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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3611:

  While studying abroad, United States citizen David Rees purchases a foreign bond with an annual coupon of 8.0 percent for 94. 0. He holds the bond for one year and then sells it for 93. 0 before he leaves. During the year, foreign currency

  appreciated 5. 0% relative to the U.S. dollar.

  Which of the following is closest to Rees's Total Dollar Return?

  A. 2. 074%.
  B. 7. 447%.
  C. 3. 883%.
  D. 12. 819%.
  D. 12. 819%.

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  Explanation

  TheTotal Dollar Returnis calculated as follows:Step 1: Calculate the value change in the foreign currency:The foreign currencyappreciatedby 0.05, or 5. 0%.

  Step 2: Use the Total Dollar return formula to calculate the return:

  R$= { [ 1+($coupon + VEND- VBEG)/ VBEG] * (1 + g) } - 1,

  WhereR$=Total dollar return,VEND= Bond value at end of period,VBEG =Bond value at end of period, andg= % change in thedollarvalue of the foreign currency.

  Here,R$= { [ 1+(8.0 + 93. 0 ?94. 0)/94. 0 ] * (1 + 0.05) } - 1

  = { [1.074468 ] * (1.05) } - 1

  = 0.12819, or12. 819%

• Question 3612:

  An uptick occurs when

  A. the current day's closing price is higher than the previous day's closing price.
  B. the current day's opening price is higher than the previous day's opening price.
  C. the current day's closing price is higher than or equal to the previous day's closing price. * the current day's opening price is higher than or equal to the previous day's opening price.
  D. the current transaction price is higher than the last transaction price.
  D. the current transaction price is higher than the last transaction price.

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  Explanation

  An uptick is simply when the current transaction price is higher than the last transaction price.

• Question 3613:

  What semiannual deposits are needed to accumulate $7,000 in 5 years if the account pays 6% per year, compounded semiannually, assuming that the first deposit is made in 6 months and also assuming that the account already has $1,750 in it today?

  A. $405. 46
  B. $377. 44
  C. $436. 15
  D. $459.52
  E. $578.01
  A. $405. 46

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  Explanation

  On the BAII Plus, press 10 N, 6 divide 2 = I/Y, 1750 PV, 7000 +/- FV, CPT PMT. On the HP12C, press 10 n, 6 ENTER 2 divide i, 1750 PV, 7000 CHS FV, PMT. Note that the answer this time is a positive number. This means that the $405. 46 is a deposit in addition to the $1,750 original deposit. The $7,000 is entered as a negative number, because the $1,750 and the $405. 46 are deposits and the $7,000 is a withdrawal. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3614:

  If the French franc moves from 8.00 to 7. 10 francs to the dollar:

  A. the dollar now trades for 0.141 francs.
  B. the French franc has depreciated.
  C. the franc now trades for 7. 10 dollars.
  D. the French franc has appreciated.
  E. the U.S. dollar has appreciated.
  D. the French franc has appreciated.

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  Explanation

  Since the U.S. dollar now purchases less French francs the U.S. dollar has depreciated; symmetrically, the French franc has appreciated. Each franc now buys .141 dollars whereas before each franc purchased .125 dollars.

• Question 3615:

  Consider the following characteristics of a firm:

  Stock price $60

  Annual dividend $1

  Debt rate 12%

  Equity floatation cost 5%

  Tax rate 40%

  Preferred Stock Par value $100

  What is the firm's after tax cost of debt?

  A. 1.8%
  B. 5%
  C. 7. 2%
  D. 12%
  E. 1.7%
  F. 60%
  C. 7. 2%

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  Explanation

  A firm's after tax cost of debt may be calculated using the following formula: After Tax Cost of Debt = Cost of Debt x (1 - Tax Rate). In this case the After Tax Cost of Debt = 12% x (1 - 40%) = 12% x 60% = 7. 2%.

• Question 3616:

  In an investment environment, an initial outlay of $1 grows to $1.23 in 3 years. If you are expecting a cash inflow of $500 in 3 years, what's the present value of the cash flow to you?

  A. $431.2
  B. $452. 25
  C. $406. 5
  D. $615
  C. $406. 5

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  Explanation

  The discount factor for 3 years is 1/1.23. Hence, the PV of $500 in 3 years is 500/1.23 = 406. 5.

• Question 3617:

  Ludicrous Telecom, an international telecommunications company, has recently announced its plans to issue additional common stock. The company has been publicly traded for over 25 years, and currently has a capital structure consisting of 35% debt, 55% equity, and 10% preferred stock. This is the first time since its initial public offering that the company has announced its intention to issue common stock. According to the Signaling Theory, this announcement should be viewed as which of the following? Choose the best answer.

  A. Bullish, because the company will be provided with additional capital from the share offering.
  B. Bullish, because it indicates superior investment prospects for the firm.
  C. Bullish, because it indicates a shift toward a more conservative capital structure.
  D. Bearish, because it indicates poor investment prospects for the firm.
  E. Bearish, because it indicates an shift toward a more radical capital structure.
  F. The signaling theory would not apply to this announcement.
  D. Bearish, because it indicates poor investment prospects for the firm.

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  Explanation

  According to the Signaling Theory, the management of companies send implicit signals to investors by their capital budgeting decisions. Believers of this theory feel that corporate managers have access to superior information, and are allowed to exploit this information asymmetry through their capital budgeting decisions. According to the signaling theory, when investment prospects are good, companies will prefer to raise capital first by using internally generated funds, i.e. retained earnings and marketable securities investments. If this source of capital is unavailable, then companies will prefer to issue debt rather than common or preferred equity. The reasoning behind this is the fact that by raising debt, the company will not dilute the ROE figure, which is expected to be high due to favorable investment prospects. In contrast, when investment prospects are poor, the Signaling Theory states that companies will prefer to raise funds first by issuing common equity. The reasoning behind this is the fact that by issuing additional equity when investment prospects are poor, companies will be able to "spread the losses" amongst a greater pool of investors, thereby lessening the overall negative effect. In this example, the management of Ludicrous Telecom have announced their intention on issuing additional common equity, and the Signaling Theory would state that this is sending a bearish signal as to the investment prospects of the firm.

• Question 3618:

  An economist with Smith, Kleen and Beetchnutty Institutional Brokerage has been examining a stock market series and is trying to determine the anticipated rate of return for the series. In her research, this economist has determined the following information:

  Anticipated ending series value: 11,800 Expected dividends during the period: $521 Observed beginning series value: 10,050.14 Required rate of return: 17. 50% per year

  What is the anticipated annual rate of return for this stock market series? (Assume a one-year holding period.)

  A. 12. 23%
  B. 22. 60%
  C. 24. 41%
  D. None of these answers is correct.
  E. 19.24%
  B. 22. 60%

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  Explanation

  To calculate the expected rate of return for a stock market series, the following information must be known:

  The beginning value for the series

  The anticipated ending value for the series, and

  The amount of any dividends and/or distributions during the period

  Once this information has been determined, the expected return on a stock market index can be found by employing the following equation:

  E(R) = [(EV - BV + Div) / BV]

  Where: E(R) = the expected return on the stock market series, EV = the anticipated ending value for the series, BV = the observed beginning value for the series, and Div = the amount of any dividends paid during the period.

  In this example, all of the necessary information has been provided and the calculation of the expected return on this stock market series is found as follows:

  E(R) = [$11,800 - $10,050.14 + $521] = 22. 60%

  This figure is significantly higher than the required rate of return. Assuming that the anticipated ending value and expected dividends prove accurate, investment in this stock market series is likely advisable.

• Question 3619:

  Holding income constant, if consumers and investors decide to spend more on goods and services, then

  A. additional spending will require increased borrowing (or less saving), which will drive up the real rate of interest.
  B. producers will expand output without increasing prices to accommodate the stronger demand.
  C. additional spending will increase the supply of loanable funds, which will reduce the real interest rate and thereby trigger additional spending.
  D. the economy's long-run capacity (LRAS) will expand to accommodate the stronger demand.
  A. additional spending will require increased borrowing (or less saving), which will drive up the real rate of interest.

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  Explanation

  Strong aggregate demand will put pressure on the market for loanable funds and will result in higher interest rates (as the demand for funds increases). This will cause aggregate demand to contract from its heightened state. This adjustment represents one of the economy's self-correcting mechanisms.

• Question 3620:

  New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. The number of shares used in Basic EPS equals ________.

  A. 600,000
  B. 575,000
  C. 500,000
  D. 200,000
  D. 200,000

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  Explanation

  Basic EPS considers only the weighted number of common stock outstanding. Therefore, number of shares used in Basic EPS = 200,000.