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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3361:

  Jacques Fontenot wants to place an order to purchase 10,000 shares of BQ Inc. at a price of 75. 00 or below. The shares are currently trading for 82. 1 bid and .82. 2 ask. What type of order should Fontenot place?

  A. Market order.
  B. Stop loss order.
  C. Limit order.
  C. Limit order.

  ---

  Explanation

• Question 3362:

  A company estimates that its weighted average cost of capital (WACC) is 10 percent. Which of the following independent projects should the company accept?

  A. Project C requires an up-front expenditure of $1,000,000 and generates a positive internal rate of return of 9.7 percent.
  B. Project D has an internal rate of return of 9.5 percent.
  C. None of the projects should be accepted.
  D. Project B has a modified internal rate of return of 9.5 percent.
  E. Project A requires an up-front expenditure of $1,000,000 and generates a net present value of $3,200.
  E. Project A requires an up-front expenditure of $1,000,000 and generates a net present value of $3,200.

  ---

  Explanation

  This is the only project with either a positive NPV or an IRR which exceeds the cost of capital.

• Question 3363:

  Which of the following would not be reported as an extraordinary item?

  A. gain or loss on sale of fixed assets
  B. gain or loss from passing of a new law
  C. gain or loss from early retirement of debt
  D. uninsured loss from a flood
  A. gain or loss on sale of fixed assets

  ---

  Explanation

  An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.

• Question 3364:

  When estimating the industry net profit margin, it is suggested that you

  A. begin with profit before interest and taxes and then estimate interest.
  B. begin with profit after taxes and deduct dividends paid.
  C. begin with the operating profit margin and then estimate depreciation expense, interest expense, and the tax rate.
  D. calculate the average earnings per share.
  C. begin with the operating profit margin and then estimate depreciation expense, interest expense, and the tax rate.

  ---

  Explanation

• Question 3365:

  Which of the following statements is most correct?

  A. The optimal capital structure is the one that maximizes EBIT, and this always calls for a debt ratio, which is lower than the one that maximizes expected EPS.
  B. When financial leverage is used, the graphical probability distribution of net income would tend to be more peaked than a distribution where no leverage is present, other things held constant.
  C. From an operational standpoint the goal of maintaining financial flexibility translates into maintaining adequate reserve borrowing capacity.
  D. While business risk varies from one industry to another and can change over time, it affects all firms equally within a particular industry.
  E. All of these statements are false.
  C. From an operational standpoint the goal of maintaining financial flexibility translates into maintaining adequate reserve borrowing capacity.

  ---

  Explanation

  Even in normal times, a firm should maintain a reserve borrowing capacity, which is the ability to borrow money at a reasonable cost when good investment opportunities arise.

• Question 3366:

  All of the following are financing cash flows EXCEPT?

  A. cash payments on preferred dividends
  B. cash received from new debt
  C. cash changes in contributed capital from equity issue
  D. cash changes in retained earnings
  D. cash changes in retained earnings

  ---

  Explanation

  Cash changes in retained earnings arise from income and hence, are part of operating cash flows.

• Question 3367:

  A bell-shaped, symmetrical frequency distribution has a mean of 5 and a standard deviation of 2. 5. The percentage of observations less than zero is about:

  A. cannot be calculated
  B. 5%
  C. 10%
  D. 2. 5%
  D. 2. 5%

  ---

  Explanation

  Note that the mean is 2 standard deviations above zero. The fraction of observations in a bell-shaped, symmetrical frequency distribution which lie outside the 2-sigma range around the mean is about 5%. Since the distribution is symmetrical about the mean, the percentage of observations less than zero is approximately equal to 5%/2 = 2. 5%.

• Question 3368:

  Which of the following is/are true about a firm's stock?

  I. A decrease in the beta of a stock will raise its price.

  II. An increase in the variance of a stock will raise its price.

  III. An increase in the market's expected return will raise its price.

  IV.

  An increase in the risk aversion of investors will raise its price.

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

  ---

  Explanation

  A decrease in the beta of a stock decreases its expected return, causing its price to rise. On the other hand, an increase in the market's expected return or an increase in risk aversion raises the expected return on the stock, decreasing its price. Finally, an increase in the variance of the stock does not necessarily change its expected return. Only if the systematic component of the stock's variance changes will the expected return change, causing a price change.

• Question 3369:

  A sample of size 225 is drawn from a population. The sample mean equals 876 and the variance of the sample equals 5,924. The 85% confidence interval for the population mean is given by:

  A. [866. 2; 884. 6]
  B. [870.1; 882. 2]
  C. [868.6; 883. 4]
  D. [869.3; 882. 7]
  C. [868.6; 883. 4]

  ---

  Explanation

  If z is the z-value corresponding to the specified confidence level, the sample mean is M and the standard deviation is D in a sample size N, the confidence interval is specified as [M - z*D/sqrt(N), M + z*D/sqrt(N)]. In the present case, for the 85% confidence interval, the normal probability table gives z = 1.44. The sample standard deviation equals sqrt(5924) = 76. 97. Therefore, the confidence interval equals [876 - 1.44*76. 97/sqrt(225), 876 + 1.44*76. 97/sqrt(225)] = [868.6, 883. 4]

• Question 3370:

  Given that the expected dividend payout ratio on a common stock is 0.7, the required rate of return is 19%, the dividend and earnings growth rate is 15%, and current earnings are $1.38, using the earnings multiplier model, what is the estimated value of the stock?

  A. Not enough information
  B. $27. 83
  C. $43. 71
  D. $29.68
  E. $25. 53
  B. $27. 83

  ---

  Explanation

  The earnings multiplier model postulates that P/E = (D1/E)/(k -g), where P/E is the price to earnings ratio, D1 is next year's expected dividends, E is next year's earnings, k is the required rate of return, and g is the growth rate in dividends. D1/ E is also known as the dividend payout ratio. In this question, the P/E is (0.7) / (0.19 - 0.15) = 17. 5. Next year's earnings are equal to current earnings multiplied by the earnings (and dividend) growth rate (1.38 x 1.15 = $1.59). We can multiply P/E by next year's earnings to arrive at our expected stock value ((P/E) x E = P) In this question, the estimated value is 17. 5 x 1.59 = $27. 83.