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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3501:

  Which of the following best qualifies as a "cash equivalent?"

  A. A firm's investment in "held to maturity" U.S. treasury bonds that mature in 5 years.
  B. All of these answers.
  C. A firm's equity investment in an unconsolidated subsidiary of a privately held firm.
  D. A firm's investment in U.S. treasury bills.
  E. None of these answers.
  D. A firm's investment in U.S. treasury bills.

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  Explanation

  Only a firm's investment in U.S. treasury bills is correct because it is readily converted to cash. U.S. treasury bills have a maximum maturity of six months.

• Question 3502:

  The ________ gives an estimate for the spread between the required rate of return and the expected growth of dividends.

  A. none of these answers
  B. dividend yield
  C. P/E ratio
  D. yield-to-maturity
  B. dividend yield

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  Explanation

  The dividend yield gives an estimate for the spread between the required rate of return and the expected growth of dividends.

• Question 3503:

  The change in ________ is a compound effect of changes in wages per hour and changes in worker productivity.

  A. the rate of inflation
  B. unit labor costs
  C. foreign competition
  D. the profit margin
  B. unit labor costs

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  Explanation

  Unit labor will cost more if wages increase and cost less if worker productivity increases. Both these effects are considered.

• Question 3504:

  Stock dividends have the greatest impact on which section of the balance sheet?

  A. the components of stockholders' equity
  B. total stockholders' equity
  C. total assets
  D. total assets and total stockholders' equity
  E. retained earnings
  A. the components of stockholders' equity

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  Explanation

  The effect of stock dividends is recorded by transferring part of the retained earnings to the contributed capital accounts. Because of the increase in contributed, it is often described as capitalizing retained earnings.

• Question 3505:

  To claim compliance, firms must meet

  A. all composite, calculation, presentation and disclosure requirements of the AIMR Performance Presentation Standards.
  B. all composite, calculation, presentation and disclosure recommendations of the AIMR Performance Presentation Standards.
  C. all composite, calculation, presentation and disclosure requirements and recommendations of the AIMR Performance Presentation Standards.
  D. all composite, calculation, presentation and disclosure requirements and at least half of the recommendations of the AIMR Performance Presentation Standards.
  A. all composite, calculation, presentation and disclosure requirements of the AIMR Performance Presentation Standards.

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  Explanation

  To claim compliance, firms must meet all composite, calculation, presentation and disclosure requirements of the AIMR Performance Presentation Standards. Firms are also strongly encouraged to follow the recommended standards.

• Question 3506:

  The venture capital industry now funds investments such as

  A. companies seeking leveraged buyouts.
  B. none of these answers.
  C. hedged funds.
  D. companies in the mature stage of their life cycle.
  E. all of these answers are correct.
  F. companies emerging from bankruptcy.
  A. companies seeking leveraged buyouts.
  D. companies in the mature stage of their life cycle.
  F. companies emerging from bankruptcy.

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  Explanation

  Recently, the venture capital industry has begun to cover a broader range of investments including funding for:

  1. Established businesses that are in the process of expanding, just prior to the IPO stage.

  2. Companies in "turnaround" situations.

  3. Management seeking LBOs, also referred to MBOs of their companies.

• Question 3507:

  Proponents of which of the following theories would claim that companies seek to balance the tax shelter benefits of debt financing with the increased interest rates and risk of bankruptcy that come with increased debt levels?

  A. Modigliani and Miller's "with-taxes" Theory of Capital Structure
  B. Bird-in-the-Hand Theory
  C. Modigliani and Miller's Theory of Capital Structure
  D. Tax Preference Theory
  E. Signaling Theory
  F. Trade-off Theory of Leverage
  F. Trade-off Theory of Leverage

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  Explanation

  Trade-off Theory of Leverage The Trade-off Theory of Leverage claims that firms will seek to balance the tax-shelter benefits of debt financing with the increased interest costs and risk of bankruptcy that come with increased debt levels. The Trade-off Theory of Leverage came about largely from criticisms raised against the Modigliani andMiller Theory of Capital Structure under the "with-taxes" assumption. MandM claimed that, under a restrictive set of assumptions, the value of firms would be maximized only when their capital structure is comprised of 100% debt. The Trade-off Theory of Leverage proposed a more realistic and moderate answer to the Capital Structure debate, and remains an important milestone in the field of Pure Finance.

• Question 3508:

  According to the infinite period Dividend Discount Model, an increase in the spread between the required rate of return on a common stock and the expected growth rate in its dividends will probably cause

  A. the stock price to decrease.
  B. price effects that cannot be predicted with the given information.
  C. earnings to fall.
  D. the stock price to increase.
  A. the stock price to decrease.

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  Explanation

  According to the infinite period Dividend Discount Model, the value of a common stock is equal to a fraction with next period's dividend in the numerator, and the spread between the required rate of return and the expected growth rate in dividends in the denominator. An increase in the spread will increase the value of the denominator, thereby decreasing the value of the stock.

• Question 3509:

  To examine the trends over time within a single firm or compare firms of different sizes, you should use:

  A. balance-sheet analysis.
  B. common industry analysis.
  C. common-size statements.
  D. cash flow analysis.
  C. common-size statements.

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  Explanation

  Common size statements normalize the financial data to allow easier comparison of different-size firms.

• Question 3510:

  Lincoln Lodging Inc. estimates that if its sales increase 10 percent then its net income will increase 18 percent. The company's EBIT equals $2. 4 million, and its interest expense is $400,000. The company's operating costs include fixed and variable costs. What is the level of the company's fixed operating costs?

  A. $2,125,000
  B. $2,000,000
  C. $1,200,000
  D. $666,667
  E. $450,000
  C. $1,200,000

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  Explanation

  We're given enough information to find both DFL and DTL.

  DTL = .18/.10 = 1.8.

  DFL = $2,400,000/($2,400,000 - $400,000) = 1.2

  Given DTL = DFL x DOL, we can calculate DOL = 1.5. Recognizing S - VC - FC = EBIT, 1.5 = (S - VC)/$2,400,000 or S - VC = $3,600,000. The difference between (S - VC) and EBIT must represent fixed operating costs. Thus, FC =

  $3,600,000 - $2,400,000 = $1,200,000.