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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 491:

  Which of the following is/are true about expenses?

  I. RandD expenses must always be capitalized.

  II. Software expenses may sometimes be capitalized.

  III.

  In extractive industries like oil and gas, companies have a choice of either expensing or capitalizing extractive costs.

  A. I, II and III
  B. II and III
  C. III only
  D. I only
  B. II and III

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  Explanation

  Difficulties in measuring the current value of assets being generated by RandD prevent a reliable application of the accrual principles, which require allocation of expenses in proportion to the current benefits generated. Hence, US GAAP takes the easiest solution and dictates that all RandD costs must be expensed immediately (unless they generate tangible or intangible assets which have alternative future uses which are measurable). On the other hand, software development costs which are similar to RandD costs are capitalized after feasibility of the product is determined. In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue-generating assets, in which case, they are capitalized.

• Question 492:

  If an investor who has a required rate of return of 7% per year pays $1,000 for a five-year ordinary annuity, the annuity pays ________ per year.

  A. $244
  B. $256
  C. $271
  D. $263
  A. $244

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  Explanation

  If the annuity pays C per year, we have 1,000 = C/0.07*(1-1/(1.07^5)) => C = 1,000*0.07/0.287 = 244.

• Question 493:

  Which of the following relationships is true?

  A. Gross profit margin < Net profit margin < Operating profit margin
  B. Gross profit margin < Operating profit margin < Net profit margin
  C. Gross profit margin > Operating profit margin > Net profit margin
  D. Net profit margin > Gross profit margin > Operating profit margin
  C. Gross profit margin > Operating profit margin > Net profit margin

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  Explanation

  Gross profit = Net sales - COGS Operating profit = Gross Profit - Sales and General Expenses = EBDIT Net Income = Earnings after depreciation, interest expense and taxes = Operating profit - depreciation - interest expense - taxes Since gross profit > operating profit > net income, "Gross profit margin > Operating profit margin > Net profit margin" is the correct choice.

• Question 494:

  Firm A issues convertible bonds to raise capital in the amount of a million dollars. An identical Firm B issues debt with warrants attached to raise the same amount. Which of the following statements is/are true in this situation?

  I. Firm A ignores the convertibility feature completely while recording the bonds.

  II. Firm B's interest expense is higher than that of Firm A.

  III.

  Both the firms recognize the dilutive effects of the debt while calculating EPS.

  A. I, II and III
  B. II and III
  C. I only
  D. II only
  A. I, II and III

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  Explanation

  While both convertible bonds and bonds with attached warrants derive significant value from the possibility of conversion to common stock, the accounting treatments for the two are quite different. With convertible bonds, the conversion feature is completely ignored and the bond is recorded as an ordinary bond. On the other hand, the proceeds from a bond-with-warrant issue are divided into two groups: those related to the bond and those related to the warrant. The former is recorded as a liability while the latter is directly added to equity, without any income statement effects. This leads to a bigger amortization of a discount (or a smaller amortization of premium) with a warrant-debt than with a convertible bond. This effect offsets the fact that a higher liability is recognized with a convertible bond. Hence, the interest expense is higher in general when debt-with-warrant is issued.

• Question 495:

  According to the AIMR-PPS, terminated portfolios are included in the composite for how long after termination?

  A. Composites must include terminated portfolios after the last full performance measurement period the portfolios were under management.
  B. Composites should include the terminated portfolio only until the date of termination.
  C. Composites should include the terminated portfolio for the last full performance measurement period under which the portfolios were managed.
  D. Composites should include the terminated portfolio for the full ten years required by the Standards for performance reporting.
  C. Composites should include the terminated portfolio for the last full performance measurement period under which the portfolios were managed.

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  Explanation

  Composites must exclude terminated portfolios after the last full performance measurement period the portfolios were under management, but composites must continue to include terminated portfolios for all periods prior to termination. This is a requirement for creation and maintenance of composites.

• Question 496:

  Arvantis works for Quick-time Brokerage. He has not been happy with his employment for some time and recently decided to start his own hedge fund. He started making administrative preparations for setting up the fund while still working for Quick-time Brokerage. He also made contact with a few of his oldest clients and gave them details about his hedge fund. The clients promised to switch accounts once the fund was initiated. Arvantis has:

  I. violated Standard III (B) - Duty to Employer by making preparations to enter a competitive business while still being employed with Quick-time Brokerage.

  II. violated Standard III (B) - Duty to Employer by soliciting Quick-time Brokerage's clients while still being employed with Quick-time Brokerage.

  III.

  not violated Standard III (B) - Duty to Employer.

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

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  Explanation

  Standard III (B) - Duty to Employer - does not preclude a departing employee from making arrangements to enter independent practice prior to leaving current employment, as long as such preparations do not constitute a breach of loyalty toward the employer. However, undertaking any activity that harms the current employer is a violation of III (B).

• Question 497:

  One year ago, Yong Kim bought a preferred stock that had a 6% dividend yield. Now, one year later, Kim sells the stock which is how selling at a 5% dividend yield. The preferred stock pays a fixed annual dividend, which Kim received right before selling. What rate of return did Kim realize on his investment?

  A. 14%.
  B. 20%.
  C. 26%.
  C. 26%.

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  Explanation

• Question 498:

  Santorum Co. has a capital structure which consists of 50 percent debt, 30 percent common stock, and 20 percent preferred stock. The company's net income was just reported to be $1,000,000. The company pays out 40 percent of its net income as dividends. How large of a capital budget can the company have, without having to issue additional common stock or change its capital structure?

  A. $600,000
  B. $2,000,000
  C. $1,200,000
  D. $200,000
  E. $180,000
  B. $2,000,000

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  Explanation

  The retained earnings break point indicates the size of the capital budget when not issuing additional common stock. BP(RE) = ($1,000,000(1 - 0.4))/0.30 = $2,000,000. BP = break point; RE = retained earnings

• Question 499:

  Country A's workforce consists in large part of seasoned workers, with an average age of around 45. Country B is relatively young, with an average workforce age of just 31. A is also a mature country, having implemented many modern advances in technology. B is a growing country with a dynamic leadership which is bringing about a technological revolution in the country. Given this, country A has ________ structural unemployment and ________ frictional unemployment than country B.

  A. lower, lower
  B. higher, lower
  C. lower, higher
  D. higher, higher
  D. higher, higher

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  Explanation

  Frictional employment arises because of the fact that employers do not known about all the available workers and their qualifications while job-seekers are not fully aware of the available job opportunities matching their interests and skills.

  This leads to a longer job placement time and also causes a higher employee turnover due to job mismatches. The resulting contribution to the unemployment rate is called "frictional unemployment." Since younger workers tend to have a

  higher job mobility, a younger workforce will also have a higher frictional unemployment.

  Changes due to technology, public policy or demands in the market place lead to people with outdated skills or skills which do not match the jobs being offered. The resultant contribution to unemployment is referred to as "structural

  unemployment." Hence, a rapidly growing economy will tend to generate a higher level of structural unemployment since in such an economy, skills tend to get outdated faster.

• Question 500:

  An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3. 6 years. What is the project's internal rate of return (IRR)?

  A. 12. 05%
  B. 13. 47%
  C. 15. 89%
  D. 14. 66%
  E. 11.18%
  A. 12. 05%

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  Explanation

  Investment cost = $180.

  CF(0) = -180

  CF(1-5) = 50

  Solve for IRR = 12. 05%.