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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2781:

  A firm needs to raise $123 million for a proposed capital expansion project. It's earnings breakpoint is $178 million and it is committed to maintaining a debt-to-equity ratio of 1.2. Its after-tax cost of debt is6. 2% and the required rate of return on its equity is 13. 2%. The firm's marginal cost of capital for the project equals ________.

  A. 7. 12%
  B. 6. 89%
  C. 9.38%
  D. 12. 19%
  C. 9.38%

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  Explanation

  Since the proposed capital requirement of $123 million is less than the earnings breakpoint, the firm's marginal cost of capital for the project equals its WACC. With D/E = 1.2, E/(D+E) = 1/(1+1.2) = 0.455. The WACC then equals 0.455*13. 2%

  + 0.545*6. 2% = 9.38%.

• Question 2782:

  Standard III includes rules on which of the following?

  A. Professional Misconduct
  B. All of these answers
  C. Prohibition against Plagiarism
  D. Obligation to Inform Employer of Code and Standards
  E. Use of Professional Designation
  F. None of these answers
  D. Obligation to Inform Employer of Code and Standards

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  Explanation

  Standard III deals with Obligation to Inform Employer of Code and Standard, Duty to Employer, Disclosure of Conflicts to Employer, Disclosure of Additional Compensation Arrangements and Responsibilities of Supervisors.

• Question 2783:

  Tamira Scott, CFA, manager of an index fund, needs to raise money soon (although not immediately) to pay taxes. Although she believes in the efficient market hypothesis (EMH), she remembers that there are a few anomalies she may take advantage of to earn higher returns. Which of the following actions is most unlikely to provide excess returns? Scott should purchase stocks in:

  A. companies with low price/earnings ratios and/or with high book to market ratios.
  B. companies that announce stock splits.
  C. companies not followed by analysts.
  D. mid-December, with the intent to sell in early January.
  B. companies that announce stock splits.

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  Explanation

  According to event studies of the semi-strong form of the EMH, stock splits do not have a short run or long run impact on returns. This finding supports the EMH. The other choices are considered anomalies. That is, they reject the semi-strong form of the EMH, and suggest that investors can earn excess returns by exploiting these anomalies. The January anomaly (from a time-series test of the semi- strong EMH) suggests that investors can earn excess returns by buying stocks in December and selling them in the first week of January, due to tax-induced trading at year-end. Cross-sectional tests of the semi-strong form EMH have shown that low P/E stocks, stocks of firms neglected by analysts, and stocks of firms with high book to value ratios can produce superior returns.

• Question 2784:

  Becker Glass Corporation expects to have earnings before interest and taxes during the coming year of $1,000,000, and it expects its earnings and dividends to grow indefinitely at a constant annual rate of 12. 5 percent. The firm has $5,000,000 of debt outstanding bearing a coupon interest rate of 8 percent, and it has 100,000 shares of common stock outstanding. Historically, Becker has paid 50 percent of net earnings to common shareholders in the form of dividends. The current price of Becker's common stock is $40, but it would incur a 10 percent flotation cost if it were to sell new stock. The firm's tax rate is 40 percent. What is Becker's cost of newly issued stock?

  A. 17. 5%
  B. 16. 5%
  C. 16. 0%
  D. 17. 0%
  E. 18.0%
  A. 17. 5%

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  Explanation

  Cost of new common equity:

  k(e) = $1.80/$40.00(1-.10) + 0.125 = 17. 5%.

  The dividend of $1.80 was derived by:

  EBIT$1,000,000

  Interest 400,000

  EBT$600,000

  Taxes (40%)240,000

  Net income$360,000

  EPS(1) = $360,000/100,000 = $3. 60.

  D(1) = $3. 60(0.5) = $1.80.

• Question 2785:

  The chairman of the House Ways and Means committee, who has major sway on spending programs, has been researching the economy and believes that the nation is heading for an inflationary spiral. Inflation is currently not considered a problem. He proposes a fiscal policy solution. Which of the following would not impede his proposition from alleviating the problem?

  I.congressional opposition to spending cuts II.difficulty determining the degree of spending cuts required III.correctly choosing between tax hikes and spending cuts IV.impact lag V.recognition lag

  A. III, IV
  B. I, II, IV, V
  C. II, IV, V
  D. II, IV
  E. I, II, III, IV, V
  F. I, II, V
  B. I, II, IV, V

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  Explanation

  I, II, IV, and V are classic problems with fiscal policy. III is incorrect because in terms of fiscal policy tax or spending measures are interchangeable.

• Question 2786:

  Which of the following equations correctly illustrates the calculation of the Weighted Average Cost of Capital (WACC)?

  A. None of these answers
  B. {{Percentage of debt* [coupon on outstanding debt * (1 - combined state/federal tax rate)]} + {percentage of preferred stock * [annual preferred dividend/(required rate of return)]} + {percentage of common equity * cost of common equity}}
  C. {{Percentage of debt * [coupon on outstanding debt * (1 + combined state/federal tax rate)]} + {percentage of preferred stock * [annual preferred dividend/(offering price - flotation costs)]} + {percentage of common equity * cost of common equity}}
  D. {{Percentage of debt* [yield to maturity of outstanding debt * (1 - combined state/federal tax rate)]} + {percentage of preferred stock * [annual preferred dividend/(offering price - flotation costs)]} + {percentage of common equity * cost of common equity}}
  E. {Average cost of equity + average cost of debt + average cost of preferred stock}* subjective divisor
  F. {Percentage of debt * [coupon on outstanding debt * (1 + combined state/federal tax rate)]} + {percentage of preferred stock * [annual preferred dividend/(offering price + flotation costs)]} + {percentage of common equity * cost of common equity}}
  D. {{Percentage of debt* [yield to maturity of outstanding debt * (1 - combined state/federal tax rate)]} + {percentage of preferred stock * [annual preferred dividend/(offering price - flotation costs)]} + {percentage of common equity * cost of common equity}}

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  Explanation

  The Weighted Average Cost of Capital is a fundamentally important concept within the field of corporate finance, and the CFA candidate should have a complete understanding of both the mechanics of the WACC figure, as well as the relationships between its components. In calculating the cost of outstanding common equity, there exist three distinct methods, the Dividend-Yield-plus- Growth-Rate, or Discounted Cash Flow approach, the Capital Asset Pricing Model (CAPM), and the Bond-Yield-plus-Risk-Premium approach. It is important for the CFA candidate to have a complete understanding of each method, along with their weaknesses and advantages.

• Question 2787:

  Kulwicki Corporation wants to determine the effect of an expansion of its sales on its operating income (EBIT). The firm's current degree of operating leverage is 2. 5. It projects new unit sales to be 170,000, an increase of 45,000 over last year's level of 125,000 units. Last year's EBIT was $60,000. Based on a degree of operating leverage of 2. 5, what is this year's expected EBIT with the increase in sales?

  A. $175,000
  B. $60,000
  C. $114,000
  D. $90,000
  E. $100,000
  C. $114,000

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  Explanation

  Set up the DOL equation, letting x be the unknown new EBIT:

  Let x = New EBIT.

  DOL(Q) = % change EBIT/ % change Sales

  % change in sales = 45000/125000 = 36%

  2. 5 = (x - $60,000/$60,000) / .36

  2. 5 (0.36) = ((x - $60,000)/$60,000)

  0.90 = (x - $60,000/$60,000)

  $54,000 = x - $60,000

  x = $114,000.

  New EBIT = $114,000.

• Question 2788:

  The slope coefficient in a regression measures:

  A. The significance of the regression line.
  B. The percentage change in the dependent variable caused by a 1% change in the independent variable.
  C. The rate at which the dependent variable changes with respect to the independent variable.
  D. The change in the independent variable caused by a unit change in the dependent variable.
  C. The rate at which the dependent variable changes with respect to the independent variable.

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  Explanation

  In a univariate regression, the slope coefficient gives the change in the dependent variable caused by a unit change in the independent variable. It thus measures the rate at which the dependent variable changes with respect to the independent variable.

• Question 2789:

  At which stage in an industry life cycle would profit margins most likely be at their highest?

  A. mature growth
  B. pioneering development
  C. rapid accelerating growth
  D. deceleration of growth and decline
  E. stabilization and market maturity
  C. rapid accelerating growth

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  Explanation

  In this stage, there are a limited of number of firms for the product/service and demand is very high enabling the firm to experience high markups.

• Question 2790:

  Firms A and B have the same fixed costs in producing widgets. However, firm A charges 15% more than firm B for a widget while its variable costs per widget are 12% lower than those of B. If firm A sells a widget for 35% above its variable costs, the break-even point for B is ________ times higher than that for A.

  A. 2. 0
  B. 9.2
  C. 3. 3
  D. 2. 5
  B. 9.2

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  Explanation

  The break-even quantity, Q, is given by Q = FC/(P - V), where FC = total fixed costs, P = average sale price per unit and V = average variable cost per unit. You're given that FCA = FCB, PA = 1.35VA, PA = 1.15PB and VA = 0.88VB.

  Therefore, PB = (1.35/1.15)VA = 1.174VA and VB = (1/0.88)VA = 1.136V A.

  This gives QA/QB = FC(PA-VA)/FC(PB-VB) = (PB - VB)/(PA - VA) = (1.174 - 1.136)/(1.35 - 1) = 0.109.

  Thus, the break-even point for B is (1/0.109) = 9.21 times that for A.