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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3741:

  The opportunity costs of a project refer to:

  A. the costs already incurred in developing the project.
  B. none of these answers.
  C. the costs that would be incurred in one or more of mutually exclusive projects that are rejected in favor of the project selected.
  D. the costs incurred due to the effects of the project on the firm's other projects at hand.
  B. none of these answers.

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  Explanation

  The cash flows that could be earned if the assets were not used for the project but elsewhere are known as "opportunity costs." None of the given choices fits this definition. Note that the costs already incurred in developing the project are called "sunk costs," the costs incurred due to the effects of the project on the firm's other projects at hand are "externality" or "spill-over" costs. "The costs that would be incurred in one or more of mutually exclusive projects that are rejected in favor of the project selected" looks tempting but is not an opportunity cost.

• Question 3742:

  Jim Williams, a financial analyst with Churn Brothers Brokerage, is attempting to value share of Intelligent Semiconductor. In his calculation, Jim calculates the following for each subperiod:

  [Net income + Depreciation - Capital Expenditures - Increases in Working Capital - Principal Repayments + New Debt Issues]. The results of this calculation will be referred to as "X."

  The second step in the process is the determination of the "multiple" of X that shares of Intelligent will trade for in three years. This figure will be referred to as "M."

  Finally, Jim determines the required equity rate of return for shares of Intelligent Semiconductor. This figure will be referred to as "r."

  These calculations are inputted into the following equation:

  Price of Intelligent Semiconductor = {[X during year 1 / (1 + r)] + [X during year 2 / (1 + r)(1 + r)] + [X in year 3 / (1 + r)(1 + r)(1 + r)] + [M * X in year 3/ (1 + r)(1 + r)(1 + r)]}

  The results of this calculation are used as the value of Intelligent shares.

  Which of the following best characterized the valuation method employed by Jim Williams?

  A. Free cash flow to equity method
  B. Arbitrage-pricing model
  C. Supernormal growth model
  D. None of these answers
  E. Multi-period dividend discount model
  A. Free cash flow to equity method

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  Explanation

  The method illustrated in this example is the free cash flow to equity method.

• Question 3743:

  The standard deviation of a two-stock portfolio least likely:

  A. must be less than or equal to the weighted-average standard deviation.
  B. can be reduced by increasing the relative weight of the stock with lower standard deviation.
  C. will be the lowest when the correlation between the two stocks equals zero.
  C. will be the lowest when the correlation between the two stocks equals zero.

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  Explanation

• Question 3744:

  According to the AIMR-PPS, performance must be calculated

  A. before or after the deduction of trading expenses, as long as that information is disclosed.
  B. before or after the deduction of trading expenses, without the need for disclosures because there will be no difference in the numbers.
  C. before the deduction of trading expenses.
  D. after the deduction of trading expenses.
  D. after the deduction of trading expenses.

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  Explanation

  Performance must be calculated after the deduction of trading expenses (e.g., broker commissions and SEC fees), if any. This is a requirement for calculation of returns.

• Question 3745:

  A firm's financial data show:

  Taxable income 1,500 Taxes paid 500 Non-cash operating expenses 780 Bonds retired 700 Loss on retired bonds 140

  Then, the financing cash flow equals ________.

  A. -700
  B. -840
  C. 160
  D. -900
  D. -900

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  Explanation

  The firm's tax rate equals 500/1,500 = 30%. Note that loss on bonds retired is an extraordinary item under US GAAP and presented after-tax. Hence, the total cash spent on retiring bonds = 700 + 140/(1-0.3) = 900. So financing cash flow =

  900.

• Question 3746:

  Which measures of central tendency are not affected by extremely low or extremely high values?

  A. None of these answers
  B. Geometric mean and mean
  C. Mean and mode
  D. Mode and median
  E. Mean and median
  D. Mode and median

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  Explanation

  Both are concepts which are based on the position of the observations when ordered (median) and the number of most frequent occurrences (mode). They are measures which are not affected by extreme values.

• Question 3747:

  How will an unanticipated increase in aggregate demand emanating from an increase in business and consumer optimism influence equilibrium output in the goods and services market?

  A. Output will decrease and prices rise.
  B. Output will decrease and prices fall.
  C. Output will increase and prices rise.
  D. Output will increase and prices decline.
  C. Output will increase and prices rise.

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  Explanation

  Optimism concerning the future direction of the economy will stimulate investment. Investment today may be necessary in order to benefit fully from future opportunities. This will cause aggregate demand to rise; in response, output will rise as will prices (due to increased competition for output and resources).

• Question 3748:

  Which of the following statements is true?

  A. Given a small decrease in the real risk-free rate, a large increase in the risk premium for a stock, and a large decrease in the return on equity, one would expect the required rate of return on the stock to increase, the growth rate to decrease, and the earnings multiplier to increase.
  B. Given a large decrease in the rate of inflation and the risk premium for a stock, and a large increase in the return on equity, one would expect the required rate of return on the stock to decrease, the growth rate to increase, and the earnings multiplier to increase.
  C. Given a large increase in the rate of inflation, a small decrease in the risk premium for a stock, and a large decrease in the return on equity, one would expect the required rate of return on the stock to decrease, the growth rate to decrease, and the earnings multiplier to decrease.
  D. Given a small increase in the rate of inflation, a small increase in risk premium for a stock, and a larger decrease in the return on equity, one would expect the required rate of return on the stock to increase, the growth rate to decrease, and the earnings multiplier to increase.
  B. Given a large decrease in the rate of inflation and the risk premium for a stock, and a large increase in the return on equity, one would expect the required rate of return on the stock to decrease, the growth rate to increase, and the earnings multiplier to increase.

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  Explanation

  The direction of change approach to estimating an earnings multiplier begins with the current earnings multiplier and estimates the direction of change for the dividend payout ratio and the variables that influence the required rate of return and growth rate. The required rate of return is positively correlated with the real risk-free rate, the rate of inflation, and the risk premium. The growth rate is positively correlated with the return on equity and earnings retention rate. The earnings multiplier is positively correlated with the growth rate, and negatively correlated with the required rate of return.

• Question 3749:

  Which of the following is/are revenue recognition methods?

  I. Completed Contract Method

  II. Successful Efforts Method

  III. Deferred Collection Method

  IV.

  Full Cost Method

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

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  Explanation

  II and IV refer to the methods under which costs in drilling oil wells can be capitalized. There is no such thing as III.

• Question 3750:

  A firm's tax rate is 40%. If its pretax income is overstated by 100 due to errors in recording cash transactions, then the operating cash flow due to these errors is:

  A. overstated by 40.
  B. overstated by 100.
  C. overstated by 60.
  D. understated by 60.
  C. overstated by 60.

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  Explanation

  operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts Since the pretax income is overstated by 100, net income is overstated by 100*(1-0.4) = 60. Since the errors are in the cash transaction accounts, not non-cash accounts, this implies that operating cash flow is overstated by 60 due to these errors.