- On Jan 1, 2007, Company A entered into a lease agreement to lease a piece of machinery as the lessor. The annual lease payments are $50,000 due Dec 31, the lease term is for 5 years, the machine has an estimated useful life of 6 years, and Company A currently records the machine on its balance sheet at its cost of $160,000. The incremental rate of the lease is 8% and they are reasonably assured of the collection of the lease payments. Which of the following best describes the classification and effect of the lease on Company A’s income statement for 2007? A) Operating lease, rental revenue of $50,000. B) Direct financing lease, interest income of $15,971. C) Sales type lease, gross profit of $39,635 plus interest income of $15,791. D) Direct financing lease, gross profit of $39,635 plus interest income of $15,791. => Can someone explain why it’s a direct financing lease rather than a sales-type lease? ------------------------------------- 2) Assets, Dec 31, 07 ::::::::::: $5,250,000 Liabilities, Dec 31, 07 ::::::::::: $2,200,000 Cont. Cap, Dec 31, 07 :::::::::: $1,400,000 Retained Earnings, Jan 1, 07::: $800,000 Dividends Declared during 07:: $200,000 Net Income for 2007 is closest to: A) $650,000 B) $850,000 C) $1,050,000 D) $1,850,000 ------------------------------------- 3) CITC Info: WACC: 14% ROA: 20% Dividend Yield: 0% Consensus Estimate of Stock’s Value: $53 Current Price of stock: $50 Industry Average: WACC: 12% ROA: 15% Dividend Yield: 1.2% Consensus Estimate of Stock’s Value: N/A Current Price of Stock: N/A A) CITC company is a growth company, it’s stock is a growth stock B) CITC company is a growth company, it’s stock is a speculative stock C) CITC company is a speculative company, it’s stock is a growth stock D) CITC company is a speculative company, it’s stock is a speculative stock -------------------------------------- 4) Compared with an otherwise identical amortizing security, a zero-coupon bond will most likely have: A) less interest rate risk and more reinvestment risk B) more interest rate risk and less reinvestment risk C) the same reinvestment risk and less interest rate risk D) the same interest rate risk and less reinvestment risk => B ? if so, is it because zero bonds are issued at discounts and thus have higher interest rate risk? -------------------------------------- 5) Which classification of hedge funds is least likely to use a short position in stock as a part of its strategy? A) Market-neutral funds B) Emering-market funds C) Distressed securities funds D) Risk arbitrage in M&A => C ? -------------------------------------- 6) The second step of the portfolio management process is least likely to include examining: A) historical trends B) current social conditions C) projected financial forecasts D) current and projected political conditions -------------------------------------- 7) An analyst purchased $100,000 of a newly issued Treasury inflation protection security based on the following info: Issuance:::::::::::::::::: Jan 1 08 Issuance Price::::::::::: $1,000 Maturity::::::::::::::::::: 10 years Auction set real rate:::: 2% Interest payable::::::::: Annually CPI-U::::::::::::::::::::::: 5% (annual rate) The coupon payment at the end of one year is: A) $2,000 B) $2,100 C) $5,000 D) $7,000 => $100,000*(1.05)*(.02) = $2,100 = B ? ------------------------------------- 8) A european-based company follows IASB GAAP and capitalizes new product development costs. In 2007 they spent $25 million on new product development and reported an amortization expense related to a prior year’s new product development of $10 million. Other info for 2007 is: Net Income: 225 million Average assets: 1875 million CFO: 290 million In comparing this company to a US based company with US GAAP, ignoring taxes, the ROA and CFO would be: A) ROA=10.7%, CFO=265 B) ROA=10.7%, CFO=275 C) ROA=11.2%, CFO=265 D) ROA=11.2%, CFO=275 => Sorry to repost this, I know there are 2 threads out there with this same question, but the last response came in May/June, so I was hoping some people might know how to answer this now (or map knows for sure now!).
===I don’t know how, but the other thread was deleted, so I’m re-posting the most relevant responses below=== FROM simski81 : 1. I think C. The PV of min payments is 199,635 while the thing is recorded at a cost of 160,000 so likely that the lessor manufactures it (making it s sales lease rather than direct financing if CL). Capital lease since PV min payments greater than 90% fv and lease term over 75% life of asset. Only sales type leases recognise profit at inception so lessor recognies difference between BV and PV as profit. BV x 8% = interest received each year after that, with the rest of the lease payment (50000) amortizing the asset to zero over the five years. 2. Equity = Assets – Liabilities = 3050000. We know equity consists of cont capital and beginning RE + net income for the year (less dividends). So minus 1.4m and 800k to give 850000. Note that we are not being asked to find the increase to RE (which would be 650k) but the net income so we do not deduct the dividend payments. 3. ROA above industry average and stock valued below intrinsic value = growth company and growth stock (there is a difference though!). 4. Zero coupon bonds have the largest duration (will change in value most) for a given yield change since the CF is all at maturity, hence the high interest rate risk. They have low reinvestment risk as there is no income to reinvest before maturity. 5. B – this is just looking for market exposure – all the others are seeking to benefit from gains and falls in the market. 6. B – I think. The rest seem more linked to investment management. 7. A – The principal amount on a TIPS bond is reset annually and you receive interest on the principal amount as it stood at the beginning of the period. So the interest is 2000 this year, but will be 2100 next year. 8. US GAAP states you must expense development costs. Net income is reduced by 25m as this would be expenses, but is also increased by the amortization of the prior year amount as this would have been expenses in the prior year. Assets are reduced by 25m as these would have been increased by capitalising the development costs. Not sure about prior year amortization since, while it would not have been on the balance sheet in the first place (so should deduct it)? CFO is reduced by the 25m expene – the 10m amort. Charge is non cash so doesnt affect this. I think ROA = 210/1860 = 11.29, and CFO is 265 so C.
FROM Mihaz :: ad7) I think it is 2100. I believe the principal should be adjusted for inflation in the last period and interest is calculated on this basis.
FROM skut003 :: “” 2. Equity = Assets – Liabilities = 3050000. We know equity consists of cont capital and beginning RE + net income for the year (less dividends). So minus 1.4m and 800k to give 850000. Note that we are not being asked to find the increase to RE (which would be 650k) but the net income so we do not deduct the dividend payments. “” i dont get this is dividends parts of NI ? , i got 1,050,000
FROM Mihaz :: I would also say 1,050,000 for q 2. I think you should add dividends not substract them in orther to get net income…
FROM simski81 :: yep sorry, agree on q2. its 1050000. does anyone have an authoratative stance on TIPS?
FROM cpk123 :: 1) On Jan 1, 2007, Company A entered into a lease agreement to lease a piece of machinery as the lessor. The annual lease payments are $50,000 due Dec 31, the lease term is for 5 years, the machine has an estimated useful life of 6 years, and Company A currently records the machine on its balance sheet at its cost of $160,000. The incremental rate of the lease is 8% and they are reasonably assured of the collection of the lease payments. Which of the following best describes the classification and effect of the lease on Company A’s income statement for 2007? A) Operating lease, rental revenue of $50,000. B) Direct financing lease, interest income of $15,971. C) Sales type lease, gross profit of $39,635 plus interest income of $15,791. D) Direct financing lease, gross profit of $39,635 plus interest income of $15,791. => Can someone explain why it’s a direct financing lease rather than a sales-type lease? Sales type lease is only for when the lessor is either the manufacturer and a profit is recognized at the inception of the lease. Since the PV(MLP) = 199635, and he is recording the asset at 160000, no profit is being recognized. And at no time does the question say that Company A is the manufacturer. So it is not a Sales type lease. As for Choice A, life of asset=6 years, life of lease = 5 years -> 83% > 75% so not an operating lease. Between B and D - only a Direct Financing lease - no Gross profit is recognized. D is therefore out and you are left with B. For B-> Interest Income = 199635 * .08=15971. Ans. 2) Assets, Dec 31, 07 ::::::::::: $5,250,000 Liabilities, Dec 31, 07 ::::::::::: $2,200,000 Cont. Cap, Dec 31, 07 :::::::::: $1,400,000 Retained Earnings, Jan 1, 07::: $800,000 Dividends Declared during 07:: $200,000 Net Income for 2007 is closest to: A) $650,000 B) $850,000 C) $1,050,000 D) $1,850,000 Ending E=A-L=5250-2200=3050 Ending E-Cont. Cap=3050-1400=1650=Ending RE. Beg RE + NI - Dividends Declared = Ending RE 800 + NI - 200 = 1650 NI = 1650+200-800=1050 Ans Choice C CP
again, i don’t know why the other thread got deleted, so I pasted most of the responses here. I apologize in advance if nothing was pasted 100% accurately. thanks for all the responses and thanks for explaining the lease one again CP 1) B , this is the real answer 2) so it’s consensus that we subtract the dividends even though they are _just_ declared? 6) anyone got any more input on this? 7) I tackled this problem after reading this: http://www.analystforum.com/phorums/read.php?11,765058,765064#msg-765064 Take a look and tell me if you still think the answer is A) 2000 or if it’s consensus that it should be B) 2100 A couple of these are from mock1 so I do have the answers for those. The rest are from mock2 and I _do not_ have the answers so I’m relying on you guys Reggie, definitely work through these and post your answers pls! beingthatguy, a friend from this forum was nice enough to send them to me about a month ago, if you want to take a look, shoot me an email at smahbod@gmail.com
For Question 7 it will be 2100 Looking at the CFAI notes page Vol 5 pp 300 “the inflation-adjusted principle that is the basis for computing the coupon interest of the first six-month period”
Yosh the thread probably got deleted because you were publicly posting questions and answers from a private CFA exam that you have to pay for to see.
Exactly. Better not run the risk to get banned. Don’t simply copy and paste if you really need to ask the same type of question.