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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 11:

  If you owe 3 debts ($100 due 6 months from now, $500 due 8 months from now, and $1,000 due 11 months from now), what single payment can you make today to settle them, if interest is assessed at 10% per year, compounded monthly?

  A. $1,600.00
  B. $1,475. 78
  C. $1,552. 39
  D. $1,387. 29
  E. $1,504. 88
  B. $1,475. 78

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  Explanation

  Find the answer to this question by solving 3 compound interest problems. On the BAII Plus, press 6 N, 10 divide 12 = I/Y, 0 PMT, 100 FV, CPT PV, which yields $95. 14. Then press STO 1. Then press 8 N, 500 FV, CPT PV, which yields $467. 88. Then press + RCL 1 = STO 1. Then press 11 N, 1000 FV, CPT PV, which yields $912. 76. Press + RCL 1 = to see the answer. On the HP12C, press 6 n, 10 ENTER 12 divide i, 0 PMT, 100 FV, PV. Then press STO 1. Then press 8 n, 500 FV, PV. Then press RCL 1 + STO 1. Then press 11 n, 1000 FV, PV. Press RCL 1 + to see the answer. Make sure the BAII Plus has the P/Y value set to 1.

• Question 12:

  Tracy company reports the following in its statement of cash flows:

  Net Income $1,000 Depreciation and Amortization 350 Decrease (Increase) in Accounts receivable (10) Decrease (increase) in inventory 200 Decrease (increase) in prepaid expenses 80 Increase (decrease) in trade payables (300) Increase (decrease) in taxes payable 75 Cash Flow from operations 1,395

  Tracy used the indirect method of determining cash flow from operations (CFO), had they used the direct method

  A. CFO would have been higher as gains are not deducted in arriving at CFO.
  B. CFO would have been the same.
  C. it is not possible to determine what CFO would have been without more information.
  D. CFO would have been lower as losses and depreciation are not added back in arriving at CFO.
  B. CFO would have been the same.

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  Explanation

  The method does not affect the CFO.

• Question 13:

  If alpha = .05, what is the probability of making a Type I error?

  A. None of these answers
  B. 20/20
  D. 19/20
  E. 1/20
  E. 1/20

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  Explanation

  Alpha is the probability of committing a type I error. So 0.05 = 1/20.

• Question 14:

  Which of the following statements is correct?

  A. To find a firm's marginal cost of capital for capital budgeting purposes, we would develop an MCC and an IOS schedule, find the WACC at the intersection of the two curves, and define that WACC to be the corporate cost of capital. However, this procedure will not lead to a meaningful answer if the firm uses debt.
  B. If a project has only costs (no revenues) as would certain environmental projects, then the project is likely to have two regular IRRs but only one MIRR.
  C. In general, the PVs of riskier cash flows should be found using relatively high discount rates. However, if a cash flow is non-normal (cash inflows followed by cash outflows, a lower discount rate should be used to evaluate risky projects.
  D. It is better to use the NPV method to evaluate independent projects, but for mutually exclusive projects, especially if projects vary greatly in size, the MIRR method is better.
  E. Firms A and B have identical balance sheets and income statements, pay the same rate of interest, have the same cost of retained earnings, k(s), and have the same very good set of investment opportunities. However, Firm A pays out only 20 percent of its earnings versus an 80 percent payout for Firm B. Firm A will probably have the higher marginal cost of capital schedule.
  C. In general, the PVs of riskier cash flows should be found using relatively high discount rates. However, if a cash flow is non-normal (cash inflows followed by cash outflows, a lower discount rate should be used to evaluate risky projects.

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  Explanation

  The other statements are incorrect because of the following: A project that has only costs has no IRR. The WACC incorporates the cost of all capital: debt, preferred stock, and equity. The NPV method is best used to evaluate mutually exclusive projects of varying size because the MIRR method may produce a conflicting result from the NPV in this situation. Firm B will have the higher cost of capital because it has the higher payout forcing it to go to more costly equity capital before Firm A.

• Question 15:

  Wireless Company received venture capital financing that allowed the company to begin commercial manufacturing. This stage of financing is known as:

  A. first-stage
  B. second-stage
  C. third-stage
  A. first-stage

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  Explanation

• Question 16:

  Most technical analysts believe that

  A. successful fundamental analysis is possible, and is practiced by the majority of fundamental analysts. They believe that technical analysis is simpler to implement, however, and more reliable because of its greater use of financial statements.
  B. successful fundamental analysis is very difficult. They believe that while success is possible, most fundamental analysts are unable to consistently earn above-average returns. They believe that fundamental analysts rely too heavily on financial accounting statements, which do not contain a great deal of information useful to security analysts.
  C. successful fundamental analysis is very difficult. They believe that while success is possible, most fundamental analysts are unable to consistently earn above-average returns. Technical analysis is a better investment guide because of its greater use of financial accounting statements.
  D. successful fundamental analysis is very difficult. They believe that while success is possible, most fundamental analysts are unable to consistently earn above-average returns. They believe that fundamental analysts rely too heavily on financial accounting statements, which often have incorrect information.
  B. successful fundamental analysis is very difficult. They believe that while success is possible, most fundamental analysts are unable to consistently earn above-average returns. They believe that fundamental analysts rely too heavily on financial accounting statements, which do not contain a great deal of information useful to security analysts.

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  Explanation

  Technical analysts tend to believe that successful fundamental analysis is contingent on obtaining new information before others, and processing it quickly and correctly. But they feel that this is very difficult, and that fundamental analysis is held back by its heavy reliance on financial accounting statements. They believe that those statements do not contain a great deal of information useful to security analysts, that different accounting standards make comparisons difficult, and that many important psychological factors and other nonquantifiable variables (such as customer goodwill) do not appear in those statements.

• Question 17:

  Byron Corporation's present capital structure, which is also its target capital structure, is 40 percent debt and 60 percent common equity. Next year's net income is projected to be $21,000, and Byron's payout ratio is 30 percent. The company's earnings and dividends are growing at a constant rate of 5 percent; the last dividend was $2. 00; and the current equilibrium stock price is $21.88. Byron can raise all the debt financing it needs at 14 percent. If Byron issues new common stock, a 20 percent flotation cost will be incurred. The firm's marginal tax rate is 40 percent. What is the maximum amount of new capital that can be raised at the lowest component cost of equity?

  A. $14,700
  B. $21,000
  C. $17,400
  D. $24,500
  E. $12,600
  D. $24,500

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  Explanation

  BP(RE) = $21,000 x .70/ .60 = $24,500.

• Question 18:

  Birch Ltd. had net income for the year of $101,504 and a simple capital structure consisting of the following common shares outstanding:

  Months OutstandingNumber of Shares

  January A. $2. 72
  B. $2. 67
  C. $2. 88
  D. $4. 23
  E. $2. 41

  B. $2. 67

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  Explanation

  Following is the calculation for the weighted average number of shares outstanding (before the 20% stock dividend):

  24,000 X (2 / 12) = 4,000 29,400 X (4 / 12) = 9,800 36,000 X (5 / 12) = 15,000 35,040 X (1 /12) = 2,920 weighted average 31,720

  Stock dividends are assumed to have occurred at the beginning of the year. Thus, the weighted average number of shares equals the amount before the stock dividend plus 20% more which is equal to 38,064 (31,720 + 20% X 31,720). EPS equals net income divided by the weighted average number of shares outstanding which is $2. 67 ($101,504 / 38,064).

• Question 19:

  An investment recommendation can be disseminated to clients via each of the following methods, EXCEPT:

  A. through a brief update report.
  B. by addition to a recommended list.
  C. by oral communication.
  D. through an initial detailed research report.
  E. by deletion from a recommended list.
  F. all of these answers are acceptable methods.
  F. all of these answers are acceptable methods.

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  Explanation

  According to Standard IV (B.3) - Fair Dealing, an investment recommendation is any opinion expressed by a member in regard to purchasing, selling or holding a given security or other investment. All of the methods listed are acceptable for dissemination.

• Question 20:

  The "Treasury Stock" method of calculating EPS involves:

  A. considering call option exercise when the average stock price is below strike price.
  B. considering call option exercise when the average stock price is above the strike price.
  C. using options as stock equivalents only if they are anti-dilutive.
  D. considering repurchase of shares at the highest market price.
  B. considering call option exercise when the average stock price is above the strike price.

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  Explanation

  In the Treasury stock method, it is assumed that the proceeds from the exercise of warrants and employee call options are used to repurchase shares at the average market price during the period. Considering call option exercise when the average stock price is below strike price is incorrect since it is an irrational strategy and leads to anti-dilution of EPS.