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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2771:

  Consider the following information:

  30-day treasury rate (Risk Free rate) 6. 4%

  Company XYZ Bond yield 11.2%

  Beta 1.1

  Risk Premium 3. 5%

  Credit Rating B

  Marginal Tax Rate 40% Calculate Company XYZ's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach.

  A. 17. 6%
  B. 15. 2%
  C. 14. 7%
  D. 8.82%
  E. 16. 17%
  F. 11.36%
  C. 14. 7%

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  Explanation

  To estimate a firm's cost of retained earnings using the Bond-Yield-plus-Risk-Premium approach, simply take the company's bond yield and add the risk premium. In this case the cost of retained earnings = 11.2% + 3. 5% = 14. 7%.

• Question 2772:

  Which of the following calculations can be successfully performed without knowing the required rate of return?

  I.Net Present Value II.Internal Rate of Return III.Modified Internal Rate of Return IV.Time-Weighted Rate of Return V.Dollar-Weighted Rate of Return VI.Valuing a common stock using the Dividend Discount Model VII.Valuing a common stock using the Free-Cash-Flow-to-Equity Model

  A. II, V, VI
  B. II, IV, V
  C. I, II, VI
  D. II, IV, V, VI, VII
  E. II, IV, VI, VII
  B. II, IV, V

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  Explanation

  Of the financial figures listed, only the Internal Rate of Return, which is also known as the "Dollar-weighted Rate of Return," and the Time-Weighted Rate of Return, can be calculated without knowing the required rate of return.

• Question 2773:

  The following information applies to a company's preferred stock: Current price $48.00 per share Par value $50.00 per share Annual dividend $3. 50 per share The company issued the preferred stock at par and incurred a 10% floatation cost. If the company's marginal corporate tax rate is 34%, what is the after-tax cost of preferred stock at the time of issue?

  A. 4. 6%
  B. 5. 1%
  C. 7%
  D. 7. 8%
  E. 7. 3%
  F. 3. 5%
  D. 7. 8%

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  Explanation

  The cost of preferred stock is calculated as the preferred stock dividend divided by the net issuing price. The dividend for this preferred stock is $3. 50, and the net issuing price was $45. 00. Thus the cost of preferred stock is 3. 5 divided by 45 or 7. 8%. There are no tax savings associated with the use of preferred stock, therefore no tax adjustments are made when calculating the cost.

• Question 2774:

  Clay Industries, a large industrial firm, is evaluating the sales of its existing line of coiled machine tubing. In their analysis, the operating managers of Clay Industries have identified the following information related to the coiled machine tubing division and its product: Average variable cost of $100.50 Average sales price of $167. 75 Breakeven quantity of 15,985 units Which of the following best describes the total fixed cost for this product?

  A. $1,114,800
  B. The calculation of the total fixed production costs for this product cannot be calculated from the information given.
  C. $875,000
  D. None of these answers is correct.
  E. $925,000
  F. $1,075,000
  F. $1,075,000

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  Explanation

  To calculate the breakeven quantity for a product, use the following equation: {Fixed operating costs/[avg. sales price per unit - variable cost per unit]}. To determine the total fixed production cost of this product, we must rearrange the standard equation using algebra, in a manner such that the resulting equation resembles the following: [$167. 75 - $100.50]

  * 15,985 units = X. Solving for X, which represents the total fixed production costs, yields an answer of $1,075,000.

• Question 2775:

  Which of the following is not a current liability?

  A. Allowance for Uncollectible Accounts
  B. Wages Payable
  C. Unearned Revenue
  D. Notes Payable
  A. Allowance for Uncollectible Accounts

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  Explanation

  Allowance for Uncollectible Accounts is a contra account to Accounts Receivable, both of which are reported in the current asset section of the balance sheet.

• Question 2776:

  Chandler Communications' CFO has provided the following information:

  *

  The company's capital budget is expected to be $5,000,000.

  *

  The company's target capital structure is 70 percent debt and 30 percent equity.

  *

  The company's net income is $4,500,000. If the company follows a residual dividend policy, what portion of its net income should it pay out as dividends this year?

  A. 66. 67%
  B. 40.00%
  C. 33. 33%
  D. 60.00%
  E. 50.00%
  A. 66. 67%

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  Explanation

  $5,000,000 x 0.3 = $1,500,000 of retained earnings needed to fund the capital budget. $4,500,000 - $1,500,000 = $3,000,000 of net income available for dividends. Dividend payout ratio = $3,000,000/$4,500,000 = 0.6667, or 66. 67%.

• Question 2777:

  Assume the following information about a publicly traded utility company:

  Next annual dividend: $2. 10 Earnings per share next year: $2. 91 Anticipated growth rate: 7. 5% per year Required rate of return: 10.5% per year

  What is the expected earnings multiplier for this utility company?

  A. 24. 05
  B. None of these answers is correct.
  C. 13. 30
  D. 26. 60
  E. 46. 20
  F. 75. 25
  A. 24. 05

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  Explanation

  To determine the earnings multiplier (i.e. the price-to-earnings ratio) for an individual company, use the following formula:

  P/E = [(d1 / e1) / (k - g)]

  Where: P/E = the earnings multiplier, d1 / e1 = the dividend payout ratio at t1, k = the required rate of return, and g = the anticipated future growth rate. In this example, all of the necessary information has been provided, but some rearranging

  is necessary. Specifically, the dividend payout ratio must be determined. This figure is found as follows:

  Dividend payout ratio = [$2. 10 / $2. 91] = 0.721649, or 72. 16%

  Now that the dividend payout ratio has been determined, we can solve for the appropriate earnings multiplier. The calculation of this figure is found as follows:

  P/E = [0.7216 / (0.105 - 0.075)] = 24. 05

  This is a relatively high multiple for a utility company growing by 7. 5% per year. (Although this figure is not completely beyond the realm of reason.) An analyst examining this stock would likely regard this earnings multiplier with some degree

  of caution. Further analysis would probably be warranted.

• Question 2778:

  Which of the following is/are true about project risk analysis?

  I. Stand-alone risk is measured by the variability of the projects expected returns.

  II. Corporate risk measures the impact of the project's risk on the company's stock price variability.

  III.

  Market risk measures the impact of the project on the stock's unsystematic risk.

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

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  Explanation

  Standalone risk evaluates the risk of a project ignoring all portfolio aspects by looking at the variability of the project's projected returns. The corporate risk of a project is measured by the project's impact on the uncertainty about the firm's future earnings. The market risk of a project is measured by the project's impact on the systematic risk of the firm's stock.

• Question 2779:

  Bartel Corp. has decided to build a new manufacturing facility in a foreign country where production costs will be considerably less than costs at Bartel's aging domestic plant. Bartel expects the increased profits from this off-shore facility will completely pay off the cost of construction within seven years. Bartel hopes to finance the new facility with a single debt issue with the lowest possible coupon rate. The form of borrowing best suited to this project would most likely be:

  A. medium-term notes (MTN).
  B. debentures with a negative pledge clause
  C. secured mortgage bonds.
  C. secured mortgage bonds.

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  Explanation

• Question 2780:

  A random variable, X, has a mean of 10 and a standard deviation of 15. Another random variable, Y, is defined by Y = 2X + 3. Then, which of the following is/are true? I. The mean of Y is 33. II. The variance of Y is 30. III. The standard deviation of Y is 33. IV. X and Y are perfectly correlated.

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

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  Explanation

  The mean of Y is 2*10 + 3 = 23. The standard deviation of Y is 2*15 = 30. Its variance is then equal to 30^2 = 900. Finally, since Y is a linear multiple of X, X and Y are perfectly correlated (positively, in this case)