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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1641:

  As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: YearProject XProject Z 0-$100,000-$100,000 150,000 10,000 240,000 30,000 330,000 40,000 410,000 60,000 If Denver's cost of capital is 15 percent, which project would you choose?

  A. Project Z, since it has the higher NPV.
  B. Project X, since it has the higher NPV.
  C. Neither project.
  D. Project X, since it has the higher IRR.
  E. Project Z, since it has the higher IRR.
  C. Neither project.

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  Explanation

  (In thousands)

  NPV(X) = -100 + 50(PVIF(15%,1)) + 40(PVIF(15%,2)) + 30(PVIF(15%,3)) + 10(PVIF(15%,4)) = -100 + 50(0.8696) + 40(0.7561) + 30(0.6575) + 10(0.5718) = -0.833 = -$833. NPVZ = -100 + 10(PVIF(15%,1)) + 30(PVIF(15%,2)) + 40(PVIF(15%

  ,3)) + 60(PVIF(15%,4)) = -100 + 10(0.8696) + 30(0.7561) + 40(0.6575) + 60(0.5718) = -8.013 = -$8,013.

  At a cost of capital of 15%, both projects have negative NPVs and, thus, both would be rejected.

• Question 1642:

  Nicki Tobin, CFA candidate, has just started studying portfolio management. She notes the following similarities between the graphical representations of the fundamental and systematic views of risk. Which one of her observations is INCORRECT? For both views of risk:

  A. the y-axis represents expected return.
  B. investors require a higher expected return for riskier investments.
  C. investors demand a risk premium above the nominal risk-free rate.
  D. the graphs plot the market's risk premium against expected return.
  D. the graphs plot the market's risk premium against expected return.

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  Explanation

  The systematic view of risk is that the security's required risk premium is a function of its systematic, or non diversifiable risk, while the fundamental view of risk is that the security's risk premium is a function of its total risk. However, the market's risk premium is not on either axis for either view. The fundamental view plots total risk versus expected return, and the systematic view plots beta (systematic risk) versus expected return. Although both views use the concept of a risk premium over the risk-free rate, the calculation differs. The risk premiumFundamental view= total risk = business risk + financial risk + liquidity risk + exchange rate risk + country risk. The risk premiumsystematic view= Expected ReturnMarket?Nominal ReturnRisk-Free. The equation for the stock's risk premium is: [Expected ReturnMarket?Nominal ReturnRisk-Free] * Beta.

• Question 1643:

  Standard V (A), Prohibition against Use of Material Nonpublic Information applies to

  A. all members of the investment community.
  B. recipients of information who are not directly or indirectly associated with the firm the material nonpublic information is about.
  C. recipients of information who are directly or indirectly associated with the firm the material nonpublic information is about.
  D. none of these answers.
  B. recipients of information who are not directly or indirectly associated with the firm the material nonpublic information is about.

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  Explanation

  Standard V (A), Prohibition against Use of Material Nonpublic Information applies to recipients of information who are not directly or indirectly associated with the firm the material nonpublic information is about. Such persons include research analysts, portfolio managers, venture capitalists, pension sponsors, investor relations executives, rating agencies, trust officers and others who make or recommend investment decisions.

• Question 1644:

  A 10-year 5% Treasury bond is issued at a price to yield 5. 2%. Three months after issuance, market rates for 10-year Treasuries decline by 100 basis points. The most likely price of this bond at issuance and three months later is:

  A. above par at issuance, but below par three months later
  B. below par at issuance, but above par three months later
  C. below par at issuance, and below par three months later
  B. below par at issuance, but above par three months later

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  Explanation

• Question 1645:

  Which of the following is not an approach to real estate value, when performing an appraisal?

  A. Market approach
  B. Cost approach
  C. Income approach
  D. Property transfer approach
  D. Property transfer approach

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  Explanation

  Real estate appraisers look at each of these approaches, cost, comparative sales and income to arrive at the best estimate of value.

• Question 1646:

  A price level at which the demand for a stock is expected to increase significantly is best characterized by which of the following?

  A. Reversal level.
  B. Support level.
  C. Resistance level.
  D. More than one of these answers is correct.
  E. Rotation price.
  B. Support level.

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  Explanation

  Technical analysts frequently examine historical price information to determine important "support" and "resistance" levels. A support level is a price range at which the demand for a stock is expected to increase, i.e. buying pressure will increase forcing the stock price upward, or will prevent it from moving down. A resistance level is a price range at which the supply of a stock is expected to increase significantly, forcing the price of the stock down, or preventing it from advancing.

  "Rotation price" and "reversal level" are largely fictitious terms.

• Question 1647:

  Helms Aircraft has a capital structure, which consists of 60 percent debt and 40 percent common stock. The company's equity financing will come from issuing new common stock. The company recently issued bonds with a yield to maturity of 9 percent. The company's stock is currently trading at $40 a share. The year-end dividend is expected to be $4 a share (that is, D(1) = $4. 00), and the dividend is expected to grow at a constant rate of 5 percent. The flotation costs associated with issuing new common stock are estimated to be 10 percent. The company's tax rate is 35 percent. What is the company's weighted average cost of capital?

  A. 11.84%
  B. 10.98%
  C. 8.33%
  D. 9.51%
  E. 9.95%
  E. 9.95%

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  Explanation

  Calculate the after-tax cost of debt = (1 - 0.35) 9% = 5. 85%.

  Calculate the cost of new equity: k(e) = $4/[$40(1 - 0.1)] + 0.05 = 0.1611 or 16. 11%. Compute WACC (Weighted Average Cost of Capital): 0.6(5. 85%) + 0.4(16. 11%) = 9.95%.

• Question 1648:

  Sparten, Inc., a plumbing contractor, received a check for $3,000 on June 30 for services to be performed in the following fiscal month. During the July accounting period, Sparten completed all but $500 of the job. What adjusting entry needs to be made at the end of July?

  A. increase Cash and Revenue for $3,000
  B. decrease Accounts Receivable and increase Revenue for $2,500
  C. increase Unearned Revenue and decrease Cash for $500
  D. debit Unearned Revenue and credit Revenue for $2,500
  D. debit Unearned Revenue and credit Revenue for $2,500

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  Explanation

  When the check was received on June 30, a liability was established for $3,000 because revenue could not be recognized until it was earned. During July, $2,500 of revenue was earned and should be recognized, along with a reduction (debit) to the Unearned Revenue account.

• Question 1649:

  The ________ states that broker/dealers should be subject to strict standards because they are advertising themselves as market professionals.

  A. cover canon
  B. canopy principle
  C. posting criterion
  D. shingle theory
  E. marketing regulation
  D. shingle theory

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  Explanation

  The shingle theory states that broker/dealers should be subject to strict standards because they are "hanging out their shingles," or, advertising themselves as market professionals. The theory states that inherent in the relationship between brokers/dealers and their clients is the representation that the customer will be dealt with fairly. Brokers/dealers are in a position to exploit their customers' trust and ignorance and therefore they are held to a higher duty of care.

• Question 1650:

  Which of the following would be an example of non-activist monetary policy?

  A. The Central Bank attempts to counter-act negative developments in the economy.
  B. Inflation is the only target for the Central Bank.
  C. The Central Bank tries to keep the money supply constant.
  D. The government keeps spending constant and allows tax revenues to rise or fall to compensate for changes in aggregate income.
  E. The Central Bank increases the money supply by 5% every year.
  E. The Central Bank increases the money supply by 5% every year.

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  Explanation

  The classic non-activist monetary policy example is to increase the money supply by a particular level every year. Activist or discretionary monetary policy involves changing the supply of money to counteract negative developments in the economy.