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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 161:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$15,000>, Year 1: $5,000, Year 2: $8,000, Year 3: $11,000? (Note that the <> are used to indicate a negative number).

  A. 27. 12%
  B. 23. 74%
  C. 25. 55%
  D. 26. 61%
  E. 24. 02%
  E. 24. 02%

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 15000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 8000 ENTER DownArrow DownArrow 11000 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 5000 BlueShift CFj 8000 BlueShift CFj 11000 BlueShift CFj Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 162:

  The semi-logarithmic scale is so named because:

  A. Values on the x-axis are equally spaced if their logarithms are the same.
  B. Values on the y-axis are equally spaced if their logarithms are the same.
  C. Values on the x-axis are equally spaced if there are equal differences in their logarithms.
  D. Values on the y-axis are equally spaced if there are equal differences in their logarithms.
  D. Values on the y-axis are equally spaced if there are equal differences in their logarithms.

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  Explanation

  Values on the y-axis are equally spaced if there are equal differences in their logarithms. Thus, 100 is as close to 10, as 10 is to 1. (In base 10, log 100 - log 10 = 1, log 10 - log 1 = 1; in base e, the differences are also the same, each equal to 2. 302. )

• Question 163:

  What deposit today is needed to have $2,000 in 4 years, assuming the money will earn interest at 5% per year, compounded monthly?

  A. $2,000.00
  B. $1,290.81
  C. $584. 57
  D. $1,638.14
  E. $1,934. 02
  D. $1,638.14

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  Explanation

  On the BAII Plus, press 48 N, 5 divide 12 = I/Y, 0 PMT, 2000 FV, CPT PV. On the HP12C, press 48 n, 5 ENTER 12 divide i, 0 PMT, 2000 FV, PV. Make sure the BAII Plus has the P/Y value set to 1.

• Question 164:

  A junior financial analyst with Churn Brothers brokerage has been instructed to value shares of Intelligent Semiconductor, a diversified technology company. A senior analyst at Churn Brothers has provided the following information:

  The required rate of return on equity is 15% per year

  The senior analyst has predicted that shares of Intelligent will sell at a multiple of 25 times predicted free cash flow to equity in four years.

  The estimated free cash flows for each of the next four years are:

  Year 1: $15,000,000

  Year 2: $18,500,000 Year 3: $21,000,000 Year 4: $35,000,000

  Intelligent Semiconductor has 1,000,000 shares of common stock outstanding.

  Using this information, what is the value per share of Intelligent Semiconductor according to the free cash flow to equity model?

  A. $65. 81
  B. $561.13
  C. $56. 67
  D. $650.34
  E. The answer cannot be calculated from the information provided.
  F. None of these answers is correct.
  B. $561.13

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  Explanation

  When determining the value of a common stock using the free cash flow to equity model, it is necessary to determine three things:

  1. The required rate of return on equity investments.

  2. The estimated free cash flow to equity multiple at time "k."

  3. The estimated free cash flows figures for the time periods leading up to "k."

  In this example, the calculation must begin with the discounting the free cash flow to equity figures for each of the four years provided. These figures are discounted each period by the required return on equity investments, and the final answer is converted to a per-share basis. This process is illustrated below: Year 1: ($15,000,000 / 1.15) / 1,000,000 shares outstanding = $13. 04

  Year 2: [$18,500,000 / (1.15)(1.15)] / 1,000,000 shares outstanding = $13. 99 Year 3: [$21,000,000 / (1.15)(1.15)(1.15)] / 1,000,000 shares outstanding = $13. 81 Year 4: [$35,000,000 / (1.15)(1.15)(1.15)(1.15)] / 1,000,000 shares outstanding = $20.01

  Now that the free cash-flow-to-equity figures have been discounted and converted to a per-share basis, the next step in the valuation process is to determine the value of the final cash flow, which is defined as:

  [(Free cash flow to equity multiple * Final free cash flow) / (1 + r)(1+r)...(1 + k)]

  In the body of this question, we were given the anticipated multiple of free cash to equity that shares of Intelligent Semiconductor will sell for at time period 4: 25 times. Imputing this information into the terminal cash flow equation will yield the

  following:

  {[25 * ($35,000,000 / 1,000,000 shares outstanding)] / [(1.15) (1.15)(1.15)(1.15)]} = $500.28.

  Adding the answers from step 1 to the final year cash flow will yield the following:

  Value of Intelligent Semiconductor = [$13. 04 + $13. 99 + $13. 81 + $20.01 + $500.28] = $561.13 per share.

• Question 165:

  The principle of ________ says that people do not really buy or rent real estate per se but, instead, judge properties as different sets of benefits and costs.

  A. substitution
  B. replacement
  C. equivalency
  D. surrogation
  A. substitution

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  Explanation

  Because of the principle of substitution, an analysis of supply should not limit potential competitors to geographically and physically similar properties.

• Question 166:

  The contents of the section of the annual report entitled "Management's Discussion and Analysis" (MDandA) are

  A. mandated by regulations of the SEC.
  B. mandated by pronouncements of the Financial Accounting Standards Board (FASB).
  C. reviewed by independent auditors.
  D. mandated by regulations of the Internal Revenue Service.
  E. none of these answers.
  A. mandated by regulations of the SEC.

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  Explanation

  The contents of the MDandA section are mandated by the SEC and not FASB.

• Question 167:

  A bond has a modified duration of 6 and a convexity of 62. 5. What happens to the bond's price if interest rates rise 25 basis points?

  A. it goes up 1.46%
  B. it goes down 1.46%
  C. it goes up 4%
  D. it goes down 15%
  B. it goes down 1.46%

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  Explanation

  P/P = (-)(MD)(i) + (C)P/P = (-)(6)(+.0025) + (62. 5)=- .015 + .00039 = - .01461

• Question 168:

  The Dow Theory postulates that there are

  A. two types of price movements over time.
  B. ten types of price movements over time.
  C. four types of price movements over time.
  D. five types of price movements over time.
  E. three types of price movements over time.
  E. three types of price movements over time.

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  Explanation

  The Dow Theory was invented in the late 19th century by Charles Dow, publisher of the Wall Street Journal. It postulated that there were three types of price movements over time: major trends, intermediate trends, and short-term movements. These three types of trends interacted with one another, and identifying and isolating them individually would lead to profit opportunities.

• Question 169:

  In the real world, dividends ________.

  A. are usually changed every year to reflect earnings changes
  B. fluctuate more widely than earnings
  C. tend to be a lower percentage of earnings for mature firms
  D. are usually set as a fixed percentage of earnings
  E. usually exhibit greater stability than earnings
  E. usually exhibit greater stability than earnings

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  Explanation

  Most firms and stockholders expect earnings to grow over time with dividends growing virtually the same as earnings. In the past, a "stable dividend policy" meant a company paid the same dollar dividend for several years in a row, but today it means increasing the dividend at a reasonably steady rate. From an investor's viewpoint, the most stable policy is that whose dividend growth rate is predictable. The second most stable policy is where stockholders can reasonably be sure that the current dividend will not be reduced. The least stable is where earnings and cash flows are so volatile that investors cannot count on the company to maintain the current dividend. Since profits and cash flow vary over time for a firm, one would suggest that firms should vary their dividends over time, increasing them when cash flows are large and lowering them when cash is low relative to investment opportunities. However, many stockholders rely on dividends and reducing dividends may send incorrect signals, which could drive the stock price. Thus, maximizing a firm's stock price requires a balance of its internal fund requirements against the desires of the stockholders

• Question 170:

  Intraperiod income tax allocation arises because

  A. certain revenues and expenses appear in the financial statements but are excluded from taxable income.
  B. items included in the determination of taxable income may be presented in different sections of the financial statements.
  C. income taxes must be allocated between current and future periods.
  D. certain revenues and expenses appear in the financial statements either before or after they are included in taxable income.
  E. none of these answers.
  B. items included in the determination of taxable income may be presented in different sections of the financial statements.

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  Explanation

  To provide a fair presentation of the results of operations, accounting rules require that income tax expense for the period be allocated among income from continuing operations, discontinued operations, extraordinary items, and items charged or credited to shareholders' equity.