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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3721:

  A sudden and unexpected decrease in the tax rate would be expected to have the most significant impact on the carrying cost of which of the following components of a firm's capital structure?

  A. Retained earnings
  B. Common stock
  C. None of these answers
  D. Preferred stock
  E. Debt
  E. Debt

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  Explanation

  After a sudden and unexpected decrease in the tax rate, corporations will find themselves in an environment where the tax-shelter benefits of debt financing have become compromised. Currently, firms can deduct coupon payments on their debt securities from their annual income, and this taxdeductibility feature is an important consideration in any capital budgeting decision. A decrease in the tax rate will increase the cost of debt, and therefore will decrease the attractiveness of debt securities as an alternative to other methods of financing.

• Question 3722:

  What is the first step in a top-down equity valuation approach?

  A. Forecast the direction of general economy.
  B. Select the security you think will perform best based on your economic and industry forecast.
  C. Project the economic outlook for each industry under review.
  D. All steps would be taken simultaneously.
  A. Forecast the direction of general economy.

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  Explanation

  A projection of the general economic outlook is the first stage for a top-down approach.

• Question 3723:

  If a company converted a short-term note payable into a long-term note payable, this transaction would

  A. none of these answers.
  B. increase working capital.
  C. decrease working capital and the current ratio.
  D. increase both working capital and the current ratio.
  E. decrease only working capital.
  D. increase both working capital and the current ratio.

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  Explanation

  This transaction reduces current liabilities, but does not change current assets and, therefore, increases working capital and increases the current ratio.

• Question 3724:

  With regard to a theoretical Treasury yield curve constructed with the bootstrapping method:

  A. every point on the curve is constructed by utilizing current on-the-run Treasury yields of various maturities.
  B. the yield for most maturities used to construct the Treasury yield curve are observed yields rather than interpolated yields.
  C. any yield on the Treasury yield curve that is not one of the on-the-run maturities is only an approximation for that maturity.
  C. any yield on the Treasury yield curve that is not one of the on-the-run maturities is only an approximation for that maturity.

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  Explanation

• Question 3725:

  What annual interest rate, compounded annually, is equivalent to 8% per year, compounded semiannually?

  A. 8.04%
  B. 8.16%
  C. 7. 82%
  D. 8.09%
  E. 8%
  B. 8.16%

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  Explanation

  Questions of this type are illustrating the concept of an Effective Interest Rate, which is a rate compounded annually that has the same effect as a rate compounded more often than one time a year. As such, a depositor or a creditor is indifferent between them, since they have the same effect. To solve this question, make any deposit and see how much is in the account after one year. The ratio of theending FV to the beginning PV will indicate the annual rate earned. On the BAII Plus, press 2 N, 8 divide 2 = I/Y, 100 PV, 0 PMT, CPT FV. On the HP12C, press 2 n, 8 ENTER 2 divide i, 100 PV, 0 PMT, FV. The number displayed will be 108.16. In other words, after one year, $100 has become $108.16. An interest rate of 8.16%, compounded annually, would cause a $100 deposit to become $108.16 in one year. Choosing an initial deposit of $100 helps a great deal in these situations. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 3726:

  An independent financial analyst has been investigating shares of Viirius Wavelength, a small fiber optics firm, for possible investment. This financial analyst has a history of value investing, and believes that shares of Viirius are not reflecting their "intrinsic value." In her analysis, this financial analyst has assimilated the following information for Viirius Wavelength:

  Net Worth: $2,000,000 Number of common shares outstanding: 8,900,000 Current stock price: $11.63 per share Earnings per share: $0.16

  Using this information, what is the price-to-book ratio for Viirius Wavelength? Further, what is the price-to-earnings ratio using trailing earnings figures?

  A. 51.75, (72. 69)
  B. 0.225, 72. 69
  C. The answer cannot be calculated from the information provided.
  D. None of these answers is correct.
  E. 0.225, (72. 69)
  F. 51.75, 72. 69
  F. 51.75, 72. 69

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  Explanation

  The book value of a common stock is found by dividing the net worth of a company by the number of outstanding shares. While there exists several different methods for calculating net worth, the most simplistic involves subtracting total

  liabilities from total assets, giving us the shareholder's equity figure. The book value is often seen by investment professionals as a "floor" for common stock prices, and the price-to-book ratio is quite popular in the field of investment

  management. The calculation of the price-to-book ratio involves the following equation:

  Price-to-book ratio = {P0 / (Net worth / # of common shares outstanding)}

  In this example, all of the necessary information has been provided. Imputing these figures into the priceto-book value equation will yield the following:

  Price-to-book value = {$11.63 / ($2,000,000 / 8,900,000)} = 51.75.

  Any time the price-to-book ratio is greater than one, a stock is said to be "trading at a premium to book."

  Frequently, investment professionals will use the term "intrinsic value" when referring to the book value, as illustrated in this example. A figure of less than one for the price-to-book ratio is commonly referred to as "trading at a discount to

  book." Stocks trading below book value are often sought after by value investors, who believe the shares have been discounted below their liquidation value. While the price-to-book value is a useful tool in the stock selection process, it

  possesses some important flaws. One problem with the Price-To-Book Ratio is that one of the terms - Book Value - is so easily manipulated. Valuation of inventory and real estate are easily adjusted on the books. Stock buy-backs and write-

  offs of exceptional items also deflate Book Value, making high priced stocks seem overvalued.

  Since trailing numbers are to be used (i.e. earnings figures which have already been realized), the calculation of the price-to-earnings ratio is simple in this case - simply divide the market price by the EPS figure, which leads to a P/E of 72. 69

  for Viirius Wavelength.

• Question 3727:

  A distribution has a mean equal to 12 and a standard deviation of 36. It has a coefficient of variation equal to:

  A. zero
  B. none of these answers
  C. 0.335
  D. 3. 00
  D. 3. 00

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  Explanation

  The coefficient of variation equals the standard deviation divided by mean.

• Question 3728:

  Which of the following is not required to determine the value of a stock that is to be held for one year?

  A. required rate of return
  B. expected sale price
  C. original purchase price
  D. dividends
  C. original purchase price

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  Explanation

  A stock that is held for one year earns the investor some dividend and will be sold after one year for some capital gain. Both the expected sale price and the dividend payout during the one-year holding period need to be discounted to reflect the present value of the stock.

• Question 3729:

  Which of the following regarding bond market indexes is FALSE?

  A. Unlike stocks, bonds lack continuous price trading data.
  B. The bond universe is more stable than the stock universe.
  C. There are more bond issues than stocks.
  D. The price volatility of bonds is constantly changing due to the influence of maturity and market yield on bond durations.
  B. The bond universe is more stable than the stock universe.

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  Explanation

• Question 3730:

  If a firm uses debt financing (Debt ratio = 0.40) and sales change from the current level, which of the following statements is most correct?

  A. The percentage change in net income relative to the percentage change in sales (and in EBIT) will not depend on the interest rate paid on the debt.
  B. The percentage change in EBIT will equal the percentage change in net income.
  C. The percentage change in net operating income (EBIT) resulting from the change in sales will exceed the percentage change in net income (NI).
  D. Since debt is used, the degree of operating leverage must be greater than 1. E. The percentage change in net operating income will be less than the percentage change in net income.
  E

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  Explanation

  The greater the use of fixed assets, the more sensitive EBIT will be to changes in sales. Interest charges on debt are included in net income and not operating income, as the use of debt financing will have an impact on net income when sales change.