FSA - Q's

CFA Level I
#1
  1. Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45 percent. The firm paid $1 million to holders of its 1 million common shares and $250,000 to 100,000 preferred shareholders. What was AKB’s earnings per share (EPS) last year? A) $2.25. B) $2.50. C) $4.75. D) $3.75. ---------------------------------------------------------------------------------------------------------------- 2) Based on the following data, how many shares of common stock should be used to calculate diluted earnings per share? Net income of $1,500,000, tax retention rate of 60% 1,000,000 shares of common are outstanding at the beginning of the year. 10,000, 6% convertible bonds with each bond convertible into 20 shares of common stock were issued at par ($100) on June 30th of this year. The firm has 100,000 warrants outstanding all year with an exercise price of $25 per share. The average stock price for the period is $20, and the ending stock price is $30. A) 1,266,667. B) 1,000,000. C) 1,100,000. D) 1,016,667. --------------------------------------------------------------------------------------------------------------- 3) Which of the following statements about depreciation is TRUE? A) Straight line depreciation yields a decreasing rate of return over the life of the asset. B) The initial tax savings created by using accelerated depreciation rather than straight-line depreciation is a deferral because a greater tax payment will be required at the end of the asset’s life. C) The total depreciation expense calculated with the sum of the years digits method is greater than that given by using the straight-line method. D) All of these are correct. ---------------------------------------------------------------------------------------------------------------- 4) During periods of rising prices: A) LIFO Gross Profit Margin> FIFO Gross Profit Margin. B) LIFO Current ratio> FIFO Current Ratio. C) LIFO Inventory Turnover < FIFO Inventory Turnover. D) LIFO Debt to Equity Ratio> FIFO Debt to Equity Ratio. ---------------------------------------------------------------------------------------------------------------- 5) At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of $20 million, cost of goods sold (COGS) of $64 million, and inventory purchases of $58 million. If the LIFO reserve was $6 million at the end of 2006 and $16 million at the end of 2007, compute first-in, first-out (FIFO) inventory at the end of 2007 and FIFO COGS for the year ended 2007. FIFO Inventory FIFO COGS A) $36 million $74 million B) $36 million $54 million C) $26 million $54 million D) $26 million $74 million ---------------------------------------------------------------------------------------------------------------- 6) A company has $5 million in debt outstanding with a coupon rate of 12 percent. Currently the YTM on these bonds is 14 percent. If the tax rate is 40 percent, what is the after tax cost of debt? A) 5.6%. B) 8.4%. C) 4.8%. D) 7.2%
#2
  1. C 2. C 3. B 4. D 5. Dont feel like doing it… 6.B
#3

Answers: 1) C EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million – 250,000) for AKB. ---------------------------------------------------------------------------------------------------------------- 2) C First, Check for dilution: Basic EPS = 1,500,000 / 1,000,000 = 1.50 Warrants: anti-dilutive since the average stock price is less than the exercise price Convertible bonds: numerator impact = (# bonds) × (par value) × (interest rate) × (tax retention rate) × (0.5 for 1/2 year outstanding) = (10,000) × (100) × (0.06) × (0.6) × (0.5) = 18,000, so the numerator = 1,518,000 Denominator impact: increase in average shares = [(# bonds) × (conversion factor) × (# months outstanding)] / 12 = (1,200,000 / 12 = 100,000) so, the denominator = 1,100,000 and EPS with conversion = 1,518,000 / 1,100,000 = 1.38, which is less than 1.50. The bonds are dilutive and the diluted EPS calculation should use 1,100,000 shares of common stock in the denominator. The warrants are out of the money based on the average price of $20. ---------------------------------------------------------------------------------------------------------------- 3) B In the early years of the asset’s life the increased depreciation will decrease earnings and therefore taxes will be less. In the later years of the asset’s life depreciation expense will decrease, income will increase, and taxes will increase. ---------------------------------------------------------------------------------------------------------------- 4) D FIFO inventory, and therefore FIFO assets and equity, will be higher by the LIFO reserve. ---------------------------------------------------------------------------------------------------------------- 5) B 2007 FIFO inventory was $36 million ($20 million LIFO inventory + $16 million reserve). 2007 FIFO COGS was $54 million ($64 million LIFO COGS – $10 million increase in LIFO reserve). ---------------------------------------------------------------------------------------------------------------- 6) B (0.14)(1 - 0.4)

#4
  1. B I believe: FIFOinv = LIFOinv + LR FIFOinv = $20M + $16M FIFOinv = $36M FIFOcogs = LIFOcogs - ChangeLR FIFOcogs = $64M - ($16M - $6M) FIFOcogs = $54M edit: cavil got to it first =]