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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1861:

  Which of the following statements is correct?

  A. The bond-yield-plus-risk-premium approach to estimating the cost of equity is not always accurate but its advantages are that it is a standardized and objective model.
  B. Although some methods of estimating the cost of capital encounter severe difficulties, the CAPM (Capital Asset Pricing Model) is a simple and reliable model that provides great accuracy and consistency in estimating the cost of capital.
  C. Depreciation-generated funds are an additional source of capital and, in fact, represent the largest single source of funds for some firms.
  D. The DCF (Discounted Cash Flow) model is preferred over other models to estimate the cost of equity because of the ease with which a firm's growth rate is obtained.
  C. Depreciation-generated funds are an additional source of capital and, in fact, represent the largest single source of funds for some firms.

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  Explanation

  Since depreciation is a significant non-cash expense, it is added back to net income when calculating cash flow.

• Question 1862:

  The Mike and Laurie Consulting Group Inc. is trying to decide which computer system to purchase. They can purchase state-of-the-art equipment for $20,000, which they expect to generate cash flows of $6,000 at the end of each of the next 6 years. Alternatively, they can spend $12,000 for equipment that can be used for 3 years and generates cash flows of $6,000 at the end of each year. If the company'scost of capital is 10 percent and both "projects" can be repeated indefinitely, then what is the equivalent annual annuity (EAA) of the more profitable strategy?

  A. $2,423. 74
  B. $1,407. 85
  C. $1,666. 67
  D. $6,131.56
  E. $1,174. 62
  B. $1,407. 85

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  Explanation

  First, compute the NPV of each project over its initial life. The relevant cash flows for the state-of-the- art equipment are CF(0) = -$20,000 and CF(1-6) = $6,000. Discounting at 10 percent yields NPV = $6,131.56. The relevant CFs for the less

  advanced equipment are CF(0) = -$12,000 and CF(1-3) = $6,000. Discounting again at 10 percent yields NPV = $2,921.11. Next, find the EAA of each project as follows: EAA for the state-of-the-art equipment: N = 6; I/YR = 10; PV = 6,131.56, FV = 0; solve for PMT = EAA = $1,407. 85. EAA less advanced: N = 3; I/YR = 10; PV = $2,921.11; FV = 0; solve for PMT = EAA = $1,174. 62.

  Thus, the state-of-the-art project is more profitable.

• Question 1863:

  Standard III (D), Disclosure of Additional Compensation Arrangements is important because

  A. outside arrangements may affect loyalties and objectivity and create potential conflicts of interest.
  B. none of these answers.
  C. outside arrangements are not allowed under circumstances.
  D. third parties are inherently in competition with the current employer.
  E. the verbal disclosure requirement allows for "compensation in kind."
  F. all of these answers.
  A. outside arrangements may affect loyalties and objectivity and create potential conflicts of interest.

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  Explanation

  Under Standard III (D), members must disclose outside compensation/benefits to employers because outside arrangements may affect loyalties and objectivity and create potential conflicts of interest. Disclosure thus allows an employer to consider the outside arrangements when evaluating the actions and motivations of members. Moreover, the employer is entitled to have full knowledge of compensation/benefit arrangements to assess the true cost of the outside services members are providing.

• Question 1864:

  Given that a firm will exist for two years and issue dividends of $20 per share at the end of each year, and the required rate of return on shares is 10%, what is the value of its common stock according to the Dividend Discount Model?

  A. $28.32
  B. $40.00
  C. $35. 93
  D. Not enough information
  E. $34. 71
  E. $34. 71

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  Explanation

  The dividend discount model (Dividend Discount Model) assumes that the value of a share of common stock is the present value of all future dividends. In this question, the value of a share of common stock is equal to 20/(1 +0.10) + 20 /[(1 + 0.10)^2] = $34. 71.

• Question 1865:

  In order to comply with Standard IV (B.4), Priority of Transactions, firms should prepare and distribute to firm personnel a code of ethics and compliance procedures. The code and procedures should do all of the following, EXCEPT:

  A. ensure that procedures will be enforced.
  B. contain disciplinary procedures.
  C. limit the number of access persons.
  D. establish reporting and prior-clearance requirements.
  E. define personal transactions, investment and prohibited transactions.
  F. maintain a list of clients and their holdings.
  G. consider special situations.
  F. maintain a list of clients and their holdings.

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  Explanation

  The question deals with the compliance procedures under Standard IV (B.4). Personal transactions must be defined to all employees. The number of access persons - those who have knowledge of pending or actual recommendations or action - should be limited, by implementing Fire Walls. A reporting system for all employees' personal transactions should be established, as well as procedures for special situations. Authority should be given to a compliance officer to enforce the procedures, which should include disciplinary action. Maintaining lists of client holdings is NOT a compliance procedure under Standard IV (B.4), but Standard IV (B.3).

• Question 1866:

  Which of the following would be classified a cash inflow from investing activities?

  A. proceeds from selling investments in the debt securities of other entities, except cash equivalents
  B. all responses are correct
  C. proceeds from collecting the principal amount of loans
  D. proceeds from selling investments in the equity securities of other companies
  B. all responses are correct

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  Explanation

  All responses qualify as cash inflows from investing activities.

• Question 1867:

  A benefit period for accounting amortization can not exceed how many years ________.

  A. 15
  B. 40
  C. 30
  D. 25
  B. 40

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  Explanation

  In accounting no benefit can be amortized over more than 40 years. The difficulties of going further do not provide sufficient benefit to justify the cost.

• Question 1868:

  The wildlife department has been feeding a special food to rainbow trout fingerlings in a pond. A sample of the weights of 40 trout revealed that the mean weight is 402. 7 grams and the standard deviation 8.8 grams. What is the point estimate?

  A. None of these answers
  B. 10.0675
  C. 8.8
  D. 40
  E. 402. 7
  E. 402. 7

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  Explanation

  The sample mean is a good estimate for the population mean.

• Question 1869:

  Given that the expected dividend payout ratio on a common stock is 0.77, the required rate of return is 23%, the dividend growth rate is 18%, using the earnings multiplier model, what is the estimated value of the stock?

  A. $28.51
  B. $23. 94
  C. $34. 91
  D. $41.84
  E. Not enough information
  E. Not enough information

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  Explanation

  In order to estimate the value of the stock using the earnings multiplier model, one will eventually have to multiply the P/E ratio by next year's earnings (E). The P/E ratio can be determined with the information presented in this problem, but E cannot be.

• Question 1870:

  How should holdings of equity securities of less than a 20% interest generally be classified on a firm's balance sheet?

  A. As either trading or available-for-sale securities
  B. Using the equity method
  C. All of these answers
  D. As controlling interest securities
  E. None of these answers
  A. As either trading or available-for-sale securities

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  Explanation

  So long as it is management intent, these securities should be classified as either trading or availablefor-sale securities. The equity method is used to account for an equity interest where management has an ability to exert significant influence over an investee's business activities.