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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2011:

  Radio Corp. owns a leading radio network with 200 million weekly listeners. To combat a declining radio audience, the company has implemented a strategy of targeting the Hispanic audience. After careful analysis, Radio Corp. makes the decision to acquire a Hispanic radio station, rather than convert existing radio stations. The acquisition strategy benefits from rules that allow clustering of ownership of local radio stations. The basis of the strategic initiative and the basis of the acquisition strategy, respectively, are:

  A. market timing and geography
  B. lifestyles and technology
  C. demographics and regulation
  C. demographics and regulation

  ---

  Explanation

• Question 2012:

  Which of the following is NOT an operating efficiency ratio?

  A. Asset turnover
  B. Equity turnover
  C. Sales-to-assets ratio
  D. Operating profit margin
  D. Operating profit margin

  ---

  Explanation

  Operating efficiency ratios are a measure of how well the firm is utilizing its assets and capital. This utilization has a direct yardstick in terms of total sales generated. Hence, operating efficiency ratios express total sales as a fraction of assets or equity. On the other hand, Operating profit margin belongs to the group of operating profitability ratios.

• Question 2013:

  The objective of analysis of alternative economies and security markets in the three-step, top-down approach is to decide how to allocate investment funds

  A. among countries and industries.
  B. among countries.
  C. among countries and industries, and between bonds stock and cash.
  D. between bonds, stock and cash.
  E. among countries and between bonds, stock and cash.
  E. among countries and between bonds, stock and cash.

  ---

  Explanation

  The analysis of alternative economies and security markets is the first step in the three step process, and involves the decision to allocate funds at a general level between countries and types of securities. Making the decision to allocate between different industries is made in the second step.

• Question 2014:

  An investor purchases oil commodity futures contracts worth $25 million and an equal amount of 10-year Treasury notes with an interest rate of 3. 5%. Assuming that oi! prices rise by 10% and the price of the notes remains unchanged, the total return of the position after three months is closest to:

  A. $2,500,000
  B. $2,600,000
  C. $2,700,000
  C. $2,700,000

  ---

  Explanation

• Question 2015:

  Which of the following definitions about appraisal is false?

  A. The cost approach to valuation is based on what it would cost to rebuild the property at today's prices.
  B. The comparative sales approach to valuation is based on the sales price of properties that are similar to the subject property.
  C. The income approach to valuation projects the property's value as the present value of its future annual after-tax net operating income.
  D. The `capitalization rate' equals the required rate of return minus the growth rate.
  C. The income approach to valuation projects the property's value as the present value of its future annual after-tax net operating income.

  ---

  Explanation

• Question 2016:

  An analyst is attempting to value shares of a regional bank, and has solicited the help of a senior financial analyst. During their conversation, the senior financial analyst provides the following information about the regional bank under examination:

  Required rate of return on the bank's equity: 12. 75% per year Free cash flow to equity multiple at t4: 20 1,500,000 shares outstanding

  Additionally, the analyst has obtained the following estimates of free cash flow to equity over the next four years:

  Year 1: $1,750,000 Year 2: $2,225,000 Year 3: $2,500,000 Year 4: $2,650,000

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

  A. $18.99
  B. $45. 54
  C. The answer cannot be calculated from the information provided.
  D. None of these answers is correct.
  E. $31.26
  F. $26. 31
  F. $26. 31

  ---

  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: ($1,750,000 / 1.1275) / 1,500,000 shares outstanding = $1.03

  Year 2: [$2,225,000 / (1.1275)(1.1275)] / 1,500,000 shares outstanding = $1.17 Year 3: [$2,500,000 / (1.1275)(1.1275)(1.1275)] / 1,500,000 shares outstanding = $1.16 Year 4: [$2,650,000 / (1.1275)(1.1275)(1.1275)(1.1275)] / 1,500,000 shares outstanding = $1.09

  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: specifically, 20 times. Imputing this information into the terminal cash flow equation

  will yield the following:

  {[20 * ($2,650,000 / 1,500,000 shares outstanding)] / [(1.1275) (1.1275)(1.1275)(1.1275)]} = $21.86

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

  Value of Intelligent Semiconductor = [$1.03 + $1.17 + $1.16 + $1.09 + $21.86] = $26. 31 per share.

• Question 2017:

  Janice Grass, CFA, created a gourmet baby food line. To get the production lines up and running, she must borrow $12 million. Grass is concerned that the US Federal Reserve (Fed) will raise interest rates dramatically, so she enters into a 2 x 8 FRA agreement. The FRA is quoted at 6%. LIBOR interest rates on the expiration day of the FRA are presented in the table below.

  

  Based on the table, calculate the payoff on Grass' transaction.

  A. 0.
  B. -$2,630.81
  C. -$2,956. 39
  A. 0.

  ---

  Explanation

• Question 2018:

  Gregory Johansson has collected the following data on Trilby and Tribble, Ltd: The sustainable growth rate of the firm is closest to:

  A. 6. 0%.
  B. 7. 1%.
  C. 8.4%.
  C. 8.4%.

  ---

  Explanation

• Question 2019:

  What is the present value today of these annual cash flows: $1,000, $2,000, $3,000? Assume the first cash flow occurs 1 year from today and an interest rate of 10% per year, compounded annually.

  A. $2,304. 67
  B. $2,754. 32
  C. $4,815. 93
  D. $4,000.00
  E. $4,104. 98
  C. $4,815. 93

  ---

  Explanation

  You could solve this question using 3 different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 0 ENTER DownArrow 1000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 3000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 10 ENTER DownArrow CPT. On the HP12C, press these keys: 0 BlueShift CFo 1000 BlueShift CFj 2000 BlueShift CFj 3000 BlueShift CFj. Then press 10 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 2020:

  Consider the following characteristics of firm XYZ:

  Stock price $50

  Annual dividend $2

  Debt rate 10%

  Equity floatation cost 7%

  Tax rate 40%

  Preferred Stock Par value $100

  What is the firm's after tax cost of debt?

  A. 60%
  B. 4. 3%
  C. 10%
  D. 40%
  E. 6%
  F. 4%
  G. 5%
  E. 6%

  ---

  Explanation

  A firm's after tax cost of debt may be calculated using the following formula: After Tax Cost of Debt = Cost of Debt x (1 - Tax Rate). In this case the After Tax Cost of Debt = 10% x (1 - 40%) = 10% x 60% = 6%.