CFA Institute CFA-LEVEL-1 Online Practice Questions and Exam Preparation

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1:

  The most commonly held view of capital structure, according to the text, is that the weighted average cost of capital ________.

  A. increases proportionately with increases in leverage
  B. does not change with leverage
  C. none of these answers
  D. increases with moderate amounts of leverage and then falls
  E. first falls with moderate levels of leverage and then increases
  E. first falls with moderate levels of leverage and then increases

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  Explanation

  The optimal capital structure must strike a balance between risk and return which maximizes the firm's stock price. Using more debt raises the risk borne by stockholders, however, using more debt leads to a higher expected rate of return.

• Question 2:

  When individuals are unemployed because they lack the qualifications to fill available jobs, we call this a form of

  A. natural unemployment.
  B. frictional unemployment.
  C. structural unemployment.
  D. cyclical unemployment.
  C. structural unemployment.

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  Explanation

  Structural unemployment implies that changes in the basic characteristics of the economy prevent the "matching up" of available jobs with available workers. Thus, workers possess skills which are not demanded by employers and employers demand skills that unemployed workers do not have.

• Question 3:

  Given the following points: (-2, 0), (-1,0), (0,1), (1, 1) and (2, 3) What is the slope of the regression line?

  A. None of these answers
  B. 0.6
  C. 0.0
  D. 0.5
  E. 0.7
  E. 0.7

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  Explanation

  For this, you need to create tables with columns for X,Y,XY,X^2,Y' and Y-Y'. This will be as follows.

  XYXY X^2 Y'Y-Y'

  -2004-0.40.4

  -10010.3-0.3

  010010

  11111.7-0.7

  23642. 40.6

  Sum057100

  N=5.

  The regression equation is Y' = a + bX.

  Then to find the slope, which is b, use the formula

  b = [n(SXY)-(SX)(SY)]/[n(SX^2)-(SX)^2] where here S stands for "Sum of." b = [5(0)-(0)(5)]/[5(10)-0] = 0.7

• Question 4:

  According to the contrarians, if a substantial number of investment advisory services are bearish, it implies:

  I. the market is reaching a peak.

  II. the onset of a market decline.

  III.

  the beginning of a bull market.

  A. III only
  B. I and II
  C. II only
  D. I only
  A. III only

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  Explanation

  Contrarians believe that most market participants make wrong investment decisions as the market approaches the peak or trough in a cycle. Therefore, if a large number of advisory services are bearish, they believe that the market is about to turn bullish after having reached a trough.

• Question 5:

  Clay Industries, a large industrial firm, is evaluating the sales of its existing line of coiled machine tubing. In their analysis, the operating managers of Clay Industries have identified the following information related to the coiled machine tubing division and its product: Annual fixed operating expenses of $925,000 Average variable cost of $90 Break-even quantity of 20,109 units Which of the following best describes the average variable cost for this product?

  A. $44
  B. None of these answers is correct.
  C. $46
  D. $41.70
  E. $38
  F. The average selling price of this product cannot be determined from the information provided.
  A. $44

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  Explanation

  To calculate the break-even quantity for a product, use the following equation: {Fixed operating costs/[avg. sales price per unit - variable cost per unit]}. To determine the average selling price of this product, we must rearrange the standard equation using algebra, in a manner such that the resulting equation resembles the following: {[$925,000/20,109] + X = $90}. This equation is further rearranged into the following: {$46 + X = $90}. Finally, the ending equation becomes: {X = $90 - $46}. Solving for X yields an average variable cost per unit of $44.

• Question 6:

  If you buy a television for $650 and agree to pay for it with 24 monthly payments of $33, beginning next month, what annual interest rate, compounded monthly, are you being charged?

  A. 15. 93%
  B. 21.00%
  C. 5. 08%
  D. 18.38%
  E. 19.74%
  E. 19.74%

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  Explanation

  On the BAII Plus, press 24 N, 650 PV, 33 +/- PMT, 0 FV, CPT I/Y. Then press x 12 = to see the answer. On the HP12C, press 24 n, 650 PV, 33 CHS PMT, 0 FV, i. Then press 12 x to see the answer. The last multiplication by 12 is needed since the calculator returns the periodic interest rate. Make sure the BAII Plus has the P/Y value set to 1.

• Question 7:

  If a company fails to record a material amount of depreciation in a previous year, this is considered

  A. an accounting error.
  B. a change in estimate.
  C. an unusual item.
  D. a change in accounting principle.
  A. an accounting error.

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  Explanation

  This is neither unusual or a change, but simply an error.

• Question 8:

  Victor Lazquez is an analyst with Amro Investments and follows the optical instrument manufacturers. In this capacity, he has learnt a few trade secrets pertaining to a leading edge firm, Fibroptica. Recently, he was approached by Fibroptica's competitor, Lensmakers Inc., who offered him a 3 month project on the optical industry practices. Victor realizes that such a project could reveal Fibroptica's trade secrets indirectly. However, he decides he will be very careful and accepts Lensmakers' offer. If he does not inform his employer about this project, he will

  A. not have violated any AIMR code since the project does not give rise to a conflict of interest with Amro's business.
  B. have violated Standard III (C) - Disclosure of Conflicts to the Employer.
  C. have violated Standard III (B) - Duty to the Employer.
  D. have violated Standard III (D) - Disclosure of Additional Compensation Arrangements.
  D. have violated Standard III (D) - Disclosure of Additional Compensation Arrangements.

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  Explanation

  Victor's knowledge about the trade secrets have arisen in course of his employment with Amro. As such, he has an obligation to get written permission from Amro before he can accept any outside projects. Note that if such a project had been in direct competition with Amro's business, Victor would also have violated Standard III (B) - Duty to the Employer.

• Question 9:

  If you deposit $300 a month, beginning next month, for 10 years into an account paying 8% per year, compounded monthly, how much is in your account after that last deposit?

  A. $38,444,973. 53
  B. $30,000.00
  C. $54,883. 81
  D. $3,091.62
  E. $58,402. 98
  C. $54,883. 81

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  Explanation

  On the BAII Plus, press 120 N, 8 divide 12 = I/Y, 0 PV, 300 PMT, CPT FV. On the HP12C, press 120 n, 8 ENTER 12 divide i, 0 PV, 300 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.

• Question 10:

  A liability can be recognized when

  A. an obligation exists to make a future payment based on a past event
  B. all of these answers
  C. only when the amount is certain
  D. any time a future payment is due
  A. an obligation exists to make a future payment based on a past event

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  Explanation

  The amount need not be certain and some future payments such as wages to be paid in the future may not be reported as liabilities.