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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 2931:

  The management of Strings and All, Inc., a small, highly leveraged, electric guitar manufacturer, wants to reduce the company's degree of total leverage (DTL) to 2. 0. Currently, the company's expected operating performance is as follows: To obtain a DTL of 2. 0, management must (all else constant):

  A. increase variable expenses by 30%.
  B. reduce variable expenses by 38.5%.
  C. reduce variable expenses by 30%.
  D. increase variable expenses by 38.5%.
  C. reduce variable expenses by 30%.

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  Explanation

  To obtain this result, we need to calculate the current variable costs, determine the variable costs that will result in a DTL ratio of 2. 00, and calculate the percentage change.

  Step 1: Calculate current variable costs (VC): VC = 0.6 * 500,000 = 300,000

  Step 2: Calculate Variable costs needed to decrease the DTL to 2. 0:

  Rearranging the formula for DTL:

  = (Sales

• Question 2932:

  If the null hypothesis that two means are equal is in fact true, where will 97% of the computed z-value lie between?

  A. +/- 2. 07
  B. +/- 2. 33
  C. +/- 2. 17
  D. none of these answers
  E. +/- 2. 58
  C. +/- 2. 17

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  Explanation

  From the z tables, we can find 0.97/2 = 0.485, which corresponds to a z-value of +/-2. 17.

• Question 2933:

  Congress passes a law requiring the government to pay certain debts of companies that have declared bankruptcy. Which of the following terms most accurately describes this program?

  A. supply-side
  B. automatic stabilizer
  C. expansionary fiscal policy
  D. moral hazard
  E. none of these answers is correct
  F. monetary policy
  B. automatic stabilizer

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  Explanation

  An automatic stabilizer is anything that would decrease the government budget surplus during slow economies and increase the surplus during strong economic periods. During slow economic periods, bankruptcies are likely to rise, and by paying a portion of the defunct firms' debts, the government is injecting demand into the economy. This should be distinguished from an expansionary fiscal policy, because the program is not designed to expand national income, but to stabilize a slowdown without the need for further government action.

• Question 2934:

  Which of the following securities is commonly valued as a perpetuity? Further, which of the following best describes the equation used to value this security?

  A. Zero coupon bond; {P0 = [Face value / (1 + k)^n]}
  B. More than one of these answers is correct
  C. Preferred stock; {P0 = [d1 / k]}
  D. Common stock; {P0 = [d1 / g]}
  E. Zero coupon bond; {P0 = [Face value / (1 + k)^n] + g}
  F. Preferred stock; {P0 = [(d1 / k) +g]}
  C. Preferred stock; {P0 = [d1 / k]}

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  Explanation

  A "perpetuity" is an investment which is expected to last forever. Preferred stock is commonly valued as a perpetuity, using this equation:

  {P0 = [d1 / k]}

  Where: , P0 = the price of the preferred stock at time 0, d1 = the dividend at t = 1 and k = the required rate of return.

  A zero coupon bond is not an example of a perpetuity, because the duration of the cash flows produced by a zero coupon bond has a finite and measurable life. Common stock, on the other hand, is sometimes valued as a perpetuity, but the equation provided in this example is incorrect.

• Question 2935:

  A company pays a dividend of $8 per share to the holders of its perpetual preferred stock. The appropriate discount rate is 7% per year. What is the value of the preferred stock?

  A. $114. 28
  B. $11.73
  C. Not able to compute with the above data.
  D. $14. 18
  A. $114. 28

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  Explanation

  Value = dividend/discount rate = 8/0.07= $114. 28.

• Question 2936:

  A true-false test consists of six questions. If you guess the answer to each question, what is the probability of getting all six questions correct?

  A. None of these answers
  C. 0.06250
  D. 0.03125
  E. 0.0156
  E. 0.0156

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  Explanation

  This is binomial distribution with p = 0.5, q = 0.5, n = 6, r = 6. Therefore 6!(0.5^6)(0.5^0)/6!0! = 0.0156.

• Question 2937:

  A country cannot maintain currency convertibility if:

  A. none of these answers.
  B. it allows the exchange rate value of its currency to fluctuate and follows an independent monetary policy.
  C. it fixes the exchange rate value of its currency and has a dependent monetary policy.
  D. it fixes the exchange rate value of its currency and follows an independent monetary policy.
  D. it fixes the exchange rate value of its currency and follows an independent monetary policy.

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  Explanation

  A country can either follow an independent monetary policy and allow its exchange rate to fluctuate or tie its monetary policy to the maintenance of the fixed exchange rate.

• Question 2938:

  Which of the following statements is most correct?

  A. When comparing two projects, the project with the higher IRR will also have the higher MIRR.
  B. Both IRR and MIRR can produce multiple rates of return.
  C. The modified internal rate of return (MIRR) of a project increases as the cost of capital increases.
  D. All of these statements are correct.
  E. The internal rate of return (IRR) of a project increases as the cost of capital increases.
  C. The modified internal rate of return (MIRR) of a project increases as the cost of capital increases.

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  Explanation

  The MIRR is dependent on the cost of capital. As the cost of capital increases, so does the terminal value. Because the MIRR is the rate, which equates the PV with the terminal value, the MIRR increases as the terminal value increases.

• Question 2939:

  The following data are available for a firm for a given year:

  Net Sales 21,896 Sales and marketing expenses 4,346 Administrative expenses 2,143 COGS 10,084 Depreciation 967 Interest expense 573 Tax rate35% Dividends paid 3,445 Preferred Dividends 897 Average total equity 37,432 Average common equity 26,782 Average total liabilities1 8,583

  In the above example, the firm's operating profit margin equals ________.

  A. 0.24
  B. 0.35
  C. 0.18
  D. 0.54
  A. 0.24

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  Explanation

  Operating Profit Margin = 21,896 - 10,084 - 4,346 - 2,143 = 5,323. (Earnings before depreciation, interest, and taxes as a % of sales; EBDIT). Therefore, Operating Profit Margin = 5,323/21,896 = 0.24.

• Question 2940:

  Dorrie James, a financial analyst with consulting firm Brown, Ketchuppe and Company, is trying to determine the earnings per share (EPS) figure for Floweration.com. Assume the following information: Sales: $4,500,000 Fixed costs: $2,000,000 Variable costs: $1,200,000 Interest expense: $40,000 Tax rate: 35% Weighted Average Cost of Capital: 12. 25% Beta coefficient: 1.25 Common shares outstanding: 4,755,000 Using this information, what are the EPS for Floweration.com?

  A. $0.1492
  B. $0.1722
  C. $0.1676
  D. $0.2440
  E. $0.2360
  F. The answer cannot be calculated from the information provided.
  B. $0.1722

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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 individuals do not understand themechanics behind the EPS calculation, and an investigation into the components of EPS 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 = [($4,500,000 - $2,000,000 - $1,200,000 - $40,000)(1 - .35)] /

  4,755,000}= $0.1722