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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3101:

  Which of the following statements about contrary-opinion and smart money technicians is CORRECT?

  A. If mutual funds cash holdings are more than 13% of total fund assets, smart-money technicians are bullish.
  B. When the ratio of short sales by specialists to total NYSE short sales is at 0.20, smart-money technicians are bearish.
  C. The CBOE put call ratio is 0.75. Contrary-opinion technicians are bullish.
  D. When the yield spread on high quality versus lower-quality bonds narrows, the confidence index decreases and smart-money technicians become bullish.
  C. The CBOE put call ratio is 0.75. Contrary-opinion technicians are bullish.

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  Explanation

  When the CBOE put call ratio is equal to or greater than 0.50, this suggests that investors are bearish and thus contrary-opinion technicians are bullish. The other statements are incorrect. The mutual fund ratio is not an indicator for smart

  money technicians. When the mutual fund ratio is equal to or greater than 0.13, it means that investors are bearish and contrary-opinion technicians are bullish. The statement beginning, "When the yield spread on high quality versus lower-

  quality bonds narrows," is partially true. A narrowing yield spread is a bullish sign to smart-money technicians, but because it means that the confidence index has increased.

  Summary of the indicators for contrary-opinion and smart money technicians:

  Contrary-opinion technicians (trade the opposite of the mass of general investors):

  Smart-money technicians (follow the professional investors):

• Question 3102:

  Which of the following methods is the best way of conducting a comparative financial statement analysis?

  A. Comparing of a company's balance sheet to its income statement.
  B. All of these methods are equally good.
  C. Break-even analysis.
  D. An index-number trend series analysis.
  E. A cash flow forecast.
  D. An index-number trend series analysis.

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  Explanation

  An index-number trend series analysis is quite useful when comparing financial statements that cover more than two or three periods with a year-to-year change analysis. The year-to-year change analysis method can be cumbersome when attempting to compare three or more periods.

• Question 3103:

  The following are all true concerning transactional analysis, except,

  A. it can be used to convert indirect method cash flow from operations to the direct method.
  B. it is a technique that can be used to create a cash flow statement for firms that do not prepare such statements in accordance with SFAS 95 and IAS 7.
  C. it helps to understand the relationship between the accrual of revenues, expenses, assets, and liabilities and their cash flow consequences.
  D. it is a method that groups changes in the current assets and current liabilities and reconciles them to the relevant income statement items.
  E. it is a method that classifies cash flows among operating, financing, and investing activities.
  D. it is a method that groups changes in the current assets and current liabilities and reconciles them to the relevant income statement items.

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  Explanation

  This method reconciles line-item changes in the balance sheet with their related income statement components to derive the cash flow consequences of the reported transactions and events.

• Question 3104:

  Project A has a higher IRR than project B. Both projects have normal cash flows. If the projects have the same cost of capital which is greater than the crossover rate,

  A. Project A has a higher NPV.
  B. Both projects have the same NPV.
  C. Project B has a higher NPV.
  D. Insufficient information.
  A. Project A has a higher NPV.

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  Explanation

  The crossover rate is the discount rate at which the graphs of NPV versus discount rate for the two projects cross. Since the projects have normal cash flows, they will have a single crossover rate. Further, the project with the higher IRR has a "flatter" NPV profile. Therefore, if the cost of capital is larger than the crossover rate, the project with the flatter profile will have a larger NPV.

• Question 3105:

  What annual interest rate, compounded annually, is equivalent to 6% per year, compounded monthly?

  A. 6. 01%
  B. 6. 17%
  C. 6. 09%
  D. 6%
  E. 5. 87%
  B. 6. 17%

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  Explanation

  Questions of this type are illustrating the concept of an Effective Interest Rate, which is a rate compounded annually that has the same effect as a rate compounded more often than one time a year. As such, a depositor or a creditor is indifferent between them, since they have the same effect. To solve this question, make any deposit and see how much is in the account after one year. The ratio of the ending FV to the beginning PV will indicate the annual rate earned. On the BAII Plus, press 12 N, 6 divide 12 = I/Y, 100 PV, 0 PMT, CPT FV. On the HP12C, press 12 n, 6 ENTER 12 divide i, 100 PV, 0 PMT, FV. The number displayed will be 106. 17. In other words, after one year, $100 has become $106. 17. An interest rate of 6. 17%, compounded annually, would cause a $100 deposit to become $106. 17 in one year. Choosing an initial deposit of $100 helps a great deal in these situations. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3106:

  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) (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' cost of preferred stock?

  A. 12. 6%
  B. 13. 2%
  C. 11.0%
  D. 12. 0%
  E. 10.0%
  A. 12. 6%

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  Explanation

  K(ps) (cost of preferred stock) = $12/$100 (0.95) = 12. 6%.

• Question 3107:

  Which of the following statements about the AIMR Performance Presentation Standards is true?

  A. All aspects of the AIMR Performance Presentation Standards are mandatory.
  B. None of these answers is true.
  C. All aspects of the AIMR Performance Presentation Standards are recommended. They are simply guidelines and don't necessarily need to be followed.
  D. Some aspects of the AIMR Performance Presentation Standards are mandatory, while others are recommended.
  D. Some aspects of the AIMR Performance Presentation Standards are mandatory, while others are recommended.

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  Explanation

  Some aspects of the AIMR Performance Presentation Standards are mandatory (i.e., they must be followed to claim compliance); other aspects are strongly recommended (i.e., they should be followed). Note that AIMR strongly encourages firms to adopt the recommended Standards in addition to the required standards.

• Question 3108:

  Which one of the following will most likely cause a future increase in a country's sustainable level of real output?

  A. an increase in income redistribution payments from high- to low-income recipients
  B. a decline in the nation's oil reserves
  C. higher marginal tax rates
  D. an increase in the national debt
  E. an increase in the economy's net investment rate
  E. an increase in the economy's net investment rate

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  Explanation

  Net investment can increase the supply of physical capital which makes it feasible for the economy to produce a higher level of output permanently into the future. Investment in physical capital can expand the supply of buildings, machines and other physical assets. This allows the economy to produce and sustain a large rate of output, shifting both LRAS and SRAS to the right.

• Question 3109:

  Taylor Technologies has a target capital structure, which is 40 percent debt and 60 percent equity. The equity will be financed with retained earnings. The company's bonds have a yield to maturity of 10 percent. The company's stock has a beta = 1.1. The risk-free rate is 6 percent, the market risk premium is 5 percent, and the tax rate is 30 percent. The company is considering a project with the following cash flows: TimeCash flow ($) 0-50,000 135,000 243,000 360,000 4-40,000 What is the project's modified internal rate of return (MIRR)?

  A. 6. 76%
  B. 16. 14%
  C. 20.52%
  D. 10.78%
  E. 9.26%
  C. 20.52%

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  Explanation

  First, find the company's weighted average cost of capital:

  We're given the before-tax cost of debt, k(d) = 10%. We can find the cost of equity as follows:

  K(s) = 0.06 + 0.05(1.1) = 0.115 or 11.5%.

  Thus, the WACC is:

  k = 0.4(0.10)(1 - 0.3) + 0.6(0.115) = 0.097 or 9.7%.

  Second, the PV of all cash outflows can be calculated as follows:

  PV of CF(4): N = 4, I = 9.7, PMT = 0, FV = 40,000 and solve for PV. Total PV(Costs) = -$50,000 - $27,620.62 = -$77,620.62.

  Third, find the terminal value of the project at t = 4:

  FV of CF(1) at t = 4 is calculated as follows: N = 3, I = 9.7, PV = -35,000, PMT = 0, and solve for FV = $46,204,89. Similarly, the FVs of CF(2) and CF(3) are found to be $51,746. 59 and $65,820, respectively. Summing these FVs gives a

  terminal value of $46,204. 89 + $51,746. 59 + $65,820.00 = $163,771.48.

  Finally, the MIRR can be calculated as N = 4, PV = -77,620.62, PMT = 0, FV = 163,771.48, and solve for I = MIRR = 20.52%.

• Question 3110:

  Which Standard deals with personal integrity and prohibits individual behavior that reflects badly on the investment industry?

  A. III (C)
  B. I (D)
  C. II (B)
  D. III
  E. None of these answers
  F. IV (A)
  B. I (D)

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  Explanation

  Standard II (B) deals with personal integrity and prohibits individual behavior that reflects adversely on the entire profession.