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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2731:

  Projects L and S each have an initial cost of $10,000, followed by a series of positive cash inflows. Project L has total, undiscounted cash inflows of $16,000, while S has total undiscounted inflows of $15,000. Further, at a discount rate of 10 percent, the two projects have identical NPVs. Which project's NPV will be more sensitive to changes in the discount rate?

  A. Both projects are equally sensitive to changes in the discount rate since their NPVs are equal at all costs of capital.
  B. Neither project is sensitive to changes in the discount rate, since both have NPV profiles which are horizontal.
  C. Project S.
  D. The solution cannot be determined unless the timing of the cash flows is known.
  E. Project L.
  E. Project L.

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  Explanation

  The NPV profile plots a project's NPV against the discount rates. The higher the undiscounted inflows, the steeper the NPV profile, and the steeper the NPV profiles, the more sensitive the project is to discount rate changes.

• Question 2732:

  If one or more numbers in a dataset are negative, which of the following is not always defined?

  A. mean
  B. median
  C. geometric mean
  D. mode
  C. geometric mean

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  Explanation

  The geometric mean involves taking mathematical roots. These operations are not always defined to give real numbers when you are dealing with negative numbers.

• Question 2733:

  Which of the following would be considered an automatic stabilizer?

  I. Federal Reserve policy

  II. government payrolls

  III.

  public works projects

  A. I, III
  B. none of these answers is correct
  C. II, III
  D. I, II, III
  E. I, II
  F. III only
  B. none of these answers is correct

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  Explanation

  An automatic stabilizer is anything that would decrease the government budget surplus during slow economies and increase the surplus during strong economic periods. Federal Reserve policy is not automatic, its directed. Government payrolls do not inherently increase or decrease during economic periods. Similarly, public works projects would not automatically increase due to an economic slowdown.

• Question 2734:

  The Target (optimal) Capital Structure will be the mix of debt, preferred stock, and common equity that will accomplish which of the following items?

  A. Ensures that all debt and preferred dividend payments are met
  B. Maximize the firm's profits
  C. Provides funding for any project that a firm wishes to undertake
  D. Provide the lowest debt cost
  E. Maximize the firm's stock price
  F. Provide the smallest chance of bankruptcy
  E. Maximize the firm's stock price

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  Explanation

  The Target (Optimal) Capital Structure is defined as the percentages of debt, preferred stock, and common equity that will maximize the firm's stock price.

• Question 2735:

  Ned Jameson. CFA, is considering the purchase of a newly issued asset-backed security (ABS) for his fixed income portfolio. According to the broker/dealer offering the bond, the OAS for the issue is 75 basis points (bps). Based on the OAS value, which of the following assumptions can Jameson make about this particular ABS?

  A. The OAS represents the investor's compensation for credit risk, liquidity risk, and option risk.
  B. The bond is trading at a yield that is more than 75 bps higher than a Treasury security with a comparable maturity.
  C. The implied cost of an option embedded in the security is always equal to the difference between the OAS and the Treasury spread.
  B. The bond is trading at a yield that is more than 75 bps higher than a Treasury security with a comparable maturity.

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  Explanation

• Question 2736:

  Given that the risk-free rate of return is 7%, what is the value of a bond with coupon payments of $100 every six months, a final payment of $2,000 in 8 years, and a risk-premium of 5%?

  A. $1,532. 69
  B. $2,320.56
  C. $1,818.40
  D. Not enough information
  E. $1,285. 38
  C. $1,818.40

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  Explanation

  The value of bond is equal to the present value of the stream of coupon payments (which can be thought of as an annuity for a certain number of years) plus the present value of the final payment. The required rate of return on the bond is equal to the risk-free rate of return plus the risk-premium (7+5=12% for the year, 6% for six months). Using appendix C in the book by Reilly and Brown, the present value of the coupons is $100 x 10.106 = $1,010.60. The present value of the final payment is $2,000 x 0.4039 = $807. 80, or $2,000/(1.06^16). The value of the bond is 1010.60 + 807. 80 = $1818.40. Note that many textbooks recommend using the six-month interest rate and doubling the number of yearly periods in making this calculation. Using 6% for 16 periods, the value of the final payment is $787. 40 and the total value of the bond is 1010.60 + 787. 40 = $1,798.

• Question 2737:

  Which of the following defines the investment decision?

  A. Compute the expected value of the stock discounted to the present and compare it to the prevailing market price. If the present value of the expected price exceeds the market price, the particular stock is an attractive investment.
  B. All of these answers
  C. Compute an expected long-run rate of return based on the expected dividend yield plus the expected growth rate. If this expected return exceeds the required rate of return, the particular stock is an attractive investment.
  D. Compute the expected rate of return during the holding period on the basis of the expected value of the stock and the expected dividend. If this expected rate of return exceeds the required rate of return, the particular stock is an attractive investment.
  E. None of these answers
  B. All of these answers

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  Explanation

  The investment decision, i.e., whether or not a particular stock is an attractive investment, is based on all three of these comparisons.

• Question 2738:

  Makeover Inc. believes that at its current stock price of $16. 00 the firm is undervalued in the market. Makeover plans to repurchase 2. 4 million of its 20 million shares outstanding. The firm's managers expect that they can repurchase the entire 2. 4 million shares at the expected equilibrium price after repurchase. The firm's current earnings are $44 million. If management's assumptions hold, what is the expected market price after repurchase?

  A. $16. 00
  B. $17. 26
  C. $20.00
  D. $18.18
  E. $24. 40
  D. $18.18

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  Explanation

  Step 1: Current EPS = $44 million/20 million = $2. 20 per share.

  Step 2: P/E ratio = $16. 00/$2. 20 = 7. 27x.

  Step 3: EPS after repurchase = $44 million/17. 6 million = $2. 50.

  Step 4:Expected market price after repurchase: 7. 27 x $2. 50 = $18.18 per share.

• Question 2739:

  Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting periods.

  A. To reduce the federal income tax liability.
  B. To adhere to the concept of conservatism.
  C. To aid management in the decision-making process.
  D. To match the costs of production with the revenues as earned.
  E. To maximize accounting income.
  D. To match the costs of production with the revenues as earned.

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  Explanation

  If costs benefit more than one accounting period, they should be systematically and rationally allocated to all periods benefited. Matching refers to the process of recognizing expenses over the periods where revenues have benefited from these expenses.

• Question 2740:

  If the cost of a hamburger is $1.99 today, what would it cost in 30 years, assuming the price increases at a rate of 8% per year, compounded annually?

  A. $2. 22
  B. $17. 60
  C. $6. 51
  D. $20.02
  E. $31.48
  D. $20.02

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  Explanation

  Consider the $1.99 as a PV and solve for the FV. On the BAII Plus, press 30 N, 8 I/Y, 1.99 PV, 0 PMT, CPT FV. On the HP12C, press 30 n, 8 i, 1.99 PV, 0 PMT, FV. Make sure the BAII Plus has the P/Y value set to 1.