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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3481:

  Past experience of a large manufacturing firm with administering a test to recent college graduates who had applied for a job revealed that the mean test score was 500, and the standard deviation was 50. The distribution of the test scores was normal. Based on this experience, management is considering placing a person whose scores is in the upper 6 percent of the distribution directly into a responsible position. What is the lowest score a college graduate must earn to qualify for a responsible position?

  A. None of these answers
  B. 460
  C. 625
  D. 578
  E. 50
  D. 578

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  Explanation

  Find the z value representing 44% of the area under the curve. From the z tables, z = 1.55. Using z = (x-u)/sigma. 1.55 = (x-500)/50. x = 577. 5

• Question 3482:

  Which of the following companies has the highest degree of financial leverage? Choose the best answer. Firm A EBIT: $10,000,000 Interest Paid: $750,000 Total Operating Expenses: $25,000,000 Fixed Operating Expenses: $19,750,000 Firm B EBIT: $8,970,000 Interest Paid: $88,000 Total Operating Expenses: $20,050,000 Fixed Operating Expenses: $17,000,000 Firm C EBIT: $10,500,000 Interest Paid: $1,050,000 Total Operating Expenses: $50,000,000 Fixed Operating Expenses: $35,000,000 Firm D EBIT: $10,000,000 Interest Paid: $750,000 Total Operating Expenses: $50,000,000 Fixed Operating Expenses: $41,000,000 Firm E EBIT: $5,195,000 Interest Paid: $400,000 Total Operating Expenses: $35,000,000 Fixed Operating Expenses: $9,875,000

  A. Firm A
  B. Firm E
  C. Firm B
  D. Firm C
  E. Firm D
  F. Firm A and D have identical DFL's
  D. Firm C

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  Explanation

  The Degree of Financial Leverage (DFL) measures the percentage change in EPS that results from a given percentage change in EBIT. Financial Leverage is the second component of total leverage, along with Operating Leverage. The equation used to calculate the Degree of Financial Leverage is as follows: {DFL = [EBIT/(EBIT - Interest Paid)]}. In this example, Firm C has the highest DFL, with a figure of 1.11. While Firm A and D do have identical Degree of Financial Leverage calculations, the question asks which firm has the highest DFL, which is firm C. When calculating the DFL figure, remember that the answer can never be less than one, and can never be negative. In a situation where the company under examination has zero interest expense, the DFL would be equal to one; i.e. the EBIT is equal to the EBIT minus the interest expense. Another important note to remember is that in calculating the Degree of Financial Leverage, dividend payments to preferred stockholders should be included in the interest expense figure. Operating expenses are not factored into the DFL calculation, rather are used in the determination of Operating Leverage.

• Question 3483:

  Clay Industries, a large industrial firm, is examining its capital structure. The firm is financed according to the following schedule based on market values:

  50% debt

  40% common stock

  10% perpetual preferred stock

  Additionally, consider the following information:

  Yield on outstanding debt: 8.50%

  Tax rate: 35%

  Annual preferred dividend: $2. 55

  Preferred stock price: $25. 97

  Return on equity: 16. 75%

  Dividend payout ratio: 50%

  Cost of common stock: 14. 25%

  Using this information, what is the Weighted Average Cost of Capital for Clay Industries?

  A. 8.97%
  B. 9.37%
  C. 9.45%
  D. 9.25%
  E. 9.37%
  F. None of these answers
  C. 9.45%

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  Explanation

  In order to calculate the WACC, it is necessary to first calculate the component after-tax cost of debt, common equity, and preferred equity. Once the cost of these components is determined, they are imputed into the WACC equation, which is

  as follows:

  {WACC = [(% weight of debt securities * cost of debt) + (% weight of common stock * cost of common stock) + (% weight of preferred stock * cost of preferred stock)]} To calculate the component cost of debt, use the following equation:

  {After-tax cost of debt = [yield on outstanding debt securities * (1 - tax rate)}

  Factoring in the given information into this equation would yield the following:

  {After-tax cost of debt = [8.50% * (1 - 0.35%)]} = 5. 525%

  To calculate the component cost of outstanding preferred stock, the following equation must be used:

  {Cost of preferred stock = [annual dividend / preferred stock price]}

  {Cost of preferred stock - = [$2. 55 / $25. 97]} = 9.82%.

  The final component of the WACC calculation, the cost of common equity, has been provided as 14. 25%.

  Now that the after-tax cost of debt, preferred stock, and common stock have been determined, the WACC calculation can be found. The calculation of the WACC is as follows:

  {[0.50 * 0.05525] + [0.40 * 0.1425] + [0.10 * 0.0982]} = 9.445%

• Question 3484:

  The accumulated depreciation account should show

  A. total depreciation for fixed assets since the business was formed
  B. current depreciation expense plus estimated depreciation for next year
  C. total depreciation for fixed assets still in use
  D. only the depreciation expense recognized during the current year
  C. total depreciation for fixed assets still in use

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  Explanation

  Depreciation recognized and accumulated on fixed assets still on the books is reflected in the Accumulated Depreciation account(s).

• Question 3485:

  The probability that events A and B do not occur simultaneously equals 0.77. The probability of neither A nor B occurring equals 0.38. If P(A) equals 0.26, the probability of B occurring equals ________.

  A. 0.43
  B. 0.59
  C. 0.62
  D. 0.21
  B. 0.59

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  Explanation

  The probability that events A and B do not occur simultaneously equals one minus the probability that events A and B occur simultaneously. Thus,

  P(A and B) = 1 - 0.77 = 0.23.

  The probability of neither A nor B occurring equals one minus the probability of either A or B occurring. Thus, P(A or B) = 1 - 0.38 = 0.62.

  Now, P(A or B) = P(A) + P(B) - P(A and B). Therefore, P(B) = P(A or B) - P(A) + P(A and B) = 0.62 - 0.26 + 0.23 = 0.59.

• Question 3486:

  If you deposit $5,000 into an account paying 9% per year, compounded monthly, how much do you have in the account in 10 years?

  A. $5,403. 52
  B. $12,001.66
  C. $9,116. 87
  D. $2,039.69
  E. $12,256. 79
  E. $12,256. 79

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  Explanation

  On the BAII Plus, press 120 N, 9 divide 12 = I/Y, 5000 PV, 0 PMT, CPT FV. On the HP12C, press 120 n, 9 ENTER 12 divide i, 5000 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3487:

  An investor buys a 15-year, 10 percent annual pay coupon bond for $1,000. He plans to hold the bond for 5 years while reinvesting the coupons at 12 percent. At the end of the 5-year period he feels he can sell the bond to yield 9 percent. What is the expected realized (horizon) yield?

  A. 10.0%.
  B. 11.8%.
  C. 11.2%.
  D. 12. 2%.
  C. 11.2%.

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  Explanation

  The key to this problem is to find all future cash flows. N = 5, I/Y = 12, PMT = 100, PV = 0CPT FV = 635. 28 = VALUE OF COUPONSN = 10, I/Y = 9, PMT = 100, FV= 1000CPT PV = 1,064. 18 = VALUE OF BOND 5 YEARS OUT Realized Return =

  

  Question-LI-SS14-LOS1A-a-answer-1

  

  Question-LI-SS14-LOS1-A-a-answer-2

• Question 3488:

  Vanderheiden Inc. is considering two average-risk alternative ways of producing its patented polo shirts. Process S has a cost of $8,000 and will produce net cash flows of $5,000 per year for 2 years. Process L will cost $11,500 and will produce cash flows of $4,000 per year for 4 years. The company has a contract that requires it to produce the shirts for 4 years, but the patent will expire after 4 years, so the shirts will not be produced after 4 years. Inflation is expected to be zero during the next 4 years. If cash inflows occur at the end of each year, and if Vanderheiden's cost of capital is 10 percent, by what amount will the better project increase Vanderheiden's value?

  A. $1,179.46
  B. $1,237. 76
  C. $677. 69
  D. $1,312. 31
  E. $1,098.89
  B. $1,237. 76

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  Explanation

  0 k = 10%1234

  S

  -8,0005,0005,0005,0005,000

  -8,000

  -3,000

  IRR(S) = 16. 26%.

  NPV(S) = $1,237. 76. (extended NPV)

  0 k = 10%1234

  -11,5004,0004,0004,0004,000

  IRR(L) = 14. 66%.

  NPV(L) = $1,179.46.

• Question 3489:

  An increase in the tax rate ________ the optimal debt-to-equity ratio. It ________ the after-tax cost of debt. Assume all else equal.

  A. this answer cannot be generated because "tax" is not a factor in the optimal debt-to-equity ratio
  B. increases; increases
  C. this answer cannot be generated because "tax" is not a factor in after-tax cost of debt
  D. decreases; increases
  E. increases; decreases
  F. decreases; decreases
  E. increases; decreases

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  Explanation

  Since interest payments are tax deductible, higher tax rates make debt more attractive relative to equity, increasing the optimal D/E ratio. The after-tax cost of debt decrease, assuming that the pre-tax cost of debt is not affected by the change in the tax rate (in reality, it could increase due to decreased profitability of the firm and the resultant decrease in its solvency).

• Question 3490:

  When merchandise inventory is purchased under a periodic system, which account is debited?

  A. Accounts Payable
  B. Cash
  C. Merchandise Inventory
  D. Purchases
  D. Purchases

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  Explanation

  The periodic inventory system records purchases of merchandise inventory in an income statement account called Purchases.