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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 271:

  Suppose you need $1,500 in 15 months. How much must you deposit today, if the deposit will earn interest at 8% per year, compounded monthly?

  A. $472. 86
  B. $1,249.93
  C. $1,357. 71
  D. $291.77
  E. $341.55
  C. $1,357. 71

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  Explanation

  On the BAII Plus, press 15 N, 8 divide 12 = I/Y, 0 PMT, 1500 FV, CPT PV. On the HP12C, press 15 n, 8 ENTER 12 divide i, 0 PMT, 1500 FV, PV. Make sure the BAII Plus has the P/Y value set to 1.

• Question 272:

  Which of the following statements about the cost of capital is TRUE?

  A. New common equity used to finance projects is usually dilutive.
  B. The component cost of retained earnings equals the required rate of return on new stock.
  C. Using the marginal cost of capital (MCC) is superior to the weighted average cost of capital (WACC) because the MCC assumes different risks across projects.
  D. A firm can shift its retained earnings breakpoint by changing the dividend policy.
  D. A firm can shift its retained earnings breakpoint by changing the dividend policy.

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  Explanation

  The firm can shift the break point of the MCC schedule by changing its payout ratio through the dividend policy. Remember that the dividend payout ratio is in the numerator of the calculation that dictates the breakpoint between lower cost

  internally generated equity (retained earnings) and higher cost externally generated equity (common stock).

  The other choices are false. New common equity is not by definition dilutive. However, if the firm does not earn the cost of new common equity on the portion of the investment that is financed with the new issue, the firm's earnings per share

  will fall. The MCC is the cost of the last dollar raised by the company and assumes constant risk across projects. The component cost of retained earnings equals the required rate of return on existing stock.

• Question 273:

  Which of the following AIMR Standards states that a financial analyst must consider the suitability of an investment for each client or portfolio before undertaking investment action?

  A. IV (B.2)
  B. III E
  C. none of these answers
  D. III D
  A. IV (B.2)

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  Explanation

  Standard IV (B.2) - Portfolio Investment Recommendations and Actions states: "Members shall consider the appropriateness and suitability of investment recommendations or actions for each portfolio or client. Members shall not make a recommendation unless they reasonably determine that the recommendation is suitable to the client's financial situation, investment experience and investment objectives."

• Question 274:

  If you have $5,000 in an account today and withdraw $2,000 in 3 years, how much can you withdraw from the account in 5 years, if the account earns interest at 8% per year, compounded annually?

  A. $3,000.00
  B. $5,013. 84
  C. $4,407. 98
  D. $5,714. 93
  E. $2,000.00
  B. $5,013. 84

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  Explanation

  The way to approach this problem is to find the PV today of the $2,000 amount, determine the difference between this amount and the original $5,000 amount, and then move this remaining amount to the 5 year point. On the BAII Plus, press 3 N, 8 I/Y, 2000 FV, 0 PMT, CPT PV. Then press + 5000 =. Then press PV, 5 N, CPT FV to see the answer. On the HP12C, press 3 n, 8 i, 2000 FV, 0 PMT, CPT PV. Then press 5000 +. Then press PV, 5 n, FV to see the answer. Make sure the BAII Plus has the P/Y value set to 1.

• Question 275:

  Why do the corporation's directors declare stock dividends?

  A. to increase the number of shares outstanding
  B. all of these answers are correct
  C. to keep the market value of the company's stock affordable
  D. to provide tangible evidence of management's confidence in the company's strong performance
  B. all of these answers are correct

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  Explanation

  Declaring a stock dividend will increase the number of shares outstanding and thereby keep the per share price low enough to be an attractive investment. Stock dividends may also show the company management's confidence in the present and future performance of the company.

• Question 276:

  Pamela Burke is a cotton farmer in Texas. Her crop will be ready for harvest in three months, but Burke does not believe prices will remain at their current level. Burke contacts Brooke Anderson, a derivatives dealer, to negotiate a forward contract. Anderson agrees to be the counter party to a forward contract that will eliminate Burke's exposure to the price of cotton. The contract is structured as a nondeliverable forward with a contract price of S47. If the price of cotton is $49 in three months, which counter party will be exposed to the greater amount of credit risk and which counter party will make a payment?

  A. Burke will be exposed to greater credit risk, and Anderson will make a payment.
  B. Anderson will be exposed to greater credit risk, and Burke will make a payment.
  C. Burke will be exposed to greater credit risk, and Burke will make a payment.
  B. Anderson will be exposed to greater credit risk, and Burke will make a payment.

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  Explanation

• Question 277:

  The percentage mix of debt, preferred stock, and common equity that will maximize a firm's stock price is known as:

  A. Marginal cost of capital
  B. Weighted average cost of capital (WACC)
  C. After tax cost of capital
  D. Marked to market value of equity
  E. Target (Optimal) Capital Structure
  E. Target (Optimal) Capital Structure

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  Explanation

  The target or optimal capital structure of a firm is that percentage mix of debt, preferred stock, and common equity that will maximize the firm's stock price.

• Question 278:

  A price level at which the supply of stock is expected to increase significantly is best described as which of the following?

  A. Resistance level.
  B. Rotation price.
  C. Reversal level.
  D. None of these answers is correct.
  E. Support level.
  A. Resistance level.

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  Explanation

  Technical analysts frequently examine historical price information to determine important "support" and "resistance" levels. A support level is a price range at which the demand for a stock is expected to increase, i.e. buying pressure will increase forcing the stock price upward, or will prevent it from moving down. A resistance level is a price range at which the supply of a stock is expected to increase significantly, forcing the price of the stock down, or preventing it from advancing.

  "Rotation price" and "reversal level" are largely fictitious terms.

• Question 279:

  When compared to a traditional mutual fund, an ETF will most likely offer:

  A. better risk management
  B. less portfolio transparency
  C. higher exposure to capital gains distribution taxes.
  A. better risk management

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  Explanation

• Question 280:

  The value of an existing single-family home used for residential purposes will most likely be calculated using the:

  A. cost approach.
  B. income approach
  C. sales comparison approach
  C. sales comparison approach

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  Explanation