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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1441:

  William Moore is explaining the attributes and importance of asset allocation for investment portfolios to a group of wealthy individual investors. Which of Moore's following statements is least likely correct?

  A. Asset allocation involves assigning policy weights to relevant asset classes.
  B. Asset allocation is the process of selecting specific securities to include in the portfolio.
  C. 85-95% of a typical portfolio's return can be explained by the target asset allocation.
  B. Asset allocation is the process of selecting specific securities to include in the portfolio.

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  Explanation

• Question 1442:

  The following data pertain to Cosmotron Company's financial state as of Dec 31, 1994:

  Net Income $400 Increase in inventory $120 Decrease in accounts receivable $45 Increase in payables $165 Depreciatio n$100 Dividends paid$85 Tax rate 30%

  What was Cosmotron's operating cash flow in 1994?

  A. $590
  B. $490
  C. $675
  D. $505
  A. $590

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  Explanation

  In this case, OCF = 400 - 120 + 45 + 165 + 100 = $590. Dividends paid are investing cash flows and not part of OCF. Note that tax rate is not relevant in the indirect method since it has already been factored into in the net income figure.

• Question 1443:

  Which best describes venture capital?

  A. Venture capital is typically a secondary form of financing, after bank financing.
  B. Venture capital is in the form of equity.
  C. Venture capital is short-term financing, usually at higher-than-market rates.
  D. Venture capital is financing for privately held companies, typically in the form of equity and/or longterm debt.
  E. Venture capital is equity and debt financing available to privately and publicly held companies.
  D. Venture capital is financing for privately held companies, typically in the form of equity and/or longterm debt.

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  Explanation

  Venture capital becomes available when financing from banks and public debt or equity markets is either unavailable or inappropriate.

• Question 1444:

  The ultimate responsibility to ensure compliance with code rests with:

  A. every member of the firm.
  B. the CEO of the firm.
  C. all of these answers.
  D. the highest ranking AIMR member of the firm.
  D. the highest ranking AIMR member of the firm.

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  Explanation

  While every member must always comply with the Code, Standard III (A) stipulates that ensuring compliance with the Code in an organization ultimately is the responsibility of the senior most AIMR member of the firm reporting to a nonmember. He must make sure that the firm environment is sympathetic to compliance with the Code.

• Question 1445:

  A bond has a yield of 10 percent and an effective duration of 7. 5 years. If the market yield changes by 10 basis points, what is the change in the bond's price?

  A. 0.375%.
  B. 1.500%.
  C. 2. 000%.
  D. 0.750%.
  D. 0.750%.

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  Explanation

  The formula for effective duration calculates the approximate change in price for a 100 basis point change. Here, we are asked to provide the approximate percentage change in the bond's price for a 10bp change. Ten basis points is 1/10th, or 0.10 of 100bp. Thus, the calculation is 0.10 * 7. 50 = 0.750%.

• Question 1446:

  Grateway Inc. has a weighted average cost of capital of 11.5 percent. Its target capital structure is 55 percent equity and 45 percent debt. The company has sufficient retained earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9 percent, and the company's tax rate is 30 percent. If the expected dividend next period and current stock price are $5 and $45, respectively, what is the company's growth rate?

  A. 3. 44%
  B. 8.16%
  C. 2. 68%
  D. 4. 64%
  E. 6. 75%
  D. 4. 64%

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  Explanation

  Solve for k(s) (component cost of retained earnings or internal equity):

  WACC (Weighted Average Cost of Capital) = 11.5% = w(s)k(s) + w(d)k(d)(1 - T)

  11.5% = 0.55k(s) + 0.45(0.09)(0.70)

  k(s) = 15. 75%.

  Solve for g: k(s) = 15. 75% = D1/P0 + g

  15. 75% = $5/$45 + g

  g = 4. 64%.

• Question 1447:

  Consider the following information:

  Borrowing Rate 10%

  Marginal Tax Rate 40%

  Preferred Stock Par Price $50

  Preferred Dividend $5

  Preferred Stock floatation cost 2. 0%

  Cost of common equity 15. 0%

  Preferred Stock issued at Par

  The Optimal Capital Structure is 45% debt, 50% common equity, and 5% preferred stock. Credit Rating BB+

  What is the firm's Weighted Average Cost of Capital (WACC)?

  A. 9.0%
  B. 7. 14%
  C. 9.06%
  D. 10.71%
  E. 2. 5%
  F. 28.00%
  D. 10.71%

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  Explanation

  The firm's Weighted Average Cost of Capital (WACC) is a weighted average of the component cost of capital. In this case 10%(borrowing rate) x (1-.4)Tax savings = 6% is the component cost of debt. $5 (preferred dividend) / 49(Par minus floatation cost) = 10.2% is the component cost of preferred stock. Thus the WACC = .45(6%) + .5(15%) + .05(10.2%) = 10.71%

• Question 1448:

  The AIMR Performance Presentation Standards require that firms report, at a minimum, ________ years of performance to claim compliance with the standards.

  A. one
  B. fifteen
  C. five
  D. ten
  E. seven
  F. two
  D. ten

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  Explanation

  The AIMR-PPS require that firms report, at a minimum, 10 years of investment performance (or performance since the inception of the firm if inception is less than 10 years) to claim compliance with the Standards.

• Question 1449:

  Holiday Corp. holds 10,000 shares of its $10 par value common stock as treasury stock reacquired in 1994 for $120,000. On December 12, 1996, Holiday reissued all 10,000 shares for $190,000. Under the cost method of accounting for treasury stock, the reissuance resulted in increasing

  A. additional paid-in capital by $70,000.
  B. treasury stock by $100,000.
  C. capital stock by $100,000.
  D. retained earnings by $70,000.
  E. gain on sale of investments by $70,000.
  A. additional paid-in capital by $70,000.

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  Explanation

  Under the cost method, treasury stock is decreased by $120,000, cash is increased by $190,000 and the difference (which is like a gain) is reported as an increase in additional paid-in capital. Accounting rules do not allow a firm to record a gain or loss when it buys back treasury stock because the transaction is viewed as an equity transaction.

• Question 1450:

  A defined benefit pension plan: A. pays defined benefits for a certain period after retirement.

  B. disburses benefits based on the returns on the fund's investments.

  C. promises to pay retirees a specific income stream.

  D. none of these answers.

  Correct Answer. C
  C

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  Explanation

  In a defined benefit pension plan, the retirement benefits are "predefined." The employer commits to providing the benefits regardless of the performance of the pension plan. Thus, in this plan, the risk of pension plan performance is borne by the employer and not the employee.