CFA Practice Question

There are 361 practice questions for this study session.

CFA Practice Question

Perry Rakimov, CFA, is the General Partner in a real estate development project and is responsible for completing the project within an 18-month period and within budget. Rakimov is expected to receive equity of 20% if the project comes within budget. Concerned that project costs could escalate, the Limited Partners require Rakimov to cap expenses at 15% above budget. Costs were within expectations until the last month of construction, when the costs of imported lighting fixtures (accounting for roughly 5% of total costs) escalated by more than 50%. As a result, the overall return declined below the partners' expected 35% ROI. Rakimov did not inform the Limited Partners about the increased costs. Did Rakimov violate the Standards?
A. Yes, because returns were lower than expected by the Partners.
B. Yes, because he did not disclose the increased costs to his Partners.
C. No
Explanation: No violation took place. Rakimov was not required to inform the Limited Partners regarding the increase in lighting fixture costs because this increase would not cause the overall project cost to escalate higher than the 15% budget variance contingency agreed upon by the partnership.

User Contributed Comments 4

User Comment
navarro I had 33% chance to be right, and i was. I'm gonna kill this exman.
CherLLL If your clients has agreed to lift the budget, and finally your work is within the budget, you do not need to inform them.
jorgeandre The question didn't say that the final cost was above or below the 15% variance contingency.. so Hoy I can know that it wasn't reach the cap?
truss88 read it carefully... windows were at most 5% of cost and project was under budget going into the last month. so to go over budget they needed to increase cost by 15%, but even if you doubled something with a 5% weight, you won't get up to a 15% increase.
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