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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 1981:

  Which of the following statements is most correct?

  A. All of these answers.
  B. All else equal, an increase in a company's stock price will increase the marginal cost of issuing new common equity.
  C. None of these answers.
  D. If a company's tax rate increases but the yield to maturity of its noncallable bonds remains the same, the company's marginal cost of debt capital used to calculate its weighted average cost of capital will fall.
  E. All else equal, an increase in a company's stock price will increase the marginal cost of retained earnings.
  D. If a company's tax rate increases but the yield to maturity of its noncallable bonds remains the same, the company's marginal cost of debt capital used to calculate its weighted average cost of capital will fall.

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  Explanation

  The debt cost used to calculate a firm's WACC is k(d)(1 - T). If k(d) (interest rate on the firm's new debt) remains constant but T increases, then the term (1 - T) decreases and the value of the entire equation, k(d)(1 - T), decreases.

• Question 1982:

  Standard III includes which of the following?

  A. Performance Presentation
  B. All of these answers
  C. None of these answers
  D. Reasonable Basis and Representations
  E. Disclosure of Additional Compensation Arrangements
  F. Use of Professional Designation
  E. Disclosure of Additional Compensation Arrangements

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  Explanation

  Standard III deals with Obligation to Inform Employer of Code and Standards, Duty to Employer, Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and Responsibilities of Supervisors.

• Question 1983:

  A perpetual preferred stock has a face value of $1,000 and a coupon rate of 6% per year. If it is issued at $850, what's the implicit annual discount rate?

  A. 6. 94%
  B. 7. 00%
  C. 7. 19%
  D. 7. 06%
  D. 7. 06%

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  Explanation

  A preferred stock is valued like a perpetuity. The price of a preferred stock with a face value F and a coupon rate c equals F*c/r, where r is the implicit discount rate. In this case, we have 850 = 1,000*0.06/r, giving r = 7. 06%.

• Question 1984:

  Cariella is a junior analyst who is currently preparing a report on a diamond producing firm, Dense Carbon, Inc. Dense Carbon recently announced that the results of a mining survey in its South African diamond mines were in, which revealed substantial amounts of diamond reserves for the first time. It has offered to take a few industry analysts for a tour of the facilities and take stock of the situation first hand. During this tour, all expenses, including air-fare and basic accommodations, were provided for by Dense Carbon. Since the visit spanned a weekend, Dense Carbon also arranged for a Safari tour for all the analysts. Cariella did not consider the safari to be an undue entertainment, given the fact that the analysts had to be in the middle of nowhere for 5 days. She was quite assiduous in her appraisal of the mining reserves and in the final analysis, the tour proved extremely valuable to her analysis. However, she did not reveal the fact about the Safari trip to her employer. Cariella has

  I. violated Standard III (C) - Disclosure of Conflicts to Employer.

  II. violated Standard IV (A.1) - Reasonable Basis and Representations.

  III. violated Standard IV (A.3) - Independence and Objectivity.

  IV.

  not violated the AIMR code of ethics.

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

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  Explanation

  Standard IV (A.3) - Independence and Objectivity requires members to use reasonable care and judgment while making investment recommendations. In particular, it requires that members avoid even appearances of conflict of interest or circumstances that could affect their independence or objectivity. While Dense Carbons travel arrangements for the analysts might not be considered an unnecessary "gift" (this is a gray area), the safari definitely is an unacceptable arrangement from the AIMR code of ethics' perspective. By accepting this gift, Cariella violated Standard IV (A.3). By not disclosing this fact to her employer, she violated Standard III (C) - Disclosure of Conflicts to Employer.

• Question 1985:

  The firm's target capital structure is consistent with which of the following?

  A. Minimum cost of equity.
  B. Maximum earnings per share (EPS).
  C. Minimum cost of debt.
  D. Minimum risk.
  E. Minimum weighted average cost of capital (WACC).
  E. Minimum weighted average cost of capital (WACC).

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  Explanation

  The target capital structure is the mix of debt, preferred stock, and common equity with which the firm plans to raise capital.

• Question 1986:

  The current account trade balance + the capital account trade balance =

  A. the currency balance at the World Bank
  B. GDP
  C. the foreign exchange rate
  D. GNP
  E. the trade deficit/surplus
  F. zero
  F. zero

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  Explanation

  By accounting identity, the capital account and current account must balance to zero. If there is a deficit in one, there must be a surplus in the other. This is one reason why if a nation has a government budget deficit, which amounts to negative domestic investment, the shortfall could be made up by foreigners, causing a capital account surplus. Conversely there must be a current account deficit in such a situation. This is one reason why budget deficits and trade deficits are linked. Note that the term "trade balance" usually refers to the current account.

• Question 1987:

  What annual interest rate, compounded annually, would cause a series of 30 deposits of $500 to accumulate to $50,000, if the first deposit is made one year from today?

  A. 9.04%
  B. 10.12%
  C. 7. 32%
  D. 5. 38%
  E. 10.09%
  C. 7. 32%

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  Explanation

  On the BAII Plus, press 30 N, 0 PV, 500 PMT, 50000 +/- FV, CPT I/Y. On the HP12C, press 30 n, 0 PV, 500 PMT, 50000 CHS FV, i. Make sure the BAII Plus has the P/Y value set to 1.

• Question 1988:

  When a mature firm raises the dividend, signaling theory implies that its stock price ________. When a growth firm cuts the dividend, signaling theory implies that its stock price ________.

  A. will fall; may rise or fall
  B. will rise; will fall
  C. will fall; will rise
  D. will rise; may rise or fall
  D. will rise; may rise or fall

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  Explanation

  The signaling theory is properly applicable only to mature firms which have had stable dividend policies. In its pure form, the theory regards dividend changes as signals of management's forecasts of future earnings. Such an assumption is not fully justifiable for young, growth firms, which may cut dividends simply to supply retained earnings capital for expansion projects, without any signaling about the firm's future earnings prospects. Indeed, many growth firms pay no dividends at all for quite some time without an adverse effect on their stock prices. Hence, the increase in the dividend of a mature firm is taken as a signal by investors - under the signaling hypothesis - that the management's forecasts of future earnings are quite favorable, leading to a rise in the stock price. On the other hand, for a growth firm, such a signaling conclusion does not necessarily hold.

• Question 1989:

  Which of the following statements about refunding and redemption is TRUE?

  A. A sinking fund is an example of refunding.
  B. An investor concerned about premature redemption is indifferent between a noncallable bond and a nonrefundable bond.
  C. Callable bonds redeemed at a special redemption price are redeemed at par.
  D. A nonrefundable bond can be redeemed with funds from operations, from a new equity issue, or from a lower coupon issue.
  C. Callable bonds redeemed at a special redemption price are redeemed at par.

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  Explanation

  This statement is true. Bonds redeemed at par are redeemed at the special redemption price. When bonds are called at a premium, the issuer redeems them at a price above par, or the regular or general redemption price. The other statements are false. A sinking fund is a type of redemption, which refers to the retirement of bonds. An investor concerned about premature redemption would prefer a noncallable bond because a noncallable bond cannot be called for any reason. A nonrefundable bond can be called for any reason other than refunding. The term refunding specifically means redeeming a bond with funds raised from a new bond issued at a lower coupon rate. A nonrefundable bond can be redeemed with funds from operations or a new equity issue. Note: A bond can be both nonrefundable and callable.

• Question 1990:

  Fiduciary duty includes a duty of loyalty and a reasonable standard of ________.

  A. care
  B. none of these answers
  C. prudence
  D. custody
  A. care

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  Explanation

  Standard IV (B.1) - Fiduciary Duties - states: Because the fiduciary is in a position of trust, the duty required in fiduciary relationships exceeds what may be acceptable in other industries. Fiduciaries owe undivided loyalty to their clients and must place client interests before their own. The investment manager's fiduciary responsibility to a client includes a duty of loyalty and a duty to exercise a reasonable standard of care. Investment actions should be carried out for the sole benefit of the client and in a manner the manager believes to be in the interest of the client, given the known facts and circumstances.