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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2231:

  Standard II (B) deals with ________.

  A. None of these answers
  B. Plagiarism
  C. Use of Professional Designation
  D. Fundamental Responsibilities
  E. Professional Misconduct
  F. Obligation to Inform Employer of Code and Standards
  G. Duty to Employer
  H. Disclosure of Conflicts to Employer
  E. Professional Misconduct

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  Explanation

  Standard I deals with Fundamental Responsibilities. Standard II (A) deals with Use of Professional Designation. Standard II (B) deals with Professional Misconduct. Standard II (C) deals with Plagiarism. Standard III (A) deals with the Obligation to Inform Employer of Codes and Standards. Standard III (B) deals with the Duty to Employer. Standard III (C) deals with Disclosure of Conflicts to Employer.

• Question 2232:

  The deferred income tax account

  A. is where the difference between income tax expense and income tax payable is reconciled
  B. is always reported as a long-term liability since the tax is not due until the next fiscal year
  C. is reported as an other asset even though it has a credit balance
  D. none of these answers is correct
  A. is where the difference between income tax expense and income tax payable is reconciled

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  Explanation

  The difference between income tax expense (based on accounting income) and the actual income taxes payable (based on taxable income) is reconciled in an account called deferred income taxes.

• Question 2233:

  Sally Ferguson, CFA, is a hedge fund manager. Ferguson utilizes both futures and forward contracts in the fund she manages. In speaking with a client, Ferguson makes the following statements to answer their questions about futures and

  forward contracts:

  Statement 1:A futures contract is an exchange traded instrument with standardized features.

  Statement 2:Forward contracts are marked-to-market on a daily basis to reduce credit risk to both counter parties.

  Indicate whether Statement 1 and Statement 2 are most likely correct or incorrect.

  A. Only Statement 1 is correct.
  B. Only Statement 2 is correct.
  C. Both statements are correct.
  A. Only Statement 1 is correct.

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  Explanation

• Question 2234:

  Jurgens is a portfolio manager with an investment firm based in New York. One of her firm's clients has told Jurgens that he will compensate her beyond that provided by her firm on the basis of the capital appreciation of his portfolio each year. Jurgens should:

  A. Turn down the additional compensations because it will result in conflicts with the interest of other client's accounts.
  B. Turn down the additional compensation because it will create undue pressure on her to achieve strong short-term performance.
  C. Obtain permission from her employer prior to accepting the compensation arrangement.
  D. Receive permission from AIMR for the compensation arrangement.
  C. Obtain permission from her employer prior to accepting the compensation arrangement.

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  Explanation

  This question pertains to Standard III (D), Disclosure of Additional Compensation Arrangements. If Jurgens were to be compensated, based on the account's performance, beyond that provided by her firm, such a practice is not a violation of the Standards, so long as Jurgens discloses the arrangement inwriting to her employer and obtains permission from the employer before entering the agreement. Members are not required to receive permission from AIMR for such arrangements.

• Question 2235:

  Which of the following statements is most correct?

  A. The CAPM approach is typically used to estimate a firm's flotation cost adjustment factor, and this factor is added to the DCF cost estimate.
  B. These statements are all incorrect.
  C. In practice (as opposed to in theory), the DCF method and the CAPM method usually produce exactly the same estimate for k(s).
  D. The risk premium used in the bond-yield-plus-risk-premium method is the same as the one used in the CAPM method.
  E. Under normal conditions, the CAPM (Capital Asset Pricing Model) approach to estimating a firm's cost of retained earnings gives a higher estimate than the DCF (Discounted Cash Flow) approach.
  B. These statements are all incorrect.

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  Explanation

  All are incorrect. Under the CAPM approach, it is at best difficult to obtain correct estimates of the inputs require to make it operational. The same could be said about the growth rate input under the DCF approach. The risk premium under the bond-yield-plus-risk premium approach is purely judgmental and results in a ballpark estimate.

• Question 2236:

  Delphinium Inc.'s target capital structure has a debt ratio of 60 percent. The firm can raise up to $100,000 in new debt at a before-tax cost of 8.5 percent. If more than $100,000 of debt is required, the cost will be 9 percent. Net income last year was $100,000, and it is expected to continue to grow each year at a rate of 10 percent indefinitely. The firm expects to maintain its dividend payout ratio of 40 percent on the 10,000 shares of common stock outstanding. If it must sell new common stock, it would encounter a 15 percent flotation cost on the first $400,000, and a 20 percent cost if more than $400,000 of new outside equity is required. Delphinium's tax rate is 30 percent, and its current stock price is $88 per share. The firm has an unlimited number of projects, which will earn a 10.25 percent return. What is this year's capital budget if the firm invests to the point where the Marginal Cost of Capital (MCC) intersects the Investment Opportunity Schedule (IOS)?

  A. The company has an infinite capital budget.
  B. $1,000,000
  C. $1,165,000
  D. $400,000
  E. $1,150,000
  C. $1,165,000

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  Explanation

  Step 1 Find the break points for the problem. There will be three break points: one for retained earnings, one for debt, and one for the change in flotation costs of new stock.

  Step 2 Calculate the component costs of capital:

  We know NI = $100,000 and there are 10,000 shares, therefore E(0) = $100,000/10,000 = $10. Also, the payout ratio is 40% so D(0) is $4. D(1) = D(0)(1 + g) = $4(1.1) = $4. 40.

  k(s) = D1/P0 + g = $4. 40/$88 + 10% = 15%.

  ke(1) = D1/P0(1 - F1) + g = $4. 40/$88(1 - 0.15) + 10% = 15. 88%.

  ke(2) = D1/P0(1 - F2) + g = $4. 40/$88(1 - 0.20) + 10% = 16. 25%.

  kd(1) = 8.5%(1 - T) = 8.5%(0.7) = 5. 95%.

  kd(2) = 9%(1 - T) = 9%(0.7) = 6. 30%.

  Step 3 Calculate the marginal costs of capital:

  MCC(1) = w(ce)k(s) + w(d)k(d1) = 0.4(15. 00%) + 0.6(5. 95%) = 9.57%.

  MCC(2) = w(ce)k(e1) + w(d)k(d1) = 0.4(15. 88%) + 0.6(5. 95%) = 9.92%.

  MCC(3) = w(ce)k(e1) + w(d)k(d2) = 0.4(15. 88%) + 0.6(6. 30%) = 10.13%.

  MCC(4) = w(ce)k(e2) + w(d)k(d2) = 0.4(16. 25%) + 0.6(6. 30%) = 10.28%.

  MCC Applicable Range

  1$0 through $165,000

  2$165,000 - $166,667

  3$166,667 - $1,165,000

  4over $1,165,000

  Since the IRR of all projects is given as 10.25% the point where the MCC intersects the IOS is $1,165,000, where the MCC jumps from 10.13% to 10.28%.

• Question 2237:

  When prices are rising, which of the following inventory valuation methods produces the lowest income tax liability?

  A. None of these answers
  B. LIFO
  C. Average cost
  D. FIFO
  B. LIFO

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  Explanation

  When prices are rising, LIFO will produce the lowest profit, and the lowest income tax liability, because the last in (highest cost) inventory is the first out. This leaves the oldest inventory on hand and since it has the lowest cost, ending inventory will have the lowest value which means that cost of goods sold will be the highest and profits will be the lowest (ending inventory = beginning inventory + net purchases - cost of goods sold).

• Question 2238:

  A distribution has a mean of 7 and a range of -100 to +50. The distribution is ________.

  A. incomplete
  B. right skewed
  C. defective
  D. left skewed
  D. left skewed

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  Explanation

  The range of values is larger to the left of the mean. Hence, the distribution is left-skewed.

• Question 2239:

  Your distant uncle's will specifies that you will receive a 20-year annuity of $10,000 a year, the payments starting seven years from now. How much is the annuity worth to you today if your discount rate is 4% per year?

  A. $107,406
  B. $135,903
  C. $122,321
  D. $110,911
  A. $107,406

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  Explanation

  The payments start at the end of 7 years. Thus, at the end of year 6, the annuity will be worth 10,000/0.04*(1-1/(1.04^20)) = 135,903. The present value of this amount is 135,903/(1.04^6) = 107,406.

• Question 2240:

  Standard II of the Standards of Professional Conduct deals with Relationships with and Responsibilities to ________.

  A. AIMR
  B. Clients
  C. the Profession
  D. Employers
  E. None of these answers
  C. the Profession

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  Explanation

  Standard II of the Standards of Professional Conduct deals with Relationships with and Responsibilities to the Profession.