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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3141:

  The cumulative effect of changing to a new accounting principle on the amount of retained earnings at the beginning of the period in which the change is made should be included in net income of ________.

  A. the period of change and future periods
  B. the period of change
  C. future periods
  D. none of these answers
  E. neither future periods nor the period of change
  B. the period of change

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  Explanation

  A change from one acceptable method of accounting to another should be accounted for as the cumulative effect of a change in accounting principle. The cumulative effect should be recognized as a component of net income, net of tax effect, in the period of change.

• Question 3142:

  A 5-year project requires an initial outlay of 650. It also needs capital spending of 700 at the end of year 1 and 900 at the end of year 2. It has no revenues for the first 2 years but receives 1,200 in year 3, 1,600 in year 4 and 2,300 in year 5. If the project's cost of capital is 7. 5%, the project's MIRR equals ________.

  A. 21%
  B. 17%
  C. 14%
  D. 7. 5%
  A. 21%

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  Explanation

  The MIRR is defined as that rate which discounts the terminal value of the cash inflows to equate to the present value of a project's costs (using the project's cost of capital). This can be better understood using actual numbers. The present value of the costs = 650 + 700/1.075 + 900/1.075^2 = 2,080. The terminal value (future value at the end of year 5) of the project equals 1,200*1.075^2 + 1,600*1.075 + 2,300 = 5406. 75. Note that both these are calculated using the project's cost of capital. Then, MIRR satisfies 2,080 = 5406. 75/(1+MIrr)^5. Solving gives MIRR = 21%.

• Question 3143:

  Hercules Poirot has just received the AIMR letter, informing him that he has passed the Level III exam in the CFA program. He changes his resume to reflect this information. The header now says, "Hercules Poirot, CFA," the "CFA" written in a smaller font. With respect to Standard II (A) - Use of Professional Designation - if Hercules circulates this resume, he will:

  A. have violated Standard II (A). He cannot use the CFA designation till AIMR informs him that he has earned the charter.
  B. have violated Standard II (A). He cannot put the CFA designation on his business card immediately after his name.
  C. have violated Standard II (A). He cannot claim to be a CFA till he obtains the final diploma from AIMR.
  D. not have violated Standard II (A).
  A. have violated Standard II (A). He cannot use the CFA designation till AIMR informs him that he has earned the charter.

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  Explanation

  A candidate earns a CFA charter only after he has passed all 3 exams and has accumulated sufficient professional experience to satisfy the requirements of the program. Till the ICFA Board approves his candidacy, Hercules cannot use the designation, "CFA."

• Question 3144:

  A study by the National Park Service revealed that 50% of the vacationers going to the Rocky Mountain region visit Yellowstone Park, 40% visit the Tetons and 35% visit both. What is the probability that a vacationer will visit at least one of these magnificent attractions?

  A. None of these answers
  B. 0.55
  C. 0.95
  D. 0.05
  E. 0.35
  B. 0.55

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  Explanation

  0.5 + 0.4 - 0.35 = 0.55

• Question 3145:

  A bond does not pay initial coupon payments but instead accrues them over a pre-determined period and then pays a lump sum at the end of that period. The bond subsequently pays regular coupon payments until maturity. Such a bond is best described as:

  A. a step-up note
  B. a zero-coupon bond
  C. a deferred-coupon bond
  C. a deferred-coupon bond

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  Explanation

• Question 3146:

  The management of Intelligent Semiconductor is considering the creation of a new manufacturing facility. The following information applies to the new facility:

  Initial investment outlay: ($50,200,000)

  t1: ($3,000,000)

  t2: ($1,500,000)

  t3: $12,000,000

  t4: $20,000,000

  t5: $25,000,000

  t6: $25,000,000

  t7: $20,000,000

  t8: ($1,500,000)

  t9: ($3,000,000)

  t10: $500,000

  Assuming a 15% discount rate, along with a $0.00 salvage value at the end of year 10, what is the Modified Internal Rate of Return for this project?

  A. 13. 19%
  B. 9.88%
  C. 12. 66%
  D. 14. 61%
  E. 13. 90%
  F. Because this is a non-normal project, the Modified Internal Rate of Return cannot be calculated.
  E. 13. 90%

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  Explanation

  Remember that the Modified Internal Rate of Return escapes many of the pitfalls associated with the traditional Internal Rate of Return calculation. One such pitfall is the fact that the traditional IRR cannot produce reliable calculations for

  "non-normal" projects, such as the project illustrated in this example. The Modified Internal Rate of Return, however, escapes this basic flaw and can be used to evaluate virtually any project. The calculation of the answer in this example is as

  follows:

  Step 1: Determine the Future Value of the cash inflows by compounding each positive inflow by the cost of capital. This value is often referred to as the "Terminal Value." Remember that in this example, the positive cash inflows begin at

  period 3.

  Step 2: Determine the Present Value of the cash outflows by discounting each negative inflow by the cost of capital. The cash inflows to be discounted occur in periods 1, 2, 8, and 9. Step 3: Determine the rate that equates the PV of the cash

  outflows to the FV of the cash inflows. The calculation of the FV of the cash inflows is shown as follows:

  FV of the cash inflows = {[$12,000,000 * 2. 660] + [$20,000,000 * 2. 313] + [$25,000,000 * 2. 011] + [$25,000,000 * 1.749] + [$20,000,000 * 1.521] + [$500,000 * 1]} = $203,100,000.

  This is the terminal value.

  The calculation of the PV of the cash outflows is calculated as follows:

  PV of the cash outflows = {$50,200,000 + [$3,000,000 / 1.15] + [$1,500,000 /1.323] + [$1,500,000 / 3. 059] + [$3,000,000 / 3. 518]} = $55,285,596. 07 Now that the present and future (terminal) values of the cash flows have been determined,

  the Modified Internal Rate of Return can take place. The following values are imputed into the Present Value worksheet on your calculator:

  PV =($55,285,596), FV = $203,100,000, N = 10, PMT = $0.00, Compute I. Imputing these values will yield an answer of 13. 896% for the Modified Internal Rate of Return.

• Question 3147:

  Given that an individual owns a common stock with a required rate of return of 15%, on which he expects to receive a dividend of $5 after one year, after which time he will immediately sell it for an expected price of $30, what is the value of the common stock to the individual?

  A. $30.94
  B. $30.43
  C. $31.09
  D. $35
  E. Not enough information
  B. $30.43

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  Explanation

  According to the dividend discount model with a finite horizon, the value of a common stock to the owner is the present value of the future dividends that he will receive, and the present value of the price for which he will sell the stock. In this question, the value of the stock will be 5/1.15 + 30/1.15 = $30.43

• Question 3148:

  Project A has an internal rate of return of 18 percent, while Project B has an internal rate of return of 16 percent. However, if the company's cost of capital (WACC) is 12 percent, Project B has a higher net present value. Which of the following statements is most correct?

  A. All of these answers are correct.
  B. The crossover rate for the two project is less than 12 percent.
  C. None of these answers are correct.
  D. Assuming that the two projects have the same scale, Project A probably has a faster payback than Project B.
  E. Assuming the timing of the two projects is the same, Project A is probably of larger scale than Project B.
  D. Assuming that the two projects have the same scale, Project A probably has a faster payback than Project B.

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  Explanation

  Draw out the NPV profiles of these two projects. As B's NPV declines more rapidly with an increase in discount rates, this implies that more of the cash flows are coming later on. Therefore, Project A has a faster payback than Project B.

• Question 3149:

  Which of the following factors affect(s) a firm's optimal pay-out ratio?

  I. The availability and cost of external capital.

  II. The investment opportunities available.

  III. The firm's target debt-to-equity ratio.

  IV.

  Investors' preference for dividends versus capital gains.

  A. II only
  B. I only
  C. I, II, III and IV
  D. IV only
  E. I, II and III
  F. I and III
  G. III only
  H. III and IV
  C. I, II, III and IV

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  Explanation

  A firm must consider all of these factors while determining what fraction of the earnings it should pay out. It should be noted that another factor that must be considered is the capability of keeping the dividends stable over time.

• Question 3150:

  If you deposit $900 a year, beginning next year, for 20 years into an account paying 8% per year, compounded annually, how much is in your account after that last deposit?

  A. $40,598.15
  B. $50,003. 98
  C. $530,118.37
  D. $48,304. 12
  E. $41,185. 77
  E. $41,185. 77

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  Explanation

  On the BAII Plus, press 20 N, 8 I/Y, 0 PV, 900 PMT, CPT FV. On the HP12C, press 20 n, 8 i, 0 PV, 900 PMT, FV. On the BAII Plus, make sure the value of P/Y is set to 1. Note that the answer is displayed as a negative number.