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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1541:

  A firm has fixed costs of $13,000, variable costs of $15 and sale price per unit of $22. The firm has an interest expense of $800. The degree of financial leverage of the firm at an output level of 2,000 units is:

  A. 4. 2
  B. 2. 3
  C. 4. 0
  D. 5. 0
  D. 5. 0

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  Explanation

  DFL = EBIT/(EBIT - I). Also, EBIT = Q(P-V) - FC. Therefore, EBIT = 2000*(22-15) - 13,000 = 1,000 and DFL = 1000/(1000 - 800) = 5.

• Question 1542:

  Which of the following is/are true about operating cash flows of a project?

  I. The annual operating cash flow equals operating income minus net non-cash expenses.

  II. Financing costs are excluded from the operating cash flows.

  III.

  Project evaluation is based on net cash flows, not net income.

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

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  Explanation

  The annual operating cash flow equals operating income plus net non-cash expenses. Financing costs are excluded since they are accounted for in the discounting process through the use of WACC.

• Question 1543:

  A fundamental analyst is examining the perpetual preferred stock of a large telecom company. The preferred stock is expected to pay a quarterly dividend of $0.55, and the required rate of return is 11.75% per year. At what price would this preferred stock be fairly valued?

  A. $16. 44
  B. The answer cannot be calculated from the information provided.
  C. $18.20
  D. None of these answers is correct.
  E. $18.72
  F. $21.14
  E. $18.72

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  Explanation

  Assuming that the quarterly dividend is to remain unchanged forever allows us to use the standard perpetuity model, which is illustrated as follows:

  Value of preferred stock = {Annual dividend / required rate of return}

  In this example, we are given the quarterly dividend, which must be multiplied be annualized in order to be imputed into the perpetuity valuation equation.

  So said, a quarterly dividend of $0.55 translates into a yearly dividend of $2. 20. Incorporating this yearly dividend into the perpetuity valuation model will result in the following:

  Value of preferred stock = {$2. 20 / 0.1175} = $18.72

• Question 1544:

  A stock's return has a mean of 6% and a coefficient of variation of 2. Its variance equals

  A. 144%%
  B. 3%%
  C. 6%%
  D. 12%%
  A. 144%%

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  Explanation

  Coefficient of variation = standard deviation/mean. Therefore, standard deviation = 2*6 = 12. Variance = 12^2 = 144

• Question 1545:

  When a firm experiences LIFO liquidation under rising prices, it recognizes:

  A. lower COGS and lower cash flows.
  B. lower COGS and higher cash flows.
  C. higher COGS and lower cash flows.
  D. higher COGS and higher cash flows.
  A. lower COGS and lower cash flows.

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  Explanation

  In LIFO liquidation under rising prices, the quantity of goods purchased during a period is less than the quantity sold. This leads to a sale of goods purchased in prior periods at lower prices (since prices are rising). This understates the costof-goods-sold (COGS), thus overstating the income and causing higher taxes than in the absence of the LIFO liquidation. The higher taxes cause a higher cash outflow. (This is an extremely important topic with which you should be completely familiar.)

• Question 1546:

  A growth stock:

  A. is a stock which generates rates of returns higher than stocks with similar risks.
  B. all of these answers.
  C. promises rates of return higher than those that can be obtained by investing in the market portfolio.
  D. represents a company that has management abilities and investment opportunities that yield rates of return higher than the required rate of return.
  A. is a stock which generates rates of returns higher than stocks with similar risks.

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  Explanation

  You have to be careful in distinguishing between a growth stock and a growth firm. A growth stock need not represent a growth firm. Rather, it is defined as a stock that has consistently generated returns higher than those justified by the risks. Such a situation arises either because the company has surprise windfalls or because at some point in the past, the market underestimated the firm's growth potential. Note that this is not in violation of efficient markets theory, which says that on average, investors correctly impound the available information in the stock price, though in any individual case, the market might over- or underestimate the impact of the new information on the value of the firm.

• Question 1547:

  The AIMR-PPS recommend that both ________ and ________ risks be presented in conjunction with composite returns.

  A. absolute; unsystematic
  B. total; market
  C. external; internal
  D. unsystematic; systematic
  B. total; market

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  Explanation

  Total risk relates to the variability of actual (absolute) returns not relative to the market. Market (systematic) risk relates to the volatility of returns relative to the market or some other benchmark.

• Question 1548:

  Events A and B are mutually exclusive. P(A) = 0.45, P(B) = 0.27. The probability of neither A nor B occurring equals ________.

  A. 0.28
  B. 0.88
  C. 0.72
  D. 0.12
  A. 0.28

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  Explanation

  The probability of neither A nor B occurring equals one minus the probability of either A or B occurring i.e. P(neither A nor B) = 1 - P(A or B). Now, P(A or B) = P(A) + P(B) - P(A and B).

  Also, for mutually exclusive events, P(A and B) = 0 by definition. Therefore,

  P(A or B) = 0.45 + 0.27 = 0.72. Finally, P(neither A nor B) = 1 - P(A or B) = 1 - 0.72 = 0.28.

• Question 1549:

  Which of the following would not be included as an asset on a corporate balance sheet?

  A. Inventory
  B. Marketable securities
  C. Buildings
  D. Accounts receivable
  E. Common stock
  E. Common stock

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  Explanation

  Common stock. Common stock is not as asset; it represents funds received from the sale of stock to owners of the firm. It is ownership equity, not an asset.

• Question 1550:

  When estimating change in sales for a market series, change in sales is regressed against change in ________.

  A. Earnings
  B. Nominal GNP
  C. None of these answers
  D. Revenues
  B. Nominal GNP

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  Explanation

  Regressing change in sales with change in GNP basically to find a relationship between GNP and sales, so that GNP growth rate can be used to estimate future sales changes.