) gives the
result of 8 × (1 − 0.35) = 5.2%.
A is incorrect because if the after-tax amount of the coupon rate is used, the result will be
0.06(1 − 0.35) = 3.9%.
C is incorrect because if the after-tax cost for six-month yield is used, the result will be 0.04(1 −
0.35) = 2.6%.

44. Answer: A
WACC  wd rd 1  t   wp rp  we re

= (1/3)(0.12)(1−0.4)+(1/3)(0.17)+(1/3)(0.20)
= 14.73%
B is incorrect because if all costs are considered after tax:
[(1/3)(0.12) + (1/3)(0.17) + (1/3)(0.20)] × (1 − 0.4) = 9.8%
C is incorrect because if tax effect on cost of debt is miscalculated:
(1/3)(0.12)(0.4) + (1/3)(0.17) + (1/3)(0.20) = 13.93%

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45. Answer: C
Bonds are a form of debt that must be adjusted for taxes when calculating the weighted
average cost of capital.
A is incorrect because adjustment for taxes is applicable for the cost of debt and not in the
cost of equity.
B is incorrect because adjustment for taxes is applicable for the cost of debt and not in the cost
of equity.

46. Answer: C
Both statements on why we see the adjustment of floatation costs in the cost of capital instead of
the net present value calculation are correct.

47. Answer: C
As a company raises more funds, the costs of different sources of capital may change, resulting in a
change in the weighted average cost of capital.
The target capital structure is:
Equity = 65%
Debt = 35%
New financing $12.5 million
65% of 12.5 m = $8.125 million
35% of 12.5 m = $ 4.375 million
rd(1 – t) = 3%; re = 14%
Hence WACC = 0.35 * 3% + 0.65 * 14% = 10.15%.

48. Answer: A
Using the CAPM method, 5.25% + 0.75 (9.75%) = 12.56%.

49. Answer: C
Debt-rating approach which is used to estimate the before-tax cost of debt is an example of the
matrix pricing method. Matrix pricing method involves pricing on the basis of valuation-relevant
characteristics.

50. Answer: B
Bond yield plus risk premium is used to calculate cost of equity not cost of debt. The other two are
approaches to calculate cost of debt.

ALTERNATIVE INVESTMENT

51. Answer: A
General characteristics of alternative investments include: illiquidity of underlying investments,
narrow manager specialization, low correlation with traditional investments, low level of

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 regulation and less transparency, limited and potentially problematic historical risk and return
data, unique legal and tax considerations.

52. Answer: B
A is incorrect because beta is a measure of systematic risk. C is incorrect because alpha returns are
not correlated with beta returns.

53. Answer: C
All three statements regarding funds of funds are correct.

54. Answer: C
Early stage financing (early stage venture capital) is provided to companies moving toward
operation but before commercial production and sales have occurred.

55. Answer: B
The convenience yield must be less than the cost of carry to arrive at a futures price below the
spot price because the futures price is approximately equal to: spot price * (1 + r) + storage cost –
convenience yield. The cost of carry is defined as interest cost plus storage cost.

56. Answer: A
Only a small group of investors trades in physical commodities while most investors invest in
commodities using commodity derivatives rather than the physical good itself.

57. Answer: C
Distressed debt and merger arbitrage are event driven strategies.

58. Answer: C
Strong and sustainable cash flow is an attractive feature of a target company in a leveraged
buyout.

59. Answer: C
Alternative investments are associated with limited portfolio transparency.

60. Answer: B
Collateralized mortgage debt is an example of public debt.

61. Answer: A
First he should research how returns are calculated and if they are comparable before making any
decision.

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62. Answer: C
The maximum value AKD is most likely to assign is that using the highest multiple (7 × PKR400
billion = PKR2,800 billion).

63. Answer: A
BMA is most likely to use average quotes. The securities are actively traded so no liquidity
adjustment is required.

64. Answer: C
Note that we divide NOI by the capitalization rate and not by the cost of equity. Financing cost is
not considered because the valuation process is independent of financing.

65. Answer: A
In REIT valuation, two common measures of income are funds from operations (AFO) and adjusted
funds from operations (AFFO).

66. Answer: C
The maximum value is simply EBITDA times the highest multiple: = 900 million.

67. Answer: B
As the price increases of commodities are mirrored in higher price indices, the nominal return is
equal to inflation and the real return is zero.

68. Answer: B
Management fee  100  1.25  0.04  $5 million
Incentive fee   100  1.25  100   0.2  $5 million
100  1.25  100  10
Re turn   15%
100

69. Answer: C
The management fee for hedge funds is based on assets under management.

70. Answer: B
Step 1: Calculate the management fee.
Value of investment at the end of first year (after return) = 100 million * 1.30 = 130 million.
Management fee = 130 million * 0.02 = 2.6 million.
Step 2: Calculate the incentive fee.
Given a 10% hurdle rate, the amount to consider for the incentive fee = 30 – 10 = 20 million.
Incentive fee = 20 million * 0.20 = $4.0 million.
Total fees earned = 2.6 million + 4.0 million = 6.6 million.

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 130.00  6.60 123.40
Investor’s net return =   1  23.4%
100.00 100

71. Answer: C
Invested capital = 200,000,000
Value of fund after a year = 200,000,000 * 1.35 = 270,000,000.
Management fee = 270,000,000 * 0.02 = 5,400,000.
Incentive fees = (270,000,000 – 200,000,000 – 5,400,000) * 0.2 = 12,920,000.
Total fee = 5,400,000 + 12,920,000 = 18,320,000.

72. Answer: B
Management fee  200  1.15  0.02  £4.6 million
Incentive fee   230  200  4.6 million   0.1  £2.54 million
Fund value after fees = £230 million – £4.6 million – £2.54 million = £222.86 million
222.86 million
Investor return   1  11.43%
200 million

73. Answer: A
The soft hurdle rate is surpassed, because the return of the fund is 12.50%. For that reason,
the full fee, based on the full performance, is due.
Management fee =225 million * 0.01 = $2.25 million.
Incentive fee = $25 million * 0.15 = $3.75 million.
Total fees = $6 million.
Fund assets at the end of the period after fees = 225 – 6 = $219 million.
219
Return for the investor =  1  9.5%
200

74. Answer: B
Incentive fee is based on the performance relative to the previous high-water mark after fees.
Management fee = $250 million * 0.02 = $5 million.
Incentive fee = ($250 million – $227.2 million) * 0.2 = $4.56 million.
Total fees = $5 million + $4.56 million = $9.56 million.

75. Answer: B
Downside risk measures focus on the left side of the return distribution curve where
losses occur. Sortino ratio is a measure of downside risk.

76. Answer: C
The value at risk of an alternative investment is best described as the minimum amount of loss
expected over a given time period at a given probability level.

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77. Answer: A
A clawback provision requires the manager to return any periodic incentive fees to
investors that would result in investors receiving less than 80% of the profits generated by
portfolio investments as a whole.

78. Answer: C
Health care facilities are categorized as social infrastructure. Waste treatment plants are
utility infrastructure. Broadcasting towers are communications infrastructure.

79. Answer: C
Hedge fund fee structures indicate management fees as a percentage of assets under
management and incentive fees as a percentage of gains in value. A 3 and 15 fee
structure means a fund charges a 3% management fee and a 15% incentive fee. Sales load
is typically associated with mutual funds and is not indicated by hedge fund fee structures.

80. Answer: B
Equity hedge funds with a short bias attempt to profit from short positions in equities
they believe to be overvalued. These funds may hold long equity positions but typically have
net short exposure to the market. An event driven strategy focuses on companies involved
in mergers, in financial distress, or in other special situations. A fundamental value
strategy attempts to identify undervalued equities.

MARKET ORGANIZATION AND STRUCTURE

81. Answer: A
Once you have entered into a forward contract, it is difficult to exit from the contract. (There is a
full reading on forward contracts in derivatives.)

82. Answer: A
Selling dollars in the forward market locks in a conversion rate and hedges against the risk of the
dollar depreciating against the euro.

83. Answer: A
ETFs are securities that represent ownership in the assets held by the fund. The investment
companies that create exchange-traded funds (ETFs) are financial intermediaries. The transaction
costs of trading shares of ETFs are generally lower than the combined costs of trading the
underlying assets of the ETF.

84. Answer: B
Convertible debt is a fixed income security.

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85. Answer: A
Clearing houses arrange for financial settlement of trades. In futures markets, they guarantee
contract performance.

86. Answer: C
Since Margaret believes that the stock is overvalued, she should place a short-sale order that
would be profitable if the stock moves in the direction of the estimated value.

87. Answer: B
The repayment of borrowed security or other asset is referred to as covering the short position.

88. Answer: C
The return is 25 percent. If the position had been unleveraged, the return would be 16.67% = (70 -
60)/60. Because of leverage, the return is 25% = 1.5 * 16.67%.
Another way to look at this problem is that the equity contributed by the trader (the minimum
margin requirement) is 66.67% = 100%/1.5 . The trader contributed $40 = 66.67% of $60 per share.
10
The gain is $10 per share, resulting in a return of 25% = .
40

89. Answer: B
The return is -20.4percent.
Total cost of the purchase = $13,200 = 600 × $22
Equity invested = $10,560 = 0.80 × $13,200
Amount borrowed = $2,640 = 13,200 - 10,560
Interest paid at month end = $105.6  0.04  $2, 640
Dividend received at month end = $360 = 600 × $0.60
Proceeds on stock sale = $10,800 = 600 × $18
Total commissions paid = $10 = $5 + $5
Net gain/loss = -$2,155.6 = - 13,200 - 105.6 + 360 + 10,800 - 10
Initial investment, including commission on purchase = $10,565
$2, 155.6
Return = -20.4% = 
$10, 565

90. Answer: A
He will need to contribute €2,250 = 45% of €5,000 as the initial margin.

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91. Answer: C

92. Answer: C
48
The stock price is 48 and the leverage ratio is 2. This means that  2 . So equity
Equity
24
(amount actually contributed by investor) is 24. Hence, the initial margin is  0.5 Margin call price =
48
1  Initial M arg in 1  0.5
Initial price  34.29  48
1  Ma int enance M arg in 1  MM
Solving for MM, we get MM = 0.30.

93. Answer: B
Fill-or-kill orders are also known as immediate-or-cancel orders. They are cancelled unless
filled (in part or in whole) immediately.

94. Answer: B
The maximum possible loss is $1,950. If the stock price crosses $60, the stop buy order
will become valid and will get executed at a maximum limit price of $65. The maximum
loss per share is $13 = $65 - $52, or $1,950 for 150 shares.

95. Answer: C
This order is said to make a new market. The new buy order is better than the existing best
buy offer of $154.62.

96. Answer: A
Order I (time of arrival of 7:12:01) has precedence. In the order precedence hierarchy,
the first rule is price priority. Based on this rule, sell orders I, II and III get precedence
over order IV. The next rule is display precedence at a given price. Because order II is a
hidden order, orders I and III get precedence. Finally, order I gets precedence over
order III based on time priority at same price and same display status.

97. Answer: B
Dave’s average trade price is:

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 200  $10.02  300  $9.89  100  $9.84
$9.92 
100  300  100
Dave’s sell order first fills with the most aggressively priced buy order, which is D’s
order for 200 shares at $10.02. Dave still has 800 shares for sale. The next most
aggressively priced buy order is C’s order for 300 shares at $9.89. This order is filled. Dave still
has 500 shares for sale. The next most aggressively priced buy order is B’s order for
100 shares at $9.84. A third trade takes place. Dave still has 400 shares for sale. The next buy
order is A’s order for 900 shares at $9.70. However, this price is below Dave’s limit
price of $9.83. Therefore, no more trade is possible.

98. Answer: B
This sale is a private placement. As the company is already registered, the share sale is not an
initial public offering. The sale cannot be called as shelf registration because the
company is not selling shares to the public in fragments.

99. Answer: A
In call markets, orders are accumulated and securities trade only at specific times.

100. Answer: C
Ensuring that investors earn at least the risk free rate is least likely to be an objective
of market regulation.

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