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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 501:

  Consider the following two projects: Project A Initial cash outflow:$1,000,000 Cash inflows as follows t1: $500,000 t2: $450,000 t3: $250,000 t4: $150,000 t5: $150,000 Project B Initial cash outflow: $1,000,000 Cash inflows as follows t1: $150,000 t2: $150,000 t3: $250,000 t4: $450,000 t5: $500,000 Assuming a cost of capital of 9%, no taxes, and a $0.00 salvage value for each project at the end of year 5, what is the NPV of each project? Additionally, which of the two projects has the steeper NPV profile?

  A. Project A NPV: $88,596. 13, Project B NPV: $110,900.51, Project A has a steeper NPV profile
  B. Project A NPV: $114,078.88, Project B NPV: $100,669.59, Project has B has a steeper NPV profile
  C. Project A NPV: $234,270.95, Project B NPV: $100,669.59 , Project A has a steeper NPV profile
  D. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project B has a steeper NPV profile
  E. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project A has a steeper NPV profile
  D. Project A NPV: $234,270.95, Project B NPV: $100,669.59, Project B has a steeper NPV profile

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  Explanation

  Due to the fact that project B has the majority of its cash inflows coming in later periods, it is more sensitive to changes in the cost of capital than is project A, which has the majority of its cash flows coming in earlier periods. This is exemplified by a steeper NPV profile.

• Question 502:

  The sponsors of a well-known charity came up with a unique idea to attract wealthy patrons to the $500 a plate dinner. After the dinner, it was announced that each patron attending could buy a set of 20 tickets for the gaming tables. The chance of winning a prize for each of the 20 plays is 50-50. If you bought a set of 20 tickets, what is the chance that you will win 15 or more prizes?

  A. 0.021
  B. 0.250
  C. 0.006
  D. None of these answers
  E. 0.750
  A. 0.021

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  Explanation

  This is a binomial probability. The probability of getting r successes out of n trials where the probability of success each trial is p and probability of failure each trial is q (where q = 1-p) is given by: n!(p^r)[q^(n-r)]/r!(n-r)!. Here n = 20, p = 0.5 and q = 0.5 and r = 15,16,17,18,19,20. Therefore we have P(15) = 20!(0.5^15)(0.5^5)/15!5! = 0.0148 P(16) = 20!(0.5^16)(0.5^4)/16!4! = 0.0046 P(17) = 20!(0.5^17)(0.5^3)/17!3! = 0.0011 P(18) = 20!(0.5^18)(0.5^2)/18!2! = 0.0002 P(19) = 20!(0.5^19)(0.5^1)/19!1! = 0.00002 P(20) = 20!(0.5^20)(0.5^0)/20!0! = 0.000001 The sum adds up to 0.207.

• Question 503:

  Prepaid expenses are:

  A. classified as current liabilities on the balance sheet.
  B. advance payments for goods not yet received which extend beyond the current accounting period.
  C. not included in the calculation of a company's working capital.
  D. advance payments for work that the company has not yet performed. The work will be completed within the current accounting period.
  B. advance payments for goods not yet received which extend beyond the current accounting period.

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  Explanation

  Prepaid expenses occur when you pay for a service before you actually receive the benefits of the service.

• Question 504:

  Assume the following information about a common stock:

  Last annual dividend per share: $0.25 Price per share: $18.90 Required return: 15% per year Expected growth rate: 11% per year

  What is the value of this common stock?

  A. $16. 43
  B. The answer cannot be determined from the information provided.
  C. $6. 25
  D. $17. 03
  E. $6. 94
  E. $6. 94

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  Explanation

  To determine the value of a common stock using the Infinite Period Dividend Discount Model, use the following equation:

  {V = [d1 / (k - g)]}

  Where: V = the value of the common stock at t0, d1 = the annual dividend at t1 (which is found by multiplying d0 by (1 + g), k = the investor's required rate of return, and g = the anticipated annual growth rate.

  In this example, all of the necessary information has been provided, and incorporating this information will lead to the following:

  {V = [($0.25 * 1.11) / (0.15 - 0.11)] = $6. 94

  This value is significantly less than the price of the shares in the open market. While at first it may be appealing to assume that the common stock is overvalued, this may be a dangerous assumption. Equally likely is the possibility that the

  Infinite Period DDM is not the ideal valuation model for this common stock. Perhaps the price of this common stock is reflecting other sources of potential cash flows, ratherthan the summation of the present value of future dividends. This is an important point to consider, and one with which you should become familiar.

• Question 505:

  The real Risk-Free Rate in different countries will vary widely due to which of the following factors?

  A. All of these answers
  B. Growth rate of the labor force
  C. Growth rate of the average number of hours worked
  D. Growth rate of labor productivity
  A. All of these answers

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  Explanation

  The real risk free rate is dependent on the growth rate, because typically an investor will want to have a return larger than the projected growth rate of an economy. The growth rate of an economy is affected by variables like the growth rates of the labor force, the work hours and productivity.

• Question 506:

  ________ techniques are based on the strong relationship between the economy and security markets. Market projections are based on the outlook for the aggregate economy.

  A. Micro
  B. Macro
  C. Fundamental
  D. Technical
  B. Macro

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  Explanation

  Analysis of both economies and securities markets are macro-techniques to aid investment decision which includes deciding if certain asset classes or industries could be performing better or worse than they are actually weighted/valued at.

• Question 507:

  Technical analysts

  A. use fundamental company information to find market trends.
  B. do not believe in market trends.
  C. try to take advantage of ongoing market trends.
  D. try to predict future market trends.
  C. try to take advantage of ongoing market trends.

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  Explanation

  Technical analysis, in contrast to the efficient market hypothesis and fundamental analysis, holds that past price and volume data can be used to discover market trends that can predict future market behavior. Technical analysts do not try to predict future market trends, but try to find and take advantage of current, ongoing ones.

• Question 508:

  Companies report accounts receivable at:

  A. their net realizable value.
  B. their liquidation value.
  C. the lower-of-cost-or-market value.
  D. their fair market value.
  A. their net realizable value.

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  Explanation

  The net realizable value of the accounts receivable is equal to the total amount receivable less an allowance for uncollectible items. In practice, companies report accounts receivable at their net realizable value.

• Question 509:

  Balanced funds invest A. in a broad market index.

  B. in a wide variety of common stocks.

  C. in both common stock and fixed-income securities.

  D. primarily in bonds.

  Correct Answer. C
  C

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  Explanation

  Balanced funds diversify outside the stock market by combining investments in common stock with those in fixed-income securities such as government and corporate bonds. The ratio of stocks to fixed-income securities that the fund will invest in will be stated in its prospectus.

• Question 510:

  An investment management firm has been hired by ETV Corporation to work on an initial public offering for the company. The firm's brokerage unit now has a sell recommendation on ETV, but the head of the investment banking department has asked the head of the brokerage unit to change the recommendation from sell to buy. According to the Standards, the head of the brokerage unit would be permitted to:

  A. Increase the recommendation by no more than one increment (in this case, to a hold recommendation).
  B. Assign a new analyst to decide if the stock deserves a higher rating.
  C. Place the company on a restricted list and give only factual information about the firm.
  D. Reassign responsibility for rating the stock to the head of the investment banking unit.
  C. Place the company on a restricted list and give only factual information about the firm.

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  Explanation

  This question relates to Standard IV (A.3), Independence and Objectivity. When asked to change a recommendation on a company stock to gain business for the firm, the head of the brokerage unit must refuse in order to maintain his independence and objectivity in making the recommendation. To avoid the appearance of a conflict of interest, the firm should discontinue issuing recommendations about the company. Changing the recommendation in any manner is a violation of the member's duty to maintain independence and objectivity. Assigning a new analyst would not address the conflict of interest. Reassigning responsibility for the stock to the head of investment banking would actually exacerbate the conflict.