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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 141:

  Which of the following is/are TRUE?

  I. The cash flow from operations are higher when expenses are capitalized.

  II. Total cash flows are higher when the expenses are capitalized.

  III. Capitalization of interest costs leads to higher net income.

  IV.

  Capitalization of interest costs is not allowed under GAAP.

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

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  Explanation

  While CFO is lower under expensing since the entire cash expense is charged against it, expensing leads to a lower total income, causing lower tax payments. Hence, total cash flows are higher under expensing.

• Question 142:

  Assume the following series of transactions

  t0: Unknown t1: Purchase 10,000 shares of Intelligent Semiconductor for $98.90 per share t2: Sell 10,000 shares of Intelligent Semiconductor for $105. 30 per share t3: Sell 5,000 shares of Intelligent Semiconductor for $111.65 per share t4: Sell 5,000 shares of Intelligent Semiconductor for $140.00 per share

  Similar investments have merited a 13. 45% discount rate. Assuming no taxes or transaction charges, what is the dollar-weighted rate of return for this series of investments?

  A. 66. 11%
  B. None of these answers is correct.
  C. The answer cannot be calculated from the information provided.
  D. 46. 76%
  E. 58.27%
  C. The answer cannot be calculated from the information provided.

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of the answer. In fact, the dollar-weighted rate of return is another name for the IRR equation, and this nomenclature is commonly used within the field of investment management. So said, in the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period, beginning with t0: the initial investment outlay. In this example, the initial cash outlay is not specified, and therefore the calculation of the dollar-weighted rate of return cannot accurately be determined.

• Question 143:

  What annual interest rate, compounded annually, will cause an original deposit of $400 to grow to $625, after 7 years?

  A. 8.57%
  B. 6. 58%
  C. 7. 27%
  D. 6. 14%
  E. 5. 78%
  B. 6. 58%

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  Explanation

  On the BAII Plus, press 7 N, 400 PV, 0 PMT, 625 +/- FV, then CPT I/Y. On the HP12C, press 7 n, 400 PV, 0 PMT, 625 CHS FV, then press i. Make sure the BAII Plus has the P/Y value set to 1.

• Question 144:

  Which of the following is/are true about a normal distribution?

  I. It is a bimodal distribution.

  II. It can be characterized completely by a single parameter.

  III. It ranges from negative infinity to positive infinity.

  IV.

  It is positively skewed.

  A. I only
  B. III only
  C. IV only
  D. II only
  E. II, III and IV
  F. II and III
  G. III and IV
  B. III only

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  Explanation

  A normal distribution is completely characterized by 2 parameters, mean and variance. It ranges from negative infinity to positive infinity, has a single mode or peak (occurring at the mean), is symmetrical about the mean and has zero skewness.

• Question 145:

  Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $600 in after-tax income during the coming year, and it will retain 40 percent of those earnings. The current market price of the firm's stock is $28; its last dividend was $2. 20, and its expected dividend growth rate is 6 percent. Allison can issue new common stock at a 15 percent flotation cost. What will Allison's marginal cost of equity capital (not the WACC) be if it must fund a capital budget requiring $600 in total new capital?

  A. 13. 9%
  B. 14. 3%
  C. 9.7%
  D. 15. 8%
  E. 7. 9%
  D. 15. 8%

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  Explanation

  Calculate the retained earnings break point:

  Given:

  Net income = $600; Debt = 0.4; Equity = 0.6; Dividend payout = 0.6.

  Break point(RE) = $600(1 - 0.6)/0.6 = $400.

  Allison will need new equity capital; capital budget exceeds Break point(RE).

  Use the dividend growth model to calculate k(s):

  k(s) = D1/Po + g = 2. 2(1.06)/28(1-.15) + .06 = 0.0979 + 0.06 = 0.1579 = 15. 8%.

  k(s) = component cost of retained earnings or internal equity.

• Question 146:

  Calculate the cost of debt for the following firm:

  Borrowing Rate 9.5%

  Marginal Tax Rate 34%

  Credit Rating BB+

  Owner's Equity 15%

  A. 1.5%
  B. 8.075%
  C. 1.43%
  D. 9.5%
  E. 6. 27%
  E. 6. 27%

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  Explanation

  The cost of debt is simply the rate of borrowing less the tax savings. Due to the fact that interest expense is tax deductible, the cost of debt in this case is 9.5%(1 - .34) = 9.5%(.66) = 6. 27%.

• Question 147:

  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 "overbought." Which of the following technical indicators would this analyst likely use to support his opinion? Choose the best answer.

  A. The Block Uptick-Downtick Ratio has declined below 0.70.
  B. All of these choices indicate an "overbought" condition.
  C. The Diffusion Index has increased significantly.
  D. The Block Uptick-Downtick Ratio has advanced beyond 1.1. E. The CBOE Put/Call Ratio has declined to 0.50.
  D. The Block Uptick-Downtick Ratio has advanced beyond 1.1. E. The CBOE Put/Call Ratio has declined to 0.50.

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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 contrarian 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 market as "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 148:

  In valuing real estate, the most popular income approach is called ________.

  A. retrospective value
  B. the cost approach
  C. none of these answers
  D. direct capitalization
  E. the comparative sales approach
  F. depreciation method
  D. direct capitalization

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  Explanation

  The direct capitalization approach =

  Market Value = Annual NOI / Market Capitalization Rate

• Question 149:

  The following is a sign that a company is a "growth company":

  A. It has no earnings and does not pay a dividend.
  B. It has very strong negative cash flows and borrows heavily to make up for the negative cash flows.
  C. It has earnings but does not pay dividends and its employees are not overly compensated.
  D. It has earnings and pays out large dividends.
  C. It has earnings but does not pay dividends and its employees are not overly compensated.

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  Explanation

  Companies characterized as "growth companies" are those that do make money, but they keep the money within the company so as to grow the company. Companies that pay dividends are not maximizing the funds available to fund future growth. Companies that limit earnings by paying employees exorbitant salaries are not growth companies. Companies like this are giving funds to employees rather than holding them within the corporation to fund future growth.

• Question 150:

  If you need $25,000 in 10 years, how much must you deposit today, if your money will earn 6% per year, compounded annually?

  A. $25,000
  B. $13,959.87
  C. $2,320.01
  D. $44,771.19
  E. $23,200.08
  B. $13,959.87

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  Explanation

  On the BAII Plus, press 10 N, 6 I/Y, 0 PMT, 25000 FV, CPT PV. On the HP12C, press 10 n, 6 i, 0 PMT, 25000 FV, PV. Note that the answer will be shown as a negative number.