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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3261:

  A portfolio manager with Churn Brothers Brokerage Company is asked to provide an a registered representative with a figure for the "risk-free interest rate." The portfolio manager references the quoted rate on U.S. Treasury 10-year notes,

  currently at 4. 75% per year, and uses this rate as the risk-free interest rate.

  Which of the following best describes the rate referenced by this portfolio manager? Further, what two components comprise this rate?

  A. Real interest rate; inflation premium, real inflation-free rate of return
  B. Nominal interest rate; risk premium, real inflation-free rate of return
  C. Nominal interest rate; inflation premium, real inflation-free rate of return
  D. Quoted intrinsic rate, inflation premium, real inflation-free rate of return
  E. Quoted interest rate; nominal interest rate, inflation premium
  F. None of these answers is correct.
  C. Nominal interest rate; inflation premium, real inflation-free rate of return

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  Explanation

  The risk-free rate as measured by the rate on U.S. Treasury securities often referred to as the "nominal," or "quoted," rate. This rate is comprised of two components, the real "inflation-free" rate of interest, and an inflation premium that is equal to the anticipated rate of inflation. The equation for the calculation of the nominal interest rate is as follows:

  Risk-free rate of return = k* + IP

  where: k* = the real inflation-free rate of return and IP = the inflation premium

  An increase in anticipated inflation will cause a change in the nominal risk-free rate equal to the change in expected inflation. For instance, if the inflation premium increases by 100 basis points, then the nominal risk-free interest rate will increase by 100 basis points. Further, if the inflation-free rate of interest experiences a change, that change will be identically mirrored in the nominal risk-free interest rate. For example, suppose the inflation-free rate of interest decreases by 50 basis points. In this situation, the result would be a 50 basis point reduction in the nominal risk-free rate of interest.

  When either the real "inflation-free" interest rate or the expected inflation rate are significantly large, the calculation of the nominal risk-free rate differs from the equation used when these factors are significantly small. Specifically, the calculation of the nominal risk-free rate of interest when theinflation-free rate of interest and/or the inflation premium are significantly high, the calculation of the nominal risk-free rate is as follows:

  Nominal RFR = (1 + Real RFR)(1 + E(I)) - 1

  Where: Real RFR = the real inflation-free rate of interest and E(I) = the anticipated inflation rate.

• Question 3262:

  When a plant asset is sold for more than its book value

  A. book value of the asset minus gain on disposal equals cash received
  B. cash received plus accumulated depreciation plus gain on disposal equals the original cost
  C. original cost minus accumulated depreciation equals cash received plus gain on disposal
  D. cash received plus accumulated depreciation minus gain on disposal equals the original cost
  D. cash received plus accumulated depreciation minus gain on disposal equals the original cost

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  Explanation

  Gain or loss on disposal of a fixed asset is calculated by subtracting the book value (Original cost - Accumulated Depreciation) from the cash received.

• Question 3263:

  Which of the following conditions are necessary for the IRR and NPV calculations to produce similar ranking decisions. Choose the best possible answer.

  A. Projects must have equal lifespans, projects must be of equal scale
  B. Projects must be independent, have equal lifespans, and must be equal in scale
  C. Projects must be of equal size and have equal life, and must have normal cash flows
  D. Projects must have equal lifespans, projects must have normal cash flows
  E. Projects must be mutually exclusive, have equal lifespans, and must be of equal scale
  C. Projects must be of equal size and have equal life, and must have normal cash flows

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  Explanation

  When examining mutually-exclusive projects with equal lifespans and of equal size, the IRR and NPV calculations will produce similar ranking results as long as the projects under examination have "normal" cash flows. It is when the projects under examination have "non-normal" cash flows that IRR calculations can experience difficulty. Non-normal cash flows are defined as cash flows in which negative flows are juxtaposed within a series of positive cash inflows, creating a situation in which the sign will change more than once. When examining these "non-normal" projects, the Internal Rate of Return method will often produce multiple answers which leads to an incorrect accept/reject decision.

• Question 3264:

  For a typical firm with a given capital structure, which of the following is correct? (Note: All rates are after taxes.)

  A. None of these answers.
  B. k(e) > k(s) > WACC > k(d).
  C. WACC > k(e) > k(s) > k(d).
  D. k(d) > k(e) > k(s) > WACC.
  E. k(s) > k(e) > k(d) > WACC.
  B. k(e) > k(s) > WACC > k(d).

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  Explanation

  k(d) = interest rate on the firm's new debt; k(e) = component cost of external equity, or equity obtained by issuing new common stock as opposed to retaining earnings; k(s) = component cost of retainedearnings (or internal equity). Typically, the cost of equity is higher than the cost of retained earnings because of flotation costs involved in issuing new common stock. The cost of debt is the lowest because it is the relevant cost of new debt, taking into account the tax deductibility of interest, and because of this deductibility of interest, it is the lowest component. The WACC is a weighted average of all the components, so it would be somewhere in the middle.

• Question 3265:

  ________ refers to measurable characteristics, such as household size, age structure, occupation, gender, and marital status.

  A. Characgraphics
  B. Socialgraphics
  C. Psychographics
  D. Demographics
  D. Demographics

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  Explanation

  By comparing demographic and psychographic trends to the features of a property, you can judge whether it is likely to gain or lose favor among potential buyers or tenants.

• Question 3266:

  Currency overlay portfolios must be valued at least ________.

  A. monthly
  B. yearly
  C. quarterly
  D. hourly
  E. daily
  C. quarterly

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  Explanation

  In accordance with the AIMR-PPS, currency overlay portfolios must be valued at least quarterly, but because of the volatile nature of these portfolios, firms may need to revalue currency overlay portfolios more frequently than quarterly to obtain full and fair disclosure.

• Question 3267:

  A net decline on an advance-decline series for the NYSE, coupled with a rising SandP 500 would, according to technical analysts,

  A. signal a market trough.
  B. signal a market peak.
  C. be neither particularly bullish nor bearish.
  D. be a bullish sign.
  B. signal a market peak.

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  Explanation

  Technical analysts predict that when a market index is going up, but most stocks post price declines, the market is near its peak. Conversely, they predict that when a market index is going down, but most stocks post price increases, the market is near its trough.

• Question 3268:

  The investment management company which handles the portfolio of an investment company is hired by ________.

  A. the investment company's board of directors
  B. the shareholders in the investment company
  C. none of these answers
  D. an advisory firm
  A. the investment company's board of directors

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  Explanation

  The investment management company which handles the portfolio of an investment company is hired by the investment company's board of directors.

• Question 3269:

  In a period of falling prices, the FIFO inventory method

  A. neither of these answers is correct
  B. both of these answers are correct
  C. magnifies the effects of the business cycle on income
  D. gives the lowest possible value for ending inventory
  B. both of these answers are correct

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  Explanation

  The first-in-first-out (FIFO) method is based on the assumption that the costs of the first items acquired should be assigned to the first items sold, therefore ending inventory on hand is based on the most recent prices.

• Question 3270:

  Consider the following annual growth forecasts for a common stock:

  Growth in years 1-2 = 30% Growth in years 3-4 = 20% Growth after year 4 = 15%

  Assuming that the last dividend was $0.80 per share, and the required rate of return is 17. 5% per year, what is the value of this common stock?

  A. $50.87
  B. $43. 59
  C. $58.12
  D. $47. 05
  E. None of these answers is correct.
  F. $61.78
  A. $50.87

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  Explanation

  To determine the value of a common stock experiencing temporary supernormal growth, use the following equation:

  {V = {[d0 * (1 + gs)^1] / k} + {[d1 * (1 + gs)^2} + ... {dn * (1 + gs)^n} + {[dn * (1 + gs)^n * (1 + gn] / (k - g)}/ (1 + k)^n}}

  Where: V = the value of common stock at t0, d0 = the dividend at t0, d1 = the dividend at t1, dn = the dividend at tn, gs = the supernormal rate of growth, gn = the normal rate of growth, n = the time period "n", and k = the required rate of

  return.

  In this example, there is a transitional growth period of two years, during which the growth rate of Composite Software is expected to grow at 25% annually. This period will follow the two-year supernormal growth period, and would be denoted as g subset t. The calculation of the value of this common stock is illustrated as follows:

  {V = {[$0.80 * (1.30)^1] / (1.175)^1} + {[$0.80 * (1.30)^2] / (1.175)^2} + {[$0.80 * (1.30)^2 * (1.20)^1] / (1.175)^3} + {[$0.80 * (1.30)^2 * (1.20)^2] / (1.175)^4} + {{[$0.80 * (1.30)^2 * (1.20)^2 * (1.15)^1]/ (0.175 - 0.15)}/ (1.175)^4}

  Which can be deduced to the following:

  {V = [$0.885106 + $0.979267 + $1.000102 + $1.021381 + $46. 98352] = $50.87}