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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2191:

  A drastic decrease in the United States market would:

  A. cause an increase in the world market index.
  B. not affect the world market index.
  C. cause a decrease in the world market index.
  D. cannot predict the impact.
  C. cause a decrease in the world market index.

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  Explanation

• Question 2192:

  Copybold Corporation is a start-up firm considering two alternative capital structures--one is conservative and the other aggressive. The conservative capital structure calls for a D/A ratio = 0.25, while the aggressive strategy call for D/A =

  0.75. Once the firm selects its target capital structure it envisions two possible scenarios for its operations: Feast or Famine. The Feast scenario has a 60 percent probability of occurring and forecast EBIT in this state is $60,000. The Famine state has a 40 percent chance of occurring and the EBIT is expected to be $20,000. Further, if the firm selects the conservative capital structure its cost of debt will be 10 percent, while with the aggressive capital structure its debt cost will be 12 percent. The firm will have $400,000 in total assets, it will face a 40 percent marginal tax rate, and the book value of equity per share under either scenario is $10.00 per share. What is the coefficient of variation of expected EPS under the aggressive capital structure plan?

  A. 2. 45
  B. 1.00
  C. 1.18
  D. 3. 76
  E. 2. 88
  A. 2. 45

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  Explanation

  Calculate coefficient of variation

  Expected EPS(Aggressive):

  E(EPS) = 0.6 EPS(Feast) + 0.4 EPS(Famine) = (0.6)($1.44) + 0.4(-$0.96) = $0.48. Standard deviation

  SD(EPS-aggressive) = [0.6($1.44 - $0.48)^2 + 0.4(-$0.96 - $0.48)^2]^1/2

  = [0.5530 + 0.8294]^1/2 = 1.176.

  CV(Aggressive) = 1.176/0.48 = 2. 45.

• Question 2193:

  Which of the following is used to calculate the actual adjustment for bad debt expense for the period?

  A. percent of accounts receivable
  B. percent of net sales
  C. aging
  D. all of these answers
  B. percent of net sales

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  Explanation

  The aging and percent of Accounts Receivable methods calculate what the balance of the allowance account should be, however, percent of net sales method calculates the actual expense for the period.

• Question 2194:

  What is the remaining balance on a $100,000 loan after making monthly payments of $733. 76 for 10 years, if the interest rate is 8% per year, compounded monthly?

  A. $86,204. 11
  B. $11,948.80
  C. $0
  D. $87,725. 54
  E. $91,343. 92
  D. $87,725. 54

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  Explanation

  On the BAII Plus, press 120 N, 8 divide 12 = I/Y, 100000 PV, 733. 76 +/- PMT, CPT FV. On the HP12C, press 120 n, 8 ENTER 12 divide i, 100000 PV, 733. 76 CHS PMT, FV. The remaining balance will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2195:

  If you buy a television for $650 and agree to pay for it with 24 payments of $30 (with the first payment occurring next month), what is the size of the final payment needed at month 24 to completely pay off the television? Assume the interest rate you are being charged is 16% per year, compounded monthly.

  A. $47. 54
  B. $0.00
  C. $203. 98
  D. $30.00
  E. $51.25
  E. $51.25

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  Explanation

  This question describes a situation often called a balloon payment. On the BAII Plus, press 24 N, 16 divide 12 = I/Y, 650 PV, 30 +/- PMT, CPT FV. On the HP12C, press 24 n, 16 ENTER 12 divide i, 650 PV, 30 CHS PMT, FV. The answer is shown as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2196:

  A firm's capital structure consists of 35% debt with an after-tax cost of 5. 2%. Common equity makes up 55% of the structure and the rest is made up of preferred equity. The preferred stock has a coupon of 7% and the required rate of return on the common stock is 13. 7%. The firm's WACC is ________.

  A. 10.06%
  B. 15. 61%
  C. none of these answers
  D. 13. 24%
  E. 12. 19%
  F. 11.95%
  G. 14. 39%
  C. none of these answers

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  Explanation

  To get the WACC in this case, you need to have information on the cost of preferred stock. This is not necessarily equal to the coupon rate on the preferred equity. Rather, it is the discount rate that equates the present value of the perpetual payments on the preferred equity to its current price. Without the price information, you cannot get the cost of preferred equity and hence, WACC cannot be calculated.

• Question 2197:

  The following stock market return data were observed last year:

  Returns# of stocks less than -5% 129 between -5% and 0% 301 between 0% and 10% 636 between 10% and 20% 274 more than 20% 173

  The probability that a randomly selected stock had either a negative return or a return more than 20% equals ________.

  A. 0.27
  B. 0.53
  C. 0.60
  D. 0.40
  D. 0.40

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  Explanation

  For a frequency distribution, the estimated probability of a particular class/event occurring equals the relative frequency of that class. Now, the number of stocks that had either a negative return or a return more than 20% equals 129 + 301 + 173 = 603. The total number of stocks equals 129 + 301 + 636 + 274 + 173 = 1513. Therefore, the estimated probability of a randomly selected stock having either a negative return or a return more than 20% equals 603/1513 = 0.40.

• Question 2198:

  Cavanaugh's stock will start paying a $2 per share dividend four years from today (D4). Analysts are estimating at that time Cavanaugh's dividend growth rate will stabilize at 7%. If investors want to earn 12% on investments of this type, what value would they put on Cavanaugh shares today?

  A. $28.47.
  B. $31.89.
  C. $40.00.
  D. $50.18.
  A. $28.47.

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  Explanation

  P3 = D4 / (k

• Question 2199:

  If an overstatement of depreciation by 100 and an understatement of accounts receivables by 40 causes a firm's net income to be understated by 70, the firm's tax rate is ________.

  A. 35%
  B. 50%
  C. 40%
  D. 30%
  D. 30%

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  Explanation

  An overstatement of depreciation by 100 causes the income to be understated by 100*(1-tax rate). Hence, tax rate = 30%.

• Question 2200:

  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. Assume that at one point along the marginal cost of capital schedule the component cost of equity is 18 percent. What is the Weighted Average Cost of Capital (WACC) at that point?

  A. 16. 4%
  B. 14. 2%
  C. 10.8%
  D. 13. 6%
  E. 18.0%
  B. 14. 2%

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  Explanation

  MCC (Marginal Cost of Capital) = 0.4(0.14)(1 - 0.4) + 0.6(0.18) = 0.142 = 14. 2%.