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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3001:

  Which of the following statements is correct?

  A. It is unrealistic to expect that increases in net working capital that are required at the start of an expansion project are simply recovered at the project's completion. Thus, these cash flows are included only at the start of a project.
  B. Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value.
  C. All of these statements are false.
  D. An asset that is sold for less than book value at the end of a project's life will generate a loss for the firm and will cause an actual cash outflow attributable to the project.
  E. Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions.
  B. Equipment sold for more than its book value at the end of a project's life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value.

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  Explanation

  A gain on the sale occurs when equipment is sold for more than its book value. This increases profit and cash flow.

• Question 3002:

  The post-audit is used to

  A. eliminate potentially profitable but risky projects.
  B. all of these answers are correct.
  C. review cash flow forecasts.
  D. stimulate management to improve operations and bring results into line with forecasts.
  E. none of these answers are correct.
  D. stimulate management to improve operations and bring results into line with forecasts.

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  Explanation

  The two main purposes of the post-audit are to improve forecasts and improve operations. Management is putting their reputations on the line when forecasting an investment, and they will strive to improve operations to bring results into line with forecasts.

• Question 3003:

  The completed contract method

  A. may understate gross profit.
  B. generally must be used when no contract exists.
  C. cannot be used for short-term contracts.
  D. may be used for long-term contracts at the option of the company.
  E. recognizes revenues and costs in proportion to the work completed.
  B. generally must be used when no contract exists.

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  Explanation

  The completed contract method recognizes revenues and expenses only at the end of the contract. It must be used when any one of the conditions required for use of the percentage-of-completion method is not met.

• Question 3004:

  Current liabilities are defined as those that come due:

  A. within a year.
  B. the shorter of "within an operating cycle" or "within a year."
  C. within an operating cycle.
  D. the longer of "within an operating cycle" or "within a year."
  D. the longer of "within an operating cycle" or "within a year."

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  Explanation

  The classification of liabilities into short and long-term is somewhat subjective but for balance-sheet purposes, all obligations that are coming due within a year or an operating cycle, whichever is longer, are considered to be current

• Question 3005:

  How many months will it take for an original $1,000 deposit to grow to be $2,000, if the deposit earns interest at 7% per year, compounded monthly?

  A. 9.93
  B. 10.24
  C. 117. 19
  D. 125. 42
  E. 119.17
  E. 119.17

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  Explanation

  On the BAII Plus, press 1000 PV, 2000 +/- FV, 0 PMT, 7 divide 12 = I/Y, then CPT N. On the HP12C, press 1000 PV, 2000 CHS FV, 0 PMT, 7 ENTER 12 divide i, then press n. HP12C answer is shown as 120. Answer should be in months, not years. Make sure the BAII Plus has the P/Y value set to 1.

• Question 3006:

  When an economy operates well below its full-employment capacity and the marginal propensity to consume is 3/4, a $20 billion increase in autonomous investment will cause the equilibrium income to rise

  A. $80 billion.
  B. $40 billion.
  C. $20 billion.
  D. $15 billion.
  A. $80 billion.

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  Explanation

  The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-3/4) = 4. Therefore $20 billion increase in aggregate expenditures is magnified four times to $80 billion.

• Question 3007:

  Rollins Corporation is constructing its MCC (Marginal Cost of Capital) schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm could sell, at par, $100 preferred stock, which pays a 12 percent annual dividend, but flotation costs of 5 percent would be incurred. Rollins' beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Rollins is a constant growth firm, which just paid a dividend of $2. 00, sells for $27. 00 per share, and has a growth rate of 8 percent. The firm's policy is to use a risk premium of 4 percentage points when using the bond-yield-plus-risk- premium method to find k(s) (component cost of retained earnings). The firm's net income is expected to be $1 million, and its dividend payout ratio is 40 percent. Flotation costs on new common stock total 10 percent, and the firm's marginal tax rate is 40 percent. What is Rollins' component cost of debt?

  A. 8.6%
  B. 7. 2%
  C. 10.0%
  D. 8.0%
  E. 9.1%
  B. 7. 2%

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  Explanation

  Since the bond sells at par of $1,000, its YTM and coupon rate (12 percent) are equal. Thus, the before-tax cost of debt to Rollins is 12. 0 percent. The after-tax cost of debt equals = 12. 0%(1 - 0.40) = 7. 2%.

• Question 3008:

  XYZ (a firm the produces consumer goods) is a stable company reporting the following financial information:

  Earnings per share $1.50 Dividends per share $0.30 Net Income $5 million Equity $50 million

  Given the above information, calculate the company's expected dividend growth rate.

  A. 80%
  B. 20%
  C. 1.6%
  D. 33%
  E. 8%
  F. 16%
  E. 8%

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  Explanation

  The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 - Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = (1 - (.3/1.5)) x ($5 million/$50 million) = (1 - .20) x (.10) = .08 or 8%.

• Question 3009:

  Mike Bowers has observed that during 2004 the SandP 500 index officially reported a return of 20%. After recalculating the returns on an equally weighted basis, Bowers estimates that the index returned 15%. The difference in the two calculations of return is best explained by:

  A. large capitalization stocks outperforming small capitalization stocks.
  B. small capitalization stocks outperforming large capitalization stocks.
  C. the interest expenses on margin accounts.
  A. large capitalization stocks outperforming small capitalization stocks.

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  Explanation

• Question 3010:

  If you deposit $204. 50 into an account paying 3. 15% per year simple interest, how much interest will be earned after 3 years?

  A. $$19.59
  B. $19.33
  C. $24. 59
  D. $16. 67
  E. $18.03
  B. $19.33

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  Explanation

  The question only asks for the earned interest, not the total amount in the account. On the BAII Plus, press 204. 50 x 0.0315 x 3 = to see the answer. On the HP12C, press 204. 50 ENTER 0.0315 x 3 x to see the answer.