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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3181:

  Musgrave Corporation has fixed costs of $46,000 and variable costs that are 30 percent of the current sales price of $2. 15. At a price of $2. 15, Musgrave sells 40,000 units. Musgrave can increase sales by 10,000 units by cutting its unit price from $2. 15 to $1.95, but variable cost per unit won't change. Should it cut its price?

  A. No, EBIT decreases by $250.
  B. No, EBIT decreases by $6,000.
  C. Yes, EBIT increases by $8,050.
  D. Yes, EBIT increases by $11,500.
  E. Yes, EBIT increases by $5,050.
  C. Yes, EBIT increases by $8,050.

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  Explanation

  Calculate EBIT(1) at 40,000 units using the current sales price:

  EBIT(1) = S - VC - FC = 40,000($2. 15) - 0.30(40,000)($2. 15) - $46,000 = $86,000 - $25,800 - $46,000 = $14,200.

  Calculate EBIT(2) at 50,000 units using the lower price of $1.95:

  EBIT(2) = 50,000($1.95) - 0.30(50,000)($1.95) - $46,000 = $97,500 - $29,250 - $46,000 = $22,250.

  The change in EBIT = $22,250 - $14,200 = +$8,050.

  Yes, Musgrave should cut its price, EBIT increases by $8,050.

• Question 3182:

  The value of an asset is

  A. the present value of its expected future cash flows.
  B. the sum of its expected future cash flows.
  C. its replacement cost.
  D. its book value.
  A. the present value of its expected future cash flows.

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  Explanation

  One expects an asset to provide a stream of future cash flows during its lifetime. Future returns are worth less than current ones. One adjusts for this by taking the present value of all its expected cash flows.

• Question 3183:

  Laura Mack, is considering purchasing two Treasury securities. The first is the 7-year on-the-run Treasury issued last week that has a coupon rate of 4. 98%. The second is a 7-year off-the-run Treasury that was issued two months ago and has a coupon rate of 4. 74%. Which of the following statements regarding the two issues under consideration is most accurate?

  A. The on-the-run issue has higher reinvestment risk because of its higher coupon rate.
  B. The on-the-run issue has higher interest rate risk because of its higher coupon rate.
  C. Both the on-the-run and the off-the-run issues have equivalent interest rate risk.
  A. The on-the-run issue has higher reinvestment risk because of its higher coupon rate.

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  Explanation

• Question 3184:

  Which of the following are the two general approaches to the valuation process?

  A. The top-down, three-step approach, and the bottom-down, two-step approach
  B. The top-down, three-step approach, and the bottom-up stock picking approach
  C. The bottom-up, three-step approach, and the Monte Carlo approach
  D. The top-down, two-step approach, and the bottom-up, three-step approach
  B. The top-down, three-step approach, and the bottom-up stock picking approach

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  Explanation

  Advocates of the top-down, three-step approach believe that the economy and industry have an important effect on total returns of individual stocks. Advocates of the bottom-up stock picking approach believe that it is possible to find stocks that will have superior returns regardless of the economy and industry.

• Question 3185:

  What is the annual Internal Rate of Return of this series of annual cash flows: Year 0: <$10,000>, Year 1: $5,000, Year 2: $5,000, Year 3: $7,500? (Note that the <> are used to indicate a negative number).

  A. 31.45%
  B. 21.16%
  C. 34. 45%
  D. 20.03%
  E. 28.89%
  A. 31.45%

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 10000 +/- ENTER DownArrow 5000 ENTER DownArrow DownArrow 5000 ENTER DownArrow DownArrow 7500 ENTER DownArrow DownArrow 2nd Quit. Then press Irr CPT. On the HP12C, press these keys: 10000 CHS BlueShift CFo 5000 BlueShift CFj 5000 BlueShift CFj 7500 BlueShift CFj Then press YellowShift Irr. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard.

• Question 3186:

  A consulting firm is currently under contract with a Busy Bus and Van Lines, Inc., and has agreed to formulate various financial reports and trend projections for the Company. During the most recent month, the consulting firm has been able to determine the following; Busy Bus and Van Lines currently pays out 30% of its net income as dividends, and this rate is expected to remain stable. Additionally, Busy has maintained a steady ROE of 15% for the last ten years, and this is also expected to remain stable. The risk-free rate of return is 5. 35%, and the firm is in a 35% combined state/federal income tax rate. Finally, Busy Bus and Van Lines has informed the consulting firm that its shareholders require a 12. 5% or greater rate of return, and the firm's common stock is priced at $9.65. Using the Retention Growth Rate method, which of the following most closely resembles the growth rate of Busy Bus and Van Lines, Inc.?

  A. 12. 5%
  B. 184%
  C. 19.5%
  D. The growth rate of this firm cannot be determined from the information provided.
  E. 15. 85%
  F. 10.5%
  F. 10.5%

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  Explanation

  When security analysts estimate growth rates, the Retention Growth Rate method is often the method employed. In estimating growth using this model, the retention rate (defined as the percentage of net income that is retained within the firm and not distributed as dividends), is multiplied by the figure for ROE. The calculation of the answer in this example is as follows: {[1 - payout ratio 30%]

  * ROE 15%}= 10.5%. This method is most useful when the growth rate or the components of the equation are expected to remain stable.

• Question 3187:

  Kelly Windsor and Joe Agosti, expatriates working in Yemen, are studying for the Level 1 CFA examination. This week, they are focused on new concepts in the asset valuation material. While sitting on his balcony overlooking the desert, Agosti creates the following true/false question to test Windsor's knowledge of dollar-weighted and time-weighted returns. Which of the following statements did he make FALSE?

  A. If a client adds funds to an investment during an unfavorable market, the time-weighted return will be lower than actual.
  B. The dollar-weighted return applies the concept of internal rate of return (IRR) to investment portfolios.
  C. The time-weighted return measures the compound rate of growth of $1 over a stated time period.
  D. If the investment period is greater than one year, an analyst must use the geometric mean approach when using the time-weighted return method.
  A. If a client adds funds to an investment during an unfavorable market, the time-weighted return will be lower than actual.

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  Explanation

  The time-weighted method is preferred because it is not affected by the timing of cash flows. This statement should read, "If a client adds funds to an investment during an unfavorable market, the dollar-weighted return will be lower than actual." The other statements are true.

• Question 3188:

  Jones Rutherford, a portfolio manager with Churn Brothers Brokerage, has been examining a stock market series and is trying to determine the anticipated rate of return for the series. In his analysis, Jones has amassed the following information:

  Anticipated ending series value: 1475 Expected dividends during the period: $35 Observed beginning series value: 1310 Required rate of return: 19% per year

  What is the anticipated annual rate of return for this stock market series? (Assume a one-year holding period).

  A. 15. 27%
  B. 13. 56%
  C. 8.81%
  D. 9.92%
  E. None of these answers is correct.
  A. 15. 27%

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  Explanation

  To calculate the expected rate of return for a stock market series, the following information must be known:

  The beginning value for the series

  The anticipated ending value for the series, and

  The amount of any dividends and/or distributions during the period

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation:

  E(R) = [(EV - BV + Div) / BV]

  Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.

  In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows:

  E(R) = [$1475 - $1310 + $35] / $1310 = 15. 27%

  This is less than the required rate of return. Assuming that the figures for the ending value and the expected dividends are accurate, then investment in this stock market series is not likely warranted.

• Question 3189:

  Holding other things constant, an increase in a firm's ROE will

  A. have no effect on the firm's expected growth rate.
  B. decrease the earnings multiplier.
  C. increase the earnings multiplier.
  D. decrease the firm's expected growth rate.
  C. increase the earnings multiplier.

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  Explanation

  An increase in a firm's return on equity (ROE) will increase its expected growth rate of earnings and dividends. This, in turn, will increase the earnings multiplier.

• Question 3190:

  Which of the following factors in the discounted cash flow approach to estimating the cost of common equity is the least difficult to estimate?

  A. All of these answers are equally difficult to estimate.
  B. Expected rate of return.
  C. Required return.
  D. Dividend yield.
  E. Expected growth rate.
  D. Dividend yield.

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  Explanation

  It is easy to determine the dividend yield since the dividend and the price of the stock are known. It is more difficult to establish a proper growth rate or beta as required in the other factors.