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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1261:

  In its 1996 income statement, Coopers Co. reported income before income taxes of $300,000. Coopers estimated that, because of permanent differences, taxable income for 1996 would be $280,000. During 1996, Coopers made estimated tax payments of $50,000, which were charged to income tax expense. Coopers is subject to a 30% tax rate. What amount should Coopers report as income tax expense?

  A. $84,000
  B. $40,000
  C. $34,000
  D. $90,000
  E. $50,000
  A. $84,000

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  Explanation

  Income tax expense is the sum of current income tax and deferred tax expense. There is no timing difference in this case and, therefore, no deferred tax expense. Thus, the income tax expense equals current income tax expense which is the amount of taxes payable and equal to $84,000 ($280,000 X 30%).

• Question 1262:

  What gives the home currency price of a certain quantity of the foreign currency quoted?

  A. bid-ask spread
  B. spot rate
  C. cross rate
  D. direct quotation
  E. indirect quotation
  D. direct quotation

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  Explanation

  For example, the price of foreign currency is expressed in French francs in France and in Deutsche marks in Germany. Thus, in France, the Deutsche mark might be quoted at FF 4, whereas in Germany, the franc would be quoted at DM

  0.25.

• Question 1263:

  Jack Cheney purchases an IBM October 80 put contract for a premium of $5. Cheney holds the option until the expiration date when IBM stock sells for $78 per share. At expiration, what is the loss on the contract?

  A. -$2
  B. -S3.
  C. -$5
  B. -S3.

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  Explanation

• Question 1264:

  What deposit today is needed to have $2,000 in 4 years, assuming the money will earn interest at 6% per year, compounded monthly?

  A. $1,934. 02
  B. $1,290.81
  C. $1,574. 20
  D. $1,384. 57
  E. $1,900.00
  C. $1,574. 20

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  Explanation

  On the BAII Plus, press 48 N, 6 divide 12 = I/Y, 0 PMT, 2000 FV, CPT PV. On the HP12C, press 48 n, 6 ENTER 12 divide i, 0 PMT, 2000 FV, PV. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1265:

  If you deposit $245 into an account paying 5. 5% per year simple interest, how much interest will be earned after 15 months?

  A. $259.59
  B. $15. 59
  C. $202. 13
  D. $261.84
  E. $16. 84
  E. $16. 84

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  Explanation

  The question only asks for the earned interest, not the total amount in the account. On the BAII Plus, press 245 x 0.055 x 15 divide 12 = to see the answer. On the HP12C, press 245 ENTER 0.055 x 15 x 12 divide to see the answer.

• Question 1266:

  Assume the following series of transactions:

  t0: Purchase 150 Intelligent Semiconductor common stock at $90.60 per share t1: Receive a $4. 45 per share dividend on 150 shares t1: Purchase an additional 100 shares at $100 per share t2: Receive $4. 50 per share dividend on 250 shares t2: Purchase an additional 50 shares at $105 per share t3: Receive a $4. 55 per share dividend on 300 shares t3: Sell 300 shares for $107. 84 per share Assuming no taxes or commissions and that each dividend was not reinvested, what is the dollar-weighted rate of return for this series of transactions?

  A. None of these answers is correct.
  B. The answer cannot be calculated from the information provided.
  C. 9.73%
  D. 11.18%
  E. 8.18%
  F. 9.96%
  C. 9.73%

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. Further, the dollar-weighted rate of return is simply another name for the IRR equation, and this nomenclature is commonly used

  within the field of investment management. The reason behind this classification is the fact that the IRR equation takes into account both the timing and scope of all project cash flows. In the determination of the dollar-weighted rate of return

  calculation, the first step should be to identify the cash flows for each period. This process is illustrated as follows:

  t0: -[150 shares purchased * $90.60 per share] = [$13,590]

  t1: -[100 shares purchased * $100 per share] + [$4. 45 per share dividend * 150 shares] = [$9,332. 50] t2: -[50 shares purchased * $105 per share] + [$4. 50 per share dividend * 250 shares]} = [$4,125] t3: [300 shares sold * $107. 84 per share]

  + [$4. 55 per dividend * 300 shares] = $33,717

  Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 9.73% for this investment.

• Question 1267:

  The following information is from the financial statements of Complex Capitalists for 1997 and 1998:

  Dec. 31, 1997 - 1 million common shares outstanding, capital structure all-equity

  March 31, 1998 - issued 200,000 common shares.

  May 31, 1998 - issued 800,000 warrants exercisable at a strike of 35.

  The average price during 1998 was 34 and the maximum price was 39.

  Given the above example, the Diluted EPS will use how many shares?

  A. 1.2 million
  B. 2. 0 million
  C. 1.617 million
  D. 1.15 million
  D. 1.15 million

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  Explanation

  Options and warrants enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. In this case, since the average price is less than the strike price, the warrants are anti-dilutive and ignored in the calculation of Diluted EPS. Hence, weighted number of shares used = 1 million + 9/12*200,000 = 1.15 million.

• Question 1268:

  If you deposit $5,000 today and make an additional deposit of $3,000 in 3 years, how much is in the account 6 years from today, if the money earns interest at 8% per year, compounded annually?

  A. $10,077. 70
  B. $13,775. 16
  C. $17,335. 61
  D. $11,713. 51
  E. $12,695. 00
  D. $11,713. 51

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  Explanation

  This question requires the solution of two problems. Find the FV of the original $5,000 deposit which equals $7,934. 37, then find the FV of the $3,000 deposit 3 years from now which equals $3779.14, and add the two together. On the BAII Plus, press 6 N, 8 I/Y, 5000 PV, 0 PMT, CPT FV. Then press STO 1. Then press 3 N, 3000 PV, CPT FV. Then press + RCL 1 = for the answer. On the HP12C, press 6 n, 8 i, 5000 PV, 0 PMT, FV. Then press STO 1. Then press 3 n, 3000 PV, FV. Then press RCL 1 + for the answer.

• Question 1269:

  An analyst with Smith, Kleen, and Beetchnutty is trying to determine an earnings per share (EPS) estimate for a health-care index, and has gathered the following information:

  Sales per share: $600 Next year's operating profit margin: 38% Next year's depreciation per share: $95 Next year's interest expense: $81 Next year's common stock dividend: $1.50 Next year's corporate tax rate: 35%

  Using this information, what is the EPS figure for this stock market series?

  A. $104. 73
  B. $32. 83
  C. $33. 80
  D. $128.80
  E. The answer cannot be calculated from the information provided.
  F. None of these answers is correct.
  C. $33. 80

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  Explanation

  The estimation of EPS for a stock market series involves five steps. Specifically, to determine an estimate of EPS for a stock market series, it is necessary to:

  Estimate the sales per share Estimate next year's operating profit (EBIDT), or operating profit margin Estimate next year's depreciation per share Estimate next year's interest expense per share Estimate next year's corporate tax rate

  Once estimates for these components have been determined, they are put into the following equation:

  EPS for a stock market series = {[(Sales per share * operating profit margin) - depreciation per share - interest expense per share] * (1 - corporate tax rate).

  Imputing the given information into this equation will yield the following:

  EPS for a stock market series = {[($600 * 0.38) - $95 - $81] * (1 - 0.35)} = $33. 80

  If you chose $128.80, remember that the depreciation figure is not added back to the EPS calculation. What we are looking at is an operating earnings after tax figure, not a cash-based figure.

  If you chose $32. 83, remember that common stock dividends are not incorporated into the EPS figure, only interest payments on debt and preferred securities.

  If you chose $104. 73, remember to subtract the depreciation and interest expense figures from the EBIDT figure, not from the sales figure itself. In other words, multiply the sales figure by the operating profit margin, THEN subtract the depreciation and interest expense figures.

• Question 1270:

  Which of the following is/are true about liquidity ratios, all else equal?

  I. The cash ratio increases as average receivables increase.

  II. The quick ratio is a more conservative liquidity ratio than the current ratio.

  III.

  Liquidity ratios decrease as total liabilities decrease.

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

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  Explanation

  Receivables are not part of the cash ratio and hence, changes in receivables do not directly affect the cash ratio. The quick ratio does consider receivables in addition to cash and marketable securities but ignores all other current assets. Thus, it is more conservative than the current ratio.