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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2341:

  Photon Corporation has a target capital structure of 60 percent equity and 40 percent debt. The firm can raise an unlimited amount of debt at a before-tax cost of 9 percent. The company expects to retain earnings of $300,000 in the coming year and to face a tax rate of 35 percent. The last dividend was $2 per share and the growth rate of the company is constant at 6 percent. If the company needs to issue new equity, then the flotation cost will be $5 per share. The current stock price is $30. Photon has the following investment opportunities: Project Cost IRR 1 $100,000 10.5% 2 $200,000 13. 0 3 $100,000 12. 0 4 $150,000 14. 0 5 $75,000 9.0

  A. $150,000
  B. $450,000
  C. $350,000
  D. $550,000
  E. $625,000
  B. $450,000

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  Explanation

  Calculate the retained earnings break point (BPRE) as $300,000/0.6 = $500,000. Calculate ks as D1/P0 + g = $2(1.06)/$30 + 6% = 13. 07%. Calculate ke as D1/(P0 - F) + g = $2(1.06)/($30 - $5) + 6% = 14. 48%. Find WACC below BPRE as: WACC = 0.6(13. 07%)+ 0.4(9%)(1 - 0.35) = 10.18%. Thus, up to $500,000 can be financed at 10.18%. Find WACC above BPRE as: WACC = 0.6(14. 48%) + 0.4 (9%) (1 - 0.35) = 11.03%. Thus, financing in excess of $500,000 costs 11.03%. Projects 2, 3, and 4 all have IRRs exceeding either WACC and should be accepted. These projects require $450,000 in financing. Project 1 is the next most profitable project. Given its cost of $100,000, half or $50,000 can be financed at 10.18% and the other half must be financed at 11.03%. The relevant cost of capital for Project 1 is then 0.5(10.18%) + 0.5(11.03%) = 10.61%. Since Project 1's IRR is less than the cost of capital, it should not be accepted. The firm's optimal capital budget is $450,000.

• Question 2342:

  A credit entry to Allowance for Uncollectible Accounts

  A. increases the balance
  B. neither of these answers is correct
  C. both of these answers are correct
  D. increases net receivables
  A. increases the balance

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  Explanation

  Allowance for Uncollectible Accounts, sometimes referred to as Bed Debt Reserve, is a contra account to Accounts Receivable. A credit entry increases its balance and the balance reduces the amount of net Accounts Receivable.

• Question 2343:

  In the presentation of real estate performance, disclose any changes in ________, including unrealized gains and losses.

  A. accounting
  B. investment earnings
  C. valuation
  D. audit practices
  E. cash flow
  C. valuation

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  Explanation

  Questions have arisen about the effects of real estate appraisals on recognizing gains or losses in value in performance periods. Consistent with industry practices, the AIMR-PPS require that changes in valuation, including unrealized gains and losses, be recognized in the reporting period that includes the effective date of the appraisal.

• Question 2344:

  Which of the following is/are true?

  I. An increase in inventories has a positive impact on cash flows.

  II. An increase in receivables has a positive impact on cash flows.

  III. Deferred taxes increase current cash balance.

  IV.

  Utilization of tax loss carry-forwards has a positive impact on cash flows.

  A. III and IV
  B. II and III
  C. I and II
  D. I, II, III and IV
  A. III and IV

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  Explanation

  An increase in inventories implies cash was spent to obtain more goods than were sold. An increase in receivables implies part of the sales were made on credit, not a cash basis. Both of these have a negative impact on cash flows. Deferring taxes implies some of the cash expense was delayed into the future, increasing the current cash balance. Utilization of tax loss carry-forwards implies a reduction in the taxable income by the amount of the carry-forward. This reduces cash expense on taxes.

• Question 2345:

  Keynesians believe that a discretionary fiscal policy:

  A. is destabilizing due to difficulty in timing and should not be used actively.
  B. is ineffective since people rationally anticipate its future effects.
  C. none of these answers.
  D. is not as effective as the monetary policy in controlling unemployment.
  C. none of these answers.

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  Explanation

  Keynesians believe that aggregate demand has a major influence. They maintain that suppliers will produce at a level consistent with anticipated aggregate demand. Hence, to increase economic production when the economy is operating below capacity, Keynesians advocate spurring the demand in the market through the use of an expansionary fiscal policy.

• Question 2346:

  Which accounting principle is consistent with reporting financial results that can be compared with previous periods?

  A. adequate disclosure
  B. matching
  C. consistency
  D. materiality
  C. consistency

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  Explanation

  The consistency principle requires that an accounting procedure, once adopted by a company, remain in use from one period to the next unless users are informed of the change.

• Question 2347:

  A buy side analyst is discussing the relative functionality of the Australian stock market with her colleagues. She states three specific attributes of the Australian stock market that infer that the market is a well-functioning securities market. She says, 'The Australian stock market is characterized by (1) rapid adjustment of prices to reflect new information, and (2) price continuity in the absence of significant new information." Are these accurate descriptions of attributes of a well functioning market?

  A. Both descriptions are accurate.
  B. Neither description is accurate.
  C. Only one of these descriptions is accurate.
  A. Both descriptions are accurate.

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  Explanation

• Question 2348:

  In order to value an asset, one needs

  A. the stream of expected future cash flows.
  B. the stream of expected future cash flows and the ROE of the asset.
  C. the stream of expected future cash flows, and the book value of the asset.
  D. the book value of the asset, and its ROE.
  E. the stream of expected returns and the required rate of return on the asset.
  E. the stream of expected returns and the required rate of return on the asset.

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  Explanation

  In order to value an asset, one needs to find the present value of its expected future cash flows. In order to do this, one needs the stream of expected future cash flows, and the required rate of return to discount that stream in order to arrive at its present value.

• Question 2349:

  Juliet Kaufman manages a large portfolio of risky assets for a family of investors- The portfolio consists primarily of stocks but also includes a small allocation of fixed-income investments. Currently, the expected return and standard deviation of the portfolio are 14. 0% and 12. 0%, respectively. Kaufman is considering adding one of three stocks to the portfolio. Data on each stock's expected return, beta, standard deviation, and covariance with the existing portfolio are presented below. Which stock should Kaufman add to the portfolio?

  A. Stock A
  B. Stock B
  C. Stock C
  A. Stock A

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  Explanation

• Question 2350:

  In 1998, firm A's financial statements showed the following:

  Net income = $23,000 Operating cash flows = $10,000 Financing cash flows = $24,000 Non-cash expenses = $19,000 Change in cash accounts = $6,500 Cash spent on acquiring operating capacity = $19,000

  Then, the investing cash flow of the firm in 1998 was ________.

  A. -$27,500
  B. $42,000
  C. -$19,000
  D. $69,500
  A. -$27,500

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  Explanation

  Operating + Financing + Investing cash flows = change in cash accounts. Hence, Investing cash flow = 6,500-10,000-24,000 = -$27,500.