CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Martha Halliburton, an analyst, is asked by her research director to increase the 2011 earnings estimate for Headley Electric, an important underwriting client. A violation of CFA Institute's Standards of Professional Conduct would result if the reason Halliburton increased her estimate was that ______.
A. her earnings estimate was inconsistent with the price/earnings ratio at which Headley management wished its secondary offering to be made
B. her annual sales assumptions were more conservative than those indicated by the quarterly report just released by Headley
C. her estimate did not allow for a change in accounting rules, which her firm expects to be in effect by the time Headley reports earnings for the year

User Contributed Comments 7

User Comment
abimashi can someone please explain to me why the answer is A? many thanks.
PedroEdmundo the other answers are based example of "modeling risk". While A is not a pb of assumption but of conflict of interest.
anricus But what if her estimate was inconsistent because she felt management had overestimated earnings?
wollogo The earnings estimate was changed specifically to 'market' the secondary offering - clearly a breach.
krisscfa I B. Independence and Objectivity.
Hishy I think A implies that she was being more optimistic than Headley management.
TarriqP Basically, in A the company sets a P/E that they want for the upcoming offering. They then tell her to estimate earnings to fit that P/E rather than through her model.
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