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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2121:

  A researcher has a sample of 600 observations from a population whose standard deviation is known to be 51.44. The mean of the sample is calculated to be 3. 6. The null hypothesis is stated as Ho: mean > 8.4. The researcher should

  A. accept the null at 95% significance.
  B. reject the null at 99% significance.
  C. fail to reject the null at 95% significance.
  D. none of these answers.
  B. reject the null at 99% significance.

  ---

  Explanation

  To test the hypothesis, you need to calculate the largest z-statistic since the null hypothesis is unidirectional and to the right. This makes it the hardest to reject the null and you should always use the most stringent criterion for rejecting the null. After all, the null is the hypothesis maintained to be true by default and only a sufficient weight of evidence should be used to reject that view. The largest z-statistic calculated under the null hypothesis is equal to (3. 6 - 8.4)/2. 1 = -2. 4. Now, the alternative hypothesis is H1: mean <= 8.4. Since the alternative is directional, we use a one-tailed test. For this, the critical value at 95% level is -1.645 and for 99%, it is -2. 32. -2. 32 is the value below which only 1% of the probability mass of the standard normal distribution lies. Similarly, only 5% of probability lies below -1.645). Since even the calculated z-statistic that is most favorable to the null lies in the rejection region, we can reject the null at the 99% level in a one-sided test.

• Question 2122:

  Cepeda Corporation requires a computer system for the next ten years, and is in the process of choosing among two mutually exclusive alternatives. System A costs $50,000 today, and will produce positive net cash flows of $12,000 a year for the next ten years (t = 1 through t = 10). System B costs $30,000 today and will produce positive net cash flows of $11,000 a year for the next five years. After five years, System B can be replaced under the same terms. The company's cost of capital is 10 percent. What is the equivalent annual annuity (EAA) of the best system?

  A. $6,261.18
  B. $3,862. 73
  C. $5,002. 39
  D. $3,086. 07
  E. $2,373. 48
  B. $3,862. 73

  ---

  Explanation

  First find the NPV's of each system over its initial life.

  System A: CF(0) = -50,000; CF(1-10)= 12,000; I = 10; solve for NPV = $23,734. 81. System B: CF(0) = -30,000; CF(1-5)= 11,000; I = 10, solve for NPV = $11,698.65. Second, find the value of the EAA of each system. System A: N = 10; I =

  10; PV = -23,734. 81; FV = 0; solve for PMT = EAA = $3,862. 73. System B: N = 5; I = 10; PV = -11,698.65; FV = 0; solve for PMT = EAA = $3,086. 07. Given System A has a higher EAA, it is the better of the two systems.

• Question 2123:

  Two otherwise identical firms, A and B, have one difference. A has a higher interest expense than B, arising from its higher reliance on debt financing. All other accounting statistics, including net sales and expenses are equal for the two

  firms.

  The return on total capital for firm A will be __________ that for firm B.

  A. same as
  B. insufficient information to answer the question
  C. lower than
  D. higher than
  D. higher than

  ---

  Explanation

  The return on total capital equals the net income before interest expense as a fraction of the average total capital invested. Therefore, if interest expenses were not tax deductible, the two firms would have exactly the same return on total capital. However, due to tax advantages of interest expenses, firm A will show a higher net income and hence, a higher return on capital.

• Question 2124:

  Which of the following is a key determinant of operating leverage?

  A. Cost of debt.
  B. Technology.
  C. Level of debt.
  D. Capital structure.
  E. Physical location of production facilities.
  B. Technology.

  ---

  Explanation

  If a high percentage of a firm's total costs are fixed, the firm has high operating leverage. Higher fixed costs are generally associated with more highly automated, capital-intensive firms and industries.

• Question 2125:

  If worker productivity increases by 4%, wages per hour increase by 4%, and hours worked increases by 8%, what is the change in unit labor cost?

  A. 4% increase
  B. 8% increase
  C. 4% decrease
  D. 12% increase
  E. There is no change
  E. There is no change

  ---

  Explanation

  Per-unit labor cost is a function of the percentage change in hourly wages minus the percentage change in productivity during some period of time. In this question, the increase in worker productivity exactly offsets the increase in hourly wages.

• Question 2126:

  Standard V (A) deals with ________.

  A. Prohibition against Use of Material Nonpublic Information
  B. Disclosure of Conflicts to Clients and Prospects
  C. Prohibition against Misrepresentation
  D. Disclosure of Referral Fees
  E. Performance Presentation
  F. Priority of Transactions
  G. Preservation of Confidentiality
  A. Prohibition against Use of Material Nonpublic Information

  ---

  Explanation

  Standard V (A) prohibits members who possess material nonpublic information related to the value of a security from trading in that security if such trading would breach a duty or if the information was misappropriated or relates to a tender offer.

• Question 2127:

  According to supply-side theory, an increase in marginal tax rates will

  A. all of these answers.
  B. encourage individuals to substitute less-desired, tax-deductible goods for more-desired, nondeductible goods.
  C. decrease the supply of capital and reduce its productive efficiency.
  D. decrease the supply of labor and reduce its productive efficiency.
  A. all of these answers.

  ---

  Explanation

  Increasing marginal tax rates reduces the incentive to work since individuals keep a smaller percentage of their earnings. Additionally, increased marginal tax rates divert resources away from productive roles to roles designed to "shelter" capital owners from taxation. The final consequence is that efficiency is reduced since individuals choose deductible (and less desirable) goods over nondeductible goods. Efficiency is compromised because although the non-deductible goods are affordable and preferable to deductible goods, they are not consumed.

• Question 2128:

  The management of Clay Industries have adhered to the following capital structure: 40% debt, 45% common equity, and 15% perpetual preferred equity. The following information applies to the firm:

  Yield to maturity of outstanding long-term debt = 9.5%

  Expected return on the market = 14. 5%

  Annual risk-free rate of return = 6. 25%

  Historical Beta coefficient of Clay Industries Common Stock = 1.24 Annual preferred dividend = $1.75

  Preferred stock net offering price = $28.50

  Combined state/federal corporate tax rate = 35%

  Given this information, and using the Capital Asset Pricing Model to calculate the component cost of common equity, what is the Weighted Average Cost of Capital for Clay Industries?

  A. The WACC for Clay Industries cannot be determined from the information provided.
  B. 14. 45%
  C. 10.00%
  D. 12. 14%
  E. 8.54%
  F. 10.81%
  F. 10.81%

  ---

  Explanation

  The calculation of the Weighted Average Cost of Capital is as follows: {fraction of debt * [yield to maturity on outstanding long-term debt][1-combined state/federal income tax rate]} + {fraction of preferred stock * [annual dividend/net offering price]} + {fraction of common stock * cost of equity}. The cost of common equity can be calculated using three methods, the Capital Asset Pricing Model (CAPM), the Dividend-Yield-plus-Growth-Rate (or Discounted Cash Flow) approach, and the Bond- Yield-plus-Risk-Premium approach. In this example, you are required to calculate the cost of equity using the Capital Asset Pricing Model (CAPM), which is illustrated as follows: {risk-free rate + beta(expected return on the market risk-free rate)}. Using this model, the cost of common equity can be found as 16. 48%. The cost of perpetual preferred stock can be found by dividing the annual dividend by the net offering price, which is illustrated in this case as follows: {$1.75/28.50) = 6. 14%. The after-tax cost of debt can be found by taking the yield to maturity on the firm's outstanding long- term debt (9.5%), and multiplying this figure by (1 - annual tax rate 35%) = 6. 175%. Incorporating all of these figures into the WACC equation gives a Weighted Average Cost of Capital of 10.807%

• Question 2129:

  What does a regression equation do?

  A. Predicts the value of the independent variable based on the dependent variable
  B. All of these answers
  C. None of these answers
  D. Measures the association between two variables
  E. Predicts the value of the dependent variable based on the independent variable
  E. Predicts the value of the dependent variable based on the independent variable

  ---

  Explanation

  The dependent variable is the variable Y which is being predicted by the X variable, the independent variable. The regression is written as Y' = a + bX. The letter "a" is the Y intercept and b is the slope of the line. Y' is the predicted value of Y given a specific value of X.

• Question 2130:

  Government borrowing to fund current spending tends to cause _________ to rise. Subsequently, the local currency will _________ causing the trade deficit to rise.

  A. savings rate, depreciate
  B. national income, depreciate
  C. inflation, depreciate
  D. marginal propensity to consume, appreciate
  E. interest rates, appreciate
  E. interest rates, appreciate

  ---

  Explanation

  Government borrowing creates demand for loanable funds, and therefore increases the price of such funds, i.e. the interest rate. When interest rates rise versus foreign rates, the value of the local currency rises on the foreign exchange market. This causes imports to be less expensive locally and exports to be more expensive abroad, and therefore tends to cause the current account trade deficit to widen.