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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 431:

  Under what condition would a firm report cash, or cash equivalents as a long-term asset?

  A. When a firm maintains less than its' minimum target cash balance.
  B. When funds are set aside for a specific long-term purpose such as plant expansion.
  C. All of these answers.
  D. When a firm has an under-funded pension obligation.
  E. None of these answers.
  B. When funds are set aside for a specific long-term purpose such as plant expansion.

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  Explanation

  A firm may maintain cash equivalents that are earmarked for plant expansion, sinking fund payments, or other long-term uses. In these situations many firms would report this portion of its cash, or cash equivalents as long-term because these funds are not available in the daily operation of the business.

• Question 432:

  The ________ of an investment company depends on the company's portfolio of stocks.

  A. bond-rating
  B. liquidity of the shares
  C. none of these answers
  D. value of the shares
  D. value of the shares

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  Explanation

  Share value derives from future dividends and capital gains on each stock within the portfolio. The type, quality and relative quantity of stocks within a portfolio affects the value of the shares of the portfolio.Portfolio composition also affects liquidity and creditworthiness (i.e. bond rating) but much less significantly.

• Question 433:

  Peter Ulrich runs a hedge fund which specializes in using option strategies to enhance the fund's returns. In a training session for newly hired analysts, Ulrich explains option characteristics as follows: "The maximum profit on a short call position is always less than the maximum profit on a long call position and a long at-the-money put option position will break even as soon as the price of the underlying stock decreases." Determine whether Ulrich is correct with regard to his statements about call options and put options.

  A. Ulrich is correct regarding call options only.
  B. Ulrich is correct regarding put options only.
  C. Ulrich is correct regarding both call and put options.
  A. Ulrich is correct regarding call options only.

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  Explanation

• Question 434:

  A confidence index value of 105 is

  A. a bullish sign.
  B. impossible.
  C. an unimportant sign.
  D. a bearish sign.
  B. impossible.

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  Explanation

  The confidence index is equal to the average yield on 10 top-grade corporate bonds divided by the yield on the Dow Jones average of 40 bonds, multiplied by 100. Since the average yield on high-grade bonds will always be higher than the average yield on a large cross section of bonds, the index will always have a value under 100.

• Question 435:

  Suppose that you write an investment newsletter. You track 12 stocks, and you classify these stocks into equal-sized categories of buy, sell, and hold. How many different ways can you classify these stocks into those categories?

  A. 34,860.
  B. 36,540.
  C. 34,680.
  D. 34,650.
  D. 34,650.

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  Explanation

  To answer this question, we need the formula for permutations that takes into account different ways to label things. The number of ways that you can arrange n objects so that there are n_1 of one kind, n_2 of another kind, and so on, up to n_k of a kth kind, is found by using the multinomial formula: n! /[(n_1)! * (n_2)! * ... * (n_k)!]. In this case, your equally-sized categories will be 4 of each kind, 12 in all. 12! / (4!*4!*4!) = 34,650.

• Question 436:

  Given the following choices, what is the optimal capital structure for Chip Co.? (Assume that the company's growth rate is 2 percent.)

  Debt Ratio Dividends Per Share ($) Cost of Equity 0%5. 5011.5% 256. 0012. 0 406. 5013. 0 507. 0014. 0 757. 5015. 0

  A. 50% debt; 50% equity
  B. 40% debt; 60% equity
  C. 25% debt; 75% equity
  D. 75% debt; 25% equity
  E. 0% debt; 100% equity
  C. 25% debt; 75% equity

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  Explanation

  First, calculate the stock price for each debt level using the dividend growth model, Po = D1/(ks - g).

  Debt Div/share ksPo

  0%$5. 5011.5% $5. 50/(0.115 - 0.02) = $57. 89.

  25%6. 0012%$6. 00/(0.12 - 0.02) = $60.00.

  40%6. 5013%$6. 50/(0.13 - 0.02) = $59.09.

  50%7. 0014%$7. 00/(0.14 - 0.02) = $58.33.

  75%7. 5015%$7. 50/(0.15 - 0.02) = $57. 69.

  Clearly, $60.00 is the highest price, so 25% debt and 75% equity is the optimal capital structure.

• Question 437:

  If you deposit $2,250 today into a savings account paying 8% per year, compounded semiannually, how much is in your account in 10 years?

  A. $4,587. 85
  B. $10,487. 15
  C. $3,330.55
  D. $4,857. 58
  E. $4,930.03
  E. $4,930.03

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  Explanation

  On the BAII Plus, press 20 N, 8 divide 2 = I/Y, 2250 PV, 0 PMT, CPT FV. On the HP12C, press 20 n, 8 ENTER 2 divide i, 2250 PV, 0 PMT, FV. Note that the answer will be displayed as a negative number. Make sure the BAII Plus has the P/ Y value set to 1.

• Question 438:

  The optimal debt ratio is the debt ratio that:

  A. minimizes the firm's bankruptcy costs.
  B. maximizes the firm's earnings per share and maximizes the firm's stock price.
  C. maximizes the firm's stock price.
  D. maximizes the firm's earnings per share.
  C. maximizes the firm's stock price.

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  Explanation

  The optimal debt ratio is defined as the debt level that maximizes the firm's stock price.

• Question 439:

  Ace Consulting, a multinational corporate finance consulting firm, is examining the operations of Minishabby Farms, an Irish conglomerate who is considering the development of a new distilling process for their specialty spirits division. In order to determine the feasibility of the new distilling process, Ace Consulting is trying to determine the beta of the proposed project. In their analysis, Ace Consulting begins by identifying publicly-traded companies whose operations are solely within the distilling business. Ace identifies four such firms, determines the beta of each Company, and averages them together. This figure is used as the beta of the proposed project. Which of the following techniques most correctly describes this method of identifying individual project betas?

  A. Monte Carlo simulation
  B. Empirical smoothing
  C. Accounting beta method
  D. Relational method
  E. Pure play method
  F. Case study analysis
  E. Pure play method

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  Explanation

  In this example, Ace Consulting has used the beta coefficient of four firms whose business is solely within the distilling process. These firms are "pure plays" in the distilling field. The Pure Play method of determining project betas is a popular technique in corporate finance, most likely due to its ease of use. However, the identification of "pure play" firms is often difficult for certain projects. In these cases, the second method of determining project betas is employed, the Accounting Beta method. "Monte Carlo simulation" is a method for evaluating stand-alone risk, and "empirical smoothing" is a fictitious term.

• Question 440:

  A bank has deposits of $23 billion and reserves of $3. 1 billion. If the excess reserves equal $400 million, the deposit expansion multiplier equals ________.

  A. 9.11
  B. 8.33
  C. 8.52
  D. 7. 42
  C. 8.52

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  Explanation

  The required reserves equal 3. 1 - 0.4 = $2. 7 billion on deposits worth $23 billion. Thus, the required reserve ratio equals 2. 7/23 = 11.74%. So the deposit expansion multiplier equals 1/0.1174 = 8.52.