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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1391:

  Under inflationary conditions and stable inventories, the COGS under Average Cost method:

  A. lower than FIFO COGS.
  B. could be greater or less than FIFO COGS.
  C. higher than FIFO COGS.
  D. is higher than LIFO COGS.
  C. higher than FIFO COGS.

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  Explanation

  When prices are rising, the Average cost during the period is higher than the FIFO costs. Therefore, COGS under Average Cost method will be higher than the FIFO COGS (but lower than the LIFO COGS).

• Question 1392:

  Net asset value (NAV) of an investment company is equal to

  A. the net value of its assets.
  B. the net value of its assets divided by the number of its shares outstanding.
  C. the net value of its assets divided by the number of shares issued.
  D. the net value of its assets plus depreciation expense.
  E. the net value of its assets plus depreciation expense, divided by the number of shares outstanding.
  B. the net value of its assets divided by the number of its shares outstanding.

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  Explanation

  An investment company sells shares in itself, and uses the proceeds to invest in a portfolio of individual investments such as stocks and bonds. If such a company sold 1 million shares for $50 dollars each, it would invest $50 million (minus commissions) into things like government bonds or speculative stocks. If the value of this portfolio increased to $60 million, the NAV would increase to $60.

• Question 1393:

  Archie Boone, CFA, is the managing director at Hoffman Advisors, an alternative investment management company. Boone is reviewing the work of a real estate analyst and finds that in calculating net operating income (NOI) for a property, the analyst has understated vacancy by $3,000, overstated depreciation expense by $4,000, overstated insurance expense by $4,000, and understated interest expense by $2,000. If Boone corrects the analyst's estimates of NOI for all these items, the updated estimate will:

  A. increase by $1,000 as the restatement of vacancy will be partially offset by the restatement of insurance expense.
  B. increase by $1,000 as the restatement of depreciation expense will be partially offset by the restatement of vacancy.
  C. decrease by $1,000 as the restatement of insurance expense will be more than offset by the restatement of vacancy and interest expense.
  A. increase by $1,000 as the restatement of vacancy will be partially offset by the restatement of insurance expense.

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  Explanation

• Question 1394:

  A company currently sells 75,000 units annually. At this sales level, its EBIT is $4 million, and its degree of total leverage is 2. 0. The firm's debt consists of $15 million in bonds with a 9.5 percent coupon. The company is considering a new production method which will entail an increase in fixed costs but adecrease in variable costs, and will result in a degree of operating leverage of 1.6. The president, who is concerned about the stand-alone risk of the firm, wants to keep the degree of total leverage at 2. 0. If EBIT remains at $4 million, what amount of bonds must be retired to accomplish this?

  A. $9.19 million
  B. $8.42 million
  C. $6. 58 million
  D. $4. 44 million
  E. $7. 63 million
  C. $6. 58 million

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  Explanation

  DTL = (DOL)(DFL)

  2. 0 = 1.6(DFL)

  1.25 = DFL.

  1.25 = $4,000,000/($4,000,000-I)

  $5,000,000 - 1.25(I) = $4,000,000

  I = $800,000.

  Debt = $800,000/.095 = $8,421,053.

  Must retire = $15,000,000 - $8,421,053 = $6. 58 million of debt.

• Question 1395:

  A technical analyst with Bullfighter.com, a noted investment research firm, has been examining the U.S. securities markets, and believes that the market is technically "oversold." Which of the following technical indicators would this analyst likely use to support his opinion? Choose the best answer.

  A. There has been a decline in the Confidence Index.
  B. The Block Uptick-Downtick Ratio has declined below 0.70.
  C. The % of issues trading above their 200-day moving averages is greater than 80%.
  D. The Diffusion Index has increased significantly.
  E. The CBOE Put/Call Ratio is at 0.35.
  F. None of these answers is correct.
  B. The Block Uptick-Downtick Ratio has declined below 0.70.

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  Explanation

  The Block Uptick-Downtick Ratio is used by technical analysts to gauge institutional investment activity by measuring the percentage of block trades which result in an uptick versus the block trades which are executed on a downtick. The idea behind this ratio is the belief that a block buyer would initiate an "uptick", or a bid up in the securities' price, and a block seller would initiate a "downtick," or a bid down in the securities' price. Technical analysts view a decline in the Block Uptick-Downtick Ratio below 0.70 as an indication of an oversold condition, and an increase in the Block Uptick-Downtick Ratio above 1.10 as indicative of an overbought condition. The "Diffusion Index" is a measure of market breadth, and is defined as [(# of advancing issues + 1/2 # of issues unchanged) / # of issues traded]. An increase in the diffusion index is indicative of an increase in advancing issues relative to declining issues. The CBOE Put/Call Ratio is a contrarian technical indicator used to gauge the sentiment of investment professionals, and a ratio greater than 50% is viewed by technical analysts as overtly bullish. Finally, contrarian technical analysts would view a large increase in the amount of futures traders who express bullish sentiment on stock index futures as a bearish signal. The % of issues trading below their 200-day moving average is frequently cited by technical analysts as a measure of oversold and overbought market conditions. Specifically, technical analysts see the marketas "overbought" when 80% of issues are trading above their 200-day moving average, and consider a market "oversold" when 80% of issues are trading under their 200-day moving average.

• Question 1396:

  The ________ index shows the number of stocks advancing plus one-half the number unchanged, divided by the total number of issues traded.

  A. short
  B. cumulative
  C. contrarian
  D. diffusion
  D. diffusion

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  Explanation

  By definition: The diffusion index shows the number of stocks advancing plus one-half the number unchanged, divided by the total number of issues traded. Such an index gives an idea of how many individual stocks are advancing as a percentage of all the individual stocks in a composite index.

• Question 1397:

  According to the AIMR-PPS, ________ accounting must be used for fixed-income and all other securities that accrue income.

  A. time-weighted
  B. LIFO
  C. accrual
  D. fixed income
  C. accrual

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  Explanation

  Accrual accounting must be used for fixed-income and all other securities that accrue income. Accrued income must be included in the market value calculation of the denominator and the numerator. This is a requirement for calculation of returns.

• Question 1398:

  If your discount rate is 8% per year, calculate the present value of the following cash flows:

  End of year 1: $2,200 End of year 2: $3,000 End of year 3: $7,300

  A. $11,239
  B. $14,155
  C. $9,876
  D. $10,404
  D. $10,404

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  Explanation

  The present value = 2,200/1.08 + 3,000/(1.08^2) + 7,300/(1.08^3) = 10,404

• Question 1399:

  Which of the following statements best describes the optimal capital structure?

  A. All of these answers are correct.
  B. None of these answers are correct.
  C. The optimal capital structure is the mix of debt, equity, and preferred stock, which maximizes the company's stock price.
  D. The optimal capital structure is the mix of debt, equity, and preferred stock which minimizes the company's cost of debt.
  E. The optimal capital structure is the mix of debt, equity, and preferred stock which maximizes the company's earnings per share (EPS).
  C. The optimal capital structure is the mix of debt, equity, and preferred stock, which maximizes the company's stock price.

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  Explanation

  The optimal capital structure is the one that maximizes the price of the firm's stock, and minimizes the firm's WACC.

• Question 1400:

  When looking at demographics and psychographics, which one of the following four major determinant of real estate value categories are you in?

  A. the property
  B. none of these answers
  C. demand
  D. supply
  E. the property transfer process
  C. demand

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  Explanation

  Demographics and psychographics are both subsets of analyzing demand.