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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1081:

  Which of the following projects would likely result in multiple Internal Rates of Return? Project A Initial investment outlay: ($450,000) t1: $400,000 t2: ($40,000) t3: $190,000 Project B Initial investment outlay: ($50,000) t1: $0.00 t2: $0.00 t3: $75,000 Project C Initial investment outlay: ($300,000) t1: $15,000 t2: ($34,000) t3: $0.00 t4: $400,000 Project D Initial investment outlay: ($100,000) t1: $150,000 t2: $380,000 t3: $45,000 t4: $45,000 Project E Initial investment outlay: ($1,000,000) t1: $1,500,000 t2: $1,300 t3: $0.00 t4: $60,000

  A. None of these choices
  B. Project B, Project D
  C. The answer cannot be determined from the information provided
  D. Project C, Project E
  E. Project A, Project C,
  F. Project D, Project E
  E. Project A, Project C,

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  Explanation

  In evaluating projects with "non-normal cash flows" the Internal Rate of Return method will often produce multiple IRRs which leads to an incorrect accept/reject decision. Non-normal cash flows are defined as cash flows in which the sign changes more than once. Projects A, and C involve cash outflows superimposed within their cash inflows, resulting in a sign change from positive to negative and negative to positive. In examining projects such as these, it is advisable to use either the NPV or MIRR methods, which are not subject to the problem of multiple IRRs. From observation alone, we can determine that project A and C are non-normal projects, and are thus likely to result in multiple IRR calculations. While project B, D, and E have periods of zero cash flow, they have only one change of sign in the overall cash flow process, and therefore should be characterized as "normal." While the cost of capital has been provided, it is not necessary for the determination of the correct answer in this case. What you should look for are projects with non-normal cash flows, and this should not involve any computational analysis. Besides, the cost of capital is not incorporated into the Internal Rate of Return calculation, rather is a component of the NPV and MIRR.

• Question 1082:

  At December 31, 1996, Eaton Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 1997 at a cost of $1,500,000. In 1997, Eaton appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was restricted for the retirement of bonds due in 1998. In its 1997 balance sheet, what amount should Eaton report as appropriated retained earnings?

  A. $2,950,000
  B. $3,200,000
  C. $1,450,000
  D. $1,750,000
  E. $1,200,000
  E. $1,200,000

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  Explanation

  Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. This is done by reducing retained earnings and transferring the money to appropriated retained earnings. When the appropriation is no longer necessary, the money is moved back to retained earnings.

• Question 1083:

  Which best describes venture capital?

  A. Venture capitalists exert control over the entrepreneur in order to achieve high returns.
  B. Venture capital is an extremely risky investment, whose returns are usually negative.
  C. Venture capital is method of equity financing whereby the entrepreneur loses majority ownership of his company.
  D. Venture capital is a method to take control over a young company.
  E. Venture capital is more than just capital, it is a process that fuels the growth of the venture.
  E. Venture capital is more than just capital, it is a process that fuels the growth of the venture.

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  Explanation

  Venture capital is the process forces the entrepreneur to hire a management team. The venture capital firms have significant representation on the board of directors and play a major role in shaping the company's growth strategy.

  The process also forces entrepreneurs to prepare a business plan to describe their objectives and to specify their financial projections. Venture capitalists bring in a broad amount of experience to the venture, thereby improving management's

  available resources. Ideally, the venture capital process should develop better entrepreneurs and better managers.

• Question 1084:

  Sanctions that AIMR may impose on its members include:

  I. Revocation of the member's registration as an investment advisor.

  II. Private censure.

  III. A monetary fine.

  IV.

  Suspension of membership.

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

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  Explanation

  The question deals with the disciplinary sanctions available to AIMR's PCP. The PCP can suspend membership or impose a private censure on members for violating the Code and Standards. However, AIMR has no authority to revoke a member's registration as an investment advisor, or to impose a monetary fine.

• Question 1085:

  Standard IV (B.8) deals with ________.

  A. Prohibition against Use of Material Nonpublic Information
  B. Preservation of Confidentiality
  C. None of these answers
  D. Prohibition against Misrepresentation
  E. Disclosure of Referral Fees
  F. Disclosure of Conflicts to Clients and Prospects
  G. Priority of Transactions
  E. Disclosure of Referral Fees

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  Explanation

  Standard IV (B.8) states that members shall disclose to all clients any referral fees received by the member for the recommendation of any services to the client or prospect.

• Question 1086:

  Consider the following information for a company.

  Common Stock Price $53. 25

  Preferred Stock Par Price $100

  Preferred Dividend $10

  Debt Rating BB+

  Owners Equity 25%

  Preferred Stock Flotation Cost 2. 5%

  The Preferred Stock is issued at Par

  Calculate the component cost of this newly issued preferred stock.

  A. 10%
  B. 2. 5%
  C. 18.78%
  D. 12. 5%
  E. 10.26%
  E. 10.26%

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  Explanation

  The component cost of preferred stock is the dividend divided by issue price minus floatation cost. In this case the component cost of preferred stock = $10 / (100 - 2. 5) = 10.26%.

• Question 1087:

  Portfolios that include more than one asset class are called ________ portfolios.

  A. quasi-asset
  B. multivariate
  C. multiple leverage
  D. univariate-asset
  E. multiple-asset
  E. multiple-asset

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  Explanation

  If the firm does not have discretion over the asset mix, the segments of the various asset classes, with their respective cash positions, must be included in composites composed of like assets.

• Question 1088:

  Which of the following is NOT true about Standard IV (A.2) - Research Reports?

  A. None of these answers.
  B. The analyst must separate fact from statistical conjecture to be in compliance with the standard.
  C. As long as the analyst has carried out adequate investigation, she can omit from the report certain aspects of the investigations that she deems unimportant.
  D. The report must contain a basic description of the characteristics of the investment under consideration.
  A. None of these answers.

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  Explanation

  Standard IV (A.2) - Research Reports

• Question 1089:

  Which of the following is/are revenue recognition methods?

  I. Cost Recovery Method

  II. Installment Method

  III. Sales Cost Method

  IV.

  Successful Efforts Method

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

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  Explanation

  IV refers to a method under which costs in drilling oil wells can be capitalized and is not a revenue recognition method.

• Question 1090:

  In preparing its cash flow statement for the year ended December 31, 1998, Roman Co. collected the following data:

  Gain on sale of equipment $6,000 Proceeds from sale of equipment 10,000 Purchase of A.S. Inc. bonds (par value $200,000)180,000 Amortization of bond discount2,000 Dividends declared 45,000 Dividends paid 38,000 Proceeds from sale of treasury stock (carrying amount of $65,000)75,000

  In its December 31, 1998 statement of cash flows, what amount should Roman report as net cash used in investing activities?

  A. $194,000
  B. $188,000
  C. $170,000
  D. $174,000
  E. $176,000
  C. $170,000

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  Explanation

  Investing activities include the acquisition and disposal of all long-term assets. Thus, the proceeds from sale of equipment of $10,000 and purchase of bonds of $180,000 result in a net use of cash of $170,000 from investing ($10,000180,000).