SPOILER: Issues with certain Sample 1 Questions

Would appreciate any input on these loose ends I still can’t figure out. Ethics: 2. With respect to the company sponsored event that Lecompte attended, did she violate any CFA Standards? This refers to the ski resort she was invited to. Answer was that it is a violation because she allowed a corporate issuer to pay for her travel expenses. But she disclosed this to her supervisor. Why is it a problem? Is it because there was no mention of the event (skit resort) serving a business purpose? 4. According to the CFA Research Standards, does the first statement Lecompte makes in her television appearance provide all the recommended disclosure relating to potential conflicts of interest? Answer was that she didn’t provide all disclosures for NanoMem. Does anyone remember what she did wrong? The statement is “My firm makes markets in the securities of both NanoMem and UniFlash and I currently own a position in NanoMem.” I don’t see what else she could have added. The first line of the item set even has this same phrase. Perhaps the ski resort thing or the good relations with NanoMem should have been mentioned? Quant: 7. Given Hamilton’s finding regarding heteroskedascity, the most appropriate conclsion is that the variance of the error term is: Answer: B. correlated with the values of the independent variables. “Hamilton’s test confirmed the presence of conditional hetereoskadiscity, which means that the variance of the error term is correlated with the values of the independent variables.” This is confusing to me The definition to hetereoskadiscity is that the variance of the residuals are not constant. Our book makes no mention of the error terms being correlated with independent variables. Is this the same thing? Thanks for any input.

  1. According to the CFA Research Standards, does the first statement Lecompte makes in her television appearance provide all the recommended disclosure relating to potential conflicts of interest? Answer was that she didn’t provide all disclosures for NanoMem. Does anyone remember what she did wrong? The statement is “My firm makes markets in the securities of both NanoMem and UniFlash and I currently own a position in NanoMem.” I don’t see what else she could have added. The first line of the item set even has this same phrase. Perhaps the ski resort thing or the good relations with NanoMem should have been mentioned? ANSWER (Additional): She failed to disclose that their firm is also involved in the secondary offering for NanoMem. 7. Given Hamilton’s finding regarding heteroskedascity, the most appropriate conclsion is that the variance of the error term is: Answer: B. correlated with the values of the independent variables. “Hamilton’s test confirmed the presence of conditional hetereoskadiscity, which means that the variance of the error term is correlated with the values of the independent variables.” This is confusing to me The definition to hetereoskadiscity is that the variance of the residuals are not constant. Our book makes no mention of the error terms being correlated with independent variables. Is this the same thing? There are two parts to Heteroskedasticity. One “Unconditional” - level of independent variable does not affect the variance of the residual term. Other is “Conditional” -> level of independent variable affects the residual term variance. When level of independent variable affects the residual variance - it means they are positively correlated… Q2: Lecompte violated both the CFA Institute Standard relating to independence and objectivity and the CFA Institute Research Objectivity Standards by allowing a corporate issuer to pay for her travel expenses. She is getting “paid” thro the ski trip for her favorable recommendations about Nanomem. That and the fact that the company has adopted the Research Objectivity standards - will make this action a violation - since the independence and objectivity standard is violated.

That was exactly what I was looking for–thank you! I’ve got two more, would appreciate input on this as well: Econ: 15. If a dealer’s bid-side quote for the Canadian Dollar/Brazilian Real is CAD $0.525, Tremblay’s profit on a USD$$1,000,000 initial investment in the triangular arbitrage opportuninty is closest to: Didn’t have any problem with this calculation. My only Q is, how do you know in which direction to go in this problem? For example, to get the answer you go from USD–>BRZ–>CAD. But would you have to test the alternate scenario of doing USD–>CAD–>BRZ to see if the arbitrage earnings are larger here? My hunch is that in this Q you don’t have to since you can’t because you are only give the bid side quote only. Is this right? If we were given ask, would we have to compute it both way to see which one results in a larger USD? Equity: 27. Using Chan’s base case valuation assumptions and the FCFF valuation approach, the year-end 2007 value per share of McLaughlin common stock is closest to: They find firm value by doing FCFF/(WACC-g). Then Equity value = firm value - MV of debt. Then Equity Value/#shares = value per share. Two issues on the MV debt: 1) Shouldn’t it be called BV debt since it comes from the B/S–how is MV debt diff from BV debt? 2)I noticed that the MV of debt they use is only the LT debt from the Balance Sheet. Is this always the case–to leave out Current Liabilitilities when computing MV or BV of debt? I guess more simply my Q is if CL are or are not part of debt when finding the value of a firm.

q15. If ask is also provided go finding whether there is an arbitrage possible. But most often - you will find arbitrage only in 1 route - otherwise none at all. q27: Book Value of debt is what the company paid to initially take on the debt. It might have been 5% coupon at say 6% YTM - which meant that it got the debt at a discount. Now subsequently market rates may have fallen to say 4% - which means the same debt is now a premium. So you have a new market value for that debt. And this is what someone who is trying to buy out your company at an arms length transaction would have to pay. So BV(Debt) is historical, MV(Debt) is what is now and present. It could also go the other way that rates increased further - and the debt is now more cheap.

#15… The arbritrage oppurtunity’s are the same either way around the triangle, just one is positive and one is negative. This arbitrage is a zero-sum game #27 1) It stated in the problem market value and Book value were approximately equal, so in this case they werent different. 2) I believe (not 100% sure) that current assets and current liabilities are used in your working capital investment to arrive at FCFF. So since they are already stripped out, you do not need to strip them out again when finding the MV of debt. (that is merely speculating, but you are right, they didnt count the current liab for some reason)

thx cpk. on the econ question: it is essentially trial and error then if we get an ask rate, right? because we could go one way, get a loss, then have to go the other way. on the equity q, can you please address the q i had about current liabilities not being part of mv debt? thanks again.

Current liabs - also has a portion of debt - which is the notes payable - which is not included as part of the WCInv of the firm. So when they state MV(Debt) I would assume that it includes the notes payable portion from the CL too. In this particular question - they chose to show only Current Liabs and LT Debt - and make a statement that MV(LTD) = BV(LTD) - so given you know nothing else and they have not split out the notes payable part - we can only assume that the Current liabs do not have any debt portion embedded in.

CFAdreams Wrote: ------------------------------------------------------- > #15… The arbritrage oppurtunity’s are the same > either way around the triangle, just one is > positive and one is negative. This arbitrage is a > zero-sum game > i’m not sure about this. i highly doubt it actually. > #27 > 1) It stated in the problem market value and Book > value were approximately equal, so in this case > they werent different. ahh i see that now, thanks. so basically you must use MV debt, so if the MV and BV are different, we cannot use the BV debt from the balance sheet and we would have to be provided with an additional note about what mv of debt would be? > 2) I believe (not 100% sure) that current assets > and current liabilities are used in your working > capital investment to arrive at FCFF. So since > they are already stripped out, you do not need to > strip them out again when finding the MV of debt. > (that is merely speculating, but you are right, > they didnt count the current liab for some reason) makes sense. you are right that CA and CL taken out to get FCF.

All you have to do is the arbitrage both ways to find out… One way you will gain 31,315, the other way you will lose 31,315… That was my understanding… maybe the bid-ask gets in the way of this from holding true tho…

yes it does because we are not given an ask price here. so you must be using the bid price. if we had an ask price itd be diff from the bid and the g/l would differ.

I also have a question on #25 how to calculate WCInv in this case?

you’re only given enough info to go one way around the triangle. Try to go the other way and you get stuck cos “up the bid, down the ask” means u have to use the ask which you’re not given.

“I also have a question on #25 how to calculate WCInv in this case?” I also have this question, anyone? Would appreciate it, thanks.

WCinv = Change in non cash NWC So you take the NWC for 2006, take the NWC for 2007 and subtract the two NWC = non cash assets - non cash liabilities (the only cash liability is notes payable I think)

Yeah, I tried that but it’s still not working out for me - must be missing something.

At 31 December 2007 2006 Cash and cash equivalents 32 21 Accounts receivable 413 417 Inventories 709 638 Other current assets 136 123 Current Liabilities $2,783 $2,678 CA for 2007 = 413+709+136 = 1258 CA for 2006 = 417+638+123 = 1178 Delta CA = 80 Delta CL = 2783 - 2678 = 105 NWCInv = 80-105 = -25