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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2811:

  Sandy Hart, CFA, is evaluating the possible purchase of an apartment building. As part of her research, Hart found the following data on three comparable properties:

  

  The market cap rate that Hart would be willing to pay for the apartment building is closest to:

  A. 0.125
  B. 0.143
  C. 0.145
  C. 0.145

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  Explanation

• Question 2812:

  Which of the following statements is true?

  A. There are two general approaches to the security valuation process: the top-down, three-step approach, and the bottom-up stock valuation approach. Advocates of the top-down, three-stepapproach believe that the economy and the industry effect have a significant impact on total returns for individual stocks.
  B. There are two general approaches to the security valuation process: the bottom-up stock valuation approach, and the horizontal, two-step approach. Advocates of the horizontal, two-step approach believe that the economy and the industry effect have a significant impact on total returns for individual stocks.
  C. There are two general approaches to the security valuation process: the top-down, two-step approach, and the horizontal, four-step approach. Advocates of the top-down, two-step approach believe that the economy and the industry effect have a significant impact on total returns for individual stocks.
  D. There are three general approaches to the security valuation process: the top-down, four-step approach, the bottom-up stock valuation approach, and the horizontal, three-step approach. Advocates of the horizontal, three-step approach believe that the economy and the industry effect have a significant impact on total returns for individual stocks.
  A. There are two general approaches to the security valuation process: the top-down, three-step approach, and the bottom-up stock valuation approach. Advocates of the top-down, three-stepapproach believe that the economy and the industry effect have a significant impact on total returns for individual stocks.

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  Explanation

  While advocates of the top-down, three-step approach believe that the industry effect and the economy have a significant impact on total returns for individual stocks, advocates of the bottom-up stock valuation approach believe that is possible to find stocks that are undervalued relative to their market prices, and that these stocks will provide superior returns regardless of the market or industry outlook.

• Question 2813:

  Suppose 1,600 of 2,000 registered voters sampled said they planned to vote for the Republican candidate for president. Using the 0.95 degree of confidence, what is the interval estimate for the population proportion (to the nearest tenth of a percent)?

  A. 77. 7% to 82. 3%
  B. 78.2% to 81.8%
  C. 69.2% to 86. 4%
  D. None of these answers
  E. 76. 5% to 83. 5%
  B. 78.2% to 81.8%

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  Explanation

  Interval estimate can be found from p +/- z[p(1-p)/n]^0.5. Here we have n = 2000, p = 1600/2000 = 0.8 and z = 1.96 (for 95%). Therefore 0.8 +/- 1.96*0.008944 and we get 0.7825 and 0.8175.

• Question 2814:

  Texas Products Inc. has a division, which makes burlap bags for the citrus industry. The unit has fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month. If the variable cost per bag is $2. 00, what price must the division charge in order to break even?

  A. $2. 47
  B. $3. 15
  C. $2. 24
  D. $2. 00
  E. $2. 82
  C. $2. 24

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  Explanation

  Total costs = $10,000 + $2(42,000) = $94,000. Price = $94,000/42,000 = $2. 24.

• Question 2815:

  Which of the following is/are true?

  I. Discounted payback period and simple payback period can produce conflicting project rankings.

  II. Independent projects are mutually exclusive.

  III.

  The payback period rule ignores cash flows beyond the payback period.

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

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  Explanation

  Independent projects are ones whose cash flows are not dependent on each other while mutually exclusive projects are those which cannot be undertaken simultaneously. It is not necessary for independent projects to be mutually exclusive or vice versa.

• Question 2816:

  Van Slyke Inc. has $5,000,000 in assets, and currently has no debt--it is financed entirely with 200,000 shares of common stock, each of which trades at $25 per share. The firm's EBIT is expected to be $1,250,000 at year-end (i.e., at t=1). The corporate tax rate is 40 percent. Van Slyke expects to pay out a dividend at year-end which is 50 percent of its net income. The company estimates that its earnings and dividends grow at a constant rate of 3 percent a year. The company is considering a recapitalization where they would issue $1,000,000 of debt at a before- tax cost of 10 percent. The proceeds from thedebt issued would be used to repurchase shares of the company's stock at $25 per share. The company's investment bankers estimate that the cost of equity capital would be 16 percent after the recapitalization. What would you expect the company's stock price to be immediately following the recapitalization? Assume that the dividend has not yet been paid.

  A. $27. 25
  B. $33. 17
  C. $12. 15
  D. $16. 59
  E. $20.98
  D. $16. 59

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  Explanation

  Step 1 Find EPS:

  EBIT$1,250,000

  Interest expense100,000 = 0.10($1,000,000)

  Earnings before taxes$1,150,000

  Taxes (40%)460,000

  Net income$690,000

  Shares purchased = $1,000,000/$25 = 40,000.

  Shares remaining = 200,000 - 40,000 = 160,000.

  EPS = $690,000/160,000 = $4. 3125.

  Step 2 Find D1:

  EPS(1)P/o = D1

  $4. 3125 (0.50) = $2. 1563.

  Step 3 Find Po:

  ks = D1/Po + g

  0.16 = $2. 1563/Po + 0.03 Po = $16. 59.

• Question 2817:

  Which of the following statements is most correct?

  A. All of these answers are correct.
  B. An increase in the risk-free rate is likely to decrease the marginal cost of both debt and equity financing.
  C. The WACC is calculated on a before-tax basis.
  D. None of these answers are correct.
  E. The WACC (Weighted Average Cost of Capital) for a given capital budget level is a weighted average of the marginal cost of each relevant component which makes up the firm's target capital structure.
  E. The WACC (Weighted Average Cost of Capital) for a given capital budget level is a weighted average of the marginal cost of each relevant component which makes up the firm's target capital structure.

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  Explanation

  A value-maximizing firm will establish a target (optimal) capital structure and then raise new capital in a manner that will keep the actual capital structure on target over time. The target proportions of debt, preferred stock, and common equity, along with the component cost of capital, are used to calculate the firm's WACC.

• Question 2818:

  The portion of the insurance premiums that has expired during the fiscal period is classified as

  A. an increase in retained earnings
  B. an asset
  C. an expense
  D. a liability
  C. an expense

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  Explanation

  In accordance with the matching rule, the amount of an insurance policy that has expired during the accounting period must be recorded and classified as an expense for the period.

• Question 2819:

  Sunil Vaskar is an employee of Glamorgan, a reputable investment banking firm. Glamorgan is a major underwriter for an equity issued by a private firm, Raindrop Waterworks. Sunil has accidentally discovered that the preliminary prospectus issued by Raindrop contains material overstatements about the scope of its businesses and future earning potential. Sunil:

  A. must report his findings to his supervisor and consult his legal department.
  B. must sever all connections with Glamorgan and dissociate himself from its activities.
  C. need not do anything because the prospectus has been distributed and is, in any case, preliminary.
  D. must report the case to the SEC since there has been a violation of laws governing equity issues.
  A. must report his findings to his supervisor and consult his legal department.

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  Explanation

  Standard I requires that suspected violation of laws be reported to appropriate supervisory people in the firm. It is also advisable to consult the legal department and dissociate oneself from the illegal activity. Sunil has to dissociate himself from the underwriting process involving Raindrop but he does not have to sever connections with his employer, Glamorgan.

• Question 2820:

  A commodity market is in contango if:

  A. the spot price is higher than the futures price.
  B. the spot price is equal to the futures price.
  C. the spot price is lower than the futures price.
  C. the spot price is lower than the futures price.

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  Explanation