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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2791:

  Examples of Common Stock Equivalents (CSE's) include all of the following except:

  A. stock options.
  B. treasury stock.
  C. warrants.
  D. convertible preferred stocks that have an effective yield of less than two-thirds of the average Aa corporate bond yield at the time of issuance.
  B. treasury stock.

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  Explanation

  Treasury stock is stock held by the company and therefore is not included as a CSE. The earnings of the shares held by investors would not be affected by the treasury stock.

• Question 2792:

  Which of the following is/are true about the cash conversion cycle?

  I. It increases as the inventory turnover ratio decreases.

  II. It decreases as inventory processing period decreases.

  III. It is directly proportional to the payables payment period.

  IV.

  It increases as the cash ratio decreases.

  A. II, III and IV
  B. I and IV
  C. II and III
  D. I and II
  D. I and II

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  Explanation

  The cash conversion cycle is a measure of how long the cash is tied up in short term loans and credits. These short-term financing items include receivables, inventory and accounts payable. Therefore cash conversion cycle is defined as: CCC = (Average receivables collection period) plus (Average inventory processing time) minus (Average payables payment period). Now, an increase in inventory ratio decreases inventory processing time, lowering the CCC. Also, an increase in the payables payment period decreases the CCC. However, CCC is independent of the cash ratio.

• Question 2793:

  Which of the following factors affect a firm's cost of capital?

  A. Tax rates
  B. Investment Policy
  C. All of these answers
  D. Dividend Policy
  E. The level of interest rates
  F. Capital Structure Policy
  C. All of these answers

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  Explanation

  Each of these factors may affect a firm's cost of capital. As interest rates rise, the cost of debt will also rise forcing firms to pay a higher rate of interest on debt capital (bonds). Tax rates also affect the cost of debt. Furthermore, a lower capital gains tax rate relative to ordinary income tax rates will affect the cost of equity capital relative to the cost of debt capital. Capital structure policy will affect the weighted average cost of capital (WACC), as well as affect the riskiness of both equity and debt capital. A change in the level of capital risk will in turn also affect the WACC. Dividend policy including the level of dividends and stability of dividends will have a direct affect on the cost of equity capital. Finally, a firm's WACC is affected by its investment policy. The types of investments that a firm undertakes and the riskiness of those investments are reflected in the WACC.

• Question 2794:

  Swiss Inc. had the following activities during 1996:

  Acquired 2,000 shares of stock in Molly Inc. for $26,000.

  Sold an investment in General Motors for $35,000 when the carrying value was $33,000.

  Acquired a $50,000, 4-year certificate of deposit from a bank. (During the year, interest of $3,750 was paid to Swiss.)

  Collected dividends of $1,200 on stock investments.

  In Swiss's 1996 statement of cash flows, net cash used in investing activities should be ________.

  A. $37,250
  B. $76,000
  C. $41,000
  D. $39,800
  E. $38,050
  C. $41,000

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  Explanation

  Investing activities include the acquisition and disposal of all long-term assets. Thus, the purchase of shares, sale of shares held as an investment, acquisition of long-term certificate of deposit (not a cash equivalent since long-term) are classified as investing activities and total $41,000 used (-$26,000 +35,000 - 50,000). The receipts of dividends and interest are cash flows from operating activities.

• Question 2795:

  Which of the following factors is an underlying assumption of technical analysis?

  A. Supply and demand is driven by rational and irrational behavior.
  B. The actual shifts in supply and demand cannot be observed in market behavior.
  C. Prices move randomly.
  D. Prices are not determined by supply and demand.
  A. Supply and demand is driven by rational and irrational behavior.

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  Explanation

  Supply and demand is driven by rational and irrational behavior.

• Question 2796:

  While in the managerial training program for a large multinational corporation, Daniel Waite is assigned a one-year rotation in the Mediterranean. Upon arriving at the assignment, he purchases a local (foreign currency) bond with an annual coupon of 8.5 percent for 96. 5. He holds the bond for one year and then sells it for 98.0. Waite is pleased with his return, which he calculates at 10.4%. On the plane ride home, Waite is seated next to his fellow coworker, Penny King, who begins to talk about the depressed local economy and the negative returns she had experienced on her local bond investments over the same period as Waite. She states that her total dollar return on an 8.0 percent annual coupon bond purchased at the same time as Waite's for 95. 0 and sold for 98.0 (at the same time as Waite's) was a disappointing negative 10.737%. Assume that King's calculation is correct and that Waite made some calculation error. Which of the following is closest to Waite's actual total dollar return?

  A. -32. 435%.
  B. -10.363%.
  C. -18.756%.
  D. -11.712%.
  D. -11.712%.

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  Explanation

  Waite forgot to take into account the impact of the percentage change in the dollar value of the foreign currency.

  Using the information provided by King, we can calculate the percentage change in the value of the foreign currency and then calculate Waite's total dollar return. Using the formula for total dollar return of:

  R$= { [ 1+($coupon + VEND- VBEG)/ VBEG] * (1 + g) } - 1,

  -0.10737= { [ 1+(8.0 + 98.0 ?95. 0)/95. 0 ] * (1 + FChange) } - 1

  -0.10737 = { [1.115789] * (1 + FChange) } - 1

  -0.2000 = FChange, or 20.0% depreciation.

  Now, we can calculate Waite's total dollar return.

  R$ Waite= { [ 1+(8.5 + 98.0 - 96. 5)/96. 5 ] * (1 - 0.20) } - 1

  R$ Waite= -11.712%

• Question 2797:

  Which is true for a binomial distribution?

  A. All of these answers are correct
  B. Value of p is equal to 1.50
  C. Probability of success remains the same from trial to trial
  D. There are three or more possible outcomes
  E. None of these answers are correct
  C. Probability of success remains the same from trial to trial

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  Explanation

  The probability of success is a constant in a binomial distribution.

• Question 2798:

  Portfolios

  A. can be switched from one composite to another at any time at the discretion of the investment manager.
  B. can never be switched from one composite to another, so managers must ensure they consult their clients and make appropriate choices.
  C. must not be switched from one composite to another unless documented changes in client guidelines make switching appropriate.
  D. can only be switched from one composite to another at the end of a performance period and only if documented changes in client guidelines make switching appropriate.
  C. must not be switched from one composite to another unless documented changes in client guidelines make switching appropriate.

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  Explanation

  Portfolios must not be switched from one composite to another unless documented changes in client guidelines make switching appropriate. This is a requirement for creation and maintenance of composites.

• Question 2799:

  ________ permits the producers of each nation to concentrate on the things they do best while trading for those things they do least well.

  A. None of these answers
  B. A tariff
  C. A quota
  D. Trade
  D. Trade

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  Explanation

  Trade leads to mutual gains because it allows each country to specialize more fully in the production of those things that it does best.

• Question 2800:

  The Keynesian range (the horizontal range) of a short-run aggregate supply curve illustrates that changes in aggregate demand exert little impact on prices and a great deal of impact on output when

  A. resources in the economy are fully employed.
  B. aggregate demand exceeds aggregate supply.
  C. natural unemployment is present.
  D. substantial excess capacity is present.
  D. substantial excess capacity is present.

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  Explanation

  Below the full employment capacity of the economy, increases in aggregate supply have little effect on the price level. This is the result of the Keynesian assumption that at less than full employment output levels, prices and wages are fixed since they are inflexible in a downward direction.