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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1561:

  A fund to be purchased had a net asset value (NAV) of $72. 40 and a load of 5 percent. What is the offering price per share?

  A. $76. 211. B. $3. 811. C. $76. 020.
  D. $72. 400.
  A. $76. 211. B. $3. 811. C. $76. 020.

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  Explanation

  

• Question 1562:

  Which of the following statements is most correct?

  A. None of the statements are correct.
  B. When choosing between mutually exclusive projects, managers should accept all projects with IRRs greater than the weighted average cost of capital.
  C. Multiple IRRs can occur in cases when project cash flows are normal, but they are more common in cases where project cash flows are nonnormal.
  D. All of the statements are correct.
  E. One of the disadvantages of choosing between mutually exclusive projects on the basis of the discounted payback method is that you might choose the project with the faster payback period but with the lower total return.
  E. One of the disadvantages of choosing between mutually exclusive projects on the basis of the discounted payback method is that you might choose the project with the faster payback period but with the lower total return.

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  Explanation

  The payback and discounted payback methods both ignore cash flows that are paid or received after the payback period. Concerning the other statements: Multiple IRRs can occur only for projects with nonnormal cash flows. Mutually exclusive projects implies that only one project should be chosen. The project with the highest NPV should be chosen.

• Question 1563:

  The joint probability of events A and B occurring equals 0.11. The probability of neither A nor B occurring equals 0.64. If P(A) equals 0.24, the probability of B occurring equals ________.

  A. 0.46
  B. 0.29
  C. 0.51
  D. 0.23
  D. 0.23

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  Explanation

  We are given that P(neither A nor B) = 0.64, P(A and B) = 0.11 and P(A) = 0.24. 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).

  Thus, P(A or B) = 1 - P(neither A nor B) = 1 - 0.64 = 0.36.

  Now, P(A or B) = P(A) + P(B) - P(A and B)

  Therefore, P(B) = P(A or B) - P(A) + P(A and B) = 0.36 - 0.24 + 0.11 = 0.23.

• Question 1564:

  Which is a measure of profitability?

  A. Debt to Equity Ratio
  B. Price/Earnings Ratio
  C. Return on Assets
  D. Dividend Yield
  E. Payout Ratio
  C. Return on Assets

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  Explanation

  Return on Assets = Net Income/Total Assets; With other things equal, firms with relatively large amounts of assets on their books (such as those in capital-intensive industries) will have low ROA figures. By contrast, service oriented firms having small amounts of capital on their books will have higher ROA figures.

• Question 1565:

  Which of the following statements is correct?

  A. "Business risk" is differentiated from "financial risk" by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.
  B. If corporate tax rates were decreased while other things were held constant, and if the Modigliani Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to increase their use of debt.
  C. The optimal capital structure is the one which simultaneously (1) maximizes the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its EPS.
  D. None of these statements are true.
  E. If corporate tax rates were decreased while other things were held constant, and if the Modigliani Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.
  E. If corporate tax rates were decreased while other things were held constant, and if the Modigliani Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.

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  Explanation

  If corporate tax rates were decreased while other things were held constant, and if the MM tax- adjusted tradeoff theory of capital structure were correct, corporations would decrease their use of debt because the tax shelter benefit would not be as great as when tax rates are high. Business risk is the riskiness of the firm's operations if it uses no debt. The optimal capital structure does not maximize EPS, and the degree of total leverage shows how a given change in sales will affect earnings per share.

• Question 1566:

  In order for the NPV and MIRR methods to consistently produce similar rankings, the projects being examined must possess which of the following characteristics? Choose the best answer.

  A. Projects must be independent and equal in size
  B. Projects must equal in scale and be mutually exclusive
  C. Projects must be profitable and have normal cash flows
  D. Projects must equal in scale and have the same life
  E. Projects must equal in scale and have identical cash flows
  F. Projects must have equal lifespans and normal cash flows
  D. Projects must equal in scale and have the same life

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  Explanation

  When examining mutually-exclusive projects with normal cash flows, the MIRR and NPV methods will ALWAYS produce similar results as long as the projects being examined are equal in size and have the same life.

• Question 1567:

  Which of the following would be the most likely reason to use ETFs instead of similar index funds?

  A. Lower market risk.
  B. Intraday valuation and trading.
  C. ETFs do not experience tracking error.
  B. Intraday valuation and trading.

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  Explanation

• Question 1568:

  Which of the following can be found in Standard III?

  A. Members must use the CFA designation in a dignified manner.
  B. If members receive material nonpublic information in confidence, they shall not breach that confidence by trading or causing others to trade in securities to which such information relates.
  C. Members shall maintain knowledge of AIMR's Code of Ethics.
  D. Members shall comply with any prohibitions on activities imposed by their employer if a conflict of interest exists.
  E. Members shall make reasonable and diligent efforts to avoid any material misrepresentation in any research report or investment recommendation.
  D. Members shall comply with any prohibitions on activities imposed by their employer if a conflict of interest exists.

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  Explanation

  Standard III states: "Members shall comply with any prohibitions on activities imposed by their employer if a conflict of interest exists."

• Question 1569:

  How many years would it take for a deposit of $10,000 to become $200,000, if interest of 9% per year is compounded annually?

  A. 400.93
  B. 28.89
  C. 134. 64
  D. 34. 76
  E. 8.04
  D. 34. 76

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  Explanation

  On the BAII Plus, press 10000 PV, 0 PMT, 200000 +/- FV, 9 I/Y, CPT N. On the HP12C, press 10000 PV, 200000 CHS FV, 9 i, then press n. Note that the HP12C shows 35 as the answer.

• Question 1570:

  A liability can be recognized when

  A. an obligation exists to make a future payment based on a past event
  B. any time a future payment is due
  C. only when the amount is certain
  D. all of these answers are correct
  A. an obligation exists to make a future payment based on a past event

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  Explanation

  The amount need not be certain and some future payments such as wages to be paid in the future may not be reported as liabilities.