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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2331:

  According to the FASB conceptual framework, which of the following situations violates the concept of reliability?

  A. Financial statements include property with a carrying amount increased to management's estimate of market value.
  B. None of these answers.
  C. Financial statements are issued 9 months late.
  D. Data on segments having the same expected risks and growth rates are reported to analysts estimating future profits.
  E. Management reports to stockholders regularly refer to new projects undertaken, but that financial statements never report project results.
  A. Financial statements include property with a carrying amount increased to management's estimate of market value.

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  Explanation

  Reliability has 3 primary qualities: verifiability, neutrality and representational faithfulness. Neutrality is violated here as information should not be prepared or reported to obtain a predetermined result, and should be free from bias.

• Question 2332:

  PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The company's before-tax cost of debt is 10 percent. Sales for the year totaled $3,500,000 and variable costs were 60 percent of sales. Net income was equal to $600,000 and the company's tax rate was 40 percent. If PQR's degree of total leverage is equal to 1.40, what is its degree of operating leverage?

  A. 1.15
  B. 1.22
  C. 2. 68
  D. 1.12
  E. 1.00
  B. 1.22

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  Explanation

  First, calculate PQR's DFL as EBIT/(EBIT - I). Interest expense (I) on the debt is $1,500,000(10%) = $150,000. We can work backwards from NI to find EBIT as follows: EBT = NI/(1 - T) or $600,000/0.6 = $1,000,000. EBIT = EBT + I or $1,000,000 + $150,000 = $1,150,000. DFL is thus $1,150,000/($1,150,000- $150,000) = 1.15. Recognizing DTL = DFL x DOL, we can solve 1.40 = 1.15 x DOL for DOL = 1.22.

• Question 2333:

  Which of the following is NOT a deferred credit item?

  A. Deferred gain on installment sales
  B. None of these answers
  C. Deferred tax credits
  D. Advance rental payments
  B. None of these answers

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  Explanation

  All of the responses qualify as deferred credit items.

• Question 2334:

  A 12-year, $1,000 face value zero-coupon bond is priced to yield a return of 7. 00 percent on a semi-annual basis. What is the price of the bond, and how much interest will the bond pay over its life, respectively? (Select the choice that is closest to the correct answer.)

  A. $562, $438.
  B. $444, $556.
  C. $840, $160.
  D. $438, $562.
  D. $438, $562.

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  Explanation

  Using the equation:Pricezerocoupon= Face Value * [ 1 / ( 1 + i/n)n*2]

  Here,Pricezerocoupon= 1000 * [ 1 / (1+ 0.070/2)12*2] = 1000 * 0.43796 = 437. 95, or approximately438.So, interest = Face Value ?Price = 1000 ?438 =562.

  Using thecalculator:N = (12*2) =24, I/Y = 7. 00 / 2 =3. 50, FV = 1000, PMT = 0. PV = -437. 95, or approximately $438

• Question 2335:

  You have a 15-year bond that pays $500 every 6 months. The face value is $10,000. The required rate of return is 10. What is the bond's value?

  A. $10,000
  B. $8,435
  C. $12,000
  D. none of these answers
  A. $10,000

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  Explanation

  Present value of interest payments at 10%: $500 x 15. 3725 = $7,686 Present value of principal payment at 10%: $10,000 x .2314 = 2,314 $7,686 + 2,314 = 10,000

• Question 2336:

  Siegel, Inc. has issued bonds maturing in 15 years but callable at any time after the first 8 years. The bonds have a coupon rate of 6%, and are currently trading at $992 per $ 1,000 par value. If interest rates decline over the next few years:

  A. the call option embedded in the bonds will increase in value, but the price of the bond will decrease.
  B. the price of the bond will increase, but probably by less than a comparable bond with no embedded option.
  C. the price of the bond will increase, primarily as a result of the increasing value of the call option.
  B. the price of the bond will increase, but probably by less than a comparable bond with no embedded option.

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  Explanation

• Question 2337:

  Which of the following would be considered a liability that arises from financing activities?

  A. Accounts payable
  B. Accrued wages
  C. Notes payable
  D. Taxes payable
  E. None of these answers
  C. Notes payable

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  Explanation

  Notes payable represents a liability that originates from financing activities. Liabilities that arise from financing activities typically require compensation in the form of interest. This can be contrasted with liabilities that arise from operating activities where interest bearing credit is not being extended but the liability arises from the "normal course of business."

• Question 2338:

  Two projects being considered are mutually exclusive and have the following projected cash flows: Year Project A Project B 0-$50,000-$50,000 115,9900 215,9900 315,9900 415,9900 515,990100,560 At what rate (approximately) do the NPV profiles of Projects A and B cross?

  A. The NPV profiles of these two projects do not cross.
  B. 11.5%
  C. 6. 5%
  D. 16. 5%
  E. 20.0%
  B. 11.5%

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  Explanation

  Solve for numerical PVIFA and PVIF and obtain corresponding interest rates from table. Project A:50,000 = 15,990(PVIFA(Irr,5))

  3. 12695 = PVIFA(IrrA,5)

  IRR(A) = 18%

  Project B:50,000 = 100,560(PVIF(IrrB,5)0

  0.49722 = PVIF(IrrB,5)

  IRR(B) = 15%

  Solving for the crossover rate of 11.49% requires interpolation, which is not covered in the text. However, by using trial and error and an NPV profile drawing, the student can select the correct multiple choice answer, 11.5%. Drawing an NPV

  profile drawing using the calculated IRRs, and the NPVs at k = 0%, shows that there is a crossover rate. Of the responses listed in the problem, 16. 5% and 20.0% are clearly too high, since the IRR(B) is 15%. At k = 6. 5% the NPVs are not

  equal, thus 11.5% must be the correct response.

• Question 2339:

  The bonds of Joslin Corp. are currently callable at par value. The bonds mature in eight years and have a coupon of 8%. The yield on the Joslin bonds is 175 basis points over 8-year U.S. Treasury securities, and the Treasury spot yield curve has a normal, rising shape. As yields on bonds comparable to the Joslin bonds decrease, the Joslin bonds will most likely exhibit:

  A. negative convexity
  B. increasing modified duration
  C. increasing effective duration
  A. negative convexity

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  Explanation

• Question 2340:

  Which of the following can be found in Standard I?

  A. Members shall maintain knowledge of and comply with all applicable laws.
  B. Members shall not undertake any independent practice in competition with employer without written consent.
  C. Members shall maintain appropriate records to support the reasonableness of recommendations.
  D. Members shall not participate in plagiarism.
  E. Members shall make reasonable efforts to achieve public dissemination of material nonpublic information disclosed in breach of a duty.
  A. Members shall maintain knowledge of and comply with all applicable laws.

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  Explanation

  Standard I states that members shall: "A. Maintain knowledge of and comply with all applicable laws of any governing agency or professional association governing the member's professional activities, and B. Not knowingly participate or assist in any violation of laws, rules or regulations."