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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3761:

  A financial analyst with Mally, Feasance and Company is examining shares of Intelligent Semiconductor. Assume the following information:

  Retention rate: 80%

  EPS: $3. 98

  Discount rate: 12. 35%

  Tax rate: 35%

  Beta coefficient: 1.5

  Expected return on the market: 12. 5%

  Using this information, what is the expected growth rate of Intelligent Semiconductor? Choose the best answer.

  A. 65. 00%
  B. The answer cannot be determined from the information provided.
  C. 61.75%
  D. None of these answers is correct.
  E. 43. 33%
  F. 9.88%
  B. The answer cannot be determined from the information provided.

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  Explanation

  In order to determine the dividend growth rate of Intelligent Semiconductor, the following equation should be used:

  {g = ROE(1 - Dividend Payout Ratio)}

  While the Retention Rate of Dividends (which equals one minus the Dividend Payout Ratio) is provided, the ROE figure is not. Further, the ROE figure cannot be determined from this information provided. Therefore, the growth figure cannot

  be calculated. Remember that in determining dividend growth using the formula outlined above, neither the tax rate nor the discount rate is incorporated into the equation. Furthermore, the Beta Coefficient and the expected return on the

  market are largely irrelevant in this example.

• Question 3762:

  The use of financial leverage by the firm has a potential impact on which of the following?

  1. The risk associated with the firm.

  2. The return experienced by the shareholder.

  3. The variability of net income.

  4. The degree of operating leverage.

  5. The degree of financial leverage.

  A. 1, 3, 5
  B. 1, 2, 5
  C. 2, 3, 5
  D. 2, 3, 4, 5
  E. 1, 2, 3, 5
  E. 1, 2, 3, 5

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  Explanation

  Since financial leverage is the extent to which fixed-income securities are used in a firm's capital structure all of these would impact except the degree of operating leverage, which is the percentage change in EBIT that results from a given percentage change in sales.

• Question 3763:

  Becker Glass Corporation expects to have earnings before interest and taxes during the coming year of $1,000,000, and it expects its earnings and dividends to grow indefinitely at a constant annual rate of 12. 5 percent. The firm has $5,000,000 of debt outstanding bearing a coupon interest rate of 8 percent, and it has 100,000 shares of common stock outstanding. Historically, Becker has paid 50 percent of net earnings to common shareholders in the form of dividends. The current price of Becker's common stock is $40, but it would incur a 10 percent flotation cost if it were to sell new stock. The firm's tax rate is 40 percent. What is the firm's cost of retained earnings?

  A. 15. 0%
  B. 15. 5%
  C. 16. 5%
  D. 16. 0%
  E. 17. 0%
  E. 17. 0%

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  Explanation

  EBIT$1,000,000 Interest400,000 EBT$600,000 Taxes (40%)240,000 Net income$360,000 EPS(1) = $360,000/100,000 = $3. 60. D(1) = $3. 60(0.5)= $1.80. k(s) = ($1.80/$40.00) + 0.125 = 17. 0%.

• Question 3764:

  Which of the following statements about interest rate swaps is false?

  A. The parties agreeing to swap cash flows are call the counter parties.
  B. Swap facilitators are the people who bring the counter parties together.
  C. A plain vanilla interest rate swap is a fixed rate for variable rate swap. The variable rate is usually set at LIBOR flat. The period of time involved in the swap is called the tenor.
  D. Notional principal is exchanged at initiation and termination while only net interest rate payments are exchanged on the settlement dates.
  D. Notional principal is exchanged at initiation and termination while only net interest rate payments are exchanged on the settlement dates.

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  Explanation

• Question 3765:

  The distribution of the annual incomes of a group of middle management employees approximated a normal distribution with a mean of $37,200 and a standard deviation of $800. About 68 percent of the incomes lie between what two incomes?

  A. $36,400 and $38,000
  B. None of these answers
  C. $34,800 and $39,600
  D. $35,600 and $38,800
  E. $30,000 and $40,000
  A. $36,400 and $38,000

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  Explanation

  68/2 = 0.34. The z value for 0.34 is 1. x = u +/- z*sigma. So x = 37200 +/- 1*800. e get x = 38,000 and 36,400.

• Question 3766:

  Short interest is

  A. the cumulative number of shares that have been sold short by investors and not covered. * the cumulative number of shares that have been sold short.
  B. the cumulative number of shares that have been sold short and covered.
  C. the cumulative number of shares that have been sold short, divided by daily NYSE volume.
  D. the cumulative number of shares that have been sold short, divided by daily NYSE + OTC volume.
  A. the cumulative number of shares that have been sold short by investors and not covered. * the cumulative number of shares that have been sold short.

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  Explanation

  Technical analysts measure short interest through the short interest ratio, which is equal to the outstanding short interest divided by the average daily volume of trading on the exchange. A higher ratio is interpreted as bullish, because a larger relative short interest is indicative of high potential demand for stock from those that have sold short but have not yet covered.

• Question 3767:

  At December 31, 1995, Del Monte Co. had the following balances in the accounts it maintains at Royal Street Bank:

  Checking account #101 $175,000 Checking account #102 $(10,000) Money market account $25,000 90-day certificate of deposit due 2/28/96 $50,000 180-day certificate of deposit due 3/15/96 $80,000

  Del Monte classifies investments with original maturities of 3 months or less as cash equivalents. In its December 31, 1995 balance sheet, what amount should Del Monte report as cash and cash equivalents?

  A. $240,000
  B. $190,000
  C. $320,000
  D. $165,000
  E. $200,000
  A. $240,000

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  Explanation

  Cash consists of coins, currency on hand, checking accounts (demand deposits), certificates of deposit (time deposits) and near-cash assets (money market accounts). Cash equivalents are limited to investments with original maturities to the holding entity of 3 months or less. As a result, cash and cash equivalents will be $240,000 ($175,000 - 10,000 + 25,000 + 50,000).

• Question 3768:

  Jane Higgins, CFA, is analyzing a corporate bond that she believes is a suitable addition for a client's portfolio. The 10-year security has a 7. 50% annual coupon and is non-callable by the issuer. The bond is currently priced at 104. 5 to yield 7. 177%. According to Higgins* analysis, for a 25 basis point decrease in yield, the bond's price will increase to 107. 4166 and for a 25 basis point increase in yield, the bond's price will decrease to 101.3834. Higgins' estimation of the bond's effective duration is closest to:

  A. 5. 77.
  B. 10.03.
  C. 11.55.
  C. 11.55.

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  Explanation

• Question 3769:

  When preparing a direct method statement of cash flows, the net cash flow must equal

  A. the cash collections minus the cash expenses.
  B. the cash collections plus the net noncash revenues and expenses.
  C. the cash flow from operations plus the cash flow from investments.
  D. the change in cash.
  E. the cash collections plus the changes in the operating accounts.
  D. the change in cash.

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  Explanation

  Using the direct method, the net cash flow must equal the change in cash.

• Question 3770:

  Your company is choosing between the following non-repeatable, equally risky, mutually exclusive projects with the cash flows shown below. Your cost of capital is 10 percent. How much value will your firm sacrifice if it selects the project with the higher IRR? Project S: -1,000500500500 Project L: 012345 -2,000668.76668.76668.76668.76668.76

  A. $481.15
  B. $291.70
  C. $332. 50
  D. $243. 43
  E. $535. 13
  B. $291.70

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  Explanation

  NPV(S) = $243. 43; IRR(S) = 23. 38%.

  NPV(L) = $535. 13; IRR(L) = 20.00%.

  Value sacrificed: $535. 13 - $243. 43 = $291.70.