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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3511:

  Which of the following is/are advantages of stock repurchases?

  I. Stock repurchases increase the price per share by reducing the number of shares.

  II. Stock repurchases are often viewed as a positive signal by investors, raising the intrinsic value of each share and increasing shareholder value.

  III.

  Stock repurchases allow firms to distribute funds to shareholders without raising "sticky" dividends.

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

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  Explanation

  The value of a stock repurchase does not come from a simple reduction in the number of shares outstanding. Remember that for this reduction, the firm must pay out part of its assets in the buy-back process. If such a buyback takes place at a fair price, the shareholder value is completely unaffected, for all you have done is exchanged cash for an equivalent value of common stock. The real wealth increase through a repurchase program arises from real and tangible effects like the interpretation of the program as a positive signal about future prospects. Further, if the management thinks that excess cash reserves are only temporary, then they would be reluctant to raise dividends and add instability to dividend policy. Repurchase programs allow them to distribute excess funds without paying them as dividends.

• Question 3512:

  ________ financing is one of the early stages of financing in venture capital.

  A. Mezzanine
  B. Asset-backed
  C. Turnaround
  D. Bridge
  E. none of these answers.
  F. Seed
  F. Seed

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  Explanation

  There are three early stages of financing:

  1. Seed financing. This is capital (typically less than $50,000) that is provided at the "idea" stage, which goes for product development and market research.

  2. Start-up financing. This capital is used in product development and initial marketing for firms in business under one year and has not sold their product commercially.

  3. First-stage financing. This is capital provided to initiate commercial manufacturing and sales.

• Question 3513:

  ________ financing is used to restructure a financially troubled company.

  A. None of these answers
  B. Leveraged-buyout
  C. Bridge
  D. Management-buyout
  E. Turnaround
  E. Turnaround

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  Explanation

  Turnaround financing is capital is used to restructure a troubled company that is at a more established stage of development.

• Question 3514:

  ERISA fiduciaries must adhere to the following prudent procedures:

  -establish a written investment policy for the plan

  -diversify plan assets

  - make investment decisions with the skill and care of a ________

  -monitor investment performance

  -control investment expenses

  -

  avoid prohibited transactions

  A. member
  B. supervisor
  C. prudent expert
  D. none of these answers
  E. trader
  C. prudent expert

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  Explanation

  These procedures are stipulated under the detailing of ERISA fiduciary duties, to ensure that the fiduciary complies with the duty to act with prudence. Under ERISA, the fiduciary is held to a higher standard than the Prudent Man Rule. The ERISA fiduciary needs to be as prudent as the average expert, not simply as prudent as the average person.

• Question 3515:

  Conrad Corp. has an investment project with the following cash flows: TimeProject Cash Flows 0-$1,000 2-300 4-700 The company's WACC is 12 percent. What is the project's modified internal rate of return (MIRR)?

  A. 5. 68%
  B. 3. 95%
  C. 6. 83%
  D. 3. 20%
  E. 2. 63%
  B. 3. 95%

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  Explanation

  Find the present value of the outflows:

  t = 0: -1,000

  t = 2: N = 2, I = 12, PMT = 0, FV = 300, and solve for PV = -$239.1582.

  t = 4: N = 4, I = 12, PMT = 0, FV = 700, and solve for PV = -$444. 8627.

  Total PV(Costs) = -$1,000 - $239.1582 - $444. 8627 = -$1,684. 0209.

  Find the future value of the inflows:

  t = 1: N = 4, I = 12, PV = -200, PMT = 0, and solve for FV = $314. 7039.

  t = 3: N = 2, I = 12, PV = -900, PMT = 0, and solve for FV = $1,128.96.

  t = 5: N = 0, I = 12, PV = -600, PMT = 0, and solve for FV = $600.

  Total FV(Inflows) = $314. 7039 + $1,128.96 + $600 = $2,043. 6639.

  Then find the MIRR:

  N = 5

  PV = -1,684. 0209

  PMT = 0

  FV = 2,043. 6639

  Solve for MIRR = I = 3. 9471%.

• Question 3516:

  The date on which a company actually distributes a dividend is known as the:

  A. Ex-Dividend Date
  B. Holder-of-Record Date
  C. Declaration Date
  D. Expiration Date
  E. Payment Date
  E. Payment Date

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  Explanation

  The "Payment Date" is the date that a company actually mails the dividend checks.

• Question 3517:

  Topaz Metals Inc. produces precious metals from its mining operations. The selling price for its product is reasonably assured, the units are interchangeable, and the costs of selling and distributing the product are insignificant. In order for Topaz to recognize revenue as early in the revenue cycle as is permitted under generally accepted accounting principles, the revenue recognition method that Topaz should use is the ________.

  A. percentage-of-completion method
  B. production method
  C. cash method
  D. completed-contract method
  E. cost recovery method
  B. production method

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  Explanation

  Revenue is recognized when the conditions of "realized" or "realizable" and earned are met. If products are readily realizable because they are salable at reliably determinable prices without significant effort, revenues may be recognized at completion of production.

• Question 3518:

  Over a given year, a firm's total assets increased by $7,000 and total liabilities decreased by $4,000. If the firm did not issue any new equity and paid out $1,500 in dividends, then its net income during the year was ________.

  A. $1,500
  B. $9,500
  C. $4,500
  D. $12,500
  D. $12,500

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  Explanation

  Total assets - Total liabilities = Equity. Hence,

  Change in Assets - Change in Liabilities = Change in Equity.

  Thus, change in equity = 7,000-(-4,000) = $11,000

  All of the net income not paid out as dividends goes into increasing the equity. Since no new shares were issued, Net Income = change in equity + dividends paid. This gives net income = $11,000+$1,500 = $12,500.

• Question 3519:

  When the number of discouraged workers increases during a severe recession,

  A. the measured unemployment tends to overstate the severity of the unemployment problem.
  B. the measured unemployment tends to understate the severity of the unemployment problem.
  C. frictional unemployment will rise.
  D. the natural unemployment will decline.
  B. the measured unemployment tends to understate the severity of the unemployment problem.

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  Explanation

  Persons who have given up searching for employment because they believe additional job search would be fruitless are termed discouraged workers. Because they are not current searching for work, they are not counted among the unemployed. As a result, the number of unemployed workers will be understated since unemployed individuals will drop out of the labor force and thus not be counted as unemployed.

• Question 3520:

  The research analyst for a stock brokerage firm wants to compare the dispersion in the price-earnings ratios for a group of common stock with their return on investment. For the price-earnings ratios, the mean is 10.9 and the standard deviation is 1.8. The mean return on investment is 25 percent and the standard deviation is 5. 2 percent. What is the relative dispersion for the price earnings ratios and return on investment?

  A. None of these answers
  B. Ratios 50.0 percent, investment 10.0 percent
  C. Ratios 132. 0 percent, investment 190.0 percent
  D. Ratios 32. 0 percent, investment 19.0 percent
  E. Ratios 16. 5 percent, investment 20.8 percent
  E. Ratios 16. 5 percent, investment 20.8 percent

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  Explanation

  The respective CVs are found from (s*100)/mean. Ratios: 1.8*100/10.9 = 16. 5% and investment: 5. 2*100/25 = 20.8%.