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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1051:

  What monthly payment, beginning next month, would pay off a debt of $1,000 over 15 months, if the interest rate on the debt is 18% per year, compounded monthly?

  A. $5. 12
  B. $66. 67
  C. $74. 94
  D. $68.92
  E. $76. 51
  C. $74. 94

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  Explanation

  On the BAII Plus, press 15 N, 18 divide 12 = I/Y, 1000 PV, 0 FV, CPT PMT. On the HP12C, press 15 N, 18 ENTER 12 divide i, 1000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 1052:

  Mutual funds have

  A. sometimes maintained the stability of their correlation with the market.
  B. generally maintained the stability of their correlation with the market.
  C. rarely maintained the stability of their correlation with the market.
  D. tended to decrease their level of diversification over time.
  B. generally maintained the stability of their correlation with the market.

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  Explanation

  Mutual fund managers rarely change the makeup of reasonably well diversified portfolios substantially. Studies have also found that funds tend to remain consistent in their risk class. This consistency allows investors to maintain their diversification and desired risk class.

• Question 1053:

  Oils Galore is a large firm that prefers to use the Successful Efforts method of accounting. A similar firm, Rival Oil and Gas, Inc., uses the Full Cost method. An inspection of their financial statements would reveal that: I. Oils Galore has a higher debt-to-asset ratio.

  II. Rival OandG has higher equity.

  III. Oils Galore is burdened with higher taxes.

  IV.

  Rival OandG shows higher cash flows.

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

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  Explanation

  The Successful-efforts method requires expensing of all dry-hole costs while Full Cost method allows these to be capitalized. Therefore, Rival shows higher assets, higher income and hence, higher taxes. It also shows higher equity. Since Rival pays higher taxes, it has lower cash flows.

• Question 1054:

  A study of the opinion of designers with respect to the primary color most desirable for use in executive offices showed that:

  Primary Color Number of Opinions Red 92 Orange 86 Yellow 46 Green 91 Blue 37 Indigo 46 Violet 2

  What is the probability that a designer does not prefer blue?

  A. None of these answers
  B. 0.9075
  C. 1.0000
  D. 0.8850
  E. 0.7725
  B. 0.9075

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  Explanation

  P(Blue) = 37/400. P(not blue) = 1 - 37/400 = 0.9075.

• Question 1055:

  Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2. 00, sells for $27. 00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bondyield-plus-risk- premium method to find k(s). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' WACC once it starts using new common stock financing?

  A. 16. 6%
  B. 13. 6%
  C. 14. 1%
  D. 16. 9%
  E. 16. 0%
  C. 14. 1%

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  Explanation

  k(e) = $2. 16/ $27. 00(1-.10) + 0.08 = 0.08889 + 0.08 = 0.169 = 16. 9%. WACC = 0.2(12. 0%)(0.6) + 0.2(12. 6%) + 0.6(16. 9%) = 14. 1%.

• Question 1056:

  The average cost of tuition, room and board at a small private liberal arts college is reported to be $8,500 per term, but a financial administrator at Moravian College believes that the average cost is much higher. A study was conducted using

  150 small liberal arts colleges and findings showed that the average cost per term is $9,000 with a standard deviation of $1,200. Let alpha = 0.05. The Ho: Mu less than or equal to $8,500. H1: Mu is bigger than $8,500.

  What is the critical z-value for this test?

  A. -1.645
  B. None of these answers
  C. +1.645
  D. -1.96
  E. +1.96
  C. +1.645

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  Explanation

  From the hypothesis, this is a one tailed test. Since alpha is 0.05. We have 0.05, which gives us a z value of +/1.645. From the Ho we see that the rejection region lies to the right of the mean, so the critical value is +1.645.

• Question 1057:

  If the quality of education in the U.S. improved, the direct effect would be a(n)

  A. reduction in prices.
  B. increase in both output and prices.
  C. increase in both long-run and short-run aggregate supply.
  D. increase in both short-run aggregate supply and aggregate demand.
  C. increase in both long-run and short-run aggregate supply.

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  Explanation

  Increases in education, training and skill-enhancing experience can improve the quality of the labor force and thereby expand the supply of human resources, This could cause the cost of resources to decline (permanently) and expand both short run output and long run sustainable output.

• Question 1058:

  Within the Keynesian model, equilibrium output takes place ________.

  A. when actual and expected rates of inflation are equal
  B. when the nominal interest rate and real interest rate are equal
  C. when spending equals output
  D. at full employment
  C. when spending equals output

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  Explanation

  Equilibrium is defined in this model as when aggregate expenditures are equal to output. Thus, the sum of planned consumption, investment government purchases and the difference between exports and imports must equal GDP.

• Question 1059:

  Firm A uses Sum-of-digits and Firm B uses straight-line method of depreciation. In the first year, which of the following is/are TRUE?

  I. A shows higher equity than B.

  II. A shows lower assets than B.

  III. A shows a higher debt-to-equity ratio than B.

  IV.

  A shows a higher debt-to-asset ratio.

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

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  Explanation

  Sum-of-digits results in a higher depreciation in the first year. Hence, Firm A shows lower assets, lower income and hence lower equity. Thus, its debt-to-equity and debt-to-asset ratios are higher than B's.

• Question 1060:

  An analyst is considering a bond for purchase. The bond has a coupon that resets semiannually and is determined by the following formula:

  coupon = 12% - (3. 0 * 6-month Treasury bill rate)

  Identify what type of bond this is, and calculate the coupon rate this bond would reset to if the 6-month Treasury bill rate is 4. 5%.

  A. This bond is an inverse floater, and the coupon would reset to 1.50%.
  B. This bond is an inverse floater, and the coupon would reset to 0.00%.
  C. This bond is a step up note, and the coupon would reset to 4. 50%.
  B. This bond is an inverse floater, and the coupon would reset to 0.00%.

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  Explanation