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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2451:

  Accounting rules specify that interest must be capitalized for assets that are

  A. not being used in the earning activities of the enterprise and not undergoing the activities necessary to get them ready for use.
  B. routinely produced.
  C. being constructed or otherwise being produced as discrete projects for an enterprise's own use.
  D. none of these answers.
  E. in use or ready for their intended use in the earning activities of the enterprise.
  C. being constructed or otherwise being produced as discrete projects for an enterprise's own use.

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  Explanation

  Interest costs must be capitalized only for assets constructed for internal use, or for sale or lease as discrete projects.

• Question 2452:

  ________ diversify outside the stock market by combining common stock with fixed-income securities, including government bonds, corporate bonds, convertible bonds, or preferred stock.

  A. Balanced funds
  B. None of these answers
  C. Fixed income funds
  D. Bond funds
  A. Balanced funds

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  Explanation

  Balanced funds diversify outside the stock market by combining common stock with fixed-income securities.

• Question 2453:

  Given the following spot and forward rates, how much should an investor pay for a 3-year, annual zero-coupon bond with a face value of $1,000? The investor should pay approximately:

  A. $720.
  B. $724.
  C. $884.
  D. $886.
  B. $724.

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  Explanation

  The yield to maturity on an N-year zero coupon bond is equivalent to the N-year spot rate.Thus, to determine the present value of the zero-coupon bond, we need to calculate the 3-year spot rate.

  Using the formula: (1 + Z3)3= (1 +1f0) + (1 +1f1) + (1 +1f2)

  Where Z = spot rate andnfm= The n year rate m periods from today, (1f0= the 1 year spot rate now)

  (1 + Z3)3= (1.035) * (1.115) * (1.1975)

  Z3= 1.38191/3- 1 = 0.11386, or 11.39%

  Then, the value of the zero coupon bond = 1,000 / (1.1139)3= 723. 62, or approximately$724.

  or, using a financial calculator, N = 3, I/Y = 11.39, FV = 1,000, PMT = 0, Compute PV = 723. 54, or approximately$724.

• Question 2454:

  A firm has 400 preferred stocks outstanding. It started the year with 900 common stocks and over the year, had the following transactions:

  Feb 15 Issued 300 common shares.

  May 1 Redeemed 100 preferred shares.

  Aug 15 Repurchased 150 common shares.

  Nov. 30 Issued 400 common shares.

  In the calculation of EPS, the number in the denominator would be closest to:

  A. 1440
  B. 1140
  C. 1220
  D. 1540
  B. 1140

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  Explanation

  The number of preferred stocks is not relevant in the calculation of the denominator of simple EPS. It had 900-150 = 750 shares for 12 months, 150 shares for 7. 5 months (repurchased in Aug), 300 shares for 10.5 months (issued in Feb) and 400 shares for 1 month (issued in Nov). Hence, weighted # of shares = 750 + (7. 5/12*150) + (10.5/12*300) + (1/12*400) = 1,139.6

• Question 2455:

  What is the Net Present Value of this series of annual cash flows using an interest rate of 12% per year: Year 0: <$15,000>, Year 1: $8,000, Year 2: $8,000, Year 3: $1,000, Year 4: $4,000? (Note that the <> are used to indicate a negative number).

  A. $2,077. 49
  B. $1,589.11
  C. $1,774. 26
  D. $1,981.21
  E. $1,104. 37
  C. $1,774. 26

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 15000 +/- ENTER DownArrow 8000 ENTER DownArrow DownArrow 8000 ENTER DownArrow DownArrow 1000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 12 ENTER DownArrow CPT. On the HP12C, press these keys: 15000 CHS BlueShift CFo 8000 BlueShift CFj 8000 BlueShift CFj 1000 BlueShift CFj 4000 BlueShift CFj. Then press 12 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2456:

  Which of the following is/are true?

  I. A project's sunk costs are irrelevant to the decision of accepting or rejecting it.

  II. A project's incremental cash flows are not affected by interest expenses.

  III.

  Project rankings using incremental net income and incremental net cash flows can be different.

  A. II only
  B. I and II
  C. II and III
  D. I, II and III
  E. I and III
  F. I only
  G. III only
  D. I, II and III

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  Explanation

  Incremental cash flows of a project are the cash flows that occur if and only if the project is undertaken. Since the effects of debt financing are taken into account through the discount rate used to discount the project cash flows, interest payments are ignored while estimating the project's cash flows. Therefore, a project's incremental cash flows are not affected by interest expense. Sunk costs represent expenses that have already been incurred or committed to. Therefore, they should not be allowed to affect future decisions. Finally, since income includes non-cash items, the discounting of income numbers can distort the project rankings based on cash flows. In capital budgeting, annual cash flows, not accounting income, are used to evaluate a project.

• Question 2457:

  Following an internal investigation into her professional business activities, a financial analyst with Smith, Kleen and Beetchnutty admits that in her NPV and IRR calculations, she has failed to index all cash flows for the effects of anticipated

  inflation. However, the analyst claims that the discount rate she has used in her calculations does take into effect anticipated inflation.

  Which of the following correctly describes the effects this will have on the NPV and IRR calculations?

  A. NPV will be biased downward, IRR will be biased upward
  B. NPV will be biased upward, IRR will be biased downward
  C. Both NPV and IRR will be biased downward
  D. Both NPV and IRR will remain unaffected
  E. NPV will be biased downward, IRR will be unaffected
  F. Both NPV and IRR will be biased upward
  C. Both NPV and IRR will be biased downward

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  Explanation

  By failing to index the cash flows of projects in her NPV analysis, while at the same time including an adjustment for inflation into the discount rate, this analyst has biased the NPV calculation downward. This is because the cash inflows are being understated by the inflation-adjusted discounting. This phenomenon will skew the NPV figure downward. Remember that while the Internal Rate of Return calculation does not specify an explicit discount rate, rather calculates the discount rate that equates the cash inflows of a project with its cash outflows, the fact remains that the cash flows in the calculation have not been indexed for the effects of positive inflation. What has happened here is that cash flows have been understated, and this will bias the IRR calculation downward.

• Question 2458:

  An examination of the relationship between performance and the expense ratio indicated that ________.

  A. good performance was associated with low expense ratios
  B. bad performance was associated with low expense ratios
  C. good performance was associated with high expense ratios
  D. there was no association between performance and expense ratios
  A. good performance was associated with low expense ratios

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  Explanation

  An examination of the relationship between performance and the expense ratio indicated that good performance was associated with low expense ratios; in one way, it is because management expense is money not invested in the portfolio of shares and/or bonds. Expense is necessary however when one needs to shift to better performing stocks according to market changes.

• Question 2459:

  Coats Corp. generates $10,000,000 in sales. Its variable costs equal 85 percent of sales and its fixed costs are $500,000. Therefore, the company's operating income (EBIT) equals $1,000,000. The company estimates that if its sales were to increase 10 percent, its net income and EPS would increase 17. 5 percent. What is the company's interest expense? (Assume that the change in sales would have no effect on the company's tax rate.)

  A. $142,857
  B. $100,000
  C. $857,142
  D. $105,874
  E. $111,584
  A. $142,857

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  Explanation

  Recall that DTL = % change in NI/% change in sales = 0.175/0.10 = 1.75. DTL = (S - VC)/(S - VC - FC - I)

  1.75 = ($10,000,000 - $8,500,000)/($10,000,000 - $8,500,000 - $500,000 - I)

  1.75 = $1,500,000/($1,000,000 - I) $1,500,000 = $1,750,000 - 1.75I I = $142,857. 14.

• Question 2460:

  Mark King, CFA, is valuing Nacho Inc., a food distributor. Nacho is currently selling for $28 per share and has a 3. 0% dividend yield. The risk-free rate is 4%, and the expected return on the market is 8%. King has calculated Nacho's beta to be 1.25. Based on King's analysis, Nacho stock's intrinsic value is $30 per share. King should:

  A. invest in Nacho shares.
  B. not invest in Nacho shares because the required rate of return is less than the expected rate of return.
  C. not invest in Nacho shares because the required rate of return is greater than the expected rate of return.
  A. invest in Nacho shares.

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  Explanation