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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 451:

  A firm has a net income of 150, an increase in accounts receivables of 30, depreciation of 55 and a decrease in accounts payable of 25. Its operating cash flow is ________.

  A. 200
  B. 150
  C. 95
  D. 210
  B. 150

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  Explanation

  operating cash flow = net income + noncash expenses - non-cash revenues = 150 + 55 - 30 - 25 = 150.

• Question 452:

  Which of the following relationship is true about the liquidity ratios?

  A. Cash ratio > Quick ratio > Current ratio.
  B. Quick ratio > Cash ratio > Current ratio.
  C. Cash ratio < Quick ratio < Current ratio.
  D. Cash ratio < Current ratio < Quick ratio.
  C. Cash ratio < Quick ratio < Current ratio.

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  Explanation

  The cash ratio is the most conservative of the 3 liquidity ratios since it considers only cash and marketable securities relative to the current liabilities. The quick ratio considers receivables in addition to cash and marketable securities. The current ratio takes all current assets into account.

• Question 453:

  The value of an asset is the ________ of its expected future cash flows.

  A. none of these answers
  B. weighted sum
  C. future value
  D. sum
  A. none of these answers

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  Explanation

  The value of an asset is the net present value or NPV of its expected future cash flows.

• Question 454:

  Use the following financial data on Enterprise:

  a.

  Sale of equipment$32,000

  b.

  Loss on equipment sale$9,000

  c.

  Dividends paid$12,500

  d.

  Purchase of an office suite$104,000

  e.

  Common stock repurchase$45,000

  f.

  Dividends received from investments$8,500

  g.

  Interest received on Treasury bonds$1,200

  h.

  Supplier accounts paid$3,700

  i.

  Cash collection from customers$14,200

  j.

  Ending cash balance$98,000

  In the above question, the investing cash flow is ________.

  A. -$145,000
  B. -$72,000
  C. $12,000
  D. -$136,000
  B. -$72,000

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  Explanation

  Items a and d are the investing cash flows. Note that item b is a non-cash event.

• Question 455:

  Which of the following would be counted in the calculation of GDP?

  A. the sale of cocaine in the black market
  B. the broker's fees from the sale of 100 shares of IBM stock
  C. damage to a house caused by a hurricane
  D. the sale of a rare coin to a coin collector
  B. the broker's fees from the sale of 100 shares of IBM stock

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  Explanation

  GDP is the total market value of all final goods and services produced domestically during a specific period. Non market activities are not counted; the sale of used goods are also not counted. A broker's fee is counted because it represents a service that was produced domestically.

• Question 456:

  Jim Boo, CFA, is analyzing Justin Corp., a maker of home appliances. Boo's research provides the following facts: Calculate Justin's expected price to earnings ratio (/).

  A. 8.0X
  B. 10.Ox
  C. I2. 0x
  A. 8.0X

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  Explanation

• Question 457:

  All of the following statements are true about futures and options clearing houses except:

  A. The clearinghouse acts as the opposite side of all trades once they are initiated.
  B. The clearinghouse guarantees that traders in the futures market will honor their obligations.
  C. The clearinghouse requires the daily settlement of all margin accounts.
  D. Clearinghouses have defaulted on less than one half of one percent of their trades.
  D. Clearinghouses have defaulted on less than one half of one percent of their trades.

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  Explanation

• Question 458:

  Trust Fund is a reasonably successful investment management firm that has as its clients a few pension plans. Trust Fund executes all of its trades with Prime Brokerage, an average brokerage firm. Prime Brokerage charges higher commissions than comparable players in the market but in return, provides investment research on the stocks which are part of the pension plan assets under Trust Fund's management. Portfolio managers at Trust Fund know about the close relationship on the golf links between Prime Brokerage's chief broker, Ralph Fiennes, and Trust Fund's CEO, Armis Arvanitis. They also believe that the research provided by Prime Brokerage, while not superlative, is quite useful and justifies the excess expense in brokerage. This "soft-dollars" practice is disclosed in Trust Fund's official documents and contracts but Sisko, a freshly minted CFA charterholder, thinks that Trust Fund managers are in violation of the AIMR code of Ethics. Which of the following is true?

  A. Trust Fund's managers are violating Standard IV (B.8) - Disclosure of Referral Fees by not revealing the arrangement to pension plan beneficiaries.
  B. Trust Fund's managers are violating Standard IV (B.1) - Fiduciary Duties by not executing the trades at the lowest price available.
  C. Sisko is not applying the AIMR code correctly. Trust Fund's managers are not violating any AIMR standards.
  D. Trust Fund's managers are violating Standard IV (B.3) - Fair Dealing by unfairly diverting funds from the plan assets to Prime Brokerage through higher fees.
  C. Sisko is not applying the AIMR code correctly. Trust Fund's managers are not violating any AIMR standards.

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  Explanation

  The practice of using "soft dollars" (i.e., the usage of brokerage for purchase of research services) is not forbidden by the AIMR code or securities laws, as long as they are commensurate with the services received and the practice is disclosed to the clients. In this case, there is no evidence that Trust Fund is overpaying Prime Brokerage or that it is not seeking best price and execution. Hence, Sisko is mistaken and Trust Fund managers are not in violation of the AIMR code.

• Question 459:

  Intelligent Semiconductor is considering the development of a new data storage medium, which will allow tremendous increases in the efficiency of its customer's high-end server lines. The development of the new system will take place in the

  firm's existing facilities, and the storage costs for the additional equipment are expected to be residual in nature. The following information applies to this project:

  Rent expense for the firm's existing facilities ($10,500)

  Initial cash outlay ($50,000)

  t1: $15,000

  t2: $11,000

  t3: $11,000

  t4: $15,000

  t5 ($10,000)

  t6 ($10,000)

  t7 $25,000

  Discount rate: 9%

  Assuming no taxes or related charges, that the initial cash outlay does not include any sunk costs, and a $0.00 salvage value at t7, what is the MIRR of this project?

  A. 7. 262%
  B. 6. 231%
  C. None of these answers
  D. 12. 461%
  E. This problem has more than one MIRR
  F. 14. 606%
  A. 7. 262%

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  Explanation

  In this example, you are asked to calculate the Modified Internal Rate of Return for a project. In calculating the MIRR for this project, the rent cost of $10,500 is ignored because this expense represents a sunk cost. Remember that sunk costs are irrelevant in capital budgeting decisions, and should not beincorporated into the calculation. This is due to the fact that sunk costs are not incremental in nature, and are not directly related to the acceptance of the project in question, i.e. these costs have already been incurred or have been earmarked for payment. The following illustration details the calculation of the Terminal Value (TV) for the MIRR calculation in this case: {[$15,000 *1.6771] + [11,000 * 1.53862] + [11,000

  * 1.41158] + [$15,000 * 1.29503] + [$25,000 * 1]}= TV $102,034. 15. The calculation of the present value of the cash outflows is found by discounting the cash outflows of periods 5 and 6 and adding them to the initial cash outlay as follows: {-$50,000 + [- $10,000/1.53862] + [-$10,000/1.6771]= PV of cash outflows ($62,462. 00). Incorporating these figures into your calculator's cash flow worksheet will yield the MIRR of 7. 2623%. The calculation is found by the following: PV= ($62,462. 00), FV= $102,034. 15, PMT=0, N=7, CPT I/Y ---7. 2623%. The modified IRR has a significant advantage over the regular IRR, in the fact that MIRR assumes cash flows from all projects are reinvested at some explicit rate, while the regular IRR assumes that all cash flows are reinvested at the project's IRR. This allows for much greater flexibility.

• Question 460:

  Standard II (C) - Prohibition against Plagiarism - addresses all of the following forms of communication, except:

  A. internet communications
  B. oral presentations
  C. electronic data transfer
  D. written presentations
  E. audio/visual presentations
  F. none of these answers
  G. group meetings
  F. none of these answers

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  Explanation

  Standard II (C) does not concern the form of communication of information to clients, prospects, employees, or the general public. Rather, it concerns the need to acknowledge the source of information used by the member to avoid the appearance of plagiarism.