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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3121:

  Which of the following factors is not an underlying assumption of technical analysis?

  A. Supply and demand is driven by rational and irrational behavior.
  B. Prices move in trends that persist for long periods of time.
  C. The actual shifts in supply and demand cannot be observed in market behavior.
  D. Prices are determined by supply and demand.
  C. The actual shifts in supply and demand cannot be observed in market behavior.

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  Explanation

  Shifts in supply and demand CAN be observed in market behavior.

• Question 3122:

  Which of the following projects would likely produce multiple Internal Rates of Return? Assume a 14% discount rate.

  Project A

  Initial investment outlay: ($500,000)

  t1: $900,000

  t2: ($100,000)

  t3: ($100,000)

  t4: ($10,000)

  Project B

  Initial investment outlay: ($500,000) t1: $0.00 t2: $650,000 Project C Initial investment outlay: ($50,000) t1: $0.00 t2: $0.00 t3: $65,000 t4: $0.00 t5: $0.00 t6: $65,000 Project D Initial investment outlay: ($1,000,000) t1: $675,000 t2: $675,000 t3: ($1,500) t4: $1,500 Project E Initial investment outlay: ($1,000,000) t1: $0.00 t2: $0.00 t3: $0.00 t4: $0.00 t5: $2,000,000

  A. Project A, D, and E
  B. Project A and D
  C. Project C
  D. All of these projects will likely result in multiple Internal Rates of Return.
  E. Project B
  F. Project A
  B. Project A and D

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  Explanation

  First of all, the cost of capital is irrelevant in Internal Rate of Return calculations. What is being examined in this example is the determination of "normal" versus "non-normal" projects. Non-normal projects are classified as projects that possess non-normal cash flows. In evaluating projects with "non-normal cash flows" the Internal Rate of Return method will often produce multiple IRRs which leads to an incorrect accept/reject decision. Non-normal cash flows are defined as cash flows in which the sign changes more than once. Projects A and D involve cash outflows superimposed within their cash inflows, resulting in a sign change from positive to negative and negative to positive. In examining projects such as this, it is advisable to use either the NPV or MIRR methods, which are not subject to the problem of multiple IRRs. From observation alone, we can determine that project A and D are non-normal projects, and are thus likely to result in multiple IRR calculations. While project B, C and E have periods of zero cash flows, each only has one change of sign in the overall cash flow process, and therefore all three projects should be characterized as "normal" for purposes of examination. While the cost of capital has been provided, it is not necessary for the determination of the correct answer in this case. What you should look for are projects with non-normal cash flows, and this should not involve any computational analysis. Besides, the cost of capital is not incorporated into the Internal Rate of Return calculation, rather, it is a component of the NPV and MIRR computational methods.

• Question 3123:

  Lynn Burns, CFA, is examining the performance of Intelligent Semiconductor, and has gathered the following information:

  Market discount rate: 14. 5% per year Observed Price/Earnings ratio: 26. 50 Given this information, what is the Franchise Price/Earnings ratio for Intelligent Semiconductor?

  A. The answer cannot be calculated from the information provided.
  B. 30.99
  C. 19.60
  D. 33. 40
  E. None of these answers is correct.
  F. 23. 14
  C. 19.60

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  Explanation

  The Franchise Factor method of value measurement is in many respects similar to EVA and MVA calculations. When examining a company using the franchise value approach, the observed price-to-earnings ratio is broken down into its two

  components - (1) the "base P/E," which is based on the Company's ongoing performance, and (2) a "franchise P/E" that is based on the expected value of new and profitable business opportunities. This relationship is illustrated as follows:

  Franchise P/E = Observed P/E - Base P/E

  Where the Base P/E equals the reciprocal of the market discount rate. For example, if the market discount rate is 14. 5%, the base P/E would be equal to 6. 89655.

  In this example, all the necessary information has been provided, and the calculation of the Franchise P/E is as follows:

  Franchise P/E = (26. 5 - 6. 89655) = 19.60345

• Question 3124:

  Your company's stock sells for $50 per share, its last dividend was $2. 00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 15 percent if it sold new common stock. Net income for the coming year is expected to be $500,000, the firm's payout ratio is 60 percent, and its common equity ratio is 30 percent. If the firm has a capital budget of $1,000,000, what component cost of common equity will be built into the WACC for the last dollar of capital the company raises?

  A. 12. 30%
  B. 11.75%
  C. 10.50%
  D. 9.94%
  E. 9.20%
  D. 9.94%

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  Explanation

  BP(RE) = RE/Equity fraction = $500,000(0.4)/0.3 = $666,667. BP

  = break point; RE = retained earnings

  Since the capital budget will be $1 million, and since all equity in the WACC beyond $666,667 will be external equity, the WACC of the last dollar raised will include equity at a cost of k(e):

  k(e) = $2(1.05)/$50(1 - 0.15) + .05 = 9.94%.

• Question 3125:

  Which of the following would not be included as a liability on a corporate balance sheet?

  A. Accrued liabilities
  B. Current portion of long-term debt
  C. Accounts payable
  D. Marketable securities
  E. Notes payable
  D. Marketable securities

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  Explanation

  Marketable securities are not a liability; it represents the value of a company's investment in stocks bonds and money market instruments.

• Question 3126:

  Under Standard III (E) - Responsibilities of Supervisors - which of the following are NOT responsible for maintaining appropriate supervision when they are in a supervisory role?

  A. AIMR members
  B. CFA charterholders
  C. None of these answers
  D. Level I CFA candidates
  E. CFA candidates
  C. None of these answers

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  Explanation

  Standard III (E) states the responsibility of AIMR members, CFA charterholders and candidates for the CFA designation to take steps to prevent persons acting under their supervision from violating the law or the Code and Standards.

• Question 3127:

  Which of the following is/are TRUE?

  I. Losses due to union strike at a plant are classified as extraordinary items.

  II. Unusual and infrequent items appear as part of income from continuing operations.

  III. Gains from debt retirement are classified as extraordinary items.

  IV.

  The loss from the sale of a portion of business segment is included in income from continuing operations.

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

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  Explanation

  Extraordinary items are those items are those which are unusual in nature and infrequent in occurrence. Extraordinary items appear segregated from the income from continuing operations on the Income Statement. Therefore, II is false. III is true under current GAAP. Losses due to a strike or the sale of a portion of a business segment are considered unusual but not infrequent and hence, do not qualify as extraordinary items.

• Question 3128:

  Mutual funds are distributed by

  A. three major methods: through brokers, through dedicated sales forces, or through direct purchase from the fund or direct marketing. Most no-load funds have been distributed through brokers, while most load funds have been distributed through direct marketing.
  B. two major methods: through a sales forces, or through direct purchase from the fund or direct marketing. Although most funds are currently distributed through direct marketing, there has recently been a trend toward distribution through a sales force.
  C. three major methods: through brokers, through dedicated sales forces, or through direct purchase from the fund or direct marketing. Most no-load funds have been distributed through a sales force, while most load funds have been distributed through brokers.
  D. two major methods: through a sales forces, or through direct purchase from the fund or direct marketing. Although most funds are currently distributed through a sales force, there has recently been a trend toward distribution through direct marketing.
  D. two major methods: through a sales forces, or through direct purchase from the fund or direct marketing. Although most funds are currently distributed through a sales force, there has recently been a trend toward distribution through direct marketing.

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  Explanation

  In the past, no-load funds were sold only through direct marketing because the lack of a sales fee made it difficult to compensate brokers or a dedicated sales force. More recently, some brokers have started distributing no-load funds. Currently, about 54% of funds are distributed through a sales force, while 34% are distributed through direct marketing.

• Question 3129:

  Using time series analysis you project that the Widget Index's sales per share will be $1,000. You also project that: Assuming a P/E ratio of 10X, project the Widget Index's value at year-end?

  A. $250
  B. $325
  C. $432
  D. $490
  D. $490

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  Explanation

  = [($Sales)(EBDIT profit margin) - ($D) - ($I)](1 - T)= [($1,000)(.15) - ($50) - ($30)](1 - .30) = $49Price at end = EPS(P/E) = (49)(10) = 490

• Question 3130:

  Standard I includes rules on which of the following?

  A. Professional Misconduct
  B. All of these answers
  C. Use of Professional Designation
  D. None of these answers
  E. Prohibition against Plagiarism
  D. None of these answers

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  Explanation

  Standard I refers to compliance with laws, rules and regulations and their violation. Standard II - Relationships with and Responsibilities to the Profession - includes rules on the use of Professional Designation, Professional Misconduct and Prohibition against Plagiarism.