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CFA Society Boston 2017 Practice Exam Addendum

Thank you for your comments and questions. All submitted comments were reviewed and considered by our
exam coordinator and team of level coordinators. Only questions that were incorrect or needed further
clarification are included on this addendum.

Level I: Morning Session


Answer 10. C. Explanation remains the same.
Answer 23. A. Explanation remains the same.
Answer 33. B. Clarification: With total fixed cost (TFC) declining from $2.2 million to $1.95 million, total
costs (i.e. fixed plus variable) are expected to be $5.05 million in the future. This figure is
less than total revenue (TR) of $5.2 million and the firm should stay in the market. Answer
choices A and C incorrectly state that the firm should exit the market.
Answer 65. A. Explanation remains the same.
Question 116. Which of the following is ordinarily not a difference between an open-end mutual fund (MF) and
an exchange traded fund (ETF)? The proposed answer reflects this original wording.
Answer 119. B. Explanation remains the same.

Level I: Afternoon Session


Answer 50. COGS under FIFO would be COGS under LIFO minus increase in LIFO Reserve.
COGS under LIFO = 673
COGS under FIFO = COGS under LIFO – Increase in LIFO reserve
673 – (22-18) = 669 (in millions)
Answer 61. Column header should be labeled “Interest at 6%.” Lease payments are calculated as an
annuity due.
Answer 69. A. The cost of capital calculation is 6.93%.

Level II: Morning Session


Answer 46. Clarification: Reference to “year 3” refers to time immediately after the end of year 2. Bond is a
2-year instrument and is only discounted over 2 years.
Answer 54. C. Explanation remains the same.

Level II: Afternoon Session


Answer 18. B. Explanation remains the same.
Answer 27. C. Explanation remains the same.
Answer 31. 485 = 520 + 50 (1 - .4) – 65 (Note change in the first sign of equation from “-“ to “+”)
Answer 35. C. “Current stock price is less than…”
Answer 36. C. Justified P/B = (ROE – g)/(r – g) = (9.5 – 2.6)/(8.65 – 2.6) = 1.14. This is greater than the
current P/B of 1.075 and would produce a price of $16.62, which is greater than the current price.
Answer 47. Last word of explanation should be “loss”, not “value.”
Answer 59. Clarification: While “Active risk squared = active factor risk + active specific risk”, both active
factor risk and active specific risk are variances and, therefore squared values of the standard
deviations presented.

Level III: Morning Session


Question 1, Answer C.
Time Horizon: Although little information has been provided regarding Philips’ time
horizon beyond the near term, we can reasonably conclude that Philips time horizon is
long (excellent health) and multi-stage.

Stages of his investment time horizon may be aligned as follows:


 2 years until the purchase of the house
 Indefinite time that he supports his mother (may extend into retirement)
CFA Society Boston 2017 Practice Exam Addendum
 Remainder of employment (25-30 years estimated)
 Years in retirement (20-25 years estimated)

Liquidity: Liquidity constraints are near term and open-ended with respect to support for
Philips’ mother:
 Pay off auto loan
 Establish £30,000 cash reserve
 Provide €12,000 annual support for mother (£10,000 equivalent)
 Purchase house in 2 years for £360,000
Question 2, Exhibit 2.2 Clarification: Total budget should sum to $17.0 mm. Explanation remains the same.

Level III: Afternoon Session


Answer 6. Clarification: It would be more accurate in the answer to say that Hanson is a “citizen” of
the U.S. and not a “resident” as the vignette states that Hanson resides in Spain. Further,
the Orion Company and its funds are headquartered in the U.S.
Answer 28. In last equation, (2 * 2) term should be shown as an exponent.

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