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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2251:

  Which of the following projects is likely to have multiple Internal Rates of Return? Project A Initial investment outlay: ($1,000,000) t1: $400,000 t2: $100 t3: $1,000,000 t4: $1,000,000 t5: $100 t6: $0.00 Project B Initial investment outlay: ($1,000,000) t1: $40,000 t2: $90,000 t3: $590,000 t4: ($105,000) t5: ($10,000) t6: $900,000 Project C Initial investment outlay: ($500,000) t1: $100,000 t2: $100,000 t3: $100,000 t4: $100,000 t5: $0.00 t6: $500,000 Project D Initial investment outlay: ($500,000) t1: $105,000 t2: ($40,000) t3: $45,000) t4: $400,000 t5: $400,000 t6: $65,000

  A. None of these answers
  B. Both Project B and D likely to have multiple IRRs
  C. Project C
  D. Project D
  E. Project B
  F. Project A
  B. Both Project B and D likely to have multiple IRRs

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  Explanation

  In evaluating projects with "non-normal cash flows" the Internal Rate of Return method will often produce multiple IRRs which leads to an incorrect accept/reject decision. Non-normal cash flows are defined as cash flows in which the sign changes more than once. Projects B and D involve cash outflows superimposed within the cash inflows, resulting in a sign change from positive to negative and negative to positive. In examining projects such as this, it is advisable to use either the NPV or MIRR methods. From observation alone, we can determine that project B and D are non-normal projects, and are thus likely to result in multiple IRR calculations. While projects A and C do involve periods of zero cash flow, this will not interfere with the IRR calculation to the extent of producing multiple IRRs.

• Question 2252:

  When a domestic resident purchases a foreign stock directly on the foreign stock exchange, the transaction is entered as a ________ in the BOP account.

  A. deficit
  B. surplus
  C. credit
  D. debit
  D. debit

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  Explanation

  In BOP accounting, by convention:

  1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.

  2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account. Thence, direct purchase of a foreign stock, which represent an outflow of domestic currency, is treated as a debit in the BOP account.

• Question 2253:

  Standard II (A) deals with ________.

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

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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 2254:

  Revenues of an entity are usually measured by the exchange values of the assets or liabilities involved. Recognition of revenue does not occur until

  A. the entity has substantially accomplished what it is agreed to do.
  B. the revenue is realizable.
  C. none of these answers.
  D. products or services are exchanged for cash or claims to cash.
  E. the revenue is realized and earned.
  E. the revenue is realized and earned.

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  Explanation

  Revenues are only recognized when they have been earned. Simply exchanging assets or liabilities does not result in revenue recognition.

• Question 2255:

  How much would you need to deposit today in order to be able to withdraw $500 in 2 years and $700 in 4 years, if the account has nothing in it today and interest is 6% per year, compounded annually?

  A. $999.46
  B. $1,007. 54
  C. $445. 00
  D. $1,200.00
  E. $950.51
  A. $999.46

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  Explanation

  Work this question as two compound interest problems. On the BAII Plus, press 2 N, 6 I/Y, 0 PMT, 500 FV, CPT PV, which yields $445. 00. Then press STO 1. Then press 4 N, 700 FV, CPT PV, which yields $554. 46. Then press + RCL 1 = to see the answer. On the HP12C, press 2 n, 6 i, 0 PMT, 500 FV, PV. Then press STO 1. Then press 4 n, 700 FV, PV. Then press RCL 1 + to see the answer. Note that the answer will be displayed as a negative number.

• Question 2256:

  According to the Standards of Practice Handbook, how frequently should managers gather information on client circumstances, occupation, investment objectives and risk tolerances?

  A. at least monthly
  B. at least annually
  C. at least every two years
  D. at least every five years
  B. at least annually

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  Explanation

  Under Standard IV (B.2), members have a responsibility to consider carefully the needs, circumstances and objectives of the client when determining the appropriateness of a given investment action. In order to provide sound advice, members should gather information on client circumstances, occupation, investment objectives and risk tolerances at the inception of any client relationship and such an inquiry should be repeated at least annually. This will ensure that investment recommendations take into account the diversity and changing nature of portfolio and client characteristics.

• Question 2257:

  Which of the following statements is correct?

  A. Market risk is important but does not have a direct effect on stock price because it only affects beta.
  B. Well diversified stockholders do not consider corporate risk when determining required rates of return.
  C. Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk.
  D. Empirical studies of the determinants of required rates of return (k) have found that only market risk affects stock prices.
  C. Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk.

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  Explanation

  Corporate risk is the project's risk to the corporation giving consideration to the fact that the project represents only one of the firm's portfolio of assets, hence that some of its risk effects on the firm's profits will be diversified away.

• Question 2258:

  A firm currently has a negative working capital. Which of the following is true?

  A. The firm is close to bankruptcy.
  B. The firm's accounting profits are low.
  C. The firm's current ratio is less than 1. D. The firm has a high debt-to-asset ratio.
  C. The firm's current ratio is less than 1. D. The firm has a high debt-to-asset ratio.

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  Explanation

  Working capital = Current assets - Current liabilities. If working capital is negative, then current liabilities exceed current assets, implying a current ratio of less than 1.

• Question 2259:

  With regard to international portfolios, if net performance is indicated, managers are required to disclose the assumed ________ for the benchmark.

  A. tax rate
  B. currency effects
  C. hedge
  D. disclosure
  E. differentials
  A. tax rate

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  Explanation

  To be in compliance with the AIMR-PPS, the performance presentation for international portfolios must disclose whether composites and benchmarks are presented gross or net of withholding taxes on dividends, interest and capital gains; if net, the assumed tax rate for both the composite and the benchmark.

• Question 2260:

  When dealing with charitable organizations, the fiduciary must consider all of the following, except:

  A. general economic conditions.
  B. the charity's present and anticipated financial requirements.
  C. investigation of supervisory activities once violation is known to have occurred.
  D. long and short-term institutional needs in carrying out the charitable purpose.
  E. expected total return on its investments.
  F. trends in security price levels.
  C. investigation of supervisory activities once violation is known to have occurred.

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  Explanation

  As fiduciaries for charitable organizations, members must consider: long and short-term institutional needs in carrying out the charitable purpose, the charity's present and anticipated financial requirements, expected total return on its investments, trends in security price levels and general economic conditions. Investigation of violations involving supervisors is a compliance procedure under Standard III (E), not under Standard IV (B.1), which deals with Fiduciary Duties.