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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2821:

  What annual deposit would you need to make, beginning one year from today, into an account paying 11% per year, compounded annually, in order to have $1,000,000 in 30 years?

  A. $6,129.83
  B. $33,333. 33
  C. $418.67
  D. $5,024. 60
  E. $1,374. 48
  D. $5,024. 60

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  Explanation

  On the BAII Plus, press 30 N, 11 I/Y, 0 PV, 1000000 FV, CPT PMT. On the HP12C, press 30 n, 11 i, 0 PV, 1000000 FV, PMT. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/Y value set to 1.

• Question 2822:

  Doering Computers is considering two mutually exclusive projects. Their cash flows are shown below: tProj. A Cash FlowsProj. B Cash Flows 0-$500-$700 1200 250 2400 475 3100 125 4----225 The company's cost of capital (WACC) is 10 percent. Each of the projects can be repeated. What is the equivalent annual annuity (EAA) of the project, which adds the most to shareholder value?

  A. $61.64
  B. $52. 82
  C. $63. 45
  D. $35. 20
  E. $25. 41
  B. $52. 82

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  Explanation

  Find NPV of each project.

  NPV(A) = $87. 5282.

  NPV(B) = $167. 4271. Find EAA:

  For Project A:

  N = 3; I = 10; PV = -87. 5282; FV = 0; solve for PMT = EAA = $35. 1964.

  For Project B:

  N = 4; I = 10; PV = -167. 4271; FV = 0; solve for PMT = EAA = $52. 8184.

• Question 2823:

  Ace Consulting, a multinational corporate finance consulting firm, is performing an analysis of the East Asian distribution network of Smith, Kleen, and Beetchnutty. Specifically, Ace Consulting is trying to identify the effect of changes in specific variables on the overall efficiency of SKB's distribution process. In their analysis, Ace Consulting identified a "base case" situation using the expected values for each input. Then, Ace modified each variable a few points above and below the base case, holding other variables constant. This was done in an effort to determine the effect of each variable on the overall efficiency of SKB's distribution process. Which of the following choices correctly describes this standalone risk measurement technique?

  A. Monte Carlo simulation
  B. Scenario analysis
  C. Case study analysis
  D. Regression analysis
  E. Sensitivity analysis
  F. Relational analysis
  E. Sensitivity analysis

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  Explanation

  In this example, Ace consulting has been conducting a sensitivity analysis. This analysis begins with the identification of a "base case" situation using expected values for each input. Then, a variable is manipulated holding the other variables constant, in an effort to determine the sensitivity of the output to manipulations in each variable. Sensitivity analysis is the most widely used technique for measuring stand-alone risk, and can be performed relatively easily using a commercially available spreadsheet package such as Microsoft Excel.

• Question 2824:

  Which of the following is/are true?

  I. The IRR method assumes that future cash flows are reinvested at the project's cost of capital.

  II. The NPV method assumes that future cash flows are reinvested at the project's cost of capital.

  III. The MIRR method assumes that future cash flows are reinvested at the project's cost of capital.

  IV.

  MIRR and NPV methods always lead to the same decisions for projects of similar sizes.

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

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  Explanation

  The IRR method assumes that future cash flows are reinvested at the internal rate of return of the project, not the project's cost of capital. Statements (II), (III) and (IV) are true.

• Question 2825:

  If the OTC-to-NYSE volume is low after a substantial market decline, the contrarians interpret it as

  A. a bearish signal.
  B. none of these answers.
  C. a hold signal.
  D. a bullish signal.
  D. a bullish signal.

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  Explanation

  Since the OTC market is dominated by small stocks which are riskier than the large stocks on NYSE, a low OTC volume relative to NYSE (less than 87-90%) implies that investors are bearish. Since the contrarians bet against the market at market turning points, they will consider this behavior by investors as a bullish signal if the market is at a low.

• Question 2826:

  If high-yield investment opportunities attract capital from abroad and lead to a capital account surplus, then the

  A. nation will also experience a balance of trade surplus.
  B. nation must run a current account surplus under a pure flexible exchange rate system.
  C. nation's currency must depreciate.
  D. nation must run a current account deficit under a pure flexible exchange rate system.
  E. nation's currency must appreciate.
  D. nation must run a current account deficit under a pure flexible exchange rate system.

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  Explanation

  If a nation is experiencing a surplus on its capital account balance, it must experience an offsetting deficit on its current account and vice versa. By definition, the balance of payments must be in balance so that the capital account offsets the current account.

• Question 2827:

  Which of the following are true assumptions underlying linear regression?

  (1)

  For each value of X, there is a group of Y values which are normally distributed

  (2)

  The means of these normal distributions of Y values all lie on the straight line of regression

  (3)

  The standard deviations of these normal distributions are equal

  A. All of them
  B. None of them
  C. Only (2) and (3)
  D. Only (1) and (3)
  E. Only (1) and (2)
  A. All of them

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  Explanation

  All are part of the assumptions of the linear regression. Make sure you know all the assumptions.

• Question 2828:

  Which of the following variables are hypothesized to affect the aggregate profit margin?

  A. All of these answers
  B. Rate of inflation
  C. Unit labor costs
  D. Foreign competition
  A. All of these answers

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  Explanation

  Economists Finkel and Tuttle hypothesized that 4 variables affect the aggregate profit margin. (1) Capacity utilization rate (+); (2) Unit labor costs (-); (3) Rate of inflation (+); (4) Foreign competition.

• Question 2829:

  If the beginning inventory is overstated and the ending inventory is understated, which of the following is/are true:

  I. COGS is understated

  II. COGS is overstated

  III. Income is overstated

  IV.

  Income is understated

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

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  Explanation

  COGS = Beginning inventory - Ending inventory + Purchases Hence, if BI is overstated and EI understated, COGS is overstated, implying income is understated. It should be remembered that implicit in the use of the above inventory equation is the assumption that there have been no write-downs or write-ups in the inventory.

• Question 2830:

  Which one of the following statements is true?

  A. When the stock price is above the strike price, a put option is in-the-money.
  B. When the stock price is below the strike price, a call option is in-the-money.
  C. When the stock price is above the strike price, a put option is out-of-the-money.
  D. When the stock price is below the strike price, a call option is at-the-money.
  C. When the stock price is above the strike price, a put option is out-of-the-money.

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  Explanation