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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1481:

  Peterson Investments has three bond portfolio managers. Manager X invests only in U.S. Treasury STRIPS. Manager Y invests only in putable corporate bonds. Manager Z invests only in mortgage-backed securities guaranteed by GNMA. Which of the following statements is most likely to be TRUE regarding the risks of each manager's portfolio?

  A. Manager X has more reinvestment risk than Manager Z.
  B. Manager Z has more volatility risk than Manager X.
  C. Manager Y has more interest rate risk than Manager X.
  B. Manager Z has more volatility risk than Manager X.

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  Explanation

• Question 1482:

  The estimated ________ is applied to the estimated ________ to arrive at estimated future values of a company's share.

  A. earnings multiplier, earnings per share
  B. dividend payout ratio, expected growth rate less the required rate of return
  C. dividend payout ratio, required rated of return less the expected growth rate
  A. earnings multiplier, earnings per share

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  Explanation

  Estimated earnings multiplier x Estimated earnings per share = Estimated future value of the share.

• Question 1483:

  Calculate the book value per share of General Industries common stock, given the following information. Par value of common stock, $1 per share; total assets, $12,565,000; retained earnings, $5,550,000; total liabilities, $5,012,500; number of common shares outstanding, 475,000; number of preferred shares outstanding, 0. Market value of common stock, $96. 25.

  A. $26. 45
  B. $96. 25
  C. None of these answers
  D. $15. 90
  E. $10.55
  D. $15. 90

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  Explanation

  The book value of the firm's common stock is $15. 90 which is calculated as follows: total assets of $12,565,000, minus total liabilities of $5,012,500, minus, preferred stock outstanding of $0, divided by the number of common shares outstanding of 475,000.

• Question 1484:

  A shoe manufacturer believes inflation will increase dramatically over the next year. What incentives does this create for this firm?

  A. The firm will manufacture less, knowing that prices will be higher in the future.
  B. The firm will respond to demand from retailers, regardless of inflation.
  C. If inflation is widely expected, it will have no impact on the firm's strategy.
  D. The firm will want to decrease inventories now because future inventories will be more costly and therefore less profitable.
  E. The firm will attempt to store shoes in inventory, knowing that in the future these shoes will be worth more.
  E. The firm will attempt to store shoes in inventory, knowing that in the future these shoes will be worth more.

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  Explanation

  Inflation will cause the manufacturer's costs to increase in terms of raw materials and wages. In addition, the price of shoes should also increase. Therefore the firm has an incentive to produce now, and store these goods in inventory until prices rise.

• Question 1485:

  Jackson Corporation is evaluating the following four independent, investment opportunities: Project CostRate of Return A$300,000 14% B$150,000 10 C$200,000 13 D$400,000 11 Jackson's target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the company's debt is 10 percent. Jackson will incur flotation costs for a new equity issuance of 12 percent. The growth rate is a constant 6 percent. The stock price is currently $35 per share for each of the 10,000 shares outstanding. Jackson expects to earn net income of $100,000 this coming year and the dividend payout ratio will be 50 percent. If the company's tax rate is 30 percent, then which of the projects will be accepted?

  A. All of the investment projects will be taken.
  B. Projects A, C, and D.
  C. Projects A and C.
  D. None of the investment projects will be taken.
  E. Project A.
  E. Project A.

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  Explanation

  Calculate the after-tax component cost of debt as 10%(1 - 0.3) = 7%. If the company has earnings of $100,000 and pays out 50% or $50,000 in dividends, then it will retain earnings of $50,000. The retained earnings breakpoint is $50,000/0.4 = $125,000. Since it will require financing in excess of $125,000 to undertake any of the alternatives, we can conclude the firm must issue new equity. Therefore, the pertinent component cost of equity is the cost of new equity. Calculate the expected dividend per share as $50,000/10,000 = $5. Thus, the cost of new equity is $5/[($35(1 - 0.12)] + 6% = 22. 23%. Jackson's WACC is 7%(0.6) + 22. 23%(0.4) = 13. 09%. Only the return on Project A exceeds the WACC, so only Project A will be undertaken.

• Question 1486:

  For a negatively skewed, unimodal distribution, which of the following relationships holds?

  A. mode < median
  B. mean > median
  C. mean < median
  D. mean > mode
  C. mean < median

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  Explanation

  In a negatively skewed distribution, very low values are more common than correspondingly large values. This skews the distribution to the left, moving the mean to the left of the median.

• Question 1487:

  Profit margin is a ratio that:

  A. shows the return on net sales
  B. is calculated as net sales divided by operating expenses
  C. yields the company's financial position at a point in time
  D. compares total assets to net sales
  A. shows the return on net sales

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  Explanation

  Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

• Question 1488:

  An entrepreneur has invested $2. 2 million in project A with an NPV of $245,000 and an estimated beta of 0.59. She has invested another $3. 7 million in project B with an NPV of $320,000 and an estimated beta of 1.23. The firm's estimated beta equals ________.

  A. 1.11
  B. 0.72
  C. 1.23
  D. 0.99
  D. 0.99

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  Explanation

  The market value of project A equals $2. 2 million + $245,000 = $2. 445 million.

  The market value of project B equals $3. 7 million + $320,000 = $4. 02 million.

  The firm can be considered a portfolio of 2 projects. The beta of a portfolio equals the weighted average of the betas of the individual components. The weight of a component equals the fraction of the market value it comprises. Therefore, the

  firm's market value equals 2. 445 + 4. 02 = $6. 465 million and its beta equals 2. 445/6. 465*0.59 + 4. 02/6. 465*1.23 = 0.99.

• Question 1489:

  A firm using LIFO accounting has a LIFO reserve of 900, with a LIFO ending inventory of 8,100. It is currently in the 40% tax bracket. If it switches to FIFO accounting, which of the following is true?

  I. Its ending FIFO inventory equals 7,200

  II. Its deferred taxes decrease by 360

  III.

  Its equity increases by 540

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

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  Explanation

  LIFO Reserve = FIFO Ending inventory value - LIFO Ending inventory value Therefore, the ending inventory under FIFO = 8,100 + 900 = 9,000. The deferred taxes increase by 900*0.4 = 360 and the equity increases by 900*(1-0.4) = 540.

• Question 1490:

  How many annual deposits of $1,500, beginning next year, would you need to make before you had accumulated $30,000, if the money earns 9% per year, compounded annually? Assume the account begins with a $0 balance.

  A. 14. 01
  B. 20.00
  C. 11.95
  D. 25. 51
  E. 5. 19
  C. 11.95

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  Explanation

  On the BAII Plus, press 9 I/Y, 0 PV, 1500 PMT, 30000 +/- FV, CPT N. On the HP12C, press 9 i, 0 PV, 1500 PMT, 30000 CHS FV, n. Note that the HP12C will display 12 as the answer.