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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 51:

  A financial analyst is examining the performance of Intelligent Semiconductor, a diversified technology company, and has assimilated the following information for the most recent fiscal year:

  Adjusted operating profit before tax: $12,675,000 Cash operating taxes: $4,240,000 Cost of capital: 16% per year Total capital employed: $60,700,000

  Using this information, what is the economic value added for Intelligent Semiconductor? Further, should the management of Intelligent be considered to have provided appropriate economic value for shareholders?

  A. $1,633,620; management has not created economic value
  B. $1,633,620; management has created economic value
  C. None of these answers is correct.
  D. ($1,227,000), management has not created economic value
  E. ($497,000), management has created economic value
  F. $735,000; management has not created economic value
  G. $1,227,000; management has created economic value
  D. ($1,227,000), management has not created economic value

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  Explanation

  Economic Value Added, a value-based measure of economic profit, is a registered trademark of Stern, Stewart and Company. The equation used to calculate EVA is as follows:

  EVA = {Net Operating Profits Less Adjusted Taxes - [Total Capital Employed * (Cost of Capital)]}.

  In this case, the NOPLAT figure must be calculated manually by subtracting the Cash Operating Taxes from the Adjusted Operating Profit before Tax (AOPBT) figure. Doing so will produce an answer of $8,435,000 for the Net Operating Profit

  less Adjusted Taxes figure. Now that the necessary information has been determined, the calculation of EVA is as follows:

  EVA = {$8,435,000 - ($60,700,000 * 0.16)} = ($1,227,000)

  A negative EVA calculation indicates that management has failed to provide economic profits to shareholders, as evidenced by the fact that the opportunity cost of capital employed is more than the NOPLAT figure. In this example, the

  management of Intelligent Semiconductor should be considered as having failed to provide shareholder value.

  The calculation of Adjusted Operating Profit before Taxes (AOPBT),and Cash Operating Taxes are important. The calculation of AOPBT is as follows:

  Operating profit (after depreciation and amortization) + Implied interest on operating leases + any increase in the LIFO reserve + goodwill amortization = Adjusted Operating Profit Before Taxes.

  Cash Operating Taxes, another important component of EVA, is calculated as follows:

  Cash Operating Taxes = Income Tax Expense + tax benefit from interest expenses + tax benefit from interest on leases + taxes on non-operating income

  Adjusted Operating Profit Before Taxes minus Cash Operating Taxes = Net Operating Profit Less

  Adjusted Taxes (NOPLAT). Subtracting the dollar cost of capital from the NOPLAT figure will yield the EVA.

• Question 52:

  Tessmer is a hard-working employee working in the sales department of a large bank. In this capacity, Tessmer is allowed to have an expense account to be used to entertain clients and cover business expenses. Over the past 3 months, Tessmer's expenses have almost doubled, a large part coming from expenses attributed to "business expense." While his manager, Janus Lace, is suspicious about this and believes that Tessmer is using the account for personal expenses, he has no proof of this. All of Tessmer's reimbursement bills appear to be in order. Tessmer has:

  A. violated the AIMR standard on Professional Misrepresentation.
  B. violated the AIMR standard on Reasonable Costs.
  C. not violated any AIMR standard.
  D. violated the AIMR standard on Professional Misconduct.
  C. not violated any AIMR standard.

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  Explanation

  There is no evidence that Tessmer is misusing his expense account. The increase may simply be due to an increased professional activity. There is a chance that Tessmer is altering his bills but that needs to be investigated in some depth by Janus Lace, with a detailed examination of the results accruing from increased expenses. If Tessmer is found guilty of falsifying records, he would be in violation of Standard II (B) - Professional Misconduct. Without such evidence, charges of violation cannot be leveled against anyone.

• Question 53:

  If the discount relative to the NAV of a closed-end investment company ________ during the holding period, the investor will likely experience ________ excess returns.

  A. does not change; zero
  B. increases; positive
  C. declines; positive
  D. declines; negative
  C. declines; positive

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  Explanation

  It is intuitive that if the discount increases, the share price has decreased relative to the NAV and the investor loses because he had originally bought the shares at a higher price. The analysis of these discounts remains a major question in modern finance.

• Question 54:

  When a trustee for private investment funds has responsibility toward current beneficiaries who are income oriented and future beneficiaries ("remaindermen") who are capital growth oriented, she has primary fiduciary duty toward:

  A. both have to be treated on the same footing.
  B. the income beneficiaries.
  C. the remaindermen.
  D. insufficient information.
  A. both have to be treated on the same footing.

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  Explanation

  Personal trust account trustees are subject to the "Prudent Man Rule" in their investment behavior and are required to follow the guidelines of the trust. In particular, when there are conflicting interests involved, the trustee is required to maintain an equitable balance between the interests of different groups. Standard IV (B.1) - Fiduciary Duties - and the Topical Study, "Fiduciary Duty."

• Question 55:

  Four years ago, at the advice of J.T. Lindseth, her financial planner, T.J. Ali purchased a $1,000 face, 5. 70 percent, semi-annual coupon bond with four years to maturity priced to yield 8.50 percent for $906. 70. Now, the bond has matured, and Lindseth calls Ali and informs her that because he had invested the coupons at an annual rate of 10.0 percent, her realized return was approximately: A. 8.65%.

  B. 8.50%.

  C. 10.00%.

  D. 8.35%.

  Correct Answer. A
  A

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  Explanation

  Time Saving Note:You can answer this question without doing any calculations! Because the coupon reinvestment rate was greater than the original YTM, we would expect the YTM to increase. This narrows down the choices to 8.65% and 10.00%. The rate of 10.00% is an unlikely choice because the coupon payments do not comprise 100% of the return of the bond. Thus, the realized rate will be greater than 8.50%, but less than 10.00%. The only choice that meets this criterion is 8.65%. For those of you who want to work through the calculations: We first need to calculate the FVcoupon annuity, then calculate the Total Future Value of the Bond, and finally calculate the realized return. Step 1: Calculate theFVcoupon annuity

  

  jjoachim_SS15_1_B_e_FVCoupon Here, FVcoupon annuity= [ (1 + (0.10 / 2)4*2)-1] / [0.10 / 2] * [(1000 * 0.057) / 2] = [ ( 1.05)8?1] / 0.05 * 28.5 = 9.549 * 28.5 = $272. 15 Alternatively, N = 8, I/Y = 5, PMT = 28.5, PV = 0, Compute FV = -272. 15 Step 2: Calculate the Bond's Total Future Value (TFV) TFV = Face Value + FVcoupon annuity= $1,000 + $272. 15 = $1,272. 15. Step 3: Calculate the Realized Annual Return

  

  jjoachim_SS15_1_B_e_RealizedR

  Here, Realized ReturnAnnualized Basis= [ (1,272. 15 / 906. 70)1/8?] * 2 = 0.08648, or 8.65%.

• Question 56:

  WSX Capital management is considering changing the allocation of its clients' portfolios to include commodities. The portfolios are currently invested in stocks, bonds, real estate, and hedge funds. Which of the following is the most important investment attribute to evaluate when adding commodities as an asset class?

  A. The return volatility of commodities.
  B. The relationship between commodity returns and other asset class returns.
  C. The beta of the portfolio after adding commodities.
  B. The relationship between commodity returns and other asset class returns.

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  Explanation

• Question 57:

  A mortgage holding company has found that 1% of its mortgage holders default on their mortgage and lose the property. Furthermore, 90% of those who default are late on at least two monthly payments over the life of their mortgage as compared to 45% of those who do not default. What is the probability that a mortgagee with two or more late monthly payments will default on the mortgage and lose the property?

  A. None of these answers
  B. 0.019
  C. 0.009
  D. 0.020
  E. 0.018
  D. 0.020

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  Explanation

  We have P(def) = 0.01. P(not def) = 0.99. P(two late payments/def) = 0.90. P(two late payments/not def) = 0.45. Using Bayes formula: p(def/two late payments) = (0.01*0.9)/(0.01*0.9 + 0.99*0.45) = 0.0198 = 0.020.

• Question 58:

  Standard V (B) deals with

  A. independence and objectivity.
  B. performance presentation.
  C. preservation of confidentiality.
  D. insider information.
  E. fair dealing.
  F. research report.
  B. performance presentation.

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  Explanation

  The purpose of Standard V (B) is to state the responsibility of AIMR members to avoid misrepresentation of the investment performance and encourages full disclosure of investment performance data to clients and client prospects.

• Question 59:

  A firm needs to purchase 20 warehouses in various states. To finance the purchases, it issues new shares in a seasoned equity offering. It also issues high coupon bonds on which interest must be paid semi-annually. If the firm purchases the warehouses at the beginning of the year, which of the cash flows will be affected in the year-end statements?

  Investing Operating Financing

  I.affected affected affected II.affected affected unaffected III.affected unaffected affected IV.unaffected unaffected unaffected

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

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  Explanation

  The purchase of the warehouses affects the investing cash flows. The bonds and equity offering affect the financing cash flows. These transactions do not affect operating cash flow immediately. The interest payments on the issued debt, however, will affect it. In addition, the dividends paid on the new equity will affect financing cash flows.

• Question 60:

  Technical analysts may view a buildup in credit balances as

  A. an increase in market buying power.
  B. a decrease in market buying power.
  C. an exit of investors out of the market.
  D. a rush of investors into the market.
  A. an increase in market buying power.

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  Explanation

  A credit balance results when an investor sells stocks and deposits the proceeds with his broker. Technical analysts view a buildup of credit balances as an increase in a pool of potential buying power that will soon be reinvested in the market. For this reason, such a buildup is viewed as a bullish sign.