第1节二级密卷上午

2019LevelIISampleExamAM（一）

Themorningsessionofthe2019LevelIICharteredFinancial yst®SampleExaminationhas60questions.Tobestsimulatetheexamdayexperience,candidates

areadvisedtoallocatea ageof18minutesperitemset(viteand6multiplechoicequestions)foratotalof180minutes(3hours)forthissessionoftheexam.

Questions Topic Minutes

1–6 EthicalandProfessionalStandards 18

7–12

tativeMethods

18

13–18

Economics

18

19–24

FinancialReportingand

ysis

18

25–30

FinancialReportingand

ysis

18

31–36

CorporateFinance

18

37–42

Equity

18

43–48

Equity

18

49–54

Fixed e

18

55–60

Derivatives

18

Total

180

ByaccessingthisSampleexam,youagreetothefollowingtermsofuse:ThisSampleexamisprovidedtocurrentlyCFAcandidates.Candidatesmayviewandprinttheexamfor alexampreparationonly.Thefollowingactivitiesarestrictlyprohibitedandmayresultindisciplinaryand/orlegalaction:accessingorpermittingaccessbyanyoneotherthancurrently-CFAcandidates;copying,postingtoanywebsite,ing,distributingand/orreprintingtheSampleexamforanypurpose.

®2019CFAInstitute. s .

2019LevelIISampleExamAM

Ethics

ThePensionFundCase

JasonZhang,CFA,hasrecentlybeenhiredastheChiefInvestmentOfficeroftheRegional ernmentEmployees’PensionFund.Currently,heisconductingevaluationsofallexternalmanagersemployedbythePensionFundtoensurethattheyareactingtheirbesttopursueexcellentreturnsaccordingtotheirownmandates,whilecomplyingwithallapplicablelawsandregulations.

ABCInvestmentisalocalassetmanagementfirmwithrelativelylargeAUM.10%ofthepensionfundassetswereallocatedtoABCInvestmentsduetoitsgoodtracksofperformanceforpastfiveyear.Tobetterunderstandtheinvestmentactivitiesofthisfirm,Jasonarrangedaformalmeetingwiththerespectivefundmanager,EmmaWen.

JasonrequiredEmmatoexintheheavypositionsoncommoditiesintheportfoliosethetradesdidnotconsstentwiththewrittenIPSofthepensionfund.Emmarepliedthatthere’salotoftradingopportunities ommoditymarketss etheupwardtrendsbecamemoreobvious,contrarilythestockmarketwasstagnant.

Thoughbeingagreenhand,shewasreadytograbtheseprofitstofurtherlypushupthereturnsofthefund.

JasonthenhadathoroughcheckonABCinvestmentfirm’scompliancestatements：

PerformancePresentation

Performancedatamustbe edforeachofABC’sactiveaccounts,bediscloseduponrequest,andbecomparedwiththefirm’scomposite,whichiscomposedofactiveaccountsonly.Performancedatamustbepresentedona

before-taxbasistoalls,withthedisclosurethatallperformancedataarecomputedbeforefees.

Disclosuresofs

ABCencouragesitsstafftobeinvolvedinthebusinesscommunity.Only

business-relatedsofintereststhatrelatetocurrentportfolioholdingsneedtobereportedtothesupervisors.

Violations

AnyviolationoftheABCcompliancestatementbytheemployeeswillbereportedtothe,andemployeeswillreceiveanofficialwarning.

Compensation

AlltheemployeesofABCneedtodiscusswiththeirsupervisoralloutsidecompensationthattheyarereceivingormayreceive

Record-retention

ABCmaintainsonlyrecodsforthePensionFundforthefiveyearsrequiredbyregulators.

alSecuritiesTrading

1：Ifinvestment nel nstotradestocks lients’accountsondayT,theycouldnottradethosesamestocksin alaccountsondayT-3,T-2andT-1.2：Ea ontharandomlyselectedgroupofinvestment nelmustprovideduplicatetradeconfirmationstotheABCcomplianceofficer.

3：Investment nelmustreceivepriorapprovalfor altradesonlyforthosetradesgreaterthan$10,000.

Regardingthecommoditypositions,doesEmma’stradecomplywiththeCFAInstitutecodeandstandards?

Yes,becauseitisagoodopportunitytoearnreturns.

No,becauseinvesting ommoditydoesnotfollowtherelatedIPS.

No,becauseshehasnotenoughrelatedexperiencetotradecommodities.

DoesABC’scompliancestatementconformwiththeCFAInstituteCodeandStandardswithrespecttoperformancepresentation?

No,becauseterminatedaccountsareexcluded.

No,becauseperformanceisreportedtoallsgrossoffees.

No,becauseperformancedataarepresentedonabeforetaxbasis.

DoesABC’scompliancestatementconformwiththeCFAInstituteCodeandStandardswithrespecttodisclosuresofs

ANo,becausenotonlybusinessinterestsbutalso albelief

BNo,becausenotjustthoserelatetocurrentportfolioholdingsbutalsorelatetoallactualandpotentialsofinterests

CYes.

DoesABC’scompliancestatementconformwiththeCFAInstituteCodeandStandardswithrespectto:

Violations Compensation

ANo No

BNo Yes

CYes Yes

DoesABC’scompliancestatementconformwiththeCFAInstituteCodeandStandardswithrespecttorecord-retention？

ANo,becausetheCFAInstituterequiresmaintainingrecordsinelectronicform.

BNo,becausetheCFAInstituterequiresmaintainingrecordsatleast7years.

CYes

WhichofABC’s alSecuritiesTradingismostconsistentwiththeCFAInstituteStandards?

alSecuritiesTrading1

alSecuritiesTrading2

alSecuritiesTrading3

tativeMethods:

AnnaGuCaseScenario

AnnaGu,CFA,recentlyhasbeenpromotedasthechiefinvestmentofficer(CIO)oftheM3GloryFund,aprestigiousboutiquefundhinamarket.

GuisreadinganysisreportwrittenbyhercolleagueAngelZhouaboutthe5Gcommunicationindustry.Zhou’sreportludestheresultsofaregressionofthemonthlyreturnstoa5Gcommunicationequityindexfortheprevious100monthsonvariablesrepresentingthemonthlyreturnstotheShanghai

-Shenzhen300Index(CSI300),andthemonthlyreturndifferencweenlong-termandshort-term ernmentbonds(SPREAD).

AnnaGudoubtsthatCSI300andSPREADarereasonabletvariablesandwantstodetectmulticollinearity.Becausetheregressionhasonlytwotvariables,GudecidestotestthesignificanceofthecorrelationbetweenCSI300andSPREADwithsignificancelevelof5%UsingZhou’sdata,Gufindsthecorrelationcoefficientis0.18.

GuisalsonotconvedofthevalidityofZhou’smodelandthenrunsaregressionby

herself.Gu’sregressionresultsarepresentedinExhibit1.

Exhibit1:Gu’sRegressionModel5GCommunicationEquityIndex

Variable

Coefficient

t-statistic

p-value

Constant

0.0269

0.018

0.95

CSI300

0.4625

6.190

<0.01

SPREAD

1.1264

4.280

<0.01

R2

0.40

Durbin-WatsonStatistic

0.84

Durbin–Watsoncriticalvalues(5%significance)

1.63

1.72

GuhypothesizesthattheregressioncoefficientonSPREADequalstoone,andshewantstousetheregressionresultstotestthishypothesiswithasignificancelevelof5%.Selectedvaluesofthet-distributionareshowninExhibit2.

Exhibit2

SelectedValuesofthet-Distribution(degreesof=df, ailedprobabilities=p)

Df

p=0.05

p=0.025

100

1.660

110

1.659

1.982

120

1.658

1.980

200

1.653

1.972

∞

1.645

1.960

AnnaGualsodiscussestheregressionmodelwithWendyZeng,acolleagueinGuangzhouoffice.Zengbelievesnon-stationaritymaybeaproblemandconductsDickey-Fullertestsforaunitrootoneachofthetimeseries.TheresultsarereportedinExhibit3.

Exhibit3

ResultsoftheDickey–FullerTests

TimeSeries

ValueoftheTest

Statistic

Standard

Error

t-Statistic

Significanceoft

5Gcommunication

equityindex

1.660

0.0023

1.591

0.1123

CSI300

1.659

0.0724

–5.846

0

SPREAD

1.658

0.043

–13.51

0

ZenglsGuitispossibletofindmorethanonemodelsevenwithsamedataset,thustheremustbeacriteriontoselectthemostaccurateone.Gustates,“Therootmeansquarederror(RMSE)criterionistypicallyusedtoevaluatetheout-of-sample

forecastaccuracy”.Zengreplies,“IfweusetheRMSEcriterion,themodelwiththesmallestRMSEistheoneweshouldjudgeasthemostaccurate.”

BasedonthecorrelationcoefficientbetweenCSI300andSPREAD,whichofthefollowingstatementsismostaccurate:

Thet-statisticis1.811andmulticollinearityexists.

Thet-statisticis2.976andmulticollinearitydoesnotexist.

Thet-statisticis1.811andmulticollinearitydoesnotexist.

AccordingtoGu’sregressionresultsinExhibit1,ifthemonthlyvaluesforbothCSI300andSPREADare1.0percent,thenthepredictedmonthlyreturn(%)tothe5GCommunicationEquityIndexisclosestto:

0.36.

1.03.

1.62.

AccordingtotheregressionresultsinExhibit1,theteststatisticandconclusion

relatingtoGu’shypothesistestingabouttheregressioncoefficientonSPREADis:

0.11,andthenullhypothesiscannotberejected.

0.48,andthenullhypothesiscannotberejected.

4.28,andthenullhypothesiscanberejected.

WhatisthemostappropriateinferencefromtheDurbin–WatsonstatisticreportedinExhibit1?TheDurbin–Watsontest:

isonclusive.

rejectsthenullhypothesisandconcludethereispositiveserialcorrelation.

failstorejectthenullhypothesisofnoserialcorrelation.

Assuminga5%levelofsignificance,themostappropriateconclusionthatcanbedrawnfromtheDickey–FullerresultsreportedinExhibit3isthat:

thedependentvariableexhibitsaunitrootbutbothofthetvariablesdonot.

thetestforaunitrootis onclusiveforthedependentvariable.

thetvariable hibitunitrootsbutthedependentvariabledoesnot.

WithregardstothestatementsabouttheRMSEcriterion:

Guiscorrect,andZengiscorrect.

Guiscorrect,butZengis orrect.

Guis orrect,butZengiscorrect.

Economics

AlbaCase

Albaisadevelocountry.Theernmenthasadoptedopenpoliciesforinternationaltradeandtheflowofcapital.TradeisnowsubstantialwithEuropeancountriesandisoftendenominatedineuros(€).Duringtheearly2000s,privatizationofsomepubliclyownedindustries;creationofanew-floatingcurrency,theAlbaDollar(ALD);andsoundpoliciesimplementedatthecentraputtheeconomyonatrackforsteadygrowthandstability.

MinisterofFinanceAndrewBubsispreparinghisannualreportonthestateoftheeconomyandcurrencymarketsforthelegislativebranchofernment.Hewillexamhelong-andshort-termtrendsinGDPgrowthpercapita e,inflation,andexchangerates.Heisalsoresponsiblefor mendinginitiativesforthelegislaturetoconsidertopromoteoveralleconomicprosperityforAlba’scitizens.

Toestimaong-termGDPgrowth,BubaminesthedatainExhibit1andintendstouseSolow’sgrowthaccountingequation.

Exhibit1

Long-TermTrendsofAlba’sEconomy

Growthduetocapitaldeepening

2.1%

Growthinlaborproductivity

1.4%

Populationgrowth

2.9%

Growthapital

5.3%

Growth rate of total factor

productivity

0.2%

ShareofGDPpaidtolabor

60%

BubsconsultshiscolleagueLarrySmithtoreviewthechoicesfacingtheernmentandthepossibleeffectsoneconomicgrowthandpercapita e.

Smithstates:Alba’spoliticiansaredebatingtheeffectsofgrowthratepoliciesfocusedonthree es:

higherratesofsavingandinvestment,

importingmoretechnologicalinnovations,and

greaterinvestmentinresearchanddevelopment(R&D).

Smithconcludes:Theimpactfromthesepolicieswillcausealong-termreaseintheeconomy’sgrowthrateandthestandardofliving.Furthermore,ifweemphasizeR&Dspending,thenhigherratesofsavingandinvestmentareunlikelytoencounterdiminishingmarginalreturns.

BubsbelievesthatAlbaneedstoaddressarecentreaseininflationandappreciationintheexchangerate.Ifthesetrendsacceleratethecountry’spresentprosperitycouldbethreatened.BubsandSmithdiscussalternatives.

Bubsstates:BecauseAlbaallowscapitaltoflowly,theclearestchoiceistoimplementexpansionarymaryandfiscalpoliciestostoptheappreciationofthecurrencyaccordingtotheMundell–Flemingmodel.

Smithreplies:Thereisalsoatimingdimensiontoconsider.AccordingtoeconomistRüdigerDornbusch,withinflexibledomesticpricesintheshortrun,anydecreaseinnominalmoneysupplywillinduceanreaseinthedomesticinterestrate.Thisresponsewillencouragecapitalinflowsandcausetheexchangeratetoovershoottotheupsideintheshortrun,untildomesticpriceshaveachancetoreact.

BubsalsoconcernstheimportanceofGDPgrowthtoinvestorsandtheconvergenceoflivingstandardsbetweencountries.Smithexins:

Statement1:Whenweconsiderourstockmarketsoverthelongterm,theprimaryfocusshouldbeontherateofGDPgrowth.Forlongertimehorizons,changesinearningsandtheprice/earninultiplearerelativelylessimportdeterminingappreciationinthestockmarket.Whenwelookatour emarkets,weshouldkeepinmindthathigherratesofpotentialGDPgrowthwilltranslateintolowerrealinterest

ratesandlowerexpectedrealassetreturns.

Statement2:Manycountriesthathavethesamepopulationgrowthrate,savingrate,andproductionfunctionwillhavegrowthratesandpercapitaoutputthatconvergeovertime

Statement3:Poorcountrieswillonlyconvergetothe elevelsoftherichestcountriesiftheymakeappropriateinstitutionalchanges.

Inexaminingthecurrencymarkets,BubsisconcernedthatlocalcurrencydealersarebeingtakenadvantageofbyarbitrageursfromEurope.HeyzetheratequotesinExhibit2forevidenceoftriangulararbitrageandcarrytradeopportunitiesbyEuropeanhedgefunds.

Exhibit2

InterbankandDealerCurrencyQuotesandRates

CurrencyPair

Bid(spot)

Offer(spot)

ProjectedSpot

inOneYear

One-YearLIBOR

Rates

InterbankMarket:

EUR/USD

0.8045

0.8065

0.8200

EUR0.8%

ALD/USD

1.2050

1.2100

1.2280

USD0.9%

Alba’sDealer:

ALD/EUR

1.5140

1.5190

ALD2.1%

Usingthespecifiedgrowthaccountingequation,whichisthemostappropriateconclusionBubscanmakefromhisdataontrendsintheeconomy?

GDPgrowthisprimarilydrivenbylabor.

Alba’seconomyisperformingatasteadystateofgrowth.GDPgrowthisprimarilydrivenbycapital.

Smith’sconclusionregardingthegrowthdebateismostconsistentwithwhiodelofeconomicgrowth?

EndogenousClassicalNeoclassical

WhichofthestatementsregardingalternativesdiscussedbetweenBubsandSmithinresponsetoAlba’srecentreaseininflationandappreciationinexchangerateisleastaccurate?

Smith’sstatementregardingRüdigerDornbusch

Bubs’sstatementregardingMundell–Flemingmodel

Bothstatements

InreviewingthethreestatementstoaddresstheimportanceofGDPgrowthtoinvestorsandtheconceptofconvergence,whichofBubs’scolleagues’statementsismostinaccurate?

Statement2

Statement3

Statement1

BasedontheexchangeratequotesinExhibit2,anopportunisticEuropeanhedgefundinterestedintriangulararbitragweenthedealerandinterbankmarketsismostlikelyto:

buyEURintheinterbankmarketandsellEURtotheAlba’sdealer.

buyEURfromtheAlba’sdealerandsellEURintheinterbankmarket.

discoverthatnotriangulararbitrageopportunityexists.

UsingthedataprovidedinExhibit2fortheinterbankmarketonly,aEuropeaninvestorwhoentersintoanormalone-yearcarrytradebasedonaEUR100,000positionwillachieve profitinEURclosestto:

1,865.

1,065.

1,318.

FinancialReportingandysis

NelsonGroupCaseScenario

AlbertSmithisajuniorystatNelsonGroup.NelsonisacorporationlocatedineurozonefocusingonfoodandbeverageindustryandlistedinNYSE.Nelson’sinvestmentportfolioforyearsendedDecember31,2015and2016ispresentedinExhibit1.Asapartofhisresearch,Albertisconsideringthepossibleeffectonreported eoftheaccountingclassificationoffixed einvestments.

Exhibit1PortfolioInvestmentInformation

EURinthousands

Bas athay

Gronola

Classification

Availableforsale

Heldto

Maturity

HeldtoMaturity

Costa

20,000

34,000

68,000

MarketValueasofDec31,2015

24,000

32,000

68,600

MarketValueasofDec31,2016

26,000

39,000

74,000

aAllsecuritieswerepurchasedatpar.

Inadditiontotheportfolio,Nelsonhasanimportantinteroperateinvestment.OnDecember312016Nelsonpaid€300milliontopurchase50percentstakeinGolden.TheexcessofthepurchasepriceoverthefairvalueofGolden’assetswasattributabletopreviouslyunrecordedlicenses.Theselicensesareestimatedtohaveaneconomiclifeofsixyears.ThefairvalueofGolden’sassetsandliabilitiesotherthanlicenseswasequaltotheirrecordedbookvalues.BothcompaniespreparedtheirfinancialstatementsinaccordancewithIFRS.Nelsonhasnotannouncedwhichmethoditwilluse.Smithforecaststhatthosetwocompanies’financialresultsin2017willremainthesameastheresultsin2016(excludinganyadjustmentforthemergers).

NelsonandGolden’s estatementforyearended2016,aswellasthebalance

sheetamountasatDecember312016,arepresentedinExhibit2and3.

Exhibit2 estatementforyearendedDec31,2016

Nelson(in

millions)

Golden(in

millions)

Sales

€1,200

€400

Costofgoodssold

400

180

Sellingexpense

300

30

Administrativeexpense

200

35

Depreciationandamortizationexpense

105

50

Interestexpense

45

25

Earningbeforetax

150

80

Taxexpense(30%taxrate)

45

24

e

105

56

Exhibit3BalanceSheetasofDec31,2016(inmillions)

BalanceSheetasofDec31,2016b

Nelson(in

millions)

Golden(in

millions)

Cash

€200

€80

Accountsreceivable

80

20

Inventory

100

40

TotalCurrentAsset

380

140

Property,nt,&equipmen

500

250

InvestmentinGolden

300

TotalAsset

1,180

390

CurrentLiability

380

30

LongTermDebt

160

120

TotalLiability

540

150

CommonStocks

340

110

RetainedEarning

300

130

TotalEquity

640

240

TotalLiabilityandEquity

1,180

390

bNote:BalancesheetsreflectNelson’spurchaseprice,butnotyetconsiderthe

impactoftheaccountingmethodchoice.

Additionally,NelsonwantstoenterdairyindustryinVietnamviainvestinginanexistingandrealizesitsadvancedtechnologyinmilkproduction.Afterscreening,BlueMountainDairy,aVietnamesedairycorporation,isconsidered.SomeinformationaboutBlueMountainDairyisshownasfollowing:

During2016,BlueMountainDairyguaranteedbankloansofnon-consolidatedsubsidiaries,soldreceivableswithpartialrecourse,andtookadvancepaymentsfromlargecustomerswhenpossible.

Despiteoverallworseningeconomicconditions,theallowancefordoubtfulaccountswassignificantlyreducedby€300million

BlueMountainDairyusesdecliningbalancedepreciationmethodforallfixedassetsexceptfortheleasedasset,whichisdepreciatedwithstraight-linemethodovertheleaseterm.

IfGronolaisreclassifiedasavailableforsale,thebalancesheetcarryingvalueofNelson’sinvestmentportfolio(in€thousands)atDecember31,2016wouldbeclosestto:

128,000.

165,000.

134,000

ComparedtoNelson’sreportedearningsbeforetaxesin2016,ifBasinhadbeenclassifiedasaheldfortradingsecurity,theearningsbeforetaxes(in€thousands)wouldhavebeen:

thesame.

€2,000higher.

€4,000lower.

BasedonExhibit3,ifNelson’slong-termdebttoequityratioonDec31,2016wascalculatedusingdifferentmethods,whiethodwouldresultinthelowestresult?

Equitymethod.

Consolidationwithfullgoodwill.

Consolidationwithpartialgoodwill.

BasedonSmith’sforecast,ifNelsondeemstohaveacquiredcontrolofGolden,in2017,whatamountshouldberecordedunderdepreciationandamortizationexpense?

A:€155millionB:€215millionC:€235million

BasedonSmith’sforecast,Nelson’ profitmarginfor2017willbehighestunderwhiethod?

EquityMethod.

Consolidationwithpartialgoodwill.

Consolidationwithfullgoodwill.

WhichofthefollowingactivitiesofBlueMountainDairywouldleastlikelyindicatealowerqualityofearningsforthe?The’s:

saleofreceivableswithpartialrecourse.

choiceofdepreciationmethodsforfixedassets.

guaranteeofbankloansfornon-consolidatedsubsidiaries.

PMICaseScenario

PhilipMorrisInternational.(PMI)isaleadingtobaccomanufacturefoundedin1987andlocatedinVirginia,UnitedStates.PMI’scigarettesaresoldinmorethan180markets,andinmanyofthesemarketstheyholdthenumberoneornumbertwomarketshareposition.PMIprovidesawidelyapplieddefinedbenefitpensionnandpostretirementhealthcarebenefitntoitsemployeesandretiredemployees.IvyisanequityystatJPMorganChase&Co.andisreviewingthePMI’sfile.ShewantstounderstandthefullextentofPMI’spensionobligationtodetermineitssolvencyposition.ShelearnedthatPMIpreparesitsfinancialstatementsusingUSgenerallyacceptedaccountingpriples(USGAAP).

Ivyandherassistant,Miller,foundsomeinformationaboutPMI’spensionnsfromfootnotesandsummarizedthedatainExhibit1

Exhibit1.Selectedinformationfromfootnotes(in$Millions)

Note13.Benefitns

2017

2016

FairvalueofnassetsatJanuary1

7,200

6,100

FairvalueofnassetsatDecember31

7,500

7,200

BenefitobligationatJanuary1

8,400

8,000

BenefitobligationatDecember31

9,000

8,400

Unamortizedactuarialgain(orloss)at

January1a

1,000

650

Employercontribution

700

900

Currentservicecost

800

670

Serviceperiodi pectedtobe

10years

11years

Actualreturnonnassets

120

179

aUsingtenpercent,thegreaterofbeginningnassetsandprojectedbenefitobligationruletoamortizethecumulativeamountofunrecognizedactuarialgains

andlosses.

IvyfoundthatPMIchangeditsassumptionswhendeterminingtheprojectedbenefit

obligationandpostretirementbenefitobligationsduring2017.ThedetailsareshowninExhibit2.

Exhibit2.Detailson

assumptionschanges

Pension

Postretirement

2016

2017

2016

2017

Discountrate

1.8%

2%

Expectedrateofreturnonn

assets

4.5%

4%

Health carecost trend rate

assumedfornextyear

7.15%

6.15%

Ultimatetrendrate

5.2%

4.6%

Year that rate reaches the

ultimatetrendrate

2030

2035

Millerwantstounderstandtheimpactsonthoseassumptionschangesanddiscusseswithhersupervisor.“InterestcostmightdecreaseifdiscountratereasesforPMIsethehasarelativelyyoungwork.While,decreaseinexpectedrateofreturnonnassetswillaffecttotalperiodicpensioncostfor2017.”Millersays.

Inaddition,Ivynotes“therewerebigchangesinassumptionappliedforpostretirementhealthcarebenefitn.ThosechangeswoulddecreasePI’spostretirementobligationsin2017.”

MillerwantstocomparetheinterestcoverageratioofPMIwiththeratiosofindustrycompetitorstodetermineitssolvencyposition.USTOBACCO.isatobaccofoundedin1980withsimilarsizewithPMI.USTOBACCOalsoadoptsdefinedbenefitnforitsemployeesbutwassufferingapoorinvestmentperformanceformanyyears.SelectedfinancialdataofUSTOBACCO.areshowninexhibit3.MillerfindstheysisresultsareabnormalcomparedwiththeratioofindustryaverageandaskedIvyforhelp.AfterreviewingMiller’sworkingpaper,IvynotestoMiller“youneedtomakesomeadjustmentsforP&Lbeforecalculatingthe

ratios.”

Exhibit3.SelectedfinancialdataofUSTOBACCO .fortheperiodof2017

($inmillions)

SelecteddatafromP&L

2017

Operating e

11,500

Investment e

(50)

EBIT

11,450

Interestexpense

900

NI

6,300

Selecteddatafromfootnotes

2017

PeriodicpensioncostrecognizedinSelling,GeneralandAdministrative

Expenseswas$2,000consistedof:

Currentservicecost

1,790

Interestcost

310

Expectedreturnonnassets

100

IvyasksMillertopayattentiontoPMI’sstock-basedcompensationns.Fromthefootnotes,MillerlearnsthatPMIhadannuallygrantedstockoptionandrestrictedstockunit(RSU)tokeymanagersanddirectors.Thegrantsofkeymanagerstockoptionvestafterthreeyearssegrantandhavea10-yearlife.Keymanagerrestrictedstockunit(RSU)vestandaresettledinsharesofcommonstockfiveyearsfromthegrantdate.Exhibit4showstherelevformationonshare-basedcompensationns.

Exhibit4.Relevformationonshare-basedcompensationns

StockOption

RestrictedStockUnit

(RSU)

Options(inthousands)

WeightedAverage

Exercise

Weightedaverage

grant-date fair

Units(inthousand

s)

WeightedAverage

Grant Date

Price

value (per

option)

MarketValue

Beginning

Bal.

260,000

$60.74

$8.48

5,000

$62.78

GrantedatJul. 1st,

2017

25,000

72.41

9.00

1,800

65.20

Exercised

orVested

(50,000)

46.00

7.64

(1,300)

59.80

Canceledor

Forfeited

(1,600)

69.98

9.42

(120)

67.10

Ending

Bal.

233,400

68.56

8.87

5,380

64.69

Ivyfindsthatalculatingthecompensationexpenseforstockoptionsgranted,PMIutilizeabinomialvaluationmodel.Assumptionsutilizedinthemodel,whichareevaluatedandrevisedtoreflectmarketconditionsandexperience,hadbeenchangedduringlasttwoyearsshowninexhibit5.

Exhibit5.Assumptionsappliedinutilizingthebinomialvaluation

model

Inputstothemodel

2017

2016

Risk-rate

2%

1.8%

Stockpricevolatility

15%

17%

Dividendyield

3.2%

3.5%

Estimated life of stock

options

12years

10years

WhenMillerreportsherworktoIvy,shemakestwostatements:

Statement1:“Actually,duringtheserviceperiodofstockoptionandRSU,there

wouldbeanegativeimpactonthetotalequityofPMIsethecompensation

expenseshouldberecognizedduringthisperiod.”

Statement2:“Stockoptionscanbestalignmanagers’interestwithshareholder’sinterestinpracticeandprovideliquiditytothewhenoptionsareexercised.Incontrast,cash-settledshare-basedcompensationrequiresacurrent-periodcashoutflowsfromtheandwouldleadmanagerstoberiskaverse.”

UsingtheExhibit1andExhibit2,theperiodicpensioncost(inmillions)recognizedin2017 estatementsiscloseto?

$627

$664

$696

WithregardtothediscussionbetweenIvyandMilleronassumptionschanges,whichoffollowingstatementismostaccurate?

Miller’sstatementregardingchangesondiscountrateiswrong.

Miller’sstatementregardingchangesonexpectedrateofreturnonnassetsis

correct.

Ivy’sstatementregardingchangesonassumptionsappliedforpostretirementhealthcarebenefitniswrong.

AssumingUSTOBACCO’sactualreturnonnassetsfor2017was$300million

loss,theinterestcoverageratio,fromanyst,iscloseto:

9.9

9.7

9.4

TheamountofthecompensationexpenserecognizedinP&LrelatedtotheRestrictedStockUnit(RSU)awardedin2017isclosestto(inthousands):

$11,736

$37,500

$75,000

Fortheassumptionschangesindeterminingthefairvalueofstockoptions,which

onewouldhavepositiveimpacton2017’searnings?

Thechangesondividendyield

Thechangesonstockpricevolatility

Thechangesonestimatedlifeofstockoptions

RegardingthestatementsmadebyMillerwhichofthefollowing