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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 511:

  The ______of services from foreigners ________ the supply of dollars to the exchange market.

  A. import; reduces
  B. export; expands
  C. none of these answers
  D. import; expands
  D. import; expands

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  Explanation

  The import of services from foreigners expands the supply of dollars to the exchange market; service imports are entered on the balance of payments accounts as debit items.

• Question 512:

  If a stock price that was previously in a rising trend channel suddenly enters a flat trend channel,

  A. most technical analysts would sell the stock on the presumption that it will next enter a declining trend channel. A declining trend channel is a general pattern of price decline, while a flat trend channel is a pattern of unpredictable price fluctuation.
  B. some technical analysts would sell the stock in case it will enter a declining trend channel. Most analysts will keep the stock and see what occurs. A flat trend channel is a pattern of price stability.
  C. most technical analysts would buy the stock on the presumption that it will soon re-enter the rising trend channel. A rising trend channel is a general pattern of price increase, while a flat trend channel is a pattern of unpredictable price fluctuation.
  D. all technical analysts would sell the stock on the belief that it will almost certainly enter a declining trend channel. A declining trend channel is a general pattern of price decline, while a flat trend channel is a pattern of price stability.
  B. some technical analysts would sell the stock in case it will enter a declining trend channel. Most analysts will keep the stock and see what occurs. A flat trend channel is a pattern of price stability.

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  Explanation

  A declining trend channel is a general pattern of price decline. A rising trend channel is a general pattern of price increase, while a flat trend channel is a pattern of price stability. Most technical analysts would keep a stock that has changed from being in a rising trend channel to a flat trend channel because of the possibility of it re-entering the rising trend channel. If the stock price breaks out on the downside, then the analysts would take that as a sign of an incipient declining trend channel, and sell the stock.

• Question 513:

  Foxglove Corp. is faced with an investment project. The following information is associated with this project: Allowable Depreciation YearNet Income*for 3-Yr. MACRS class 1 $50,000 0.33 2 60,000 0.45 3 70,000 0.15 4 60,000 0.07 *Assume no interest expenses and a zero tax rate. The project involves an initial investment of $100,000 in equipment that falls in the 3-year MACRS class and has an estimated salvage value of $15,000. In addition, the company expects an initial increase in net working capital of $5,000, which will be recovered in year 4. The cost of capital for the project is 12 percent. What is the project's net present value? (Round your final answer to the nearest whole dollar.)

  A. $153,840
  B. $168,604
  C. $162,409
  D. $159,071
  E. $182,344
  B. $168,604

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  Explanation

  Step 1 Calculate depreciation:

  Dep 1 = 100,000(0.33) = 33,000.

  Dep 2 = 100,000(0.45) = 45,000.

  Dep 3 = 100,000(0.15) = 15,000.

  Dep 4 = 100,000(0.07) = 7,000.

  Step 2 Calculate cash flows:

  CF 0 = -100,000 - 5,000 = -105,000.

  CF 1 = 50,000 + 33,000 = 83,000.

  CF 2 = 60,000 + 45,000 = 105,000.

  CF 3 = 70,000 + 15,000 = 85,000.

  CF 4 = 60,000 + 7,000 + 5,000 + 15,000 = 87,000.

  Step 3 Calculate NPV:

  Use CF key on calculator. Enter cash flows shown above. Enter I/YR = 12%. Solve for NPV = $168,604.

• Question 514:

  Which would not be categorized as an unusual or infrequent item?

  A. provisions for environmental remediation
  B. gains or losses from disposal of a portion of a business segment
  C. restructuring costs
  D. gains or losses on qualifying early retirement of debt
  E. employee separation costs
  D. gains or losses on qualifying early retirement of debt

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  Explanation

  Gains or losses on qualifying early retirement of debt is classified as an extraordinary item, not an unusual or infrequent item.

• Question 515:

  A cash outlay that has already been incurred and which cannot be recovered regardless of whether the project is accepted or rejected is known as which of the following terms?

  A. Incremental Cash Flow
  B. Externality
  C. Sunk Cost
  D. Opportunity Cost
  E. Cannibalization
  C. Sunk Cost

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  Explanation

  Sunk cost is defined as a cash outlay that has already been incurred and which cannot be recovered regardless of whether a project is accepted or rejected.

• Question 516:

  A portfolio manager with Churn Brothers Brokerage is trying to determine whether shares of Mile High Airlines are fairly valued. In his analysis, the portfolio manager is using the two-stage dividend discount model, and has ascertained the

  following information:

  Mile High Airlines is expected to grow at a rate of 20% per year for the next four years.

  At t5, Mile High Airlines is anticipated to return to its long-term growth rate of 10% per year. D0 = $0.44

  r = 15. 75% per year

  Common shares outstanding = 1,500,000

  Given this information, what is the value of Mile High Airlines? Use the two-stage dividend discount model.

  A. $20.77
  B. The answer cannot completely be calculated from the information provided.
  C. None of these answers is correct.
  D. $16. 91
  E. $11.65
  F. $21.23
  E. $11.65

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  Explanation

  The multi-stage dividend discount model is a more realistic way of valuing fast-growing companies that pay dividends. With this model, it is necessary to estimate the above average, or "supernormal," rate of growth, as well as the long-term rate of growth. Once these growth rates have been determined, they are used to calculate the anticipated annual dividends leading up to the point at which the growth rate decelerates to the long-run rate of growth.

  Incorporating the given information into the two-stage dividend discount model will yield the following

  P = {[$0.44 * 1.20) / 1.1575] + [($0.528 * 1.20 / 1.33981] + [($0.6336 * 1.20) / 1.55083] + [($0.76032 * 1.20) / 1.79508] + [($0.91238 * 1.10) / (.1575 - .1)]/1.55083} which can further be developed into:

  P = {$0.45616 + $0.4729 + $0.49027 + $0.50827 + $9.72} = $11.65 As you can see, the number of common shares outstanding was not necessary in this instance, and was provided largely as a distraction. However, in some cases knowing the number of common shares outstanding will be necessary in order to convert a company's dividends paid to a per-share basis.

• Question 517:

  The price range at which a technician would expect a substantial increase in the supply of a stock is

  A. the incentive price.
  B. the trough price.
  C. the support level.
  D. the resistance level.
  D. the resistance level.

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  Explanation

  Incentive price is not a real term. Technicians believe that after a stock has fallen from some previous higher price level, investors who bought at that higher level will wait for the price to come back up again to unload the stock at their break-even level. When the stock does reach that price range, selling by those investors will cause a substantial increase in supply.

• Question 518:

  Which of the following is true about Standard III (B) - Duty to Employer?

  A. It prohibits a departing employee from making arrangements to enter independent practice prior to leaving current employment.
  B. It precludes a member from entering into an independent business that is in direct competition with the employer.
  C. It requires the employee to obtain written permission from the employer as well as the outside entity before entering independent practice.
  D. It requires departing employee to give all the details about the independent practice before leaving the current employment.
  C. It requires the employee to obtain written permission from the employer as well as the outside entity before entering independent practice.

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  Explanation

  Standard III (B) - Duty to Employer - does not preclude a member from entering into independent practice while still employed. It does require the employee to obtain written permission from the employer as well as the outside entity before doing this. It does not prohibit 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.

• Question 519:

  XYZ company has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. XYZ company pays a fixed rate of 8 percent on payments that occur at 90-day intervals. Six payments remain with the next one due in exactly 90 days. On the other side of the swap, XYZ company receives payments based on the LIBOR rate. Describe the transaction between XYZ company and the dealer at the end of the sixth period if the appropriate LIBOR rate is 5 percent.

  A. XYZ company receives $12,500.
  B. Dealer pays XYZ company $7,500.
  C. Dealer receives $20,000.
  D. XYZ company pays dealer $7,500.
  D. XYZ company pays dealer $7,500.

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  Explanation

  XYZ company owes the dealer ($1,000,000)(.08)(90/360) = $20,000. The dealer owes XYZ company ($1,000,000)(.05)(90/360) = $12,500. Net: XYZ company pays the dealer $7,500.

• Question 520:

  The government currently has no debt. To alleviate an economic slow down, Congress proposes an increase in spending partially offset by an increase in the highest marginal tax rate. This will force the Treasury to issue new debt. According to which of the following economic theories would this stimulate the economy?

  I. fiscal policy

  II. supply-side

  III.

  crowding out

  A. none of these answers is correct
  B. I only
  C. I, II, III
  D. II only
  E. II, III
  B. I only

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  Explanation

  Anytime the government runs a deficit, it can be considered a fiscal stimulus. However, since marginal tax rates were increased, the supply-side effect would be negative. The crowding out effect suggests that government borrowing will increase interest rates and partially offset the stimulate effects of the new spending.