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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 521:

  Which inventory costing method is most useful in estimating the amount of inventory lost or destroyed by theft, fire, or other hazards?

  A. average cost method
  B. LIFO
  C. none of these answers is correct
  D. FIFO
  E. gross profit method
  E. gross profit method

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  Explanation

  The historical relationship between cost of goods sold and sales is applied to sales of the current period as a way of estimating COGS during the current period. COGS is then subtracted from the cost of goods available for sale to get the estimated cost of the ending inventory.

• Question 522:

  Ferengi Profiteers is a high-growth mining firm, which prefers to plow back most of its earnings into on-going operations. As a result, it maintains a low dividend payout ratio of 12%. Its permanent earnings are expected to grow at 6%. It announced earnings of $7. 22 per share yesterday and its investors are expecting a return of 9% on its stock. What's the trading price of each stock of Ferengi Profiteers?

  A. $32. 44
  B. $30.60
  C. $28.12
  D. $25. 83
  B. $30.60

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  Explanation

  The earnings next year are expected to be 7. 22 * 1.06 = $7. 65 per share. So the dividend expected next year equals 0.12 * 7. 65 = $0.918 per share. The growth rate of dividend also equals 6%. Therefore the price of a stock using the Dividend Discount Model equals P = 0.918/(9% - 6%) = $30.60.

• Question 523:

  Suppose you have two assets, A and B. Over the past 3 periods, A has returned 8%, 2%, and 6%, while B has returned 11%, -5%, and 20%. What is the return covariance between assets A and B?

  A. 0.0%%
  B. 19.79%%
  C. 10.21%%
  D. 31.38%%
  B. 19.79%%

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  Explanation

  First we must find the expected returns for A and B. These are 5. 33% and 8.67%. Second, we find the difference between each observation and the average: (8% - 5. 33%), (2% - 5. 33%), and (6% - 5. 33%) for A, and (11% - 8.67%), (-5% 8.67%), and (20% - 8.67%) for B. Next, we multiply these together and sum them: (8% - 5. 33%)*(11% - 8.67%) + (2% - 5. 33%)*(-5% - 8.67%) + (6% - 5. 33%)*(20% - 8.67%). The sum of these is 59.33%. The covariance is the probability weighted average of these cross products, so we divide by 3 to get 19.78%%. Note, we could have divided each cross product by 3 rather than the sum of the cross products. If the observations did not have the same probability or frequency, we would need to treat each cross product separately rather than divide at the end.

• Question 524:

  Interest payments should be ________ the project cash inflows.

  A. added to
  B. subtracted from
  C. ignored while estimating
  D. subtracted from or ignored while estimating
  C. ignored while estimating

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  Explanation

  The effects of debt financing are taken into account through the discount rate used to discount the project cash flows. Hence, interest payments must be ignored while estimating a project's cash flows.

• Question 525:

  What is the Net Present Value of this series of annual cash flows using an interest rate of 20% per year: Year 0: <$6,000>, Year 1: $4,000, Year 2: $3,000, Year 3: $2,000, Year 4: $1,000? (Note that the <> are used to indicate a negative number).

  A. $1,077. 49
  B. $1,056. 33
  C. $589.11
  D. $1,134. 39
  E. $981.21
  B. $1,056. 33

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  Explanation

  On the BAII Plus, press CF 2nd CLRWork 6000 +/- ENTER DownArrow 4000 ENTER DownArrow DownArrow 3000 ENTER DownArrow DownArrow 2000 ENTER DownArrow DownArrow 1000 ENTER DownArrow DownArrow 2nd Quit. Then press NPV 20 ENTER DownArrow CPT. On the HP12C, press these keys: 6000 CHS BlueShift CFo 4000 BlueShift CFj 3000 BlueShift CFj 2000 BlueShift CFj 1000 BlueShift CFj. Then press 20 i, YellowShift NPV. The "DownArrow" represents the downward-pointing arrow on the top row of the BAII Plus keyboard. Make sure that the BAII Plus has the P/Y value set to 1.

• Question 526:

  Which of the following will most affect the valuation of a firm's receivables?

  A. The rate of sales growth
  B. None of these answers
  C. The type of business that a firm is engaged in
  D. The allowance for uncollectible accounts
  E. The seasonality of a company's products
  D. The allowance for uncollectible accounts

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  Explanation

  The most important factor that will affect the valuation of receivables, of the choices given, is the allowance for uncollectible accounts. This is so, because receivables are reported on the balance sheet as "net realizable value;" i.e., total amount of receivables, less an allowance for uncollectible accounts. If management understates this allowance, the realizable value of accounts receivable will be overstated and the firm's liquidity position will not be as strong as it would appear.

• Question 527:

  Which of the following is/are FALSE?

  I. Interest expenses that are capitalized are charged against investing cash flows.

  II. Firms that expense interest costs incurred on debt must treat them as financing cash flows.

  III. Firms that expense costs show lower equity than comparable firms that capitalize the costs.

  IV.

  Capitalization of expenses leads to lower tax payments in the first year.

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

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  Explanation

  Interest expenses are treated as operating cash flows under US GAAP. Capitalization leads to higher net income since the entire expenses are not charged against it. Due to this, the tax deductions are lower in the first year, leading to higher taxes. The higher income leads to the capitalizing firm having a higher equity. The difference in equity reduces over time to zero.

• Question 528:

  To estimate the expected earnings multiplier, it is necessary to estimate changes in the ________.

  A. unit labor cost
  B. required rate of return
  C. relative strength of foreign competition
  D. capacity utilization rate
  B. required rate of return

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  Explanation

  To estimate the expected earnings multiplier, it is necessary to estimate changes in the required rate of return, the expected growth rate of dividends (earnings) (g) and the spread between k and g.

• Question 529:

  Under a flexible exchange rate system, a nation that offers more attractive investment opportunities than its trading partners can expect to run a

  A. balance of merchandise trade surplus.
  B. deficit on its capital account transactions.
  C. surplus on current account transactions.
  D. deficit on current account transactions.
  D. deficit on current account transactions.

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  Explanation

  Since a high yield on investments will attract capital, the nation will run a capital account surplus which must be offset by a current account deficit.

• Question 530:

  The ________ of portfolio performance over time is a measure of the variability or dispersion of the historical returns around their central tendency or mean return.

  A. variance
  B. standard deviation
  C. mean variance
  D. mode
  B. standard deviation

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  Explanation

  Standard deviation is also a useful measure of the relative volatility of fund categories.