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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1611:

  If you deposit $100 a month, beginning next month, for 8 years into an account paying 6% per year, compounded monthly, how much is in your account after that last deposit?

  A. $13,678.56
  B. $12,282. 85
  C. $9,600.00
  D. $12,097. 91
  E. $23,585,957
  B. $12,282. 85

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  Explanation

  On the BAII Plus, press 96 N, 6 divide 12 = I/Y, 0 PV, 100 PMT, CPT FV. On the HP12C, press 96 n, 6 ENTER 12 divide i, 0 PV, 100 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.

• Question 1612:

  Which of the following can be found in Standard III?

  A. Members shall not misrepresent investment performance.
  B. Members shall exercise diligence and thoroughness in making investment recommendations or in taking investment actions.
  C. Members shall not participate in any professional conduct involving dishonesty, fraud, deceit, etc.
  D. Members shall deliver a copy of the Code to their employer.
  E. Members shall not knowingly participate or assist in any violation of laws, rules, or regulations.
  D. Members shall deliver a copy of the Code to their employer.

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  Explanation

  Standard III states that members shall deliver a copy of the Codes and Standards to their employer if the employer does not have a copy.

• Question 1613:

  An analyst valuing the non-controlling shares of a closely held company is using a similar firm quoted on the NASDAQ with relatively high trading volume as his base for a comparable company analysis. He is most likely to use the shares of the publicly traded comparable company and apply:

  A. only a marketability discount
  B. only a minority interest discount
  C. both a marketability and minority interest discount
  A. only a marketability discount

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  Explanation

• Question 1614:

  Technical analysts believe that speculative trading peaks at market ________.

  A. mid-points
  B. troughs
  C. none of these answers
  D. peaks
  D. peaks

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  Explanation

  Technicians consider speculative activity high when the ratio of OTC volume on the NASDAQ system to NYSE volume gets to 90 percent or more. Speculative trading typically peaks at market peaks.

• Question 1615:

  The first card selected from a standard 52 card deck was a king. If it is returned to the deck, what is the probability that a king will be drawn on the second selection?

  A. 1/4 or 0.25
  B. 1/13, or 0.077
  C. None of these answers
  D. 1/3 or 0.33
  E. 12/13, or 0.923
  B. 1/13, or 0.077

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  Explanation

  There are still 4 kings out of 52 in the pack. So 4/52 = 1/13. The first selection does not affect the second selection.

• Question 1616:

  Which of the following is not a stage in the industrial life cycle?

  A. Market deceleration and decline.
  B. All of these are stages in the industrial life cycle.
  C. Mature growth.
  D. Horizon growth.
  E. Accelerating growth.
  F. Development.
  D. Horizon growth.

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  Explanation

  The industry life cycle is divided into five distinct stages. Specifically, the industrial life cycle progresses from the development stage to an accelerating growth stage to a mature growth stage to a market maturation and stabilization stage. Finally, the fifth stage of the industrial life cycle is characterized by decelerating growth and sales decline. As you can see, "horizon growth" is not a stage in the industrial life cycle.

  As an industry or company progresses through the industrial life cycle, sales begin to grow rapidly (accelerating growth) then slow considerably as the product or service begins to reach critical mass (mature growth). During the mature growth stage, the industry or company grows at a slower pace, until eventually growth begins to slow considerably (market maturity and stabilization) as the market for the industry or company's products becomes more completely defined. An industry or company typically reaches the fifth stage of the industrial life cycle, growth deceleration and decline, only after many years of stabilization. For example, the automobile became widely available in the early 20th century, and the automobile industry has experienced a period of stabilization for nearly 50 years. The market for automobiles is still experiencing single digit annual growth, and has arguably not progressed into the decline stage.

• Question 1617:

  Jay Simpson was recently convicted of a felony in the state of California. Jay is a resident of Arizona, where he conducts all his business. The felony conviction resulted from activities not related to his primary business. With regard to standard II.B-Professional Misconduct, Jay has:

  A. violated the standard since felony convictions are considered professional misconduct.
  B. not violated the standard since the conviction occurred in a non-resident state.
  C. not violated the standard since AIMR does not impose sanctions for felony convictions.
  D. not violated the standard since the conviction is for non-business activities.
  E. none of these answers.
  A. violated the standard since felony convictions are considered professional misconduct.

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  Explanation

  Standard II (B) is violated if convictions for felony or similar offenses occur, regardless of whether the offenses were related to the member's professional activities or not.

• Question 1618:

  Longstreet Corporation has a target capital structure of 30 percent debt, 50 percent common equity, and 20 percent preferred stock. The tax rate is 30 percent. The company has an optimal capital budget of $1,500,000. Longstreet will retain $500,000 of after-tax earnings this year. The last dividend was $5, the current stock price is $75, and the growth rate of the company is 10 percent. If the company raises capital through a new equity issuance, then the flotation costs are 10 percent for the first $500,000. If the company issues more than $500,000 in new equity the flotation cost increases to 15 percent. The cost of preferred stock is 9 percent and the cost of debt is 7 percent. (Assume debt and preferred stock have no flotation costs.) What is the weighted average cost of capital at the firm's optimal capital budget?

  A. 12. 18%
  B. 18.15%
  C. 12. 34%
  D. 11.94%
  E. 12. 58%
  C. 12. 34%

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  Explanation

  First, calculate the after-tax component cost of debt as 7%(1 - 0.3) = 4. 9%. Next, calculate the retained earnings breakpoint as $500,000/0.5 = $1,000,000. Thus, to finance its optimal capital budget, Longstreet must issue some new equity. Note, Longstreet needs $500,000 in financing beyond that which can be supported by retained earnings alone. However, of this additional $500,000, 50% will be new equity and the remaining 50% will represent preferred stock and debt. Thus, Longstreet will issue $250,000 in new equity and flotation costs of 10% will be incurred. The cost of new equity is then[$5(1.10%)/$75(1 - 0.1)] + 10% = 8.15% + 10% = 18.15%. Finally, the WACC = 4. 9%(0.3) + 9%(0.2) + 18.15%(0.5) = 12. 34%.

• Question 1619:

  Which of the following equations correctly illustrates the calculation of the cost of equity using the Bond-Yield-plus-Risk-Premium approach?

  A. Required rate of return on outstanding debt + subjective risk premium
  B. Before-tax yield on outstanding debt + subjective risk premium
  C. None of these answers
  D. After-tax cost of debt + subjective risk premium
  E. Annual dividend/current stock price + subjective risk premium
  F. Yield to maturity on outstanding long-term debt + subjective risk premium
  F. Yield to maturity on outstanding long-term debt + subjective risk premium

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  Explanation

  The Bond-Yield-plus-Risk-Premium approach is a rather ad hoc method used by financial managers to determine the cost of common equity. Under this approach, a subjective risk premium is added to the yield to maturity of the firm's outstanding long-term debt. Typically, senior debt is used when possible, however, due to the ad hoc nature of this approach, there is abounding room for flexibility. This large degree of flexibility both adds to and detracts from the attractiveness of Bond-Yield-plus-Risk-Premium approach.

• Question 1620:

  An analyst with Smith, Kleen and Beetchnutty is trying to determine the earnings multiple of a stock market series composed of firms in the basic materials business. In her research, the analyst has gathered the following information:

  D1: $1.10 EPS: $4. 30

  k: 13. 75% per year

  g: 10.50% per year

  Using this information, what is the earnings multiplier of this stock market series? Further, is this multiple realistic for firms in the basic materials business?

  A. None of these answers is correct.
  B. 7. 88, no
  C. 33. 84, no
  D. 7. 88, yes
  E. 10.54, no
  F. 10.54, yes
  D. 7. 88, yes

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  Explanation

  To determine the earnings multiplier, or "P/E ratio," of a stock market series, use the following equation: P/E = [(D1 / E1) / (k-g)

  Where: D1 = the annual per-share dividend at t1, E1 = the EPS figure at t1, k = the required rate of return on common stock, and g = the expected growth rate of dividends. In this example, all of the necessary information has been provided, and putting it into the equation above will yield the following:

  P/E of a stock market series = [($1.10*1.105 / ($4. 30*1.105)) / (0.1375 - 0.105)] = 7. 88

  This is a rather low multiple, appropriate for slow growth industries. The fact that the index under examination is a compilation of firms in the basic materials business substantiates this low multiple because firms in this line of business are not expected to grow very rapidly. Further, firms in the basic materials business are also likely to have a relatively high dividend payout ratio, as evidenced in this example.