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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2461:

  What is the effective date for compliance with the AIMR-Performance Presentation Standards for discretionary fee-paying portfolios meeting the definition of a wrap-fee account?

  A. January 1, 1997
  B. July 1, 1994
  C. July 1, 1995
  D. January 1, 1995
  C. July 1, 1995

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  Explanation

  From July 1, 1995, going forward, all of the firm's actual discretionary fee-paying portfolios meeting the definition of a wrap-fee account must be presented in composites that adhere to the Standards.

• Question 2462:

  Calculate the weighted average cost of capital (WACC) for a firm with the following capital structure:

  10% Preferred stock

  50% Common equity

  40% Debt

  Tax rate 40%

  Before tax cost of debt 12%

  The cost of common equity is 15%

  Cost of preferred stock 10%

  A. 7. 2%
  B. 12. 33%
  C. 11.38%
  D. 7. 98%
  E. 13. 3%
  C. 11.38%

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  Explanation

  A firm's weighted average cost of capital (WACC) = the cost of each component of capital weighted by the proportion of that component in the firm's capital structure. In this case WACC = (after tax cost of debt x 40%) + (cost of common equity x 50%) + (cost of preferred stock x 10%) = (12% x 60% x 40%) + (15% x 50%) + (10% x 10%) = 2. 88% + 7. 5% + 1% = 11.38%.

• Question 2463:

  Which of the following is/are true about the PPS?

  I. Accounts of clients that are not currently under the firm's management should not be included in the presentation of the historical performance results.

  II. Compliance with PPS cannot be met on a composite-by-composite basis, only on a firm-wide basis.

  III.

  The PPS require that firms report, at a minimum, at least the most recent 5 years (or since inception, if less than 5 years) of performance results.

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

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  Explanation

  The PPS require that firms report, at a minimum, at least the most recent 10 years (or since inception, if less than 10 years) of performance results. If this requirement cannot be met, exact reasons for this should be disclosed. Historical results should be presented as is to give a fair representation of past performance. Dropping portfolios selectively can bias the results. Also, Compliance with PPS cannot be met on a composite-by-composite basis, only on a firm-wide basis.

• Question 2464:

  Under an inflationary environment with stable inventories, a firm may change to LIFO from FIFO due to which of the following reason(s)?

  I. To allow earnings manipulation.

  II. To improve the reported current ratio.

  III. To reduce tax drain on cash.

  IV.

  Show a more accurate representation of reported assets than FIFO.

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

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  Explanation

  Under LIFO, inventory is understated and hence, current ratio is understated under normal, inflationary conditions. At the same time, COGS is larger than under FIFO due to rising prices, reducing the taxable income and leading to lower taxes. Further, firms can manipulate earnings under LIFO by changing purchasing patterns at the end of an accounting period. This happens because the LIFO COGS is determined by the prices of the latest goods purchased.

• Question 2465:

  What is your monthly payment, beginning next month, on a $15,000 loan, if you pay it off over 48 months and the interest rate is 2. 9% per year, compounded monthly?

  A. $582. 76
  B. $3,772. 68
  C. $331.35
  D. $324. 51
  E. $306. 88
  C. $331.35

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  Explanation

  On the BAII Plus, press 48 N, 2. 9 divide 12 = I/Y, 15000 PV, 0 FV, CPT PMT. On the HP12c, press 48 n, 2. 9 ENTER 12 divide i, 15000 PV, 0 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 2466:

  If the 50-day moving average for the stock price crosses the 150-day moving average from below on heavy volume, technical analysts would consider this to be

  A. inconsequential.
  B. a sign of a flat trend.
  C. a bullish sign.
  D. a bearish sign.
  C. a bullish sign.

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  Explanation

  Technical analysts use moving averages of past stock prices as indicators of long-term trends. When the 50-day moving average crosses the 150-day moving average from below on heavy volume, this is viewed as a bullish sign possibly signaling a reversal in the declining price trend. In order for such a crossing to occur, the stock price must be going though a recent uptrend, which is pulling up the 50-day moving average faster than the 150-day moving average.

• Question 2467:

  Horace Lance, CFA, states that the efficient market hypothesis and its rigorous testing have yielded many benefits to investors. Lance makes the following statements concerning an efficient market.

  Statement I:The Efficient Market Hypothesis (EMH) assumes that changes in security prices occur in a random fashion.

  Statement 2:Portfolio managers should reduce trading turnover of client accounts.

  Statement 3:The EMH establishes that the expected rate of return is the risk-free rate plus a risk premium that is the security beta times the market price of risk.

  Which of Lance's statements is least likely to be correct?

  A. Statement 1
  B. Statement 2 C. Statement 3
  C

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  Explanation

• Question 2468:

  Bell Brothers has $3,000,000 in sales. Its fixed costs are estimated to be $100,000, and its variable costs are equal to fifty cents for every dollar of sales. The company has $1,000,000 in debt outstanding at a before-tax cost of 10 percent. If Bell Brothers' sales were to increase by 20 percent, how much of a percentage increase would you expect in the company's net income?

  A. 15. 66%
  B. 18.33%
  C. 19.24%
  D. 23. 08%
  E. 21.50%
  D. 23. 08%

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  Explanation

  Step 1 Find Degree of Total Leverage (DTL)

  DTL = (S-VC)/(S-VC-F-I) = ($3,000,000-$1,500,000)/($3,000,000-$1,500,000-$100,000-$100,000 = 1.1538.

  Step 2 Find percentage increase in net income:

  %Change NI = (0.20)(DTL) = (0.20)(1.1538) = 0.2308 = 23. 08%.

• Question 2469:

  John's great-grandfather left him $100 when he died 100 years ago in an account paying 5% per year, compounded annually. How much would the account hold for John now?

  A. $12,504. 51
  B. $13,150.13
  C. $14,229.78
  D. $8,407. 76
  E. $14,113. 90
  B. $13,150.13

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  Explanation

  On the BAII Plus, press 100 N, 5 I/Y, 100 PV, 0 PMT, CPT FV. On the HP12C, press 100 n, 5 i, 100 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2470:

  Shelby Inc. is considering two projects which have the following cash flows: Project 1Project 2 Time Cash Flows Cash Flows 0-$2,000-$1,900 1500 1,100 2700 900 3800 800 41,000 600 51,100 400 At what cost of capital would the two projects have the same net present value?

  A. 5. 98%
  B. 5. 85%
  C. 6. 40%
  D. 6. 70%
  E. 4. 73%
  B. 5. 85%

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  Explanation

  Subtract Project 2 cash flows from Project 1 cash flows: CF(0) = -100 CF(1) = -600 CF(2) = -200 CF(3) = 0 CF(4) = 400 CF(5) = 700 Put these in the cash flow register and solve for the IRR = 5. 85%.