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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3051:

  The majority of venture capital investors are

  A. endowments.
  B. insurance companies.
  C. individuals.
  D. corporations.
  E. pension funds.
  E. pension funds.

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  Explanation

  In 1994, pension funds made up approximately 45 percent of the venture capital investors.

• Question 3052:

  ________ investing is investing with a view toward the social or political statements made by such an investment.

  A. None of these answers
  B. Charitable
  C. Political
  D. Social
  D. Social

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  Explanation

  Fiduciaries often feel pressure from various constituencies to engage in social investing - investing with a view toward the social or political statements made by such an investment. Members should keep in mind that although such investment may be benign the fiduciary duty of prudence is paramount and dictates that trustees judge investments according to the criteria of risk and return, asset diversification and cost- conscious investing.

• Question 3053:

  The Statement of Stockholders' Equity does not report

  A. any minimum pension liability.
  B. any cumulative impact on prior period earnings.
  C. the investment of the owners in the firm.
  D. the various accounting adjustments that reflect selected market value changes in noncurrent assets.
  E. the effect of exchange rate changes on certain foreign subsidiaries.
  B. any cumulative impact on prior period earnings.

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  Explanation

  Any cumulative impact on prior period earnings is reported net of tax after extraordinary items and discontinued operations on the income statement.

• Question 3054:

  Omega Prime Securities is a sizable investment bank that undertakes security issuances on behalf of small and medium-size businesses. Treffil Ellis is the senior vice president of corporate finance at Omega. Treffil, on one of his golf junkets, made acquaintance with Tralth Trevor, owner of a growing chain of resort hotels. Tralth invites Treffil to his estate mansion the next day and over drinks, asks him how fast Omega could issue equity-linked callable notes to finance the $200 million construction of new hotel businesses in Cairo and Bali. He forthrightly tells him that Omega could receive as much as 150 basis points above the normal fee if the issuance could be completed within the month. Treffil knows that this is not enough time to complete a research on Tralth's business and determine the issue price. However, he does know that his research wing could quickly do a comparison with one of the other hotel chains and determine an approximate issue price. He instructs his department to do so. In a month, the public offering is ready for issuance and Omega ends up making almost $15 million more than on other similar business deals. Treffil receives commendation from the CEO for "going beyond the call of duty for his employer." Treffil has

  I. violated Standard IV (B.3) - Fair Dealing.

  II. not violated any code of ethics.

  III. violated Standard IV (A.1) - Reasonable Basis and Representations.

  IV.

  violated Standard IV (B.1) - Fiduciary Duties.

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

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  Explanation

  If adequate research is not put into determining the fair price of a security issue, investors could end up paying a price that has no relevance to the intrinsic value of the security. This is in direct violation of Standard IV (A.1) - Reasonable Basis and Representations.

• Question 3055:

  Investments in debt securities classified as held-to-maturity securities should be valued at

  A. fair value.
  B. lower of cost or market.
  C. present value.
  D. amortized cost.
  E. acquisition cost.
  D. amortized cost.

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  Explanation

  Accounting rules specify that debt securities classified as held-to-maturity must be valued at amortized cost.

• Question 3056:

  Rollins Corporation is constructing its MCC 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 bondyield-plus-risk- premium method to find k(s). 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' retained earnings break point?

  A. $800,000
  B. $1,000,000
  C. $1,200,000
  D. $1,400,000
  E. $600,000
  B. $1,000,000

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  Explanation

  Retained earnings = 0.6($1,000,000) = $600,000. BP(RE) = $600,000/0.6 = $1,000,000.

• Question 3057:

  Peterson Manufacturing has earnings per share of $4. 00 and paid a dividend of $1.00 per share. Peterson's return on equity is 16. 0%. Peterson is considering a debt issue that would increase its financial leverage. Peterson is also considering increasing its dividend payout ratio. Assuming all other factors are constant, Peterson's potential growth rate:

  A. will increase due to the increased leverage, and increase further due to the higher payout ratio.
  B. will increase due to the higher payout ratio, but this increase will be offset to some extent by the increased leverage.
  C. will increase due to the increased leverage, but this increase will be offset to some extent by the higher payout ratio.
  C. will increase due to the increased leverage, but this increase will be offset to some extent by the higher payout ratio.

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  Explanation

• Question 3058:

  The value of a real estate portfolio requires, at minimum, ________ review.

  A. weekly
  B. quarterly
  C. daily
  D. monthly
  E. annual
  B. quarterly

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  Explanation

  The practice of providing quarterly reports satisfies the quarterly review requirements. The issuance process should include a review of the real estate portfolio, a review of net asset value for financial and performance purposes, and review and disclosure of any factors that might result in a material change to net asset value.

• Question 3059:

  Under the current US GAAP, the treatment of RandD expenses:

  I. underestimates current income and leads to lower taxes.

  II. leads to a more conservative balance sheet.

  III.

  is tantamount to asserting that RandD outlays have no current benefits.

  A. I only
  B. none of these are correct
  C. I, II and III
  D. I and II
  C. I, II and III

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  Explanation

  Difficulties in measuring the current value of assets being generated by RandD prevent a reliable application of the accrual principles, which require allocation of expenses in proportion to the current benefits generated. Hence, US GAAP takes the easiest solution of expensing all the RandD costs (unless they generate tangible or intangible assets which have alternative future uses which are measurable). Since RandD does generate future benefits on an expected basis, the full expensing of the costs when incurred tends to under-estimate current income and leads to lower taxes. Further, when the RandD activities do lead to profitable results, income gets overstated because of non-recognition of a portion of it in previous periods. Thus, RandD expensing adds volatility to income. On the other hand, expensing leads to a more conservative balance sheet since no assets or equity is recognized until the benefits actually materialize. Thus, by assuming that current RandD has no current benefits, the GAAP accounting tries to prevent "bad" surprises.

• Question 3060:

  What is the present value today of these annual cash flows: $5,000, $4,000, $3,000, $2,000, $1,000? Assume the first cash flow occurs 1 year from today and an interest rate of 8% per year, compounded annually.

  A. $12,854. 32
  B. $15,000
  C. $13,598.41
  D. $12,591.14
  E. $5,000
  D. $12,591.14

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  Explanation

  You could solve this question using 5 different compound interest problems, but it is easier to solve them using the calculator's cash flow functions. On the BAII Plus, press CF 2nd CLRWork 0 ENTER DownArrow 5000 ENTER DownArrow DownArrow 4000 ENTER DownArrow DownArrow 3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 1000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 8 ENTER DownArrow CPT. On the HP12C, press these keys: 0 BlueShift CFo 5000 BlueShift CFj 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj 1000 BlueShift CFj. Then press 8 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.