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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3441:

  Contrarians consider an increase in credit balances in brokerage accounts as:

  A. a hold signal.
  B. a bearish signal.
  C. none of these answers.
  D. a bullish signal.
  B. a bearish signal.

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  Explanation

  Credit balances with brokerages result when investors sell their stock holdings and leave the cash balances with their brokers, expecting to reinvest them shortly. Technical analysts view these balances as pools of potential purchasing power overhanging the market and hence believe that the market is bullish. Contrarians, on the other hand, believe that most market participants make wrong investment decisions as the market approaches the peak or trough in a cycle. Hence, contrarians consider a large increase in credit balances as a bearish signal.

• Question 3442:

  A firm has to pay 1.5% fee to underwriters when it issues new equity. The firm has a dividend payout ratio of 37% and a return on equity of 13. 9%. The firm has just announced earnings of $3. 27 per share. If the stock's cost of external equity is 14. 9%, how much capital would the firm raise by issuing 6 million shares?

  A. $111.12 million
  B. none of these answers
  C. $98.33 million
  D. $130.55 million
  D. $130.55 million

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  Explanation

  IF F is the percentage flotation cost and P is the amount of new equity raised per new share, then

  P = D1/[(Ke - g)(1-F)], where Ke is the cost of external equity and D1 is next year's expected dividend.

  Also, g = ROE*retention ratio = ROE*(1-payout ratio) = 13. 9%*(1-37%) = 8.76%. D1 = 3. 27*0.37*(1+8.76%) = $1.316. Therefore, P = 1.316/[(1-1.5%)*(14. 9% - 8.76%) = $21.76. By issuing 6 million shares, the firm will therefore raise 6*21.74

  = $130.55 million.

• Question 3443:

  An automobile manufacturer makes 2 different chassis, each of which can have 3 different body types and 8 colors. How many different looking cars can be made with these choices?

  A. 40.
  B. 24.
  C. 13.
  D. 48.
  D. 48.

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  Explanation

  The multiplication rule of counting states that the number of combinations available when there are n_1 options in one aspect, n_2 in another, and so on, up to n_k, is n_1 * n_2 * ... * n_k. In this case, the number of combinations is 2*3*8 =

  48.

• Question 3444:

  GAAP requires that:

  A. cash flows from interest related inflows and outflows on debt be considered investing cash flows.
  B. cash flows from dividend receipts be considered investing cash flows.
  C. all of these answers.
  D. none of these answers.
  D. none of these answers.

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  Explanation

  It is very important to remember the following points about dividends and interests:

  1. Dividends received from stock investments are considered operating cash flows.

  2.

  Dividends paid on equity are considered financing cash flows.

  3.

  Interest payments on debt are considered operating cash flows.

  4.

  Interest received from debt investments are considered operating cash flows.

• Question 3445:

  A liability can be recognized when

  A. when the amount is uncertain
  B. when the identity of the creditor is uncertain
  C. an obligation exists to make a future payment based on a past event
  D. all of these answers are correct
  D. all of these answers are correct

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  Explanation

  The amount or the creditor need not be certain and some future payments such as wages to be paid in the future may not be reported as liabilities.

• Question 3446:

  Government regulation of charitable organizations and public pension plans:

  A. has increased as these organizations have grown in size and importance.
  B. none of these answers.
  C. has lessened, since there is a growing trend away from charitable organizations since 1989.
  D. is still absent, although there is an effort to change this.
  A. has increased as these organizations have grown in size and importance.

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  Explanation

  Government regulation of charitable organizations and public pension plans has increased as these organizations have grown in size and importance. As such, members who are fiduciaries for these organizations must examine applicable law, client agreement and client guidelines for guidance as to their duties.

• Question 3447:

  Assume the following information about a publicly traded pharmaceutical firm:

  Revenue: $16,000,000 Cash flow: $1,700,000 Net worth per share: $14. 55 Number of common shares outstanding: 1,000,000 Required return: 21% per year Expected growth rate: 19% per year Next dividend: $1.05 per share

  Using this information, what are the price-to-sales, price-to-book, and price-to-cash flow ratios, respectively?

  A. The answer cannot be completely calculated from the information provided.
  B. 16, 52. 5, 0.0324
  C. 0.106, 38.4, 0.0324
  D. None of these answers is correct.
  E. 16, 52. 5, 30.88
  F. 0.106, 52. 5, 30.88
  A. The answer cannot be completely calculated from the information provided.

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  Explanation

  To calculate the price-to-sales, price-to-book, and price-to-cash flow ratios, it is necessary to know the price of the common stock in question at t0, which is not provided in this example.

• Question 3448:

  Given the following data, what will an arbitrageur earn after one year on a covered interest arbitrage if he begins with $1 million?

  In New York today Interest rate = 7%

  In London today spot rate = $1.75/L

  Interest rate = 12%

  In London one year forward rate = $1.68/L

  A. $7,560
  B. $5,200
  C. $4,300
  D. $3,580
  E. $6,800
  B. $5,200

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  Explanation

  Begin by borrowing $1,000,000 at 7%, owing $1,070,000 at year end.

  Convert the $1,000,000 to pounds at $1.75/L = L571,428.57 and invest this in London at 12% yielding L640,000 at year end. At the same time, sell the L640,000 forward at a rate of $1.68/L for delivery in one year yielding $1,075,200 at year

  end. At the end of the year, collect the L640,000 and deliver to the bank's foreign exchange dept. in return for $1,075,200. Repay the $1,070,000 from the $1,075,200 leaving a profit of $5,200.

• Question 3449:

  In January 1996, Weber Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Weber will be required by law to restore the land to its original condition at an estimated cost of $180,000. Weber believes it will be able to sell the property afterwards for $300,000. During 1996, Weber incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 1996 income statement, what amount should Weber report as depletion?

  A. $150,000
  B. $132,000
  C. $135,000
  D. $159,000
  E. $144,000
  E. $144,000

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  Explanation

  The depletion base is the purchase price of the land ($2,640,000), minus the value of the land after restoration $120,000 ($300,000 -180,000), plus any costs necessary to prepare the property for the extraction of ore ($360,000). The depletion charge is $2. 40 per ton ($2,640,000 -120,000 + 360,000) / 1,200,000 tons). Therefore, the firm should report $144,000 ($2. 40 X 60,000 tons) as 1996 depletion expense.

• Question 3450:

  Moynihan Motors has a cost of capital of 10.25 percent. The firm has two normal projects of equal risk. Project A has an internal rate of return of 14 percent, while Project B has an internal rate of return of 12. 25 percent. Which of the following statements is most correct?

  A. If the crossover rate (i.e., the rate at which the Project's NPV profiles intersect) is 8 percent, Project A will have a lower net present value than Project B.
  B. All of these answers are correct.
  C. If the projects are mutually exclusive, the firm should always select Project A.
  D. None of these answers are correct.
  E. Both projects have a positive net present value.
  E. Both projects have a positive net present value.

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  Explanation

  If the projects were independent, both should be accepted. They both have an IRR greater than the cost of capital, so they have positive NPVs. If the cost of capital were above 14%, both projects should be rejected. Project B will have a higher NPV at discount rates below 8% and Project A will have a higher NPV at discount rates above 8%.