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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2401:

  What stage of venture capital investments has provided the highest standard deviation of mean returns?

  A. balance
  B. later and balance are identical
  C. seed
  D. early
  E. later
  D. early

  ---

  Explanation

  The early stage has provided a 24. 3% standard deviation from 1981-1996, followed by the later stage (17. 7%), seed stage (17. 6%), and balance stage (14. 4%).

• Question 2402:

  Clay Industries, a diversified industrial firm, is considering investing into a new manufacturing facility which would allow the Company to expand its operations into a promising new market for industrial motors, specifically the High

  Temperature Superconducting, or HTS motors. This project is one of many currently under consideration for Clay Industries, and the amount of RandD expense allocated toward researching this new manufacturing facility is residual in nature.

  The following information applies to this new project.

  RandD expense for the quarter $15,000

  Initial cash outlay ($45,000)

  t1: ($40,000)

  t2: ($10,000)

  t3: $40,000

  t4: $40,000

  t5: $16,000

  t6: $25,000

  Assuming no taxes and a $0.00 salvage value at t6, which of the following best represent the IRR for his project?

  A. 7. 039%
  B. This project will have multiple IRR at any discount rate
  C. The IRR cannot be calculated due to the fact that no discount rate has been provided
  D. The IRR cannot be calculated due to the fact that the project has uneven cash flows
  E. 2. 639%
  A. 7. 039%

  ---

  Explanation

  Remember that the quarterly RandD expense is a sunk cost, and one which cannot be directly attributable to this project. Because this quarterly RandD expense is not incremental in nature, it should be omitted from the IRR calculation. Additionally, the fact that this project has uneven cash flows is irrelevant for our calculation of IRR. To determine the IRR for this project, the following information is necessary: the initial investment outlay, the amount of each period's cash inflow, and the number of periods. In calculating IRR, no discount rate is necessary, so the last answer is incorrect. The calculation of the IRR is found as follows: incorporate the initial investment outlay of ($45,000) as Cfo, for CO1= ($40,000), CO2=($10,000), CO3=$40,000, CO4=$40,000, CO5=$16,000, CO6=$25,000, CPT IRR. This yields an IRR of 7. 039%.

• Question 2403:

  The closing prices of a common stock have been 61 1/2, 62, 61 1/4, 60 7/8, and 61 1/2 for the past week. What is the range?

  A. None of these answers
  B. $1.750
  C. $1.875
  D. $1.250
  E. $1.125
  E. $1.125

  ---

  Explanation

  62 - 60.875 = 1.125

• Question 2404:

  The probability of getting a value less than 1.3 from a standard normal distribution equals ________.

  A. 0.4032
  B. 0.6847
  C. 0.9032
  D. 0.8192
  C. 0.9032

  ---

  Explanation

  The z-value of a selected observation, X, from a normal distribution with mean M and standard deviation S equals z = (X-M)/S. For a standard normal distribution, M = 0 and S = 1. Therefore, for X = 1.3, z = 1.3. Using the Normal probability tables, we get P(Y < 1.3) = 0.9032.

• Question 2405:

  Standard V (A), Prohibition against Use of Material Nonpublic Information, states that the test for determining if a tipper is breaching a fiduciary duty

  A. is whether the tippee benefits directly or indirectly from the disclosure.
  B. is whether the tipper benefits directly or indirectly from the disclosure.
  C. is whether the tipper benefits directly from the disclosure.
  D. is whether the insider benefits directly from the disclosure.
  E. none of these answers.
  B. is whether the tipper benefits directly or indirectly from the disclosure.

  ---

  Explanation

  Standard V (A), Prohibition against Use of Material Nonpublic Information, states that the test for determining if a tipper is breaching a fiduciary duty is whether the tipper benefits directly or indirectly from the disclosure. The three types of personal benefits are: 1. pecuniary benefit, 2. a quid pro quo between the insider and recipient, and 3. a gift of confidential information to a relative. An insider who selectively discloses material nonpublic information without a legitimate business purpose may be found to have breached a fiduciary duty.

• Question 2406:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate 35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities 18,583

  In the above example, the firm's return on total capital equals ________.

  A. 11.3%
  B. 3. 9%
  C. 5. 4%
  D. 6. 2%
  C. 5. 4%

  ---

  Explanation

  Return on total capital = (Net income + interest expense)/average total capital. The average total capital includes debt, common equity and preferred stock. Note that since Total assets = Total liabilities + Total Equity, the denominator is also equal to total assets. In the above example, Net Income = Earnings after depreciation, interest expense and taxes = (21,896 - 4,346 - 2,143 - 10,084 - 967 - 573)*(1 - 0.35) = 2,459. Therefore, Return on total capital = (2,459 + 573)/(37,432 + 18,583) = 5. 41%.

• Question 2407:

  Martin Philips evaluates stocks using the security market line while also considering the transaction costs of each buy and sell decision. Philips assumes that both high and low beta stocks incur the same positive percentage transactions costs on all stock trades. Which of the following is least likely an effect of Philips' assumptions?

  A. The intercept of the security market line will increase for buy signals.
  B. The intercept of the security market line will decrease for sell signals.
  C. The slope of the security market line will increase for both buy and sell signals.
  C. The slope of the security market line will increase for both buy and sell signals.

  ---

  Explanation

• Question 2408:

  Penny Linn, CFA, predicts that both Stock X and Y will return 20% next year. The Treasury bill rate is 5% and the market risk premium is 8%. The beta for Stock X is 1.5 and for Stock Y is 2. The standard deviation for Stock X is 20% and for Stock Y is 30%. Determine if Linn's predictions lie above or below the security market line.

  A. Only Stock X lies below the SML.
  B. Only Stock Y lies below the SML.
  C. Both Stock X and Stock Y lie below the SML.
  B. Only Stock Y lies below the SML.

  ---

  Explanation

• Question 2409:

  A firm's treasurer estimates that the firm will need about $15 million in 3 years' time to allow the acquisition of a growing software firm. If the firm can invest in the capital market at the risk-free rate of7% per year and wants to make sure it has the necessary funds available in 3 years, how much does it need to invest today?

  A. $12. 244 million
  B. $11.964 million
  C. $12. 113 million
  D. $13. 642 million
  A. $12. 244 million

  ---

  Explanation

  The amount needed today equals 15/(1.07^3) = $12. 244 million

• Question 2410:

  If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

  A. If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
  B. If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
  C. None of these answers are true.
  D. If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
  E. If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
  D. If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.

  ---

  Explanation

  An increase in a project's beta will cause its stock price to decrease unless the increased beta were offset by a higher expected rate of return. Therefore, high-risk investments require higher rates of return, whereas low-risk investments require lower rates of return.