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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2601:

  Which of the following statements is most correct?

  A. If a company's stock price increases, this increases its cost of equity capital.
  B. The before-tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred stock is riskier than debt.
  C. None of these statements are correct.
  D. If the cost of equity capital is low enough, it may be cheaper to issue common stock than it is to finance projects with retained earnings.
  E. All of these statements are correct.
  B. The before-tax cost of preferred stock may be lower than the before-tax cost of debt, even though preferred stock is riskier than debt.

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  Explanation

  Corporations, which receive a 70 percent exclusion of dividend income from their taxable income, own most preferred stock. Consequently, the before-tax coupons on preferred stock may be lower than the before-tax coupons on debt, despite the fact that preferred stock is riskier than debt. All the other statements are false.

• Question 2602:

  Which of the following is/are true?

  I-. Doubling every single value in a sample doubles the sample median.

  II-. Adding a constant to each value in a sample causes the median to increase by the same constant.

  III-. The median of a sample decreases as the number of observations increases.

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

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  Explanation

  The median of a set with odd number of observations equals the "middle" observation. If the number of observations is even, the median is the mean of the two middle observations. From this, I and II follow. (III) is not necessarily true.

• Question 2603:

  Jack George is evaluating Dunger Inc., a waste management firm. The company has been experiencing a strong 15% growth rate, which is forecasted to continue over the next three years before growth settles down to a sustainable level. Dunger's annual return on equity is expected to be 10%. The company recently paid a dividend of $0.50 per share from reported earnings of $2. 50 per share. George has calculated a 10% weighted average cost of capital for Dunger Inc. The firm has no debt. The company's last reported trade on the New York Stock Exchange was $35 per share. Based on the multi-stage dividend discount model, George should:

  A. not buy the stock because its intrinsic value is $32 per share.
  B. buy the stock because its intrinsic value is $38 per share.
  C. buy the stock because its intrinsic value is $41 per share.
  A. not buy the stock because its intrinsic value is $32 per share.

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  Explanation

• Question 2604:

  What is not a characteristic of an investment company?

  A. per share value is the NAV
  B. invests in a pool of funds
  C. investment management company is voted and approved by the individual investors
  D. can be classified as closed-end or open-end
  E. an investment management company is hired by a board of directors
  C. investment management company is voted and approved by the individual investors

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  Explanation

  An investment advisory firm starts an investment company and selects a board of directors for the fund. Subsequently this board of directors hires the investment advisory firm as the fund's portfolio manager.

• Question 2605:

  When a manager is responsible for the portfolios of pension plans or trusts, the duty of loyalty is owed to the ________.

  A. beneficiaries
  B. none of these answers
  C. stockholders of the firm
  D. investing public
  E. entity who hires the manager
  F. corporation
  G. board of directors
  H. manager's supervisor(s)
  A. beneficiaries

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  Explanation

  The first step in fulfilling a fiduciary duty is to determine what the responsibility is and to who it is owed. Members should take particular care in determining the identity of the "client" to whom the duty of loyalty is owed. In the context of an investment manager managing the portfolios of pension plans or trusts, the client is not the person or entity who hires the manager but, rather, the beneficiaries of the plan or trust. The duty of loyalty is owed to the beneficiaries.

• Question 2606:

  If you owe a debt of $1,000 today and also owe $500 in 24 months, what single payment could you make 12 months from today that would pay off both of these debts, if interest is assessed at 8% per year, compounded monthly?

  A. $751.62
  B. $1,426. 30
  C. $1,500.00
  D. $1,544. 68
  E. $2,041.93
  D. $1,544. 68

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  Explanation

  To solve this question, set the problem up as the sum of two compound interest calculations. Move the $1,000 from today over to month 12 and add it to the $500 brought back from month 24 to month 12. On the BAII Plus, press 12 N, 8 divide 12 = I/Y, 1000 PV, 0 PMT, CPT FV, which yields $1,083. 00. Then press STO 1. Then press 500 FV, CPT PV which yields $461.68. Finally press + RCL 1 = to see the answer. On the HP12C, press 12 n, 8 ENTER 12 divide i, 1000 PV, 0 PMT, FV. Then press STO 1. Then press 500 FV, PV. Finally press RCL 1 + to see the answer.

• Question 2607:

  Allison Coleman, CFA, owns a bond portfolio that includes Bond X, a callable bond with ten years to maturity that is callable at any time beginning one year from today. Coleman's portfolio also includes Bond Y, a noncallable security with ten years to maturity that carries the same credit rating as Bond X. Coleman expects interest rates to drift steadily lower over the next few years. Based on this assumption, Coleman should expect that:

  A. Bond Y will experience a larger decrease in value than Bond X.
  B. Bond X will benefit from positive convexity as rates decline.
  C. the option embedded in Bond X will increase in value.
  C. the option embedded in Bond X will increase in value.

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  Explanation

• Question 2608:

  Two junior portfolio managers at ContraFunds, a hedge fund manager, have been asked to summarize the mechanics of utilizing futures contracts for the firm's training manual. The first manager, Tina Kent, submits a paragraph explaining that administering a futures position will require bringing the margin account balance back to the initial margin level by posting maintenance margin any time the balance falls below the variation margin level. The second manger, Martin Ramsey, submits a paragraph explaining margin requirements are determined according to the daily settlement price which is the average of the last few trades of the day. Are Kent and Ramsey correct or incorrect with regard to their explanation of the mechanics of futures positions?

  A. Only Kent is correct.
  B. Only Ramsey is correct.
  C. Neither is correct.
  B. Only Ramsey is correct.

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  Explanation

• Question 2609:

  If a firm uses discretionary leverage, it must present performance using:

  A. all-cash basis i.e. removing leverage effects.
  B. both actual returns and all-cash basis.
  C. none of these answers.
  D. actual returns.
  B. both actual returns and all-cash basis.

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  Explanation

  For discretionary leverage, both actual returns and all-cash returns must be presented.

• Question 2610:

  On January 1, 1992, Carter Inc. purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10 year life. The equipment was sold December 31, 1996 for 50% of itsoriginal cost. If the equipment's disposition resulted in a reported loss, which of the following depreciation methods did Carter use?

  A. Straight-line.
  B. Double-declining-balance.
  C. Composite.
  D. Sum-of-the-years'-digits
  E. Accelerated.
  A. Straight-line.

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  Explanation

  The straight-line method yields the lowest amount of depreciation for the early part of the depreciable life of the asset. Because only 50% of the original cost was received and straight-line accumulated depreciation equaled 40% of cost ((100%-20%) / 10 years X 5 years( at time of sale, a 10% loss (50%-(100%-40%)) occurs.