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DiscountedCashFlowApplications

TestID:7658688

Question#1of72

QuestionID:412839

Inordertocalculatethenetpresentvalue(NPV)ofaproject,ananalystwouldleastlikelyneedtoknowthe:
A) internalrateofreturn(IRR)oftheproject.
B) opportunitycostofcapitalfortheproject.
C) timingoftheexpectedcashflowsfromtheproject.
Explanation
TheNPViscalculatedusingtheopportunitycost,discountrate,expectedcashflows,andtimingoftheexpectedcashflows
fromtheproject.Theproject'sIRRisnotusedtocalculatetheNPV.

Question#2of72

QuestionID:412885

ATreasurybill(Tbill)withafacevalueof$10,000and219daysuntilmaturityissellingfor97.375%offacevalue.Whichof
thefollowingisclosesttotheholdingperiodyieldontheTbillifhelduntilmaturity?
A) 2.81%.
B) 2.70%.
C) 2.63%.
Explanation
Theformulaforholdingperiodyieldis:(P1P0+D1)/(P0),whereD1foraTbilliszero(itdoesnothaveacoupon).
Therefore,theHPYis:($10,000$9,737.50)/($9,737.50)=0.0270=2.70%.
Alternatively(100/97.375)1=0.02696.

Question#3of72

QuestionID:412834

CalabashCrabHouseisconsideringaninvestmentinmutuallyexclusivekitchenupgradeprojectswiththefollowingcash
flows:
ProjectA ProjectB
InitialYear $10,000

$9,000

Year1

2,000

200

Year2

5,000

2,000

Year3

8,000

11,000

Year4

8,000

15,000

AssumingCalabashhasa12.5%costofcapital,whichofthefollowinginvestmentdecisionsismostappropriate?

A) AcceptProjectAbecauseitsinternalrateofreturnishigherthanthatofProject
B.
B) Acceptbothprojectsbecausetheybothhavepositivenetpresentvalues.
C) AcceptProjectBbecauseitsnetpresentvalueishigherthanthatofProjectA.
Explanation
Whennetpresentvalue(NPV)andinternalrateofreturn(IRR)giveconflictingprojectrankings,NPVisthemostappropriate
methodfordecidingbetweenmutuallyexclusiveprojects.Here,theNPVofprojectAis$6,341andtheNPVofProjectBis
$6,688.BothNPVsarepositive,soCalabashshouldselecttheProjectBbecauseofitshigherNPV.

Question#4of72

QuestionID:412869

Assumeaninvestormakesthefollowinginvestments:
Today,shepurchasesashareofstockinRedwoodAlternativesfor$50.00.
Afteroneyear,shepurchasesanadditionalsharefor$75.00.
Afteronemoreyear,shesellsbothsharesfor$100.00each.
Therearenotransactioncostsortaxes.Theinvestor'srequiredreturnis35.0%.
Duringyearone,thestockpaida$5.00persharedividend.Inyeartwo,thestockpaida$7.50persharedividend.
Thetimeweightedreturnis:
A) 51.7%.
B) 51.4%.
C) 23.2%.
Explanation
Tocalculatethetimeweightedreturn:
Step1:Separatethetimeperiodsintoholdingperiodsandcalculatethereturnoverthatperiod:

Holdingperiod1:P0=$50.00
D1=$5.00
P1=$75.00(frominformationonsecondstockpurchase)
HPR1=(7550+5)/50=0.60,or60%
Holdingperiod2:P1=$75.00
D2=$7.50
P2=$100.00
HPR2=(10075+7.50)/75=0.433,or43.3%.
Step2:Usethegeometricmeantocalculatethereturnoverbothperiods

Return=[(1+HPR1)(1+HPR2)]1/21=[(1.60)(1.433)]1/21=0.5142,or51.4%.

Question#5of72

QuestionID:412891

ATreasurybillwithafacevalueof$1,000,000and45daysuntilmaturityissellingfor$987,000.TheTreasurybill'sbank
discountyieldisclosestto:
A) 7.90%.
B) 10.40%.
C) 10.54%.
Explanation
Theactualdiscountis1.3%,1.3%(360/45)=10.4%
Thebankdiscountyieldiscomputedbythefollowingformula,r=(dollardiscount/facevalue)(360/numberofdaysuntil
maturity)=[(1,000,000987,000)/(1,000,000)](360/45)=10.40%.

Question#6of72

QuestionID:412864

Ananalystmanagedaportfolioformanyyearsandthenliquidatedit.Computingtheinternalrateofreturnoftheinflowsand
outflowsofaportfoliowouldgivethe:
A) timeweightedreturn.
B) netpresentvalue.
C) moneyweightedreturn.
Explanation
Themoneyweightedreturnistheinternalrateofreturnonaportfoliothatequatesthepresentvalueofinflowsandoutflows
overaperiodoftime.

Question#7of72

QuestionID:412836

Fisher,Inc.,isevaluatingthebenefitsofinvestinginanewindustrialprinter.Theprinterwillcost$28,000andincreaseafter
taxcashflowsby$8,000duringeachofthenextfiveyears.Whataretherespectiveinternalrateofreturn(IRR)andnet
presentvalue(NPV)oftheprinterprojectifFisher'srequiredrateofreturnis11%?
A) 5.56%$3,180.
B) 17.97%$5,844.
C) 13.20%$1,567.
Explanation
IRRKeystrokes:CF 0=$28,000CF 1=$8,000F 1=5CPTIRR=13.2%.
NPVKeystrokes:CF 0=$28,000CF 1=$8,000F 1=5I=11CPTNPV=1,567.
Sincecashflowsarelevel,analternativeis:
IRR:N=5PMT=8,000PV=28,000CPTI/Y=13.2%.

NPV:I/Y=11CPTPV=29,567+28,000=1,567

Question#8of72

QuestionID:412861

Aninvestorexpectsastockcurrentlysellingfor$20persharetoincreaseto$25byyearend.Thedividendlastyearwas$1
butheexpectsthisyear'sdividendtobe$1.25.Whatistheexpectedholdingperiodreturnonthisstock?
A) 31.25%.
B) 28.50%.
C) 24.00%.
Explanation
Return=[dividend+(endbegin)]/beginningprice
R=[1.25+(2520)]/20=6.25/20=0.3125

Question#9of72

QuestionID:412894

ATreasurybillhas90daysuntilitsmaturityandaholdingperiodyieldof3.17%.Itseffectiveannualyieldisclosestto:
A) 13.49%.
B) 12.68%.
C) 13.30%.
Explanation
Theeffectiveannualyield(EAY)isequaltotheannualizedholdingperiodyield(HPY)basedona365dayyear.EAY=(1+
HPY)365/t 1=(1.0317)365/901=13.49%.

Question#10of72

QuestionID:412874

Aninvestormakesthefollowinginvestments:
Shepurchasesashareofstockfor$50.00.
Afteroneyear,shepurchasesanadditionalsharefor$75.00.
Afteronemoreyear,shesellsbothsharesfor$100.00each.
Therearenotransactioncostsortaxes.
Duringyearone,thestockpaida$5.00persharedividend.Inyear2,thestockpaida$7.50persharedividend.Theinvestor'srequired
returnis35%.Hermoneyweightedreturnisclosestto:

A) 7.5%.
B) 48.9%.
C) 16.1%.

Explanation
Todeterminethemoneyweightedrateofreturn,useyourcalculator'scashflowandIRRfunctions.Thecashflowsareasfollows:
CF0:initialcashoutflowforpurchase=$50
CF1:dividendinflowof$5cashoutflowforadditionalpurchaseof$75=netcashoutflowof$70
CF2:dividendinflow(2$7.50=$15)+cashinflowfromsale(2$100=$200)=netcashinflowof$215
EnterthecashflowsandcomputeIRR:
CF0=50CF1=70CF2=+215CPTIRR=48.8607

Question#11of72

QuestionID:412893

ATreasurybill,with45daysuntilmaturity,hasaneffectiveannualyieldof12.50%.Thebill'sholdingperiodyieldisclosestto:
A) 1.57%.
B) 1.46%.
C) 1.54%.
Explanation
Theeffectiveannualyield(EAY)isequaltotheannualizedholdingperiodyield(HPY)basedona365dayyear.EAY=(1+
HPY)365/t 1.HPY=(EAY+1)t/3651=(1.125)45/3651=1.46%.

Question#12of72

QuestionID:412868

OnJanuary1,JonathanWoodinvests$50,000.AttheendofMarch,hisinvestmentisworth$51,000.OnApril1,Wood
deposits$10,000intohisaccount,andbytheendofJune,hisaccountisworth$60,000.Woodwithdraws$30,000onJuly1
andmakesnoadditionaldepositsorwithdrawalstherestoftheyear.Bytheendoftheyear,hisaccountisworth$33,000.
Thetimeweightedreturnfortheyearisclosestto:
A) 10.4%.
B) 7.0%.
C) 5.5%.
Explanation
JanuaryMarchreturn=51,000/50,0001=2.00%
AprilJunereturn=60,000/(51,000+10,000)1=1.64%
JulyDecemberreturn=33,000/(60,00030,000)1=10.00%
Timeweightedreturn=[(1+0.02)(10.0164)(1+0.10)]1=0.1036or10.36%

Question#13of72

QuestionID:412877

Aninvestorbuysoneshareofstockfor$100.Attheendofyearoneshebuysthreemoresharesat$89pershare.Attheend
ofyeartwoshesellsallfoursharesfor$98each.Thestockpaidadividendof$1.00pershareattheendofyearoneand

yeartwo.Whatistheinvestor'stimeweightedrateofreturn?
A) 6.35%.
B) 11.24%.
C) 0.06%.
Explanation
Theholdingperiodreturninyearoneis($89.00$100.00+$1.00)/$100.00=10.00%.
Theholdingperiodreturninyeartwois($98.00$89.00+$1.00)/$89=11.24%.
Thetimeweightedreturnis[{1+(0.1000)}{1+0.1124}]1/21=0.06%.

Question#14of72

QuestionID:412854

Astockiscurrentlyworth$75.Ifthestockwaspurchasedoneyearagofor$60,andthestockpaida$1.50dividendoverthe
courseoftheyear,whatistheholdingperiodreturn?
A) 27.5%.
B) 22.0%.
C) 24.0%.
Explanation
(7560+1.50)/60=27.5%.

Question#15of72

QuestionID:412848

Whichofthefollowingisleastlikelyaproblemassociatedwiththeinternalrateofreturn(IRR)methodformakinginvestment
decisions?
A) TheIRRmethoddeterminesthediscountratethatsetsthenetpresentvalueof
aprojectequaltozero.
B) Aninvestmentprojectmayhavemorethanoneinternalrateofreturn.
C) IRRandNPVcriteriacangiveconflictingdecisionsformutuallyexclusiveprojects.
Explanation
TheIRRmethodequatesaninvestment'spresentvalueofinflowstoitspresentvalueofoutflows.TheIRRbydefinitionisthe
discountratethatsetsthenetpresentvalueofaprojectequaltozero.Therefore,thedecisionruleforindependentprojectsis
asfollows:iftheIRRisabovethefirm'scostofcapital,theprojectshouldbeaccepted,andiftheIRRisbelowthecostof
capital,theprojectshouldberejected.

Question#16of72

QuestionID:412882

ATreasurybillhas40daystomaturity,aparvalueof$10,000,andwasjustpurchasedbyaninvestorfor$9,900.Itsholding
periodyieldisclosestto:
A) 1.00%.
B) 1.01%.
C) 9.00%.
Explanation
Theholdingperiodyieldisthereturnthattheinvestorwillearnifthebillishelduntilitmatures.Theholdingperiodyield
formulais(pricereceivedatmaturityinitialprice+interestpayments)/(initialprice)=(10,0009,900+0)/(9,900)=
1.01%.RecallthatwhenbuyingaTbill,investorspaythefacevaluelessthediscountandreceivethefacevalueatmaturity.

Question#17of72

QuestionID:412903

Theeffectiveannualyield(EAY)foraTbillmaturingin150daysis5.04%.Whataretheholdingperiodyield(HPY)andmoney
marketyield(MMY)respectively?
A) 2.04%4.90%.
B) 2.80%5.41%.
C) 5.25%2.04%.
Explanation
TheEAYtakestheholdingperiodyieldandannualizesitbasedona365dayyearaccountingforcompounding.TheHPY=(1
+0.0504)150/365=1.20411=2.04%.UsingtheHPYtocomputethemoneymarketyield=HPY(360/t)=0.0204
(360/150)=0.04896=4.90%.

Question#18of72

QuestionID:412835

ThefinancialmanageratGenesisCompanyislookingintothepurchaseofanapartmentcomplexfor$550,000.Netaftertax
cashflowsareexpectedtobe$65,000foreachofthenextfiveyears,thendropto$50,000forfouryears.Genesis'required
rateofreturnis9%onprojectsofthisnature.Afternineyears,GenesisCompanyexpectstosellthepropertyforaftertax
proceedsof$300,000.Whatistherespectiveinternalrateofreturn(IRR)andnetpresentvalue(NPV)onthisproject?
A) 6.66%$64,170.
B) 7.01%$53,765.
C) 13.99%$166,177.
Explanation
IRRKeystrokes:CF 0=$550,000CF 1=$65,000F 1=5CF 2=$50,000F 2=3CF 3=$350,000F 3=1.
NPVKeystrokes:CF 0=$550,000CF 1=$65,000F 1=5CF 2=$50,000F 2=3CF 3=$350,000F 3=1.
ComputeNPV,I=9.

Note:Althoughtherateofreturnispositive,theIRRislessthantherequiredrateof9%.Hence,theNPVisnegative.

Question#19of72

QuestionID:412870

Aninvestorbuysashareofstockfor$200.00attimet=0.Attimet=1,theinvestorbuysanadditionalsharefor$225.00.At
timet=2theinvestorsellsbothsharesfor$235.00.Duringbothyears,thestockpaidapersharedividendof$5.00.Whatare
theapproximatetimeweightedandmoneyweightedreturnsrespectively?
A) 10.8%9.4%.
B) 7.7%7.7%.
C) 9.0%15.0%.
Explanation
Timeweightedreturn=(225+5200)/200=15%(470+10450)/450=6.67%[(1.15)(1.0667)]1/21=10.8%
Moneyweightedreturn:200+[225/(1+return)]=[5/(1+return)]+[480/(1+return)2]moneyreturn=approximately9.4%
Notethattheeasiestwaytosolveforthemoneyweightedreturnistosetuptheequationandplugintheanswerchoicesto
findthediscountratethatmakesoutflowsequaltoinflows.
Usingthefinancialcalculatorstocalculatethemoneyweightedreturn:(Thefollowingkeystrokesassumethatthefinancial
memoryregistersareclearedofpriorwork.)
TIBusinessAnalystIIPlus
EnterCF 0:200,+/,Enter,downarrow
EnterCF 1:220,+/,Enter,downarrow,downarrow
EnterCF 2:480,Enter,downarrow,downarrow,
ComputeIRR:IRR,CPT
Result:9.39
HP12C
EnterCF 0:200,CHS,g,CF 0
EnterCF 1:220,CHS,g,CF j
EnterCF 2:480,g,CF j
ComputeIRR:f,IRR
Result:9.39

Question#20of72
Whichofthefollowingstatementsaboutmoneyweightedandtimeweightedreturnsisleastaccurate?
A) Themoneyweightedreturnappliestheconceptofinternalrateofreturnto
investmentportfolios.
B) Ifaclientaddsfundstoaninvestmentpriortoanunfavorablemarket,thetime
weightedreturnwillbedepressed.

QuestionID:412873

C) Iftheinvestmentperiodisgreaterthanoneyear,ananalystmustusethegeometric
meantocalculatetheannualtimeweightedreturn.
Explanation
Thetimeweightedmethodisnotaffectedbythetimingofcashflows.Theotherstatementsaretrue.

Question#21of72

QuestionID:412871

MirandaCromwell,CFA,buys2,000worthofSmith&JonesPLCsharesatthebeginningofeachyearforfouryearsat
pricesof100,120,150and130respectively.AttheendofthefourthyearthepriceofSmith&JonesPLCis140.The
sharesdonotpayadividend.Cromwellcalculatesheraveragecostpershareas[(100+120+150+130)/4]=125.
Cromwellthenusesthegeometricmeanofannualholdingperiodreturnstoconcludethathertimeweightedannualrateof
returnis8.8%.HasCromwellcorrectlydeterminedheraveragecostpershareandtimeweightedrateofreturn?
Averagecost

Timeweighted
return

A) Incorrect

Correct

B) Correct

Incorrect

C) Correct

Correct

Explanation
BecauseCromwellpurchasesshareseachyearforthesameamountofmoney,sheshouldcalculatetheaveragecostper
shareusingtheharmonicmean.Cromwelliscorrecttousethegeometricmeantocalculatethetimeweightedrateofreturn.
Thecalculationisasfollows:
Annualrateof

Year

Beginningprice

Endingprice

100

120

20%

120

150

25%

150

130

13.33%

130

140

7.69%

return

TWR=[(1.20)(1.25)(0.8667)(1.0769)]1/41=8.78%.Or,moresimply,(140/100)1/41=8.78%.

Question#22of72
Theestimatedannualaftertaxcashflowsofaproposedinvestmentareshownbelow:

Year1:$10,000
Year2:$15,000
Year3:$18,000

QuestionID:412837

Aftertaxcashflowfromsaleofinvestmentattheendofyear3is$120,000
Theinitialcostoftheinvestmentis$100,000,andtherequiredrateofreturnis12%.Thenetpresentvalue(NPV)ofthe
projectisclosestto:
A) $63,000.
B) $66,301.
C) $19,113.
Explanation
10,000/1.12=8,929
15,000/(1.12)2=11,958
138,000/(1.12)3=98,226
NPV=8,929+11,958+98,226100,000=$19,113
Alternatively:CFO=100,000CF1=10,000CF2=15,000CF3=138,000I=12CPTNPV=$19,112.

Question#23of72

QuestionID:412857

Abondthatpays$100ininteresteachyearwaspurchasedatthebeginningoftheyearfor$1,050andsoldattheendofthe
yearfor$1,100.Aninvestor'sholdingperiodreturnis:
A) 10.5%.
B) 10.0%.
C) 14.3%.
Explanation
Inputintoyourcalculator:N=1FV=1,100PMT=100PV=1,050CPTI/Y=14.29

Question#24of72

QuestionID:412862

Whyisthetimeweightedrateofreturnthepreferredmethodofperformancemeasurement?

A) Thereisnopreferencefortimeweightedversusmoneyweighted.
B) Timeweightedreturnsarenotinfluencedbythetimingofcashflows.
C) Timeweightedallowsforinterperiodmeasurementandthereforeismoreflexiblein
determiningexactlyhowaportfolioperformedduringaspecificintervaloftime.

Explanation
Moneyweightedreturnsaresensitivetothetimingorrecognitionofcashflowswhiletimeweightedratesofreturnarenot.

Question#25of72

QuestionID:485757

Aninvestorstartedtheyearwitha$10,000portfolio.Hemadea$1,000contributionattheendofthefirstquarter,a$2,000
withdrawalattheendofthethirdquarter,andendedtheyearwithaportfoliovalueof$10,553.Thequarterlyholdingperiod
returnsfortheinvestor'sportfolioareasfollows.
Q1

Q2

Q3

Q4

3%

5%

8%

10%

Theeffectiveannualmoneyweightedandtimeweightedreturnsareclosestto:
Money
weighted

Timeweighted

A) 15.13%

3.84%

B) 3.59%

16.25%

C) 15.13%

16.25%

Explanation
ThemoneyweightedreturnissimplytheIRR.TocalculatethequarterlyIRRfortheportfolio,usethecashflowfunctionsof
thefinancialcalculator.Cashinflowsareinputasnegativenumbersandcashoutflowsarepositivenumbers.Thevalueofthe
portfolioattheendoftheyearisconsideredacashoutflowbecausethatistheamountyoucouldpotentiallywithdrawifyou
liquidatedtheportfolio.
CF0=10,000CF1=1,000CF2=2,000CF3=10,553CPTIRR=3.5856%.ThisistheperiodicIRR(quarterly).The
effectiveannualreturnis(1+0.035856)41=15.13%.
Thetimeweightedreturnisthegeometricallylinkedsubperiodreturns:
(1.03)(0.95)(1.08)(1.10)1=16.25%.

Question#26of72

QuestionID:412838

Aninvestmentwithacostof$5,000isexpectedtohavecashinflowsof$3,000inyear1,and$4,000inyear2.Theinternal
rateofreturn(IRR)forthisinvestmentisclosestto:
A) 30%.
B) 25%.
C) 15%.
Explanation
TheIRRisthediscountratethatmakesthenetpresentvalueoftheinvestmentequalto0.
Thismeans$5,000+$3,000/(1+IRR)+$4,000/(1+IRR)2=0
Onewaytocomputethisproblemistousetrialanderrorwiththeexistinganswerchoicesandchoosethediscountratethat
makesthePVofthecashflowsclosestto5,000.
$3,000/(1.25)+$4,000/(1.25)2=4,960.

Alternatively:CFO=5,000CF1=3,000CF2=4,000CPTIRR=24.3%.

Question#27of72

QuestionID:412888

ATbillwithafacevalueof$100,000and140daysuntilmaturityissellingfor$98,000.Whatisthemoneymarketyield?
A) 5.25%.
B) 2.04%.
C) 5.41%.
Explanation
Themoneymarketyieldisequivalenttotheholdingperiodyieldannualizedbasedona360dayyear.=(2,000/98,000)(360/
140)=0.0525,or5.25%.

Question#28of72

QuestionID:412866

Themoneyweightedreturnalsoisknownasthe:
A) measureofthecompoundrateofgrowthof$1overastatedmeasurement
period.
B) internalrateofreturn(IRR)ofaportfolio.
C) returnoninvestedcapital.
Explanation
ItistheIRRofaportfolio,takingintoaccountallofthecashinflowsandoutflows.

Question#29of72

QuestionID:412856

WhenAnnetteFamiglettihearsthatabaseballlovingfriendiscomingtovisit,shepurchasestwopremiumseatingticketsfor
$45perticketforaneveninggame.Asthedateofthegameapproaches,Famigletti'sfriendtelephonesandsaysthathistrip
hasbeencancelled.FortunatelyforFamigletti,theticketssheholdsareinhighdemandasthereischancethattheleading
MajorLeagueBaseballhitterwillbreakthehomerunrecordduringthegame.Seeinganopportunitytoearnahighreturn,
Famiglettiputstheticketsupforsaleonaninternetsite.Theauctionclosesat$150perticket.Afterpayinga10%commission
tothesite(ontheamountofthesale)andpaying$8totalinshippingcosts,Familgletti'sholdingperiodreturnis
approximately:
A) 182%.
B) 202%.
C) 191%.
Explanation
Theholdingperiodreturniscalculatedas:(endingpricebeginningprice+/anycashflows)/beginningprice.Here,the
beginningandendingpricesaregiven.Theothercashflowsconsistofthecommissionof$30(0.101502tickets)andthe

shippingcostof$8(totalforbothtickets).Thus,herholdingperiodreturnis:(2150245308)/(245)=1.91,or
approximately191%.

Question#30of72

QuestionID:412895

WhatistheeffectiveannualyieldofaTbillthathasamoneymarketyieldof5.665%and255daystomaturity?
A) 4.01%.
B) 5.92%.
C) 5.79%.
Explanation
HoldingPeriodYield=4.0127%=5.665%(255/360)
EffectiveAnnualYield=(1.040127)365/255=1.05711=5.79%.

Question#31of72

QuestionID:412845

Whichofthefollowingstatementsregardingmakinginvestmentdecisionsusingnetpresentvalue(NPV)andinternalrateof
return(IRR)isleastaccurate?
A) Iftwoprojectsaremutuallyexclusive,oneshouldalwayschoosetheproject
withthehighestIRR.
B) ProjectswithapositiveNPVsincreaseshareholderwealth.
C) IfafirmundertakesazeroNPVproject,thefirmwillgetlarger,butshareholderwealth
willnotchange.
Explanation
Iftwoprojectsaremutuallyexclusive,thefirmshouldalwayschoosetheprojectwiththehighestNPVratherthanthehighest
IRR.Iftwoprojectsaremutuallyexclusive,thefirmmayonlychooseone.ItispossibleforNPVandIRRtogiveconflicting
decisionsforprojectsofdifferentsizes.BecauseNPVisadirectmeasureofthechangeinshareholderwealth,NPVcriteria
shouldbeusedwhenNPVandIRRdecisionsconflict.
WhenaprojecthasapositiveNPV,itwilladdtoshareholderwealthbecausetheprojectisearningmorethantheopportunity
costofcapitalneededtoundertaketheproject.IfafirmtakesonazeroNPVproject,thefirmwillearnexactlyenoughtocover
theopportunitycostofcapital.Thefirmwillincreaseinsizebytakingtheproject,butshareholderwealthwillnotchange.

Question#32of72

QuestionID:412851

Theinternalrateofreturn(IRR)methodandnetpresentvalue(NPV)methodofprojectselectionwillalwaysprovidethesame
acceptorrejectdecisionwhen:
A) upfrontprojectcostsareunder$1.0million.
B) theprojectsaremutuallyexclusive.

C) theprojectsareindependent.
Explanation
Ifaproject'sIRRexceedsthecostofcapital,theproject'sNPVwillbepositive.TheonlywayinwhichacceptingapositiveNPV
projectwouldreducefirmvalueisifitsselectionprecludesselectionofaprojectthatwouldhaveenhancedfirmvaluetoa
greaterextent(i.e.,hadahigherNPV).IRRandNPVmethodaccuracydonotdependuponprojectdurationorcosts.

Question#33of72

QuestionID:412887

ATbillwithafacevalueof$100,000and140daysuntilmaturityissellingfor$98,000.Whatisitsholdingperiodyield?
A) 2.04%.
B) 5.14%.
C) 5.25%.
Explanation
TheholdingperiodyieldisthereturntheinvestorwillearniftheTbillisheldtomaturity.HPY=(100,00098,000)/98,000=
0.0204,or2.04%.

Question#34of72

QuestionID:412863

Timeweightedreturnsareusedbytheinvestmentmanagementindustrybecausethey:

A) takeallcashinflowsandoutflowsintoaccountusingtheinternalrateofreturn.
B) resultinhigherreturnsversusthemoneyweightedreturncalculation.
C) arenotaffectedbythetimingofcashflows.
Explanation
Timeweightedreturnsarenotaffectedbythetimingofcashflows.Moneyweightedreturns,bycontrast,willbehigherwhenfundsare
addedatafavorableinvestmentperiodorwillbelowerwhenfundsareaddedduringanunfavorableperiod.Thus,timeweightedreturns
offerabetterperformancemeasurebecausetheyarenotaffectedbythetimingofflowsintoandoutoftheaccount.

Question#35of72

QuestionID:412883

ATreasurybill(Tbill)with38daysuntilmaturityhasabankdiscountyieldof3.82%.Whichofthefollowingisclosesttothe
moneymarketyieldontheTbill?
A) 3.81%.
B) 3.87%.
C) 3.84%.
Explanation

Theformulaforthemoneymarketyieldis:[360bankdiscountyield]/[360(tbankdiscountyield)].Therefore,themoney
marketyieldis:[3600.0382]/[360(380.0382)]=(13.752)/(358.548)=0.0384,or3.84%.
Alternatively:Actualdiscount=3.82%(38/360)=0.4032%.
TBillprice=1000.4032=99.5968%.
HPR=(100/99.5968)1=0.4048%.
MMY=0.4048%(360/38)=3.835%.

Question#36of72

QuestionID:412889

ATbillwithafacevalueof$100,000and140daysuntilmaturityissellingfor$98,000.Whatistheeffectiveannualyield
(EAY)?
A) 2.04%.
B) 5.41%.
C) 5.14%.
Explanation
TheEAYtakestheholdingperiodyieldandannualizesitbasedona365dayyearaccountingforcompounding.HPY=
(100,00098,000)/98,000=0.0204.EAY=(1+HPY)365/t 1=(1.0204)365/1401=0.05406=5.41%.

Question#37of72

QuestionID:412853

Ifaninvestorboughtastockfor$32andsolditoneyearlaterfor$37.50afterreceiving$2individends,whatwastheholding
periodreturnonthisinvestment?
A) 6.25%.
B) 23.44%.
C) 17.19%.
Explanation
HPR=[D+EndPriceBegPrice]/BegPrice
HPR=[2+37.5032]/32=0.2344.

Question#38of72

QuestionID:412844

WilliamsWarehousingcurrentlyhasawarehouseleasethatcallsforfiveannualpaymentsof$120,000.Thewarehouse
owner,whoneedscash,isofferingWilliamsadealwhereinWilliamswillpay$200,000thisyearandthenpayonly$80,000
eachoftheremaining4years.(Assumethatallleasepaymentsaremadeatthebeginningoftheyear.)ShouldWilliams
Warehousingaccepttheofferifitsrequiredrateofreturnis9%,andwhy?

A) Yes,thereisasavingsof$45,494inpresentvalueterms.
B) No,thereisanadditional$80,000paymentinthisyear.
C) Yes,thereisasavingsof$49,589inpresentvalueterms.
Explanation
Thepresentvalueofthecurrentleaseis$508,766.38,whilethepresentvalueoftheleasebeingofferedis$459,177.59a
savingsof49,589.Alternatively,thepresentvalueoftheextra$40,000atthebeginningofeachofthenext4yearsis
$129,589whichis$49,589morethantheextra$80,000addedtothepaymenttoday.

Question#39of72

QuestionID:412846

JackSmith,CFA,isanalyzingindependentinvestmentprojectsXandY.Smithhascalculatedthenetpresentvalue(NPV)and
internalrateofreturn(IRR)foreachproject:

ProjectX:NPV=$250IRR=15%
ProjectY:NPV=$5,000IRR=8%
Smithshouldmakewhichofthefollowingrecommendationsconcerningthetwoprojects?
A) AcceptProjectYonly.
B) AcceptProjectXonly.
C) Acceptbothprojects.
Explanation
Theprojectsareindependent,meaningthateitheroneorbothprojectsmaybechosen.BothprojectshavepositiveNPVs,
thereforebothprojectsaddtoshareholderwealthandbothprojectsshouldbeaccepted.

Question#40of72

QuestionID:412904

AninvestorhasjustpurchasedaTreasurybillfor$99,400.Ifthesecuritymaturesin40daysandhasaholdingperiodyieldof
0.604%,whatisitsmoneymarketyield?
A) 5.650%.
B) 5.436%.
C) 5.512%.
Explanation
Themoneymarketyieldistheannualizedyieldonthebasisofa360dayyearanddoesnottakeintoaccounttheeffectof
compounding.Themoneymarketyield=(holdingperiodyield)(360/numberofdaysuntilmaturity)=(0.604%)(360/40)=
5.436%.

Question#41of72

QuestionID:412860

AninvestorisconsideringinvestinginTawariCompanyforoneyear.Heexpectstoreceive$2individendsovertheyearand
feelshecansellthestockfor$30attheendoftheyear.Torealizeareturnontheinvestmentovertheyearof14%,theprice
theinvestorwouldpayforthestocktodayisclosestto:
A) $29.
B) $28.
C) $32.
Explanation
HPR=[Dividend+(EndingpriceBeginningprice)]/Beginningprice
0.14=[2+(30P)]/P
1.14P=32soP=$28.07

Question#42of72

QuestionID:412884

ATreasurybill(Tbill)withafacevalueof$10,000and44daysuntilmaturityhasaholdingperiodyieldof1.1247%.Whichof
thefollowingisclosesttotheeffectiveannualyieldontheTbill?
A) 12.47%.
B) 8.76%.
C) 9.72%.
Explanation
Theformulafortheeffectiveannualyieldis:((1+HPY)365/t )1.Therefore,theEAYis:((1.011247)(365/44))1=0.0972,or
9.72%

Question#43of72

QuestionID:412840

ThecapitalbudgetingdirectorofGreenManufacturingisevaluatingalaserimagingprojectwiththefollowingcharacteristics:
Cost:$150,000
Expectedlife:3years
Aftertaxcashflows:$60,317peryear
Salvagevalue:$0
IfGreenManufacturing'scostofcapitalis11.5%,whatistheproject'sinternalrateofreturn(IRR)?
A) 13.6%.
B) 10.0%.
C) $3,875.
Explanation
SinceweareseekingtheIRR,theanswerhastobeintermsofarateofreturn,thiseliminatestheoptionnotwrittenina

percentage.
Sincetheypayments(cashflows)areequals,wecancalculatetheIRRas:N=3PV=150,000PMT=60,317CPTI/Y=
9.999

Question#44of72

QuestionID:412898

IftheholdingperiodyieldonaTreasurybill(Tbill)with197daysuntilmaturityis1.07%,whatistheeffectiveannualyield?
A) 0.58%.
B) 1.07%.
C) 1.99%.
Explanation
TocalculatetheEAYfromtheHPY,theformulais:(1+HPY)(365/t)1.Therefore,theEAYis:(1.0107)(365/197)1=0.0199,or
1.99%.

Question#45of72

QuestionID:412890

WhatistheeffectiveannualyieldforaTreasurybillpricedat$98,853withafacevalueof$100,000and90daysremaining
untilmaturity?
A) 1.16%.
B) 4.79%.
C) 4.64%.
Explanation
HPY=(100,00098,853)/98,853=1.16%
EAY=(1+0.0116)365/901=4.79%

Question#46of72

QuestionID:412876

Aninvestorbuysoneshareofstockfor$100.Attheendofyearoneshebuysthreemoresharesat$89pershare.Attheend
ofyeartwoshesellsallfoursharesfor$98each.Thestockpaidadividendof$1.00pershareattheendofyearoneand
yeartwo.Whatistheinvestor'smoneyweightedrateofreturn?
A) 5.29%.
B) 0.06%.
C) 6.35%.
Explanation
T=0:Purchaseoffirstshare=$100.00

T=1:Dividendfromfirstshare=+$1.00
Purchaseof3moreshares=$267.00
T=2:Dividendfromfourshares=+4.00
Proceedsfromsellingshares=+$392.00
Themoneyweightedreturnistheratethatsolvestheequation:
$100.00=$266.00/(1+r)+396.00/(1+r)2.
CFO=100CF1=266CF2=396CPTIRR=6.35%.

Question#47of72

QuestionID:412849

SarahKelley,CFA,isanalyzingtwomutuallyexclusiveinvestmentprojects.Kelleyhascalculatedthenetpresentvalue(NPV)
andinternalrateofreturn(IRR)foreachproject:

Project1:NPV=$230IRR=15%
Project2:NPV=$4,000IRR=6%
Kelleyshouldmakewhichofthefollowingrecommendationsconcerningthetwoprojects?
A) AcceptProject2only.
B) AcceptProject1only.
C) Acceptbothprojects.
Explanation
Becausetheinvestmentprojectsaremutuallyexclusive,onlyoneprojectcanbechosen.TheNPVandIRRcriteriaaregiving
conflictingprojectrankings.Whendecisioncriteriaconflict,alwaysusetheNPVcriteriabecauseNPVevaluatesprojectsusing
anappropriatediscountrate,theweightedaveragecostofcapital.TheIRRmaynotbeamarketrate,thereforefuturecash
flowsassociatedwiththeprojectmaynotbecapableofearningarateofreturnequaltotheIRR.

Question#48of72

QuestionID:412880

WhatistheyieldonadiscountbasisforaTreasurybillpricedat$97,965withafacevalueof$100,000thathas172daysto
maturity?
A) 3.95%.
B) 2.04%.
C) 4.26%.
Explanation
($2,035/$100,000)(360/172)=0.04259=4.26%=bankdiscountyield.

Question#49of72

QuestionID:412842

Financialmanagersshouldalwaysselecttheprojectthatprovidesthehighestnetpresentvalue(NPV)wheneverNPVandIRR
methodsconflict,becausemaximizing:
A) shareholderwealthisthegoaloffinancialmanagement.
B) theshareholders'rateofreturnisthegoaloffinancialmanagement.
C) revenuesisthegoaloffinancialmanagement.
Explanation
Focusingonthemaximizationofearningsdoesnotconsiderthedifferencesinriskacrossprojects,whilefocusingonrevenues
precludesconcernfortheexpensesincurred.Earningahigherreturnonasmallprojectprovideslessofabenefitthanearning
aslightlylowerrateofreturnonamuchlargerproject.

Question#50of72

QuestionID:412875

Aninvestorbuysfoursharesofstockfor$50pershare.Attheendofyearoneshesellstwosharesfor$50pershare.Atthe
endofyeartwoshesellsthetworemainingsharesfor$80each.Thestockpaidnodividendattheendofyearoneanda
dividendof$5.00pershareattheendofyeartwo.Whatisthedifferencebetweenthetimeweightedrateofreturnandthe
moneyweightedrateofreturn?
A) 14.48%.
B) 20.52%.
C) 9.86%.
Explanation
T=0:Purchaseoffourshares=$200.00
T=1:Dividendfromfourshares=+$0.00
Saleoftwoshares=+$100.00
T=2:Dividendfromtwoshares=+$10.00
Proceedsfromsellingshares=+$160.00
Themoneyweightedreturnistheratethatsolvestheequation:
$200.00=$100.00/(1+r)+$170.00/(1+r)2.
Cfo=200,CF1=100,Cf2=170,CPTIRR=20.52%.
Theholdingperiodreturninyearoneis($50.00$50.00+$0.00)/$50.00=0.00%.
Theholdingperiodreturninyeartwois($80.00$50.00+$5.00)/$50=70.00%.
Thetimeweightedreturnis[(1+0.00)(1+0.70)]1/21=30.38%.
Thedifferencebetweenthetwois30.38%20.52%=9.86%.

Question#51of72

QuestionID:412879

ATreasurybillhas40daystomaturity,aparvalueof$10,000,andiscurrentlysellingfor$9,900.Itseffectiveannualyieldis
closestto:
A) 9.60%.
B) 1.00%.
C) 9.00%.
Explanation
Theeffectiveannualyield(EAY)isbasedona365dayyearandaccountsforcompoundinterest.EAY=(1+holdingperiod
yield)365/t 1.Theholdingperiodyieldformulais(pricereceivedatmaturityinitialprice+interestpayments)/(initialprice)=
(10,0009,900+0)/(9,900)=1.01%.EAY=(1.0101)365/401=9.60%.

Question#52of72

QuestionID:412843

ThefinancialmanageratIBFM,afarmimplementdistributor,iscontemplatingthefollowingthreemutuallyexclusiveprojects.
IBFM'srequiredrateofreturnis9.5%.Basedontheinformationprovided,whichshouldthefinancialmanagerselectand
why?

Project Investmentatt=0 CashFlowatt=1 IRR NPV@9.5%


A

$10,000

$11,300

13.00

$320

$25,000

$29,000

16.00

$1,484

$35,000

$40,250

15.00

$1,758

A) Alloftheprojects,becausetheyallearnmorethan9.5%.
B) ProjectAwiththelowestinitialinvestment.
C) ProjectCwiththehighestnetpresentvalue.
Explanation
Whenprojectsaremutuallyexclusive,onlyonecanbechosen.Projectselectionshouldbedoneonthebasisofwhichproject
willenhancefirmvaluethemost.Thatproject,ProjectCinthiscase,istheonewiththehighestNPV.

Question#53of72

QuestionID:412872

RobertMackenzie,CFA,buys100sharesofGWNBrewerieseachyearforfouryearsatpricesofC$10,C$12,C$15and
C$13respectively.GWNpaysadividendofC$1.00attheendofeachyear.Oneyearafterhislastpurchasehesellsallhis
GWNsharesatC$14.Mackenziecalculateshisaveragecostpershareas[(C$10+C$12+C$15+C$13)/4]=C$12.50.
Mackenziethenusestheinternalrateofreturntechniquetocalculatethathismoneyweightedannualrateofreturnis12.9%.
HasMackenziecorrectlydeterminedhisaveragecostpershareandmoneyweightedrateofreturn?
Averagecost

Moneyweighted
return

A) Correct

Correct

B) Incorrect

Correct

C) Correct

Incorrect

Explanation
BecauseMackenziepurchasedthesamenumberofshareseachyear,thearithmeticmeanisappropriateforcalculatingthe
averagecostpershare.Ifhehadpurchasedsharesforthesameamountofmoneyeachyear,theharmonicmeanwouldbe
appropriate.Mackenzieisalsocorrectinusingtheinternalrateofreturntechniquetocalculatethemoneyweightedrateof
return.Thecalculationisasfollows:
Time

Purchase/Sale

Dividend

Netcashflow

1,000

1,000

1,200

+100

1,100

1,500

+200

1,300

1,300

+300

1,000

40014=+5,600

+400

+6,000

CF0=1,000CF1=1,100CF2=1,300CF3=1,000CF4=6,000CPTIRR=12.9452.

Question#54of72

QuestionID:412902

ATreasurybill,with80daysuntilmaturity,hasaneffectiveannualyieldof8%.Itsholdingperiodyieldisclosestto:
A) 1.75%.
B) 1.70%.
C) 1.72%.
Explanation
Theeffectiveannualyield(EAY)isequaltotheannualizedholdingperiodyield(HPY)basedona365dayyear.EAY=(1+
HPY)365/t 1.HPY=(EAY+1)t/3651=(1.08)80/3651=1.70%.

Question#55of72

QuestionID:412897

Theeffectiveannualyieldforaninvestmentis10%.Whatistheyieldforthisinvestmentonabondequivalentbasis?
A) 9.76%.
B) 4.88%.
C) 10.00%.
Explanation

First,theannualyieldmustbeconvertedtoasemiannualyield.Theresultisthendoubledtoobtainthebondequivalentyield.
Semiannualyield=1.10.51=0.0488088.
Thebondequivalentyield=20.0488088=0.097618.

Question#56of72

QuestionID:412881

ATreasurybill(Tbill)withafacevalueof$10,000and137daysuntilmaturityissellingfor98.125%offacevalue.Whichof
thefollowingisclosesttothebankdiscountyieldontheTbill?
A) 4.56%.
B) 4.93%.
C) 5.06%.
Explanation
Theformulaforbankdiscountyieldis:(D/F)(360/t).Actualdiscountis10.98125=0.01875.Annualizedis:0.01875
(360/137)=0.04927

Question#57of72

QuestionID:412900

Ifthemoneymarketyieldis3.792%onaTbillwith79daystomaturity,whatistheholdingperiodyield?
A) 0.89%.
B) 0.77%.
C) 0.83%.
Explanation
Theholdingperiodyieldcanbecalculatedfromthemoneymarketyieldas:(moneymarketyield)(360t).Therefore,the
HPYis(0.03792)(79360)=0.0083=0.83%.

Question#58of72

QuestionID:412841

ThefinancialmanageratJohnson&Smithestimatesthatitsrequiredrateofreturnis11%.Whichofthefollowingindependent
projectsshouldJohnson&Smithaccept?
A) ProjectArequiresanupfrontexpenditureof$1,000,000andgeneratesanNPV
of$4,600.
B) ProjectCrequiresanupfrontexpenditureof$600,000andgeneratesapositive
internalrateofreturnof12.0%.
C) ProjectBrequiresanupfrontexpenditureof$800,000andgeneratesapositiveIRR
of10.5%.
Explanation

Whenprojectsareindependent,youcanuseeithertheNPVmethodorIRRmethodtomaketheacceptorrejectdecision.
OnlyProjectChasanIRRinexcessof11%.AcceptanceofProjectAreducesthefirm'svalueby$4,600.

Question#59of72

QuestionID:412850

ThefinancialmanageratKyserJonesisconsideringtwomutuallyexclusiveprojectswiththefollowingprojectedcashflows:

ProjectedCashFlows
Year

ProjectM

ProjectZ

$60,000

$60,000

22,500

22,500

22,500

22,500

111,000

IfKyserJones'requiredrateofreturnis11%,whichprojectwouldbechosenandwhy?
A) ProjectZ,becauseithasthehighernetpresentvalue.
B) Bothprojectsbecausetheirnetpresentvaluesarepositive.
C) ProjectM,becauseithasthehigherinternalrateofreturn.
Explanation
Sincetheprojectsaremutuallyexclusive,onlyoneoftheprojectsmaybechosen.ProjectZhasthehigherNPV.Ontheexam,
alwaysuseNPVforchoosingbetweenmutuallyexclusiveprojects.

CashFlowInputValues
ProjectM

ProjectZ

CF0

60,000

60,000

CF1

22,500

F1

CF2

111,000

F2

OutputValues
ProjectM

ProjectZ

NPV

$9,805

$13,119

IRR

18.45%

16.62%

Question#60of72

QuestionID:412901

TheholdingperiodyieldforaTBillmaturingin110daysis1.90%.Whataretheequivalentannualyield(EAY)andthemoney

marketyield(MMY)respectively?
A) 5.25%5.59%.
B) 6.90%6.80%.
C) 6.44%6.22%.
Explanation
TheEAYtakestheholdingperiodyieldandannualizesitbasedona365dayyearaccountingforcompounding.(1+
0.0190)365/1101=1.064441=6.44%.UsingtheHPYtocomputethemoneymarketyield=HPY(360/t)=0.0190(360
/110)=0.06218=6.22%.

Question#61of72

QuestionID:412892

A10%couponbondwaspurchasedfor$1,000.Oneyearlaterthebondwassoldfor$915toyield11%.Theinvestor'sholding
periodyieldonthisbondisclosestto:
A) 9.0%.
B) 1.5%.
C) 18.5%.
Explanation
HPY=[(interest+endingvalue)/beginningvalue]1
=[(100+915)/1,000]1
=1.0151=1.5%

Question#62of72

QuestionID:434186

Aninvestorbuysa$1,000parvalue,10.375%coupon,annualpaybondfor$1,033.44andsellsitoneyearlaterfor
$1,014.06.Whatistheholdingperiodyield?
A) 8.16%.
B) 8.22%.
C) 8.14%.
Explanation
Therateofreturnequalsthe[(endingcashprice)/price]100=
[(1014.06+103.751033.44)/1033.44]100=8.16%

Question#63of72

QuestionID:412852

Abondwaspurchasedexactlyoneyearagofor$910andwassoldtodayfor$1,020.Duringtheyear,thebondmadetwo
semiannualcouponpaymentsof$30.Whatistheholdingperiodreturn?

A) 6.0%.
B) 18.7%.
C) 12.1%.
Explanation
HPY=(1,020+30+30910)/910=0.1868or18.7%.

Question#64of72

QuestionID:412886

ATbillwithafacevalueof$100,000and140daysuntilmaturityissellingfor$98,000.Whatisthebankdiscountyield?
A) 4.18%.
B) 5.14%.
C) 5.41%.
Explanation
Actualdiscountis2%,annualizeddiscountis:0.02(360/140)=5.14%

Question#65of72

QuestionID:412855

Aninvestorsolda30yearbondatapriceof$850afterhepurchaseditat$800ayearago.Hereceived$50ofinterestatthe
timeofthesale.Theannualizedholdingperiodreturnis:
A) 12.5%.
B) 15.0%.
C) 6.25%.
Explanation
Theholdingperiodreturn(HPR)iscalculatedasfollows:

HPR=(PtPt1+Dt)/Pt
where:
Pt=pricepershareattheendoftimeperiodt
Dt=cashdistributionsreceivedduringtimeperiodt.
Here,HPR=(850800+50)/800=0.1250,or12.50%.

Question#66of72

QuestionID:412899

AbrokercallswithaproposaltobuyaTreasurybill(Tbill)with186daystomaturity.Hesaystheeffectiveannualyieldonthe
Tbillis4.217%.Whatistheholdingperiodyieldifyouholdthebilluntilmaturity?
A) 2.13%.

B) 8.44%.
C) 2.02%.
Explanation
TocalculatetheHPYfromtheEAY,theformulais:(1+EAY)(t/365)1.Therefore,theHPYis:(1.04217)(186/365)1=0.0213,or
2.13%.

Question#67of72

QuestionID:412847

WhichofthefollowingisNOTaproblemwiththeinternalrateofreturn(IRR)?
A) NonnormalcashflowpatternsmayresultinmultipleIRRs.
B) SometimestheIRRexceedsthecostofcapital.
C) AhigherIRRdoesnotnecessarilyindicateamoreprofitableproject.
Explanation
IftheIRRexceedsthecostofcapital,thatmerelyindicatesthattheprojectisacceptablethisisnotaproblemassociatedwith
IRR.Nonnormalcashflowpatternssuchascashoutflowsduringtheproject'slifecanresultinmultipleIRRs,leavingopenthe
questionastowhichoneisvalid.AhigherIRRwillonlyberealizediftheproject'scashflowscanbereinvestedattheIRR,and
thetrueprofitabilityofaprojectalsodependsonprojectsize,notjustIRR.

Question#68of72

QuestionID:412896

TheholdingperiodyieldofaTbillthathasabankdiscountyieldof4.70%andamoneymarketyieldof4.86%andmaturesin240daysis
closestto:

A) 3.2%.
B) 2.8%.
C) 4.9%.
Explanation
4.86(240/360)=3.24%.

Question#69of72
Thebankdiscountofa$1,000,000Tbillwith135daysuntilmaturitythatiscurrentlysellingfor$979,000is:
A) 6.1%.
B) 5.6%.
C) 5.8%.
Explanation

QuestionID:412878

($21,000/1,000,000)(360/135)=5.6%.

Question#70of72

QuestionID:412859

BancaHakalapurchasestwofrontrowconcertticketsovertheInternetfor$90perseat.Onemonthlater,therockgroup
announcesthatitisdissolvingduetopersonalityconflictsandtheconcertthatHakalahasticketsforwillbethe"farewell"
concert.Hakalaseesachancetoraisesomequickcash,sosheputstheticketsupforsaleonthesameinternetsite.The
auctionclosesat$250perticket.Afterpayinga10%commissiontothesiteontheamountofthesaleandpaying$10in
shippingcosts,Hakala'sonemonthholdingperiodreturnisapproximately:
A) 139%.
B) 144%.
C) 44%.
Explanation
Theholdingperiodreturniscalculatedas:(endingpricebeginningprice+/anycashflows)/beginningprice.Here,the
beginningandendingpricesaregiven.Theothercashflowsconsistofthecommissionof0.10$2502tickets=$50and
theshippingcostof$10(totalforbothtickets).
Thus,heronemonthholdingperiodreturnis:[(2$250)(2$90)$50$10]/(2$90)=1.44,orapproximately144%.

Question#71of72

QuestionID:412867

Whichofthefollowingismostaccuratewithrespecttotherelationshipofthemoneyweightedreturntothetimeweighted
return?Iffundsarecontributedtoaportfoliojustpriortoaperiodoffavorableperformance,the:
A) moneyweightedrateofreturnwilltendtobeelevated.
B) moneyweightedrateofreturnwilltendtobedepressed.
C) timeweightedrateofreturnwilltendtobeelevated.
Explanation
Thetimeweightedreturnsarewhattheyareandwillnotbeaffectedbycashinflowsoroutflows.Themoneyweightedreturn
issusceptibletodistortionsresultingfromcashinflowsandoutflows.Themoneyweightedreturnwillbebiasedupwardifthe
fundsareinvestedjustpriortoaperiodoffavorableperformanceandwillbebiaseddownwardiffundsareinvestedjustprior
toaperiodofrelativelyunfavorableperformance.Theoppositewillbetrueforcashoutflows.

Question#72of72

QuestionID:412865

Whichofthefollowingstatementsregardingthemoneyweightedandtimeweightedratesofreturnisleastaccurate?
A) Themoneyweightedrateofreturnremovestheeffectsofthetimingof
additionsandwithdrawalstoaportfolio.
B) Thetimeweightedrateofreturnreflectsthecompoundrateofgrowthofoneunitof
currencyoverastatedmeasurementperiod.

C) Thetimeweightedrateofreturnisthestandardintheinvestmentmanagement
industry.
Explanation
Themoneyweightedreturnisactuallyhighlysensitivetothetimingandamountofwithdrawalsandadditionstoaportfolio.
Thetimeweightedreturnremovestheeffectsoftimingandamountofwithdrawalstoaportfolioandreflectsthecompound
rateofgrowthof$1overastatedmeasurementperiod.Becausethetimeweightedrateofreturnremovestheeffectsof
timing,itisthestandardintheinvestmentmanagementindustry.