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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2891:

  Elephant Books sells paperback books for $7 each. The variable cost per book is $5. At current annual sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are reduced, the variable cost per book will drop by $1. Assume authors' royalties are reduced and sales remain constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?

  A. $175,225
  B. $200,000
  C. $600,000
  D. $333,333
  E. $466,667
  B. $200,000

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  Explanation

  $7(200,000) - $5(200,000) - F = 0

  F = $400,000.

  $7(200,000) - $4(200,000) - F = 0

  F = $600,000.

  $600,000 - $400,000 = $200,000.

• Question 2892:

  The following financial statement depicts only one point in time:

  A. Income Statement
  B. Statement of Cash Flows
  C. Statement of Retained Earnings
  D. Balance Sheet
  D. Balance Sheet

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  Explanation

  Only the balance sheet depicts the company's financial position at one point in time. All others show what happens over a certain period of time.

• Question 2893:

  Jerry Paris, CFA, manages a high yield bond fund. 20% of Paris' portfolio is invested in distressed securities. A colleague commented that investing in distressed securities is analogous to venture capital investing. Which of the following statements concerning distressed securities and venture capital is least likely to be true? An investment in distressed securities is similar to an investment in venture capital because both:

  A. are illiquid,
  B. are normally priced efficiently.
  C. require a long time horizon.
  B. are normally priced efficiently.

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  Explanation

• Question 2894:

  A mutual fund manager is examining the financial and operating condition of a Questron Media Corporation, and has discovered the following information. Sales: $3,000,000 Fixed costs: $1,000,000 Variable costs: $300,000 Interest expense: $150,000 Tax rate: 35% Weighted Average Cost of Capital: 14. 75% Beta coefficient: 1.66 Common shares outstanding: 1,321,000 Using this information, what are the earnings per share (EPS) for Questron Media?

  A. $1.26
  B. $1.47
  C. $0.66
  D. $0.76
  E. $0.78
  F. $0.89
  D. $0.76

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  Explanation

  The EPS figure is perhaps the single most popular term in the field of conventional equity investments. Any glance into financial media and business periodicals will undoubtedly uncover numerous instances in which the EPS figure is cited.

  While quite popular and useful, many investors and business professionals do not truly understand the mechanics behind the EPS calculation, and an investigation into the components of EPS figure is a valuable learning experience. The

  EPS calculation is found by the following equation: {EPS = [(Sales - Fixed Costs - Variable Costs - Interest Expense)(1 - Tax Rate)] / [# of Common Shares Outstanding]} Additionally, the EPS figure can be found by:

  {EPS = [(EBIT - Interest Expense)(1 - Tax Rate) / # of Common Shares Outstanding]} Incorporating the given information into the first EPS equation will yield the following: {EPS = [($3,000,000 - $1,000,000 - $300,000 - $150,000)(1 - 0.35)] /

  1,321,000} = $0.7627

• Question 2895:

  Suppose a tire manufacturer wants to set a mileage guarantee on its new XB 70 tire. Life test revealed that the mean mileage is 47,900 and the standard deviation of the normally distributed distribution of mileage is 2,050 miles. The manufacturer wants to set the guaranteed mileage so that no more than 5 percent of the tires will have to be replaced. What guaranteed mileage should the manufacturer announce?

  A. 32,960
  B. 44,528
  C. 49,621
  D. 40,922
  E. None of these answers
  B. 44,528

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  Explanation

  Find the z-value for an area under the curve of 1.0 - 0.55 = 0.45. For an area of 0.45, z = -1.645. Using z = (x-u)/sigma. -1.645 = x - 47900/2050. x = 44528.

• Question 2896:

  Sharon Foster owns a portfolio of two bonds. The first bond is a mortgage backed security (MBS) with a coupon rate well above current market rates for securities with similar characteristics. Foster also owns a callable corporate bond with five years to maturity and a coupon rate of 9%. The bond is nonrefundable. Comparable corporate issues brought to market recently were priced to yield 6. 5%. The risks that Sharon faces by holding each of these securities could best be described as:

  A. interest rate risk for the MBS, and call risk for the corporate bond
  B. price compression for the MBS, and reinvestment risk for the corporate bond
  C. prepayment risk for the MBS, and call risk for the corporate bond
  C. prepayment risk for the MBS, and call risk for the corporate bond

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  Explanation

• Question 2897:

  Which of the following is a long-term liability?

  A. Cost of goods sold
  B. Bonds
  C. Commercial paper
  D. Accounts payable
  E. None of these answers
  B. Bonds

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  Explanation

  Only bonds would be a long-term liability. Long-term liabilities are repaid over a time frame of greater than one year. Bonds are repaid over many years, whereas accounts payable and commercial paper are current liabilities (repaid over less than one year); cost of goods sold is an expense not a liability.

• Question 2898:

  Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC's expected EPS and k(s) for various capital structures are given below. What is the optimal capital structure for ZPC? Debt/AssetsExpected EPS ($)k(s) 20%2. 5015. 0% 303. 0015. 5 403. 2516. 0 503. 7517. 0 704. 0018.0

  A. Debt/Total Assets = 20%
  B. Debt/Total Assets = 30%
  C. Debt/Total Assets = 70%
  D. Debt/Total Assets = 40%
  E. Debt/Total Assets = 50%
  E. Debt/Total Assets = 50%

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  Explanation

  The optimal capital structure maximizes the firm's stock price. When the debt ratio is 20%, expected EPS is $2. 50. Given the firm's policy of retaining 30% of earnings, the expected dividend per share D1 is $2. 50 x 0.70 = $1.75. The stock price Po is $1.75/(15% - 7%) or $21.88. When the debt ratio is 30%, expected EPS is $3. 00 and expected D1 is $3. 00 x 0.70 = $2. 10. The stock price Po is $2. 10/(15. 5% - 7%) =$24. 71. Similarly, when the debt ratio is 40%, D1 = $2. 275 and Po = $25. 28. When the debt ratio is 50%, D1 = $2. 625 and Po = $26. 25. When the debt ratio is 70%, D1 = $2. 80 and Po = $25. 45. The stock price is highest when the debt ratio is 50%.

• Question 2899:

  Venture capital differs from investments from publicly held firms in that they are

  A. illiquid in the short-term.
  B. none of these are correct.
  C. for newer firms with very little operating history.
  D. difficult to value.
  E. all of these are correct.
  F. for small firms in which the venture capital firm and the subject company have personal involvement.
  E. all of these are correct.

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  Explanation

  Venture capital differs from investments from publicly held firms in that they are generally:

  1. For newer companies with little operating history.

  2.

  For smaller companies in which the venture capital firm and the entrepreneurial company have a high degree of personal involvement.

  3.

  Illiquid in the short-term, until the company goes public or is acquired by another company, which usually takes three to seven years.

  4. Difficult to value because there is no public market for these securities.

  5. Going to require future rounds of financing.

• Question 2900:

  Polk Products is considering an investment project with the following cash flows: tCash Flow 0-100,000 140,000 290,000 330,000 460,000 The company has a 10 percent cost of capital. What is the project's discounted payback?

  A. 2. 67 years
  B. 1.86 years
  C. 2. 49 years
  D. 1.67 years
  E. 2. 11 years
  B. 1.86 years

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  Explanation

  The PV of t = 1 CF is found as follows: N = 1, I = 10, PMT = 0, FV = 40,000, and, thus PV = - $36,363. 64. Similarly, find the PV of t = 2 CF which is $74,380.17. Since the sum of these PVs is greater than the t = 0 CF of $100,000, we know the discounted payback is less than two years. We can now solve for the discounted payback period as follows: DP = 1 + ($100,000 - $36,363. 64)/$74,380.17 = 1.86.