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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2351:

  A stock had the following percentage increases in its value over the last 5 years: 7%, 4%, 12%, 10%, 15%. The geometric rate of return on the stock equals ________.

  A. 8.72%
  B. 9.22%
  C. 9.60%
  D. 9.53%
  D. 9.53%

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  Explanation

  The geometric rate of change equals (1.04*1.07*1.1*1.15*1.12)^(1/5) - 1 = 9.53%. Note this is different from the straight geometric mean, which in this case would be (0.04*0.07*0.1*0.15*0.12)^(1/5) = 8.72%. You should be very careful about this point since the Mason and Lind textbook is quite ambiguous on this point.

• Question 2352:

  The supply curve for American dollars in the foreign exchange market:

  A. none of these answers.
  B. is dependent on the purchases of American goods by foreigners.
  C. is independent on the purchases of American goods by foreigners.
  D. is dependent on the purchases of foreign goods by Americans.
  D. is dependent on the purchases of foreign goods by Americans.

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  Explanation

  The supply curve for dollars is dependent on the purchases of foreign goods by Americans. An increase in the foreign price of the dollar means that a dollar will purchase more foreign currency and more goods priced in terms of foreign currency. The Americans buy more from abroad and therefore supply more dollars to the market as the foreign price of the dollar rises.

• Question 2353:

  An investment company

  A. invests only in stocks.
  B. borrows money from individuals and invests that money in securities.
  C. lends money to other companies or individuals.
  D. invests a pool of funds belonging to many individuals.
  D. invests a pool of funds belonging to many individuals.

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  Explanation

  An investment company sells shares in itself, and uses the proceeds to invest in a portfolio of individual investments such as stocks and bonds. If such a company sold 1 million shares for $50 dollars each, it would invest $50 million (minus commissions) into things like government bonds or speculative stocks.

• Question 2354:

  Typical features attached to preferred stock include all of the following except:

  A. Demand redemption rights.
  B. Dividend distribution preferences.
  C. Liquidation priorities.
  D. Non-voting rights.
  A. Demand redemption rights.

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  Explanation

  Preferred shareholders hold a security that looks very similar to a bond, but they are very rarely allowed to demand redemption of their shares. On the other hand, many bonds are callable.

• Question 2355:

  If 80% of investment advisory services have bullish attitudes on the stock market, technicians may view this as

  A. a bearish sign.
  B. a bullish sign.
  C. inconsequential.
  D. indicative of an unpredictable, volatile market.
  A. a bearish sign.

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  Explanation

  Many technicians feel that investment advisory services tend to be trend followers, so that by the time most services are bullish, the bull market is nearing its peak and will soon be followed by a new bear market. For this reason, such a sign would be viewed as bearish.

• Question 2356:

  An investor buys 200 shares of ABC at the market price of $100 on full margin. The initial margin requirement is 40 percent and the maintenance margin requirement is 25 percent. What is the leverage factor of the margin purchase?

  A. 2. 50.
  B. 0.40.
  C. 0.60.
  D. 4. 00.
  A. 2. 50.

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  Explanation

  The leverage factor is 1/initial margin requirement, 1/0.4 = 2. 50.

• Question 2357:

  The management of Intelligent Semiconductor have adhered to the following capital structure: 40% debt, 45% common equity, and 15% perpetual preferred equity. The following information applies to the firm:

  Before-tax cost of debt = 8.25%

  Combined state/federal tax rate = 33%

  Expected return on the market = 16. 5%

  Annual risk-free rate of return = 6. 25%

  Historical Beta coefficient of Intelligent Semiconductor's Common Stock = 1.34 Annual preferred dividend = $1.05

  Preferred stock net offering price = $18.90

  Expected annual common dividend = $0.20

  Common stock price = $100.90

  Expected growth rate = 9.75%

  Subjective risk premium = 5. 3%

  Given this information, and using the Capital Asset Pricing Model (CAPM) to calculate the component cost of common equity, what is the Weighted Average Cost of Capital for Clay Industries?

  A. The WACC for Clay Industries cannot be calculated from the information.
  B. 12. 94%
  C. 13. 55%
  D. 12. 03%
  E. 15. 60%
  F. 11.92%
  D. 12. 03%

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  Explanation

  The calculation of the Weighted Average Cost of Capital is as follows: {fraction of debt * [yield to maturity on outstanding long-term debt][1-combined state/federal income tax rate]} + {fraction of preferred stock * [annual dividend/net offering price]} + {fraction of common stock * cost of equity}. The cost of common equity can be calculated using three methods, the Capital Asset Pricing Model (CAPM), the Dividend-Yield-plus-Growth-Rate (or Discounted Cash Flow) approach, and the Bond- Yield-plus-Risk-Premium approach. In this example, you are asked to calculate the cost of common equity using the Capital Asset Pricing Model. To calculate the cost of equity using this approach, use the following equation: {riskfree rate + beta(expected return on the market - risk-free rate). Incorporating the given information into this equation gives a cost of equity of 19.989% The after-tax cost of debt can be found by multiplying the yield to maturity on the firm's outstanding long-term debt (8.25%) by (1-tax rate). Using this method, the after-tax cost of debt is found as 5. 50%. The calculation of the cost of perpetual preferred stock is relatively straightforward, simply divide the annual preferred dividend ($1.05) by the net offering price ($18.90). Using this method, the cost of preferred stock is found as 5. 556%. Incorporating these figures into the WACC equation gives the answer of 12. 027%.

• Question 2358:

  What is the future value of $450 per year for 10 years, with the first cash flow occurring today, rather than 1 year from now? Assume interest is 7% per year, compounded annually.

  A. $6,652. 62
  B. $6,217. 40
  C. $3,381.85
  D. $3,160.61
  E. $4,951.85
  A. $6,652. 62

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  Explanation

  Recognize that this question is an annuity due situation, since the first cash flow occurs immediately or at the beginning of each period. Annuities where the first payment occurs 1 period from today (or at the end of each period) are called "ordinary" annuities. This requires placing the calculator into "Begin" mode prior to solving the question. NOTE: Be sure to place the calculator OUT OF annuity due mode after this question before going on to subsequent questions, or you will get the wrong answers! On the BAII Plus, press 2nd BGN. If the display shows END, then press 2nd SET and then 2nd Quit. This will place the BAII Plus into annuity due mode (you can tell this because the BAII Plus will display BGN in small letters). Now press 10 N, 7 I/Y, 450 PMT, 0 PV, CPT FV. Place the calculator back into End mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press 2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press BlueShift END, which is the blue function on the front of the 8 digit key. This places the HP12C into Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then press 10 n, 7 i, 450 PMT, 0 PV, FV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG (the blue function written on the front of the 7 digit key). Note that the answer is displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2359:

  Beginning inventory of 50 units, purchased at $5 50 units purchased at $10 35 units purchased at $9 25 units sold at $15 70 units sold at $12 Tax rate = 40%. Beginning LIFO reserve = $300

  The net income using FIFO is ________.

  A. $210
  B. $427
  C. $309
  D. $515
  C. $309

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  Explanation

  The total revenue equals 25*15 + 70*12 = 1,215, coming from a sale of 95 units. Under FIFO, the goods purchased earliest are assumed to have been sold first. Therefore, 50 of the sold units have a cost of $5 each and 45 units have a cost of $10 each. Therefore, FIFO COGS = 50*5 + 45*10 = $700. Therefore, assuming no other costs, the pre-tax income equals 1,215 - 700 = $515 and the post tax income equals 515*(1-40%) = $309.

• Question 2360:

  What are the earnings before taxes (EBT)?

  A. $52,919.
  B. $66,241. C. $62,629.
  D. $59,580.
  A. $52,919.

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  Explanation

  79,564 - 26,664 = 52,919