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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 3881:

  Under the treasury stock method, primary earnings per share data are computed as if options and warrants (outstanding for the entire year) were exercised at the

  A. none of these answers.
  B. beginning of the period and as if the funds obtained thereby were used to purchase common stock at the current market price in effect at the end of the period.
  C. end of the period and as if the funds obtained thereby were used to purchase common stock at the current market price in effect at the end of the period.
  D. end of the period and as if the funds obtained thereby were used to purchase common stock at the average market price during the period.
  E. beginning of the period and as if the funds obtained thereby were used to purchase common stock at the average market price during the period.
  E. beginning of the period and as if the funds obtained thereby were used to purchase common stock at the average market price during the period.

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  Explanation

  The treasury stock method assumes the exercise of outstanding options and warrants at the beginning of the period or at time of issuance, if later. It also assumes that the proceeds from the exercise were used to purchase common stock at the average market price during the period.

• Question 3882:

  Property, Plant and Equipment has all of the following characteristics except:

  A. They are intended for use in operating activities, and are not acquired for sale in the ordinary course of business.
  B. They are classified as noncurrent tangible assets
  C. Their service potential diminishes with use.
  D. They don't typically make up a large part of a corporation's operating assets.
  D. They don't typically make up a large part of a corporation's operating assets.

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  Explanation

  They are typically the largest of the operating assets. Included in this category would be heavy equipment and machinery as well as real estate and buildings used in the business.

• Question 3883:

  An analyst is involved in the top-down equity valuation approach. He decides to compare an individual firm's performance within the entire industry using financial ratios and cash flow values. What stage of the top-down approach is he engaged in?

  A. Security selection.
  B. He is performing all three stages.
  C. General economic forecast.
  D. Projected economic outlook for the industry.
  A. Security selection.

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  Explanation

  This is a description of the final stage, security selection.

• Question 3884:

  The management of Clay Industries have adhered to the following capital structure: 50% debt, 35% common equity, and 15% perpetual preferred equity. The following information applies to the firm:

  Before-tax cost of debt, i.e. yield to maturity of the outstanding senior long-term debt = 9.5%

  Combined State/Federal tax rate = 35%

  Cost of common equity = 14. 45%

  Annual preferred dividend = $2. 75

  Preferred stock net offering price = $28.50

  Given this information, what is the Weighted Average Cost of Capital for Clay Industries?

  A. 9.60%
  B. 10.45%
  C. The WACC for Clay Industries cannot be calculated from the information given.
  D. 11.27%
  E. 6. 52%
  F. 8.67%
  A. 9.60%

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  Explanation

  The calculation of the Weighted Average Cost of Capital is as follows: {fraction of debt * [yield to maturity of outstanding long-term debt][1-combined state/federal income tax rate]} + {fraction of preferred stock * [annual dividend/net offering price]} + {fraction of common stock * cost of equity}. The cost of common equity can be calculated using three methods, the Capital Asset Pricing Model (CAPM), the Dividend-Yield-plus-Growth-Rate (or Discounted Cash Flow) approach, and the Bond- Yield-plus-Risk-Premium approach. In this example, the cost of equity is given, so none of the three approaches is necessary. However, the cost of debt and preferred stock must be calculated. The cost of debt is found by multiplying the before tax cost of debt (9.5%) by (1-tax rate). Incorporating the given figures into this equation will yield a cost of debt at 6. 175%. Determining the cost of perpetual preferred stock is relatively straightforward, simply divide the annual preferred dividend ($2. 75) by the net price of preferred stock ($28.50), which yields a cost of preferred stock of 9.65%. These figures can now be incorporated into the WACC equation, which is provided below: {[50% debt * 9.5% * (135%)] + [15% * ($2. 75/$28.50)] + [35% * 14. 45%]} = 9.60%

• Question 3885:

  When using macroanalysis in estimating an industry earnings multiplier

  A. you first estimate the industry growth rate (g) which is determined by the retention rate and the return on equity.
  B. you examine the relationship between the multiplier for the industry and the market.
  C. you first estimate the industry required rate of return (k) because this is influenced by the risk-free rate and the expected inflation rate.
  D. you compute an average multiplier for the industry.
  E. you examine the specific variables that influence the earnings multiplier.
  B. you examine the relationship between the multiplier for the industry and the market.

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  Explanation

  The two alternative techniques to estimate an industry earnings multiplier aremacroanalysis, where you examine the relationship between the multiplier for the industry and the market, and microanalysis where you examine the specific variables that influence the earnings multiplier.

• Question 3886:

  If investors become more risk averse, the yield spread between corporate bonds and Treasury bonds will:

  A. widen.
  B. not necessarily be affected.
  C. narrow.
  D. not be affected, since the spread reflects a constant risk premium.
  A. widen.

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  Explanation

  As investors become more risk averse, they will demand more risk-free assets. Hence, thedemand for Treasury bonds will increase and that for the corporate bonds decrease. Thiswill increase the yields on corporate bonds and decrease those on Treasury bonds, thus widening the spread.

• Question 3887:

  Bruce Johansen, CFA, is currently fully invested in the market portfolio that lies on the capita! market line (CML). Johansen desires to increase the expected return from his portfolio. Johansen is risk aversebut willing to accept higher risk if he can increase the expected return from his portfolio. According to capital market theory, Johansen can meet his risk and return objectives best by:

  A. allocating a higher proportion of the portfolio to higher risk assets
  B. borrowing at the risk-free rate to invest in the risky market portfolio
  C. owning the risky market portfolio and lending at the risk-free rate
  B. borrowing at the risk-free rate to invest in the risky market portfolio

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  Explanation

• Question 3888:

  Andrea, a portfolio manager for XYZ Investment Management Company, a registered investment organization that advises investment companies and private accounts, was promoted to that position three years ago. Bates, her supervisor, is responsible for reviewing Andrea's portfolio account transactions and her required monthly reports of personal stock transactions. Andrea has been using Jonelli, a broker, almost exclusively for portfolio account brokerage transactions. For securities in which Jonelli's firm makes a market, Jonelli has been giving Andrea lower prices for personal purchases and higher prices for personal sales than Jonelli gives to Andrea's portfolio accounts and other investors. Andrea has been filing monthly reports with Bates only for those months in which she has no personal transactions, which is about every fourth month. Which of the following applies/apply?

  I. Andrea violated the Code and Standards in that she failed to disclose to her employer her personal transactions.

  II. Andrea violated the Code and Standards by breaching her fiduciary duty to her clients.

  III.

  Bates violated the Code and Standards by failing to enforce reasonable procedures for supervising and monitoring Andrea in Andrea's trading for her own account.

  A. II only.
  B. II and III only.
  C. III only.
  D. I only.
  E. I and III only.
  F. I and II only.
  G. I, II and III.
  G. I, II and III.

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  Explanation

  This question involves three Standards. Andrea, the portfolio manager, has been obtaining lower prices for her personal securities transactions than she gets for her clients, which is a violation of Standard IV (B.1), Fiduciary Duties. In addition, she violated Standard II (B), Professional Misconduct, by failing to adhere to company policy and hiding her personal transactions from her firm. Andrea's supervisor, Bates, violated Standard III (E), Responsibilities of Supervisors, by failing to enforce the procedures for reporting personal trading. Therefore, Statements I, II and III are all correct.

• Question 3889:

  Leveraged buyout financing is used by management to:

  A. take a private firm public.
  B. buy additional product lines.
  C. develop new lines to revitalize the firm.
  D. take a public firm private.
  D. take a public firm private.

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  Explanation

• Question 3890:

  A stock has the following returns over 3 years: -10%, +15%, +25%. The annual geometric rate of return over the 3 years is ________.

  A. 19.36%
  B. 9.34%
  C. 10.15%
  D. 7. 42%
  E. 13. 31%
  F. 14. 64%
  G. 12. 21%
  H. 8.96%
  H. 8.96%

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  Explanation

  The annual geometric rate of return equals [(1-10%)(1+15%)(1+25%)]^(1/3) - 1 = (0.9 * 1.15 * 1.25)^0.33 - 1 = 0.0896 = 8.96%