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1. The mark-to-market value for Drawbridge’s forward position is closest to:
1 Drawbridge sold AUD 5 million forward to the settlement date at an all-in forward price of 0.8940 (USD/AUD). 2 To mark the position to market, Drawbridge offsets the forward transaction by buying AUD 5 million three months forward to the settlement date. 3 For the offsetting forward contract, because the AUD is the base currency in the USD/AUD quote, buying AUD forward means paying the offer for both the spot rate and forward points. I. The all-in three-month forward rate is calculated as 0.9066 – 0.00364 = 0.90296 II. This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90296) = –USD44,800 (This is a cash outflow because Drawbridge sold the AUD for- ward and the AUD appreciated against the USD). 4 To determine the mark-to-market value of the original forward position, calculate the present value of the USD cash outflow using the three-month USD discount rate: –USD44,8000/[1 + 0.0023(90/360)] = –USD44,774. The present value of the cash flow was not calculated (step 4 of calculation). The cash flow was calculated using the bid rate instead of the offer rate. 1 The all-in three-month forward rate = 0.9062 – 0.00368 = 0.90252 2 This gives a net cash flow on settlement day of 5,000,000 × (0.8940 – 0.90252) = – USD42,600, and the present value is calculated as –USD42,600/[1 + 0.0023(90/360)] = –USD42,576.
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2. In the discussion of residual income valuation, which analyst makes the most accurate statement?
Chance’s statement is the most accurate. When cash flows are negative in the analyst’s comfortable forecast time horizon, the RI model is most appropriate. Residual income is sometimes called economic profit because it estimates the company’s profit after deducting the cost of all capital. The RI model is less sensitive to estimates of ter- minal value than discounted dividend or cash flow models. Tinker is incorrect: Residual income is sometimes called economic profit because it is an estimate of the profit of the company after deducting the cost of all capital. . Evers is incorrect: The residual income model is less sensitive to estimates of terminal value than discounted dividend or cash flow models.
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3. With respect to LeCompte’s coverage of UniFlash, according to the CFA Institute Standards of Professional Conduct, the least appropriate course of action for Topaz to take would be to:
. According to Standards I(B)–Independence and Objectivity and V(A)–Diligence and Reasonable Basis, members and candidates must exercise diligence, independence, objectivity, and thoroughness in analyzing investments, making investment recommen- dations, and taking investment actions. Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly, and the analyst should immediately revise her recommendation to express her stated opinion of the company. Changing a written recommendation to what a subject company desires is not acting diligently, independently, objectively, and/or thoroughly.
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4. Does LeCompte’s second statement during her TV appearance most likely meet the CFA Institute Research Objectivity Standards recommendations?
. The recommended procedures for compliance with Research Objectivity Requirement 11, Rating System, states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation. because she communicated a rating different from her current published rating contrary to Recommendation 11, which states that firms should prohibit covered employees from communicating a rating or recommendation different from the current published rating or recommendation. because the statement alone about issuing a new report is not a viola- tion. If she disclosed her new recommendation contrary to Recommendation 8, which recommends that reports and recommendations be issued at least quarterly, with additional updates recommended when there is an announcement of significant news or events by, or that might impact, the subject company.
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5. The investment committee’s view on direct real estate investment is least likely correct with regard to:
. The investment committee is correct in that direct real investment will likely generate income and price appreciation, but their view on the diversification is incorrect. Real estate returns generally have low correlations with returns on other assets classes, such as stocks and bonds, and thus allow the endowment to diversify portfolio risk. . Investors in direct real estate can expect to generate income by leasing or renting the property. . Investors in direct real estate can expect price appreciation on the real estate investment.
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