CFA Exam Question of the Day

Level I | Level II | Level III

2025-07-08

Vignette:
Palm Development Corporation is considering a backhoe or a bulldozer for their Landscaping Division capital budget.

The projects are independent with an initial cash requirement of $13,680 for the backhoe and $17,944 for the bulldozer.

The cost of capital is 14% and after-tax cash flows, including depreciation are:

YearBackhoeBulldozer
1$4,0806,000
2$4,0806,000
3$4,0806,000
4$4,0806,000
5$4,0806,000


Question:
Based on the NPV for the backhoe, the project should be?

Select an Answer:
cannot conclude
rejected
none of these answers
accepted
Rationale:
NPV = $327 > 0 and the projects are independent.

2025-07-07

Vignette:
Project A costs $37,500 and is expected to produce a cash flow of $11,250 per year for 5 years.

Project B costs $93,750 and is expected to produce a cash flow of $27,750 per year for 5 years.

Assuming a cost of capital of 14% for the mutually exclusive projects, you must perform calculations leading to recommendations on which project to select.

Question:
Calculate the NPV of Project B.

Select an Answer:
$2,001
$1,518
$1,201
$1,815
Rationale:
NPV = -$93,750 + $27,750(PVIFA 14%, 5)

= -$93,750 + $27,750(3.4331)

= $1,519

Or, using a financial calculator, input the cash flows to the registers, input I = 14, and compute for NPV = $1,518.

2025-07-06

Question:
Cariella is a junior analyst who is currently preparing a report on a diamond producing firm, Dense Carbon, Inc. Dense Carbon recently announced that the results of a mining survey in its South African diamond mines were in, which revealed substantial amounts of diamond reserves for the first time. It has offered to take a few industry analysts for a tour of the facilities and take stock of the situation first hand. During this tour, all expenses, including air-fare and basic accommodations, were provided for by Dense Carbon. As the visit spanned a weekend, Dense Carbon also arranged a safari tour for the analysts.

Cariella did not consider the safari to be undue entertainment, given the fact that the analysts had to be in the middle of nowhere for five days. She was quite assiduous in her appraisal of the mining reserves, and in the final analysis, the tour proved to be extremely valuable to her. However, she did not reveal all of the facts about the safari trip to her employer. Cariella has:

I. violated Disclosure of Conflicts.

II. violated Misrepresentation.

III. violated Independence and Objectivity.

IV. not violated CFA Institute Code of Ethics.

Select an Answer:
I and III only
IV only
I, II and III only
I only
Rationale:
Independence and Objectivity requires members to use reasonable care and judgment while making investment recommendations. In particular, it requires that members avoid even appearances of conflict of interest or circumstances that could affect their independence or objectivity. While Dense Carbon's travel arrangements for the analysts might not be considered an unnecessary "gift" (this is a grey area), the safari definitely is an unacceptable arrangement from CFA Institute Code of Ethics' perspective. By accepting this gift, Cariella violated Independence and Objectivity. By not disclosing this fact to her employer, she violated Disclosure of Conflicts.

2025-07-05

Vignette:
Bernadette Healey is principal of Miles Partners, a LBO firm. Sybil Lawney is a financial journalist for As the World Turns, a trade publication, and writing an article on control, governance, and financial architecture.

Lawney conducts several interviews with Healey in order to understand the nature of such business transactions.

Question:
Lawney inquires about conglomerates, firms investing in several unrelated industries. Healey describes that there are quite a few disadvantages to the conglomerate structure.

Which of the following choices describe the disadvantage(s) associated with conglomerates?

I. Misallocation of investment

II. Fungible management

III. Market values for each division cannot be observed independently

Select an Answer:
I, II, and III
I and II
I and III
I only
Rationale:
The disadvantages associated with conglomerates include the misallocation of investment, the fact that market values for each division cannot be observed independently, and the difficulty of setting up incentives for division managers.

It appears that attempts by conglomerates to allocate capital investments across many unrelated industries are more likely to subtract value than add it.

Essentially, internal capital markets are not really markets but combinations of central planning (by the top management and financial staff of the conglomerate) and intracompany bargaining. Thus, divisional capital budgets depend on politics as well as pure economics.

Large, profitable divisions with plenty of free cash flow may have more bargaining power than growth opportunities, whereas smaller divisions with good growth prospects but less bargaining power are hampered.

Because the market values for a specific division cannot be observed independently, it is difficult to set incentives for division managers. This problem is particularly serious when managers are asked to commit to risky ventures.

Fungible management, the idea that good managers were fungible due to computers and that the new quantitative methods in management science would create opportunities for profits through mergers, is an advantage, not a disadvantage, associated with conglomerates.

2025-07-04

Vignette:
American Bank Corporation (ABC) has made special arrangements with Dove Capital Partners (DCP), a hedge fund.

The arrangement allowed DCP to trade mutual fund shares after hours and receive the prior day's net asset value, which is illegal. In return, DCP would borrow $20 million from ABC at a high interest rate. This special arrangement allowed DCP to buy and sell shares of mutual funds at the old net asset value, rather than the next day's closing net asset value.

This practice allowed DCP to make millions of dollars in profits.

Question:
John Doe's co-worker, Jane Smith, just passed Level I of the CFA exam. Which of the following is the most accurate?

Select an Answer:
Jane Smith, CFA Level I
Jane Smith, CFA degree expected in 2019
Passed Level I of the CFA examination in 2017
Jane Smith, CFA II
Rationale:
No designation exists for someone who passed Level I, Level II, or Level III of the exam. The CFA designation should not be referred to as a degree.