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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1411:

  Using the following assumptions, calculate the stock price at which investors Helen Alba, who shorts the stock on margin, and Kobin Lubis, who purchases the stock on margin, will receive a margin call. Which of the following choices is closest to the correct answer? Alba will receive a margin call at a stock price of:

  A. $33. 00 and Lubis will receive a margin call at a stock price of $37. 66.
  B. $33. 00 and Lubis will receive a margin call at a stock price of $53. 45.
  C. $46. 85 and Lubis will receive a margin call at a stock price of $33. 00.
  D. $37. 66 and Lubis will receive a margin call at a stock price of $53. 45.
  C. $46. 85 and Lubis will receive a margin call at a stock price of $33. 00.

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  Explanation

  Calculations are as follows:

  Since Alba is short(sold the stock), the formula for the margin call price is:

  Margin Call = (original price) * (1 + initial margin) / (1 + maintenance margin)

  = $42 * (1 + 0.45) / (1 + 0.30) =$46. 85

  Since Lubis is long(purchased the stock), the formula for the margin call price is:

  Margin Call = (original price) * (1 ?initial margin) / (1 ?maintenance margin)

  = $42 * (1 ?0.45) / (1 ?0.30) =$33. 00

• Question 1412:

  The allowance for uncollectible accounts is based on all of the following except:

  A. Experience.
  B. Profitability expectancy.
  C. Customer fortunes.
  D. Industry expectations.
  B. Profitability expectancy.

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  Explanation

  The allowance should be based on expectations both internal and external to the corporation. The effect on the bottom line should not be used as a method of determining the uncollectible amounts.

• Question 1413:

  Copybold Corporation is a start-up firm considering two alternative capital structures--one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A =

  0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share. What is the coefficient of variation of expected EPS under the conservative capital structure plan?

  A. 0.58
  B. 0.15
  C. 0.23
  D. 0.39
  E. 1.00
  A. 0.58

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  Explanation

  Calculate coefficient of variation

  Expected EPS conservative:

  E(EPS) = 0.6($1.00) + 0.4($0.20) = $0.68.

  Standard deviation

  SD(EPS-Conservative) = [0.6($1.00 - $0.68)^2 + 0.4($0.20 - $0.68)^2]^1/2 = [0.0614 + 0.0922]^1/2 = 0.3919.

  CV(Conservative) = 0.3919/0.68 = 0.576.

• Question 1414:

  Compared with firms with capital leases, firms with operating leases generally report

  A. lower cash flow from operations.
  B. lower or higher cash flow from operations depending upon market interest rates.
  C. higher cash flow from operations.
  D. identical cash flow from operations.
  A. lower cash flow from operations.

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  Explanation

  The lease payment is an outflow in the CFO section.

• Question 1415:

  A normal distribution has a mean of 39 and a variance of 625. The area under the distribution between 50 and 75 equals ________.

  A. 0.745
  B. 0.319
  C. 0.212
  D. 0.255
  D. 0.255

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  Explanation

  First note that the area between two numbers under a probability distribution is the same as the probability of getting a number between those two numbers. The standard deviation of the distribution equals sqrt(625) = 25. The z-value of 50 equals (50-39)/25 = 0.44. The z-value of 75 equals (75-39)/25 = 1.44. Using the Normal probability tables, we get P(z < 0.44) = 0.67 and P(z < 1.44) = 0.9251. The area between 50 and 75 is then given by P(0.44 < z < 1.44) = P(z < 1.44) - P (z < 0.44) = 0.9251 - 0.67 = 0.255.

• Question 1416:

  The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.

  Net Income $50,000 Provision for bad debts $2,000 Increase in Inventory $1,000 Increase in accounts payable $2,000 Purchase of new equipment $15,000 Sale of equipment for $10,000 gain $20,000 Depreciation expense $5,000 Repurchase of common stock $10,000 Payment of dividend $4,000 Interest payment $3,000

  What is net cash flow from operations?

  A. $55,000
  B. $48,000
  C. $54,000
  D. $58,000
  B. $48,000

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  Explanation

  $50,000 + $2,000 - $1,000 + $5,000 + $2,000 - $10,000

• Question 1417:

  A call option on Hartco stock with an exercise price of S50 and an expiration date one year from now is worth $4. 00 today. A put option on Hartco stock with an exercise price of $50 and an expiration date one year from now is worth $2. 25 today. U.S. Treasury notes maturing in one year are yielding 2. 0%. Hartco does not pay a dividend. The value of Hartco*s stock is closest to:

  A. $43 per share
  B. $47 per share
  C. $51 per share.
  C. $51 per share.

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  Explanation

• Question 1418:

  Consider the following information for Company ABC:

  Current Price of Stock $40.25

  Expected dividend in 1 Year $1.10

  Growth rate 9.2%

  Beta 1.2

  Risk Free Rate 4. 5%

  Expected Market Return 10%

  Calculate this company's cost of retained earnings using the Discounted Cash Flow (DCF) method.

  A. 13. 70%
  B. 11.93%
  C. 12. 0%
  D. 9.20%
  E. 13. 30%
  F. 11.04%
  B. 11.93%

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  Explanation

  The DCF method for estimating the cost of retained earnings states: Cost of Retained Earnings = (Dividend for period 1 / Current Price) + Growth Rate. In this case the estimated Cost of Retained Earnings = (1.1 / 40.25) + 9.2% = 2. 73 + 9.2 = 11.93%

• Question 1419:

  Which of the following are beliefs espoused by technical analysts?

  A. Popularity of trading rules will eventually eliminate the value of the technique.
  B. No one can consistently get new information and process it correctly and quickly.
  C. All of these answers.
  D. Fundamental analysts can only achieve superior returns if they obtain information before other investors.
  C. All of these answers.

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  Explanation

  Under the heading 'advantages of technical analysis': there is a discussion on how technical analysis relies more on tracking market movement than assimilating intrinsic market data, which is advantageous perhaps because there is too much data accumulating too fast too be any help in proficient forecasting. But technicians also recognize that new market tracking techniques have short shelf lives.

• Question 1420:

  A company has an EBIT of $4 million, and its degree of total leverage is 2. 4. The firm's debt consists of $20 million in bonds with a 10 percent yield to maturity. The company is considering a new production process that will require an increase in fixed costs but a decrease in variable costs. If adopted, the new process will result in a degree of operating leverage of 1.4. The president wants to keep the degree of total leverage at 2. 4. If EBIT remains at $4 million, what amount of bonds must be outstanding to accomplish this (assuming the yield to maturity remains at 10 percent)?

  A. $16. 7 million
  B. $18.5 million
  C. $20.1 million
  D. $19.2 million
  E. $19.8 million
  A. $16. 7 million

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  Explanation

  First, find the new DFL: DTL = (DOL)(DFL)

  2. 4 = (1.4)(DFL)

  DFL = 1.7143.

  Then, find the new interest payments in a year:

  DFL = (EBIT)/(EBIT - I)

  1.7143 = ($4,000,000)/($4,000,000 - I)

  I = $1,666,686. 11. Finally, solve for the new debt level, knowing that the yield to maturity remains at 10%. Debt Value(YTM) = Interest Payment

  Debt(0.10) = $1,666,686. 11

  Debt = $16,666,861.11 = $16. 7 million.