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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2521:

  The main purpose of a statement of cash flows of a firm is to provide relevant information about

  A. differences between net income and associated cash receipts and disbursements.
  B. the cash receipts and cash disbursements of an enterprise during a period.
  C. a firm's ability to generate future positive net cash flows.
  D. a firm's ability to meet cash operating needs.
  E. none of these answers.
  B. the cash receipts and cash disbursements of an enterprise during a period.

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  Explanation

  The statement cash flows helps investors, creditors and other users to assess the firm's ability to generate net cash inflows, meet its obligations, pay dividends and obtain external financing.

• Question 2522:

  How much must you deposit today if you wish to have $20,000 in 10 years, assuming that interest accumulates at 9% per year, compounded annually?

  A. $2,000.00
  B. $9,104. 36
  C. $8,448.22
  D. $7,236. 99
  E. $7,103. 49
  C. $8,448.22

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  Explanation

  On the BAII Plus, press 10 N, 9 I/Y, 0 PMT, 20000 FV, CPT PV. On the HP12C, press 10 n, 9 i, 0 PMT, 20000 FV, PV. Note that the answer is displayed as a negative number. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 2523:

  You are examining a group of 6 stocks. Their average annual standard deviations have been 25%, 20%, 15%, 25%, 16%, and 45%. What is the range of annual standard deviations?

  A. 25. 0%.
  B. 15. 0%.
  C. 30.0%.
  D. 29.0%.
  C. 30.0%.

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  Explanation

  The range = the maximum value - the minimum value. Here, we have 45% - 15% = 30%.

• Question 2524:

  Which of the following statements is most correct?

  A. None of these answers are correct.
  B. An increase in fixed costs, (holding sales and variable costs constant) will reduce the company's degree of operating leverage.
  C. If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage.
  D. All of these answers are correct.
  E. An increase in interest expense will reduce the company's degree of financial leverage.
  C. If the company has no debt outstanding, then its degree of total leverage equals its degree of operating leverage.

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  Explanation

  The degree of financial leverage is the percentage change in EPS that results form a given percentage change in earnings before interest and taxes. If a firm has no debt outstanding the degree of financial leverage would be 1.0.

• Question 2525:

  What is the after tax cash flow of the investment?

  A. $52,919.
  B. $35,985.
  C. $26,275.
  D. $42,646.
  D. $42,646.

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  Explanation

  NI + DEP EXP - PRIN PMT = 35,985 + 13,322 - 6,661 = 42,646

• Question 2526:

  A study of the opinion of designers with respect to the primary color most desirable for us in executive offices showed that:

  Primary Color Number of Opinions Red 92 Orange 86 Yellow 46 Green 91 Blue 37 Indigo 46 Violet 2

  What is the probability that a designer does not prefer red?

  A. 0.73
  B. 1.00
  C. 0.77
  D. 0.23
  E. None of these answers
  C. 0.77

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  Explanation

  There are 400 opinions of which 92 prefer red. The other 308 do not prefer red. Therefore the probability of not preferring red is 308/400 = 0.77.

• Question 2527:

  Companies A and B, similar in all respects, recently bought identical securities. However, using the "Management intent" rule, A has classified the securities as "trading" securities while B has categorized them as "available-for-sale" securities. Which of the following statements is/are true as a result of this difference?

  I. A and B will show same assets on their balance sheets.

  II. A will have a higher income volatility than B.

  III.

  A will have a higher cash flow volatility than B.

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

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  Explanation

  Both "trading" and "available-for-sale" securities are reported at their fair market value on the balance sheet. Hence, the reported assets for A and B are not affected by the different classifications. However, changes in the market value of trading securities are considered part of the Income statement while changes in the market value of available-for-sale securities are charged directly to the retained earnings account. This will cause a higher volatility in the income of A. Further, this higher volatility in income leads to a higher volatility in tax payments, thus causing a higher volatility in the cash flows.

• Question 2528:

  Which of the following AIMR Standards states that client transactions must have priority over transactions in which the analyst is a beneficial owner?

  A. V
  B. None of these answers
  C. VII
  D. VI
  B. None of these answers

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  Explanation

  It is Standard IV (B.4) which states that client transactions must have priority over transactions in which the analyst is a beneficial owner so that such personal transactions do not operate adversely to their client's or employer's interests.

• Question 2529:

  Dumb and Dumber Development Company has two mutually exclusive investment projects to evaluate. Assume both projects can be repeated indefinitely. The following cash flows are associated with each project: Time Project A Project B 0-$100,000-$70,000 1 30,000 30,000 2 50,000 30,000 3 70,000 30,000 4-30,000 5-10,000 The project types are equally risky and the firm's cost of capital is 12 percent. What is the EAA of the higher valued project? (Round your final answer to the nearest whole dollar.)

  A. $16,470
  B. $7,433
  C. $11,325
  D. $6,857
  E. None of the answers
  B. $7,433

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  Explanation

  Step 1 Calculate the NPV for both projects:

  A:CF(0) = -100,000; CF(1) = 30,000; CF(2) = 50,000; CF(3) = 70,000; I/YR = 12; solve for NPV = $16,470.

  B:CF(0) = -70,000; CF(1) = 30,000; CF(2) = 30,000; CF(3) = 30,000;CF(4) = 30,000; CF(5) = 10,000; I/YR = 12; NPV = $26,795.

  Step 2 Calculate the EAA for both projects:

  A: N = 3; I/YR = 12; PV = -16,470; FV = 0; solve for PMT = $6,857.

  B: N = 5; I/YR = 12; PV = -26,795; FV = 0; solve for PMT = $7,433.

  The PMT is the EAA for each project. Since Project B has the larger EAA $7,433 is the correct answer.

• Question 2530:

  Two analysts have been asked to submit brief summaries to their supervisor on various risks related to bond investing. Included in these summaries were the following statements from each analyst:

  Analyst A:In a decreasing interest rate environment, both callable and amortizing securities will experience the negative effects of price compression. Analyst B:The reinvestment risk of a portfolio can be reduced by replacing zero coupon

  securities with shorter maturity, amortizing securities such as early tranches of a CMO.

  Identify whether the statements of each analyst are correct or incorrect.

  A. Only Analyst A is correct.
  B. Only Analyst B is correct.
  C. Both analysts are correct.
  A. Only Analyst A is correct.

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  Explanation