CFOS Sample Exam Questions

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Important Notice:
This list of questions are created for the use of CFOS candidates to assist in making
preparation for the examination and strictly not meant for circulation without prior
approval from Family Office Institute or Stamford Wealth Academy.
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1. Which of the following are elements of the internal rate of return method of
analysis?

I. the timing of the cash flows

II. the cutoff point after which any future cash flows are ignored
III. the rate designated as the minimum acceptable rate of return for a project
IV. the amount of each cash flow

a. I and II only
b. III and IV only
c. I, II and III only
d. I, III and IV only
e. II, III and IV only

2. Analysis of independent projects based on the profitability index:

a. frequently conflicts with the accept and reject decisions generated by the
application of the net present value rule.
b. is useful as a decision tool when investment funds are limited.
c. is useful in determining which one of two mutually exclusive projects to accept.
d. utilizes the same basic variables as those used in the average accounting return.
e. produces results which typically are difficult to comprehend or apply.

3. The financial ratio measured as current assets divided by average daily operating
costs is the:

a. cash ratio.
b. net working capital to total assets ratio.
c. acid-test ratio.
d. interval measure.
e. operating measure.

4. The three parts of the Du Pont identity can be described as:

a. operating efficiency, asset use efficiency, and profitability.

b. financial leverage, operating efficiency, and profitability.
c. the equity multiplier, the profit margin, and the total asset turnover.
d. the debt-equity ratio, the capital intensity ratio, and the profit margin.
e. the return on assets, the profit margin, and the equity multiplier.

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5. A firm generated net income of $624. The depreciation expense was $58 and
dividends were paid in the amount of $72. Accounts payables decreased by $28,
accounts receivables increased by $16, inventory increased by $41, and net fixed
assets increased by $28. What was the net cash flow from operating activity?

a. $497
b. $553
c. $597
d. $608
e. $641

Net cash from operating activities = $624 + $58 - $28 - $16 - $41 = $597

6. A firm has 11,000 shares of stock outstanding, sales of $1.62 million, net income of
$20,020, a price-earnings ratio of 21.6, and a book value per share of $8.64. What is
the market-to-book ratio?

a. 1.82
b. 2.11
c. 2.50
d. 3.79
e. 4.55

Earnings per share = $20,020 / 11,000 = $1.82; Price per share = $1.82 x 21.6 = $39.312;
Market-to-book-ratio = $39.312 / $8.64 = 4.55

7. The discount rate that makes the net present value of an investment exactly equal to
zero is called the:

a. external rate of return.

b. internal rate of return.
c. average accounting return.
d. profitability index.
e. equalizer.

8. Net present value:

a. when applied properly, can accurately predict the cash flows that will occur if a
project is implemented.
b. is highly independent of the rate of return assigned to a particular project.
c. is the preferred method of analyzing a project even though the cash flows are only
estimates.
d. is unaffected by the timing of each and every cash flow related to a project.
e. is unaffected by the timing of the purchase of the fixed assets required for a project.

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9. When a present value of the cash inflows exceeds the initial cost of a project, then the
project should be:

a. accepted because the internal rate of return is positive

b. accepted because the profitability index is greater than 1
c. accepted because the profitability index is negative
d. rejected because the internal rate of return is negative
e. rejected because the net present value is negative

10. Courtney is analyzing two mutually exclusive projects of similar size and has
compiled the following information based on her analysis. Both projects have four
year lives.

Courtney has been asked for her best recommendation given this information. Her
recommendation should be to accept:

a. project A because it has the shortest payback period.

b. both projects as they both have positive net present values.
c. project B and reject project A based on their net present values.
d. project A and reject project B based on their average accounting returns.
e. project B and reject project A based on both the payback period and the average
accounting return.

11. Each of these categories of assets is normally shown in the balance sheet at current value,
except:

a. Inventories.
b. Accounts receivable.
c. Short-term investments in marketable securities.
d. Cash.

12. Financial assets:

a. Consist of cash and cash equivalents.

b. Are reported at cost in the balance sheet.
c. Include short-term investments in marketable securities and receivables, as well as cash.
d. Are not very productive assets and should be kept to a minimum in a well-managed
company.

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13. If a product sells for $6, variable costs are $4 and fixed costs are $100,000 what would
total sales have to be in order to break-even?

a. $190,000.
b. $199,999.
c. $300,000.
d. $399,999.

100,000 / (6-4) = 50,000 x 6 = 300,000

14. The weighted average of a firm's cost of equity and aftertax cost of debt is called
the:

a. reward to risk ratio.

b. weighted capital gains rate.
c. pure play cost of capital.
d. subjective cost of capital.
e. weighted average cost of capital.

15. The weighted average cost of capital for a firm is the:

a. discount rate which the firm should apply to all of the projects it undertakes.
b. rate of return a firm must earn on its existing assets to maintain the current value of
its stock.
c. coupon rate the firm should expect to pay on its next bond issue.
d. maximum rate which the firm should require on any projects it undertakes.
e. required rate which every project's internal rate of return must exceed.

16. If a firm uses its WACC as the discount rate for all of the projects it undertakes
then the firm will tend to:

I. reject some positive net present value projects.

II. accept some negative net present value projects.
III. favor high risk projects over low risk projects.
IV. maintain its current level of risk.

a. I and III only

b. III and IV only
c. I, II, and III only
d. I, II, and IV only
e. I, II, III, and IV

17. A financial asset that represents a claim to another financial asset is called a(n):

a. forward agreement.
b. derivative security.
c. mezzanine asset.
d. contingent security.
e. junior security.

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18. A(n) _____ contract is a legally binding agreement between two parties calling for
the sale of an asset or product in the future at a price agreed upon today.

a. forward
b. spot
c. swap
d. exchange
e. floating

19. Your firm currently has all fixed-rate debt. You would like to convert part of this
to floating-rate debt. You should consider a(n):

a. option on floating-rate bonds.

b. forward contract on U.S. Treasury bills.
c. interest rate swap.
d. currency swap.
e. interest rate call option.

20. What is the primary difference between a swap contract and a forward contract?

a. the underlying asset

b. the number of exchanges
c. daily marking to the market
d. a swap is an option while a forward contract is an obligation
e. payment on a swap is made at the time of the agreement while payment is made on
the settlement date for a forward contract

21. Which one of the following correctly describes the dividend yield?

a. next year's annual dividend divided by today's stock price

b. this year's annual dividend divided by today's stock price
c. this year's annual dividend divided by next year's expected stock price
d. the annual dividend amount divided by the face value of the stock
e. the increase in next year's dividend over this year's dividend divided by the current
stock price

22. The total return on a security is based on the:

a. arithmetic average change in the price of the security.

b. average of the arithmetic and geometric average changes in the price of the security.
c. dividend yield.
d. capital gains yield.
e. both the dividend yield and the capital gains yield.

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23. What are the geometric and arithmetic average returns for a stock with annual
returns of 5 percent, 10 percent, 8 percent, and 16 percent?

a. 5.37 percent; 5.75 percent

b. 6.49 percent; 7.67 percent
c. 7.22 percent; 5.75 percent
d. 7.22 percent; 7.67 percent
e. 9.68 percent; 5.75 percent

Geometric return = (1.05 x 1.10 x .92 x 1.16).25 – 1 = 5.37; Arithmetic average = (.05
+ .10 - .08 + .16) / 4 = 5.75 per cent

24. The principle of diversification tells us that:

a. concentrating an investment in two or three large stocks will eliminate all of the
unsystematic risk.
b. concentrating an investment in three companies all within the same industry will
greatly reduce the systematic risk.
c. spreading an investment across five diverse companies will not lower the total risk.
d. spreading an investment across many diverse assets will eliminate all of the
systematic risk.
e. spreading an investment across many diverse assets will eliminate some of the total
risk.

25. The amount of systematic risk present in a particular risky asset relative to the
systematic risk present in an average risky asset, is called the:

a. beta coefficient.
b. reward-to-risk ratio.
c. risk ratio.
d. diversifiable risk.
e. Treynor index.

26. The standard deviation of a portfolio:

a. is a weighted average of the standard deviations of the individual securities which
comprise the portfolio.
b. can never be less than the standard deviation of the most risky security in the
portfolio.
c. must be equal to or greater than the lowest standard deviation of any single security
held in the portfolio.
d. is an arithmetic average of the standard deviations of the individual securities
which comprise the portfolio.
e. can be less than the standard deviation of the least risky security in the portfolio.

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27. Which of the following statements are correct concerning diversifiable risks?

I. Diversifiable risks can be essentially eliminated by investing in thirty unrelated

securities.
II. The market rewards investors for diversifiable risk by paying a risk premium.
III. Diversifiable risks are generally associated with an individual firm or industry.
IV. Beta measures diversifiable risk.

a. I and III only

b. II and IV only
c. I and IV only
d. II and III only
e. I, II, and III only

28. Winston Brothers stock has a beta of 1.36. The risk-free rate of return is 5.25
percent and the market rate of return is 11.70 percent. What is the risk premium on
this stock?

a. 6.45 percent
b. 8.77 percent
c. 10.99 percent
d. 14.37 percent
e. 16.95 percent

Risk Premium = 1.36 x (.117 - .0525) = .08772 = 8.77 per cent

29. Which of the following statements correctly describe alpha?

a. A positive alpha indicates that a manager consistently outperforms the return

projected by the Capital Asset Pricing Model
b. If an investor is doing well, he or she will have a negative alpha
c. A negative alpha means that the investor’s performance matches the market on a
risk-adjusted basis
d. If an investor measures risk correctly, the investor’s alpha will be zero

30. All of the following are principles behind the theory of insurance except:

a. Transfers of risk from an individual to a group

b. Law of large numbers
c. Pooling of risk
d. Speculation

31. Which of the following correctly defines a “hazard”?

a. The same thing as the term “peril”

b. A condition that increases the chance of loss
c. The same thing as risk
d. Uncertainty arising from loss
e. The same thing as probability of loss

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32. All of the following statements concerning universal life are correct except:

a. the policy’s cash value is increased by the amount of the gross premium minus only
operating expenses
b. an increased cash value would increase interest earnings for the month with no
change in the mortality charge
c. interest earnings depend on investment results
d. it is not possible to predict actual future cash values

34. What is the purpose of the incontestable clause of a life insurance policy?

a. during a specified period, the policy owner may reinstate a lapsed policy upon
payment of past-due premiums and proof of insurability
b. during a specified period, the policy owner may pay a premium in default without
causing the policy to lapse
c. after a specified period, the insurer may challenge the policy on grounds of
misstatement of fact
d. after a specified period, the insurer is prohibited from challenging the policy except
on the basis of fraud

35. Which of the following wills may be entirely handwritten and need not be
witnessed, but may be effective for disposing of the testator’s property?

a. a holographic will
b. a living will
c. a nuncupative will
d. a pourover will
e. a power of attorney

36. Which of the following contract provisions, effective at death, will serve as will
substitutes for the designated beneficiaries?

a. qualified retirement plan benefits for which the decedent named a child as the
designated beneficiary
b. an IRA account for which the decedent named a child as the designated beneficiary
c. life insurance death benefits for which the insured named a child as the designated
beneficiary
d. a provision in a prenuptial agreement, naming a child to receive the decedent’s
estate and eliminating the spouse’s right to any portion of the estate

37. Which of the following sequences of steps best describes the estate planning
process that should be followed for a client?

a. select the technique, collect data, implement the plan, and identify influential
factors
b. identify influential factors, collect data, select the technique, and implement the
plan
c. collect data, identify influential factors, select the technique, and implement the
plan

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d. select the technique, implement the plan, identify influential factors, and collect
data
e. implement the plan, collect data, identify influential factors, and select the
technique

38. All of the following statements concerning reasons to avoid probate are correct
except,

a. the probate proceedings are public, and some people do not want the details
concerning their property made public
b. costs of probate can be reduced if property does not pass through the probate
procedure
c. probate proceedings do not help to resolve title disputes, which require separate
actions, anyway
d. the probate process can cause long delays in property being transferred to
beneficiaries
e. attorney’s fees for probate are often based on a percentage of the assets passing
through probate administration

39. All the following statements concerning revocable trusts are correct except:

a. a revocable trust may be used to pass an equitable interest in assets

b. a grantor may reserve a life interest or income for life
c. a grantor’s gross estate will include the value of the trust property, whether or not
he or she reserves a life interest
d. a revocable trust will not remove assets from probate unless the beneficiary
receives a vested right to income during the grantor’s lifetime

40. Asset allocation explains what percentage of an investor’s long-term returns?

a. most
b. some
c. minimal
d. none

41. Alpha forecasts must be ____________ to account for less-than-perfect

forecasting quality. When alpha forecasts are ____________ to account for forecast
imprecision, the resulting portfolio position becomes ____________.

a. shrunk, shrunk, far less moderate

b. shrunk, shrunk, far more moderate
c. grossed up, grossed up, far less moderate
d. grossed up, grossed up, far more moderate
e. none of the above

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42. Tracking error is defined as

a. the difference between the returns on the overall risky portfolio versus the
benchmark return.
b. the variance of the return of the benchmark portfolio
c. the variance of the return difference between the portfolio and the benchmark
d. the variance of the return of the actively-managed portfolio
e. none of the above.

43. If a portfolio manager consistently obtains a high Sharpe measure, the manager's
forecasting ability __________.

a. is above average
b. is average
c. is below average
d. does not exist.
e. cannot be determined based on the Sharpe measure

44. One property of a risky portfolio that combines an active portfolio of mispriced
securities with a market portfolio is that, when optimized, its squared Sharpe measure
increases by the square of the active portfolio's

a. Sharpe ratio.
b. information ratio.
c. alpha.
d. Treynor measure.
e. none of the above.

When optimized, a property of the overall risky portfolio is that its squared Sharpe measure
increases by the square of the active portfolio’s information ratio.

45. Assume the U.S. government was to decide to increase the budget deficit. This
action will most likely cause __________ to increase

a. interest rates
b. government borrowing
c. unemployment
d. both A and B
e. none of the above

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46. You want to evaluate three mutual funds using the Sharpe measure for
performance evaluation. The risk-free return during the sample period is 4%. The
average returns, standard deviations and betas for the three funds are given below, as
is the data for the S&P 500 index.

The fund with the highest Sharpe measure is __________.

a. Fund A
b. Fund B
c. Fund C
d. Funds A and B are tied for highest
e. Funds A and C are tied for highest

A: (13% - 6%) / 0.5 = 14; B: (19% - 6%) / 1.0 = 13; C: (25% - 6%) / 1.5 = 12.7; S&P
500: (18% - 6%) / 1.0 = 12

47. Which one of the following is not a money market instrument?

a. a Treasury bill
b. a negotiable certificate of deposit
c. commercial paper
d. a Treasury bond
e. a Eurodollar account

48. Commercial paper is a short-term security issued by ________ to raise funds.

a. the Federal Reserve Bank

b. commercial banks
c. large, well-known companies
d. the New York Stock Exchange
e. state and local governments

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49. Investment bankers

a. act as intermediaries between issuers of stocks and investors.

b. act as advisors to companies in helping them analyze their financial needs and find
buyers for newly issued securities.
c. accept deposits from savers and lend them out to companies.
d. A and B.
e. A, B, and C.

50. Specialists on stock exchanges perform the following functions

a. Act as dealers in their own accounts.

b. Analyze the securities in which they specialize.
c. Provide liquidity to the market.
d. A and B.
e. A and C.

Specialists are both brokers and dealers and provide liquidity to the market; they are
not analysts.

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