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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1621:

  Which of the following is/are true in an inflationary environment?

  I. For income statement purposes, LIFO is preferable to FIFO.

  II. For balance sheet purposes, LIFO is preferable to FIFO.

  III. The weighted average cost method provides a better balance sheet representation than LIFO.

  IV.

  The weighted average cost method provides a better income statement representation than FIFO.

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

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  Explanation

  Remember that for income statement, it is desirable to have the COGS as close to true, current cost, as possible. For balance sheet, the assets must be as close to current, market value, as possible. Hence, for income statement, LIFO preferred to average cost preferred to FIFO. For balance sheet, FIFO preferred to average cost preferred to LIFO.

• Question 1622:

  The six-year spot rate is 7% and the five-year spot rate is 6%. What is the implied one-year zerocoupon bond rate five years from now?

  A. 5%
  B. 6. 5%
  C. 7%
  D. 12%
  D. 12%

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  Explanation

  5r1= [(1 +/ (1 +] - 1 = [(1.07/(1.06] ?1[1.5 / 1.338] - 1 = .12

• Question 1623:

  The weighted average method is based on the assumption that the cost of merchandise sold should be calculated using the:

  A. average price of beginning inventory plus purchases during the period
  B. average price per unit of ending inventory
  C. average price of ending inventory plus purchases during the period
  D. average price per unit of beginning inventory
  A. average price of beginning inventory plus purchases during the period

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  Explanation

  Under the weighted average method, inventory is priced at the average cost of the goods available for sale (Beginning inventory plus purchases during the period).

• Question 1624:

  Which of the following is the correct chronological order in dividend payment procedures?

  A. Declaration date, record date, ex dividend date, dividend payment date.
  B. Declaration date, dividend payment date, record date, ex dividend date.
  C. Declaration date, ex dividend date, record date, dividend payment date.
  D. Declaration date, ex dividend date, dividend payment date, record date.
  C. Declaration date, ex dividend date, record date, dividend payment date.

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  Explanation

  In the U.S., the ex dividend date, i.e. the date after which the stock does not carry with it the right to receive the declared dividend, is 4 business days before the record date. The record date is the last day for registering the ownership of the stock with the firm so that the dividend check is mailed to you and not someone else.

• Question 1625:

  American textile manufacturers and union members have often lobbied successfully for restrictive quotas limiting the importation of textile products. The major impact of these quotas is

  A. lower prices for American consumers and an improvement in the quality of textile products available.
  B. a permanent reduction in unemployment in the U.S.
  C. higher prices for American consumers, a narrower selection of products and less competition in the U.S. textile industry.
  D. long-run profits in the U.S. textile industry that are substantially above market equilibrium.
  C. higher prices for American consumers, a narrower selection of products and less competition in the U.S. textile industry.

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  Explanation

  Import quotas cause the market price for the imported good to rise domestically. This hurts consumers but helps domestic producers who in addition to gaining market share also enjoy a higher price.

• Question 1626:

  Which of the following statements is false?

  A. When IRR = k (the cost of capital), NPV = 0.
  B. If the multiple IRR problem does not exist, any independent project acceptable by the NPV method will also be acceptable by the IRR method.
  C. The IRR can be positive even if the NPV is negative.
  D. The NPV will be positive if the IRR is less than the cost of capital.
  E. The NPV method is not affected by the multiple IRR problem.
  D. The NPV will be positive if the IRR is less than the cost of capital.

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  Explanation

  If the IRR is less than the cost of capital, then taking on the project imposes a cost on current stockholders. If the cost of capital is greater than the IRR, the NPV will be negative.

• Question 1627:

  A firm had an operating cash flow of 4,500, financing cash flow of 1,200 and an investing cash flow of -900. The firm has announced common stock dividends of 45 and preferred stock dividends of 23. If the outlays for maintenance of current capacity is 310, the firm's free cash flow equals ________.

  A. 4,445
  B. 5,345
  C. 4,122
  D. 4,145
  C. 4,122

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  Explanation

  FCF = Cash from operations - outlays for maintenance of current capacity - dividends declared. In this case, FCF = 4,500 - 310 - 45 - 23 = 4,122.

• Question 1628:

  How much would you have in a savings account 12 months from now if you start with a balance of $1,000 today, make a deposit of $2,000 in 6 months and make another deposit 6 months after that of $3,000? Assume that interest accrues at 6% per year, compounded monthly.

  A. $6,000.00
  B. $5,500.00
  C. $6,122. 43
  D. $7,684. 42
  E. $5,777. 55
  C. $6,122. 43

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  Explanation

  Find the answer to this question by solving a couple of compound interest problems. Move the $1,000 to month 12, then move the $2,000 forward 6 months to month 12, then add $3,000. On the BAII Plus, press 12 N, 6 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV, which yields $1,061.68. Then press STO 1. Then press 6 N, 2000 PV, CPT FV, which yields $2,060.76. Then press + RCL 1 =. Make this number positive by pressing +/- and then press + 3000 = to see the answer. On the HP12C, press 12 N, 6 ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then press STO 1. Then press 6 N, 2000 PV, FV. Then press RCL 1 +. Make this number positive by pressing CHS and then press 3000 + to see the answer.

• Question 1629:

  Which of the following relating to compliance procedures for complying with Standard III (E) is false? The compliance procedures should:

  A. none of these answers.
  B. outline permissible conduct.
  C. delineate procedures for reporting violations and sanctions.
  D. designate a team of outside colleagues to form a review board.
  E. outline the scope of the procedures.
  F. be easy to understand.
  D. designate a team of outside colleagues to form a review board.

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  Explanation

  The compliance officer should be designated from within the firm.

• Question 1630:

  Assume the following information for Bearstone Concrete and Manufacturing, Inc.

  EPS: $6. 25

  ROE: 10.16%

  Growth rate of dividends: 5. 25%

  Discount rate: 12. 80%

  Tax Rate 35%

  Common shares outstanding 2,000,000

  Using this information, what is the retention rate for this firm? Further, what is the annual dividend?

  A. 48.33%, $3. 02
  B. 51.67%, $3. 23
  C. 45. 81%, $2. 86
  D. The answer cannot be determined from the information provided.
  E. 48.33%, $3. 23
  F. 51.67%, $3. 02
  F. 51.67%, $3. 02

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  Explanation

  To determine the retention rate of dividends, the equation used to determine the growth rate of dividends must be manipulated. This equation is originally structured as follows: {g = ROE (1 - Dividend Payout Ratio)} In order to determine the

  retention rate, the equation must be rearranged to the following: {(1 - Dividend Payout Ratio) = Growth Rate of Dividends / ROE}. Imputing the given information into this equation will yield as follows: {(1 - Dividend Payout Ratio) =

  0.0525/0.1016)} = 0.51673. Remember that the retention rate is equal to (1 - Dividend Payout Ratio). Therefore, no further calculation is necessary to determine the retention rate. In order to determine the annual dividend, take the Dividend

  Payout Ratio, which is found by (1 - Retention Rate), and multiply this figure by the Earnings Per Share calculation, which is given as $6. 25. This will yield an annual dividend of $3. 02.

  As you can see, neither the discount rate, tax rate, nor the number of common shares outstanding is factored into the equation.