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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 441:

  Under the Performance Presentation Standards, selected firm composites can be designated as being in compliance, only if ________ of the firm's composites are in compliance.

  A. all
  B. many
  C. some
  D. one
  A. all

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  Explanation

  Compliance cannot be met on a per product or per composite basis, but can only be met on a firmwide basis. Composites may not be presented as being in compliance unless all of the firm's qualifying portfolios have been accounted for in at least one composite defined according to similar strategy or investment objective.

• Question 442:

  The Jones company had a net receivable balance at the beginning of 1998 of $350,000 and ended 1998 with a receivable balance of $400,000. During the year the company had credit sales of $1,000,000 and cash sales of $200,000. How much cash did the company collect during 1998?

  A. $1,050,000
  B. $950,000
  C. $1,150,000
  D. $1,250,000
  C. $1,150,000

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  Explanation

  During the year the company sold $1,200,000 of goods or services. However, receivables increased by $50,000, which decreases the change in cash during the year. Therefore the change in cash, or the cash collected during the year was $1,050,000.

• Question 443:

  What is the value of a stock that is expected to pay a $15 per share dividend in a year's time? The stock is expected to be selling for $40 per share at the end of the year. The appropriate discount rate is 12% per year.

  A. Not able to compute with the above data.
  B. $4. 91
  C. $49.11
  D. $55. 34
  C. $49.11

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  Explanation

  Value = $55/1.12=$49.11

• Question 444:

  The average discount from NAV for a closed-end investment company shares ________ over time.

  A. remains constant
  B. falls
  C. rises and falls
  D. rises
  C. rises and falls

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  Explanation

  The average discount from NAV for a closed-end investment company shares rises and falls over time depending on investors' sentiments.

• Question 445:

  Regarding beneficiaries and remaindermen, current life-income beneficiaries prefer to receive ________; remaindermen would rather have ________.

  A. a minimal current income; a high rate of current income
  B. a high rate of current income; growth and stability of principal
  C. growth and stability of principal; a high rate of current income
  D. small incremental principal repayments; predictable current income
  E. none of these answers
  B. a high rate of current income; growth and stability of principal

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  Explanation

  Trustees recognize a conflict of interests often exists between the primary or current beneficiaries of a trust and the remaindermen (secondary or later beneficiaries of the trust). Current life-income beneficiaries would prefer to receive a high rate of current income; remaindermen would rather have growth and stability of principal. Trustees thus have a duty to exercise their best skill and care to serve all beneficiaries impartially and with equal consideration of their needs.

• Question 446:

  Despite relative congruence in their ranking methods, NPV and MIRR will sometimes produce conflicting answers. Which of the following correctly illustrates an example in which the two methods would likely produce conflicting rankings?

  I. When examining projects with non-normal cash flows

  II. When examining projects that differ substantially in scale

  III. When examining independent projects

  IV.

  When examining projects that differ substantially in their lifespan

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

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  Explanation

  While the MIRR method is designed to tackle many of the problems associated with the traditional IRR calculation, there exist situations in which the MIRR will produce rankings which conflict with those produced by the NPV method. Specifically, when mutually-exclusive projects whose lifespans or scale differ substantially are being examined. In these situations, the NPV calculation should be relied on, as this method is considered to produce the correct results.

• Question 447:

  Which of the following terms describes the risk of individual projects to a corporation, taking into consideration that each project represents only one of the firm's portfolio of assets?

  A. Alpha coefficient
  B. Corporate risk
  C. Stand-alone risk
  D. Systematic risk
  E. Market risk
  B. Corporate risk

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  Explanation

  Corporate, or "within-firm" risk, is defined as the risk of individual projects to a corporation, taking into consideration the fact that each project represents only one of the firm's assets. In examining corporaterisk, there is an implicit assumption that some of the total risk to the firm's profits from the addition of new projects will be partially diversified away. Corporate risk is measured by the project's impact on uncertainty about the firm's future earnings.

• Question 448:

  The management of Intelligent Semiconductor is considering two mutually exclusive projects, which are detailed below: Project A Electron looping apparatus Initial investment outlay ($6,000,000) t1: $2,750,000 t2: $1,250,000 t3: $1,250,000 t4: $2,750,000 Cost of capital of 10.55% Project B Optical switching apparatus Initial investment outlay ($5,040,000) t1: $1,000,000 t2: $1,000,000 t3: $1,500,000 t4: $1,500,000 t5: $1,500,000 t6: $750,000 t7: $300,000 t8: $50,000 Cost of capital of 10.55% Assuming no taxes, a $0.00 salvage value at the end of the each project's life, as well as the ability to replicate each project identically at the end of its lifespan, which is the superior investment according to the Common Life approach? Additionally, what are the NPV and IRR of the superior project over the common life?

  A. Project B, NPV $305,221; IRR 13. 65%
  B. None of these answers
  C. Project B, NPV $287,725. 32; IRR 12. 38%
  D. Project A, NPV $465,515; IRR 12. 78%
  E. Project A, NPV $462,038; IRR 12. 72%
  E. Project A, NPV $462,038; IRR 12. 72%

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  Explanation

  The Replacement Chain, or "Common Life" approach, is a useful method which allows two or more projects with unequal lives to be examined. In the Replacement Chain approach, the lifespans of each project being examined are multiplied in such a way that the resulting projects share a "common life." In this example, the Optical Switching apparatus has a lifespan of eight periods, while the electron looping apparatus has a four-period lifespan. The common multiple of both projects is 8, and by replicating the cash flows of the electron looping project through period 4, i.e. by carrying out the project for an additional cycle, we can arrive at a "common life" for both projects. Carrying out the electron-looping project through eight periods will yield the following series of cash flows: Electron looping apparatus t0: ($6,000,000) t1: $2,750,000 t2: $1,250,000 t3: $1,250,000 t4: [$2,750,000 + ($6,000,000)]=($3,250,000) t5: $2,750,000 t6: $1,250,000 t7: $1,250,000 t8: $2,750,000 By incorporating these cash flows into your calculator, you will find a NPV of $462,038 for this project, as well as an IRR of 12. 72%. The Optical Switching apparatus has a NPV of $287,725 and an IRR of 12. 38%.

• Question 449:

  If you are about to go to Brazil and would like to obtain Brazilian currency, this acquisition would be accomplished in the

  A. internal affairs office.
  B. Office of the U.S. Treasury.
  C. Federal Reserve market.
  D. export/import market.
  E. foreign exchange market.
  E. foreign exchange market.

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  Explanation

  The foreign exchange market is the market in which the currencies of different countries are bought and sold. Thus, in order to exchange your dollars for cruzeiros you must access the foreign exchange market.

• Question 450:

  Given that next period's dividend is 4, the required rate of return is 14%, and the dividend growth rate is 5%, what is the current value of the common stock (using the infinite period Dividend Discount Model)?

  A. $28.57
  B. Not enough information
  C. $44. 44
  D. $31.50
  E. $29.84
  C. $44. 44

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  Explanation

  The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. In this question, the common stock is worth 4 / (0.14 - 0.05) = $44. 44.