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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3581:

  Which of the following is/are true about the Performance Presentation Standards?

  I. A member who complies with the mandatory requirements of the PPS but does not follow the recommended requirements can publicly claim compliance with the PPS.

  II. The PPS are designed to be primarily a performance measurement framework.

  III.

  The Standards are not designed to enhance or detract from the presentation of historical results.

  A. III only
  B. II and III only
  C. I, II and III
  D. I and III only
  D. I and III only

  ---

  Explanation

  The PPS are designed to be primarily a performance presentation system, not a performance measurement system. The Standards are not designed to enhance or detract from the usefulness of the information in historical results, though it does restrict the way they are to be presented. The PPS are voluntary standards and are not necessarily binding on AIMR members. Some standards are mandatory while others are recommended. To claim compliance, members must abide by the mandatory requirements, at the very least.

• Question 3582:

  What is the net operating income (NOI) of this property?

  A. $113,124.
  B. $108,599.
  C. $92,886.
  D. $97,410.
  C. $92,886.

  ---

  Explanation

  108,660 - 15,714 = 92,886

• Question 3583:

  The majority of venture capital funds are managed by

  A. investment companies.
  B. corporations.
  C. independent and private concerns.
  D. small business investment companies.
  C. independent and private concerns.

  ---

  Explanation

  In 1994, independent firms managed approximately 70 percent of the venture capital market.

• Question 3584:

  Gibson Inc. is considering the following five independent projects: Project RequiredAmount of CapitalIRR A$20 0,000 20% B600,000 15 C400,000 12 D400,000 11 E400,000 10 The company has a target capital structure, which is 40 percent debt and 60 percent equity. The company can issue bonds with a yield to maturity of 11 percent. The company has $600,000 in retained earnings, and the current stock price is $42 per share. The flotation costs associated with issuing new equity are $2 per share. Gibson's earnings are expected to continue to grow at 6 percent per year. Next year's dividend is forecasted to be $4. 00. The firm faces a 40 percent tax rate. What is the size of Gibson's capital budget?

  A. $200,000
  B. $1,200,000
  C. $800,000
  D. $1,600,000
  E. $2,000,000
  C. $800,000

  ---

  Explanation

  The size of Gibson's capital budget will be determined by the number of projects it can profitably undertake, i.e., those projects for which IRR > applicable WACC. First, find the costs of each type of financing: cost of retained earnings = k(s) = $4/$42 + 0.06 = 15. 52% and cost of debt = k(d) = 11%. To calculate the cost of new equity, we solve for k(e) = $4/($42-$2) + 0.06 = 0.16 = 16%. Given the firm's target capital structure and its retained earnings balance of $600,000, the firm can raise $1,000,000 with debt and retained earnings before it must use outside equity. Therefore, the WACC for 0 - $1,000,000 of financing = 0.4(0.11)(1 - 0.4) + 0.6(0.1552) = 11.95%. Above $1,000,000, the firm must issue some new equity, so the WACC = 0.4(0.11)(1 - 0.4) + 0.6(0.16) = 12. 24%. Obviously, Projects A and B will be undertaken. You must then determine whether Project C will be profitable. Since in taking A and B we will need financing of $800,000, the $400,000 needed for Project C would involve financing $200,000 with debt and retained earnings and $200,000 with debt and new equity. Thus, the WACC for Project C is ($200,000/$400,000) x 0.1195 + ($200,000/$400,000) x 0.1224 = 12. 095% which is greater than Project C's IRR. Clearly, only Projects A and B should be accepted, and the firm's capital budget is $800,000.

• Question 3585:

  A 10-year, semiannual-pay $1,000 bond with a 6% coupon is currently priced at $864. 10, to yield 8%. If yields increase by 50 basis points (bp), the new price of the bond would be $833. 82. If yields decrease by 50 bp, the new price of the bond would be $895. 78. The expected percentage change in the price of this bond for a 100 bp change in yield is closest to:

  A. 3. 6%.
  B. 7. 2%.
  C. 14. 4%.
  B. 7. 2%.

  ---

  Explanation

• Question 3586:

  If the underlying theory does not suggest a particular direction for the value of an estimated variable, it is appropriate to use a:

  A. a right-tailed test.
  B. a left-tailed test.
  C. a two-tailed test.
  D. either a right-tailed or left-tailed test.
  C. a two-tailed test.

  ---

  Explanation

  If there is no suggested directionality to the underlying variable, then you are interested in finding the probability under the null hypothesis that you will find a value beyond a given distance from the null value. For this, you need to use a two-tailed test.

• Question 3587:

  Externalities:

  I. are spill-over effects of a project.

  II. are not necessarily harmful and can actually be beneficial.

  III.

  should be ignored in project evaluation, just as sunk costs are.

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

  ---

  Explanation

  You should remember three things about externalities:

  1. They are spill-over effects from the project under consideration and affect the rest of the firm.

  2. They are not necessarily harmful. Many of them can be beneficial ("positive externalities").

  3. Unlike sunk costs, which have no future cash flow effects, externalities cannot be ignored in project evaluation since their effects on the cash flows are incremental cash flows themselves.

• Question 3588:

  Which of the following is/are required by AIMR-PPS with regards to calculation of returns?

  I. For leveraged portfolios, the stated returns must be on an "all-cash" basis, removing the effects of debt financing.

  II. Performance must be based on "gross" returns i.e. before necessary expenses like brokerage and SEC fees.

  III.

  Composites must be asset-weighted using beginning-of-period weights.

  A. none of them
  B. I, II and III
  C. I and III only
  D. III only
  D. III only

  ---

  Explanation

  For leveraged portfolios, PPS require a statement of performance using actual returns as well as on an "all-cash" basis (i.e. without leverage). Performance must be based on returns after trading expenses like brokerage and SEC fees. Composites must be asset-weighted using beginning-of-period weights.

• Question 3589:

  What is the following table called?

  Number of Heads Probability of Outcome 01/8 = 0.125 13/8 = 0.375 23/8 = 0.375 31/8 = 0.125 Total 8/8 = 1.000

  A. Ogive
  B. Standard deviation
  C. Probability distribution
  D. None of these answers
  E. Frequency table
  C. Probability distribution

  ---

  Explanation

  The table gives both the outcomes and probability of each outcome. Therefore it is a probability distribution table.

• Question 3590:

  Which of the following appear(s) on the Income Statement?

  I. Interest revenue.

  II. Depreciation of a machinery.

  III. Employee payroll taxes payable.

  IV.

  Commissions earned by sales staff.

  A. III only
  B. I, II and IV
  C. II and IV
  D. I and III
  B. I, II and IV

  ---

  Explanation

  Employee payroll taxes payable are a current liability.