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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3771:

  The domestic demand Q for a good A at a price P is given by Q = 500 - 5P while the supply function is given by 300 + 3P. The world price for good X is 19. If the government imposes a 10% tariff on imports, the revenues of the domestic producers will

  A. decrease by 233.
  B. increase by 579.
  C. increase by 797.
  D. decrease by 485.
  C. increase by 797.

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  Explanation

  First note that without imports, the price prevailing in the domestic market will satisfy 500 - 5P = 300 + 3P, giving P = 25. The world price is 19 and with a 5% import tariff, it becomes 19 * 1.1 = 20.9. Since this price is lower than 25, there will continue to be imports and the price prevailing in the domestic market after the tariffs will equal 20.9. Before the tariffs, the producers supply a quantity equal to 300 + 3 * 19 = 357 and have revenues of 357 * 19 = 6,783. With the tariff in place, the producers produce 300 + 3 * 20.9 = 362. 7 units and have revenues of 362. 7 * 20.9 = 7,580. Thus, the revenues increase by 7,580 - 6,783 = 797. Note that we have implicitly used the fact that the domestic producers do not have to pay the tariff and pocket the entire higher price.

• Question 3772:

  The Global Advertising Company had net income after interest but before taxes of $40,000 this year. The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raise debt at a 12 percent interest rate. The last dividend paid by Global was $0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent. Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity. What is the break point due to retained earnings being used up?

  A. $17,000
  B. $24,000
  C. $10,000
  D. $30,000
  E. $56,000
  B. $24,000

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  Explanation

  Calculate net income and retained earnings EBT$40,000 Less: Taxes$16,000 NI$24,000 RE = 0.70($24,000) = $16,800. Break point retained earnings: BP(RE) = $16,800/0.70 = $24,000.

• Question 3773:

  Which of the following best describes an income statement?

  A. An income statement reports changes over a period of time in component accounts that comprise the ownership of a firm.
  B. An income statement details the cash inflows and outflows that are related to a company's operating, investing, and financing activities over a period of time.
  C. None of these answers.
  D. An income statement summarizes the financial position of a company at a given point in time.
  E. An income statement measures a company's financial performance over a specified period of time.
  E. An income statement measures a company's financial performance over a specified period of time.

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  Explanation

  An income statement measures a company's financial performance between balance sheet dates and, hence, reflects a period of time. It lists revenues, expenses, gains, and losses of a company over a time period.

• Question 3774:

  Consider the following list of numbers:

  6, 4, 3, 8, 3, 3, 5, 9, 11, 4

  For this list, the mean, the median and the mode are given respectively by:

  A. 5. 6, 4. 5, 3
  B. 5. 6, 4, 3
  C. 5, 3, 5
  D. 5. 6, 6, 3
  A. 5. 6, 4. 5, 3

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  Explanation

  The sum of the 10 numbers is 56. The mean is 56/10 = 5. 6. The most common number is 3, which is the mode. Since there is an even number (10) of numbers in the list, the median is the average of the 5th and 6th numbers when the list is arranged in an ascending order. The median is therefore equal to (4 + 5)/2 = 4. 5.

• Question 3775:

  Patterson Company has the following information of one of its vehicles purchased on January 1, 1992:

  Vehicle cost $50,000 Useful life, years, estimated 5 Useful life, miles, estimated 100,000 Salvage value, estimated $10,000

  Actual miles driven:

  1992 30,000 1993 20,000 1994 15,000 1995 25,000 1996 12,000

  No estimates were changed during the life of the asset. The 1996 depreciation expense using the units-of-production method was ________.

  A. $4,800
  B. $4,000
  C. $6,000
  D. $10,000
  E. $5,000
  B. $4,000

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  Explanation

  Under the units-of-production method, periodic depreciation is based on the proportion of expected total production that occurred. For the years 1992 to 1995, the total accumulated depreciation was $36,000 (($50,000-10,000) X (30,000 + 20,000 + 15,000 + 25,000) / 100,000(. Therefore, the remaining depreciation for the last year, 1996, is only $4,000 ($40,000-36,000). Given that the 12,000 miles driven in 1996 exceeded the remaining estimated production of 10,000 miles, only $4,000 can be taken as depreciation in 1996.

• Question 3776:

  Costs that can be reasonably associated with specific revenues but not with specific products should be

  A. capitalized and then amortized over a period not to exceed 60 months.
  B. expensed in the period in which the related revenue is recognized.
  C. capitalized and then amortized over a period not to exceed 40 years.
  D. allocated to specific products based on the best estimate of the production processing time.
  E. charged to expense in the period incurred.
  B. expensed in the period in which the related revenue is recognized.

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  Explanation

  The expense recognition principle of "associating cause and effect" or "matching" applies when a direct cause and effect relationship can be demonstrated between costs and particular revenues.

• Question 3777:

  Funds distributed by a sales force are

  A. less common than those distributed through direct marketing.
  B. typically no-load funds.
  C. typically load funds.
  D. rare.
  C. typically load funds.

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  Explanation

  Most funds are either distributed by a sales force (such as Merrill Lynch brokers, commission-based financial planners, or dedicated sales forces) or by direct marketing, with those distributed by a sales force being the more common. Funds distributed by a sales force typically charge a sales fee in order to compensate the salespeople.

• Question 3778:

  An investor purchased a stock for $60 a share using margin from his broken If the initial margin requirement is 40%, and the maintenance margin requirement is 20%, which of the following best describes the price at which a margin call will initially be triggered?

  A. Below $30.
  B. Below $45.
  C. Below $48.
  B. Below $45.

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  Explanation

• Question 3779:

  Calculate the dividend growth rate for a company that consistently pays out 30% of its earnings in dividends and has a Return on Equity (ROE) of 10%.

  A. 6. 4%
  B. 12%
  C. 15%
  D. 10.0%
  E. 7. 0%
  F. 9.6%
  E. 7. 0%

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  Explanation

  The estimated growth rate of dividends = (Retention Rate) x (Return on Equity). In this case the estimated growth rate of dividends = (1 - Payout Ratio) x (ROE) = 70% x 10% = 7%.

• Question 3780:

  The basic asset-liability equation, assets = liabilities + shareholder equity implies:

  A. operating activities = financing activities
  B. investing activities = financing activities
  C. investing activities = operating activities
  D. none of these answers
  B. investing activities = financing activities

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  Explanation

  The asset-liability equation has the results of investing activities on the left-hand side as assets. On the right hand side are results of creditor financing (debt) and equity financing.