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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3311:

  The confidence index

  A. is equal to Barron's average yield on 10 top-grade bonds divided by the yield on the Dow Jones average of 40 bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the confidence index as a bullish indicator; an increase in its value is a bullish sign.
  B. is equal to Barron's average yield on 10 top-grade bonds divided by the yield on the Dow Jones average of 100 bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the confidence index as a bearish indicator; an increase in its value is a bearish sign.
  C. is equal to the yield on the Dow Jones average of 40 bonds divided by Barron's average yield on 40 topgrade bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view index values of under 100 to be bearish, and index values over 100 to be bullish.
  D. is equal to the yield on the Dow Jones average of 80 bonds divided by Barron's average yield on 80 topgrade bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the index as a bullish indicator; an increase in its value is a bullish sign.
  A. is equal to Barron's average yield on 10 top-grade bonds divided by the yield on the Dow Jones average of 40 bonds, multiplied by 100. Technical analysts who try to follow the "smart money" would view the confidence index as a bullish indicator; an increase in its value is a bullish sign.

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  Explanation

  The confidence index measures the yield spread between high-grade bonds (Barron's 10 top-grade bonds) and a large cross section of bonds (the Dow Jones average of 40 bonds). The yields on high-grade bonds should always be lower than the average on a wide cross-section, so the index should always have a value below 100. During periods of high confidence, investors are willing to invest more in low-quality bonds, causing their yields to decrease relative to the yields on high-grade bonds. So when confidence is high, the value of the index increases.

• Question 3312:

  If you know that your firm is facing relatively poor prospects but needs new capital, and you know that investors do not have this information, signaling theory would predict that you would

  A. postpone going into capital markets until your firm's prospects improve.
  B. be indifferent between issuing debt and equity.
  C. issue debt to maintain the returns of equity holders.
  D. issue equity to share the burden of decreased equity returns between old and new shareholders.
  E. convey your inside information to investors using the media to eliminate the information asymmetry.
  D. issue equity to share the burden of decreased equity returns between old and new shareholders.

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  Explanation

  The announcement of a stock offering is generally taken as a signal that the firm's prospects as seen by its management are not bright.

• Question 3313:

  While comparing a firm that expenses costs with one that capitalizes them:

  I. The capitalizing firm always shows higher cash flow from operations.

  II. The cumulative difference between the cash flow from operations increases over time.

  III. The capitalizing firm pays lower taxes in the first year.

  IV.

  The capitalizing firm recognizes higher deferred tax liabilities.

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

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  Explanation

  Expensing charges the entire cost to CFO while capitalization leads to a charge against the investing cash flow. Over time, depreciation reduces the tax payments. Hence, the cumulative difference in the CFOs increases over time. The expensing firm reports lower income in the first year and hence, pays lower taxes.

• Question 3314:

  A firm has net total sales of 16,000 and administrative cash expense of 4,500. It paid taxes in the amount of 2,300 and had an increase in accounts payable of 400. The depreciation expense was estimated at 1,200. Then, the firm's operating cash flow was ________.

  A. 9,600
  B. 8,000
  C. 9,200
  D. none of these answers
  A. 9,600

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  Explanation

  The increase in accounts payable implies that some of the operating expenses were on credit and did not cause a cash outflow. Therefore, this increase must be added to the net sales. Further, depreciation should be ignored since it is a non-cash expense and its effect on taxes is already impounded in the taxes of 2,300. Hence, the total operating cash flow = 16,000 + 400 - 4,500 - 2,300 = 9,600

• Question 3315:

  A portfolio manager with Smith, Kleen, and Beetchnutty is trying to determine the earnings per share (EPS) for a software index, and has gathered the following information:

  Sales per share: $340 Next year's operating profit margin: 50% Next year's depreciation per share: $50 Next year's interest expense: $68 Next year's common stock dividend: $14 Next year's corporate tax rate: 35%

  Using this information, what is the EPS figure for this stock market series?

  A. $72. 15
  B. The answer cannot be calculated from the information provided.
  C. $24. 70
  D. $33. 80
  E. $83. 80
  F. None of these answers is correct.
  D. $33. 80

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  Explanation

  The estimation of EPS for a stock market series involves five steps. Specifically, to determine an estimate of EPS for a stock market series, it is necessary to:

  Estimate the sales per share

  Estimate next year's operating profit (EBIDT), or operating profit margin Estimate next year's depreciation per share

  Estimate next year's interest expense per share

  Estimate next year's corporate tax rate

  Once estimates for these components have been determined, they are put into the following equation:

  EPS for a stock market series = {[(Sales per share * operating profit margin) - depreciation per share - interest expense per share] * (1 - corporate tax rate).

  Imputing the given information into this equation will yield the following:

  EPS for a stock market series = {[($340 * 0.50) - $50 - $68] * (1 - 0.35)} = $33. 80

  If you chose $83. 80, remember that the depreciation figure is not added back to the EPS calculation. What we are looking at is an operating earnings after tax figure, not a cash-based figure.

  If you chose $24. 70, remember that common stock dividends are not incorporated into the EPS figure, only interest payments on debt and preferred securities.

• Question 3316:

  Berger Corporation has a profit margin of 10.0%, total asset turnover of 0.75, financial leverage of 1.6, and debt/equity ratio of 62. 5%. Profit margin is defined as Net income/Sales, total asset turnover is Sales/ Total assets, financial leverage is Total assets/Equity, and debt/equity ratio is Total debt/Equity. Berger\s payout ratio is 60.0%. If these ratios are sustainable for the long term, the best estimate of Berger's growth rate of earnings and dividends is:

  A. 4. 8%.
  B. 7. 2%.
  C. 7. 5%.
  A. 4. 8%.

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  Explanation

• Question 3317:

  What semiannual deposit is needed to accumulate $8,000 in 5 years if the account pays 7% per year, compounded semiannually, assuming that the first deposit is made in 6 months and also assuming that the account already has $1,250 in it today?

  A. $336. 15
  B. $677. 44
  C. $559.52
  D. $278.01
  E. $531.63
  E. $531.63

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  Explanation

  On the BAII Plus, press 10 N, 7 divide 2 = I/Y, 1250 PV, 8000 +/- FV, CPT PMT. On the HP12C, press 10 n, 7 ENTER 2 divide i, 1250 PV, 8000 CHS FV, PMT. Note that the answer this time is a positive number. This means that the $531.63 is a deposit in addition to the $1,250 original deposit. The $5,000 is entered as a negative number, because the $1,250 and the $531.63 are deposits and the $8,000 is a withdrawal. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3318:

  Jackson Jets is considering two mutually exclusive projects. The projects have the following cash flows: Project A Project B Time Cash FlowsC ash Flows 0-$10,000-$8,000 1 1,000 7,000 2 2,000 1,000 3 6,000 1,000 4 6,000 1,000 At what cost of capital, do the two projects have the same net present value?

  A. 13. 03%
  B. 12. 26%
  C. 11.20%
  D. 12. 84%
  E. 14. 15%
  A. 13. 03%

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  Explanation

  Find the differential cash flows by subtracting B's cash flows from A's cash flows for each year. CF(0) = -2,000 CF(1) = -6,000 CF(2) = 1,000 CF(3) = 5,000 CF(4) = 5,000 Enter these cash flows and solve for the IRR = crossover rate = 13. 03%.

• Question 3319:

  New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, the number of shares used in Diluted EPS equals ________.

  A. 575,000
  B. 500,000
  C. 600,000
  D. 200,000
  B. 500,000

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  Explanation

  With dilution, there are 300,000 additional shares from the convertible bonds. Preferred equity does not count. Therefore, the number of shares used in Diluted EPS equals 200,000 + 300,000 = 500,000.

• Question 3320:

  The employees of Cartwright Manufacturing are awarded efficiency ratings. The distribution of the ratings approximates a normal distribution. The mean is 400, the standard deviation 50. What is the area under the normal curve between 400 and 482?

  A. 0.4750
  B. 0.3413
  C. 0.5000
  D. 0.4495
  E. None of these answers
  D. 0.4495

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  Explanation

  z = (x-u)/sigma. z1 = 400 - 400/50 = 0 and z2 = 482 - 400/50 = 1.64. Therefore for z = 1.64, the area under the curve is 0.4495.