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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 621:

  What is the present value of $350 per year for 10 years, with the first cash flow occurring today, rather than 1 year from now? Assume interest is 8% per year, compounded annually.

  A. $2,408.90
  B. $48.49
  C. $2,536. 41
  D. $3,500.00
  E. $2,348.53
  C. $2,536. 41

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  Explanation

  Recognize that this question is an annuity due situation, since the first cash flow occurs immediately or at the beginning of each period. Annuities where the first payment occurs 1 period from today (or at the end of each period) are called "ordinary" annuities. This requires placing the calculator into "Begin" mode prior to solving the question. NOTE: Be sure to place the calculator OUT OF annuity due mode after this question before going on to subsequent questions, or you will get the wrong answers! On the BAII Plus, press 2nd BGN. If the display shows END, then press 2nd SET and then 2nd Quit. This will place the BAII Plus into annuity due mode (you can tell this because the BAII Plus will display BGN in small letters). Now press 10 N, 8 I/Y, 350 PMT, 0 FV, CPT PV. Place the calculator back into End mode (for ordinary annuities) by pressing 2nd BGN and then if the calculator is displaying BGN, press 2nd SET and 2nd Quit. The BGN letters should disappear from the display. On the HP12C, press BlueShift END, which is the blue function on the front of the 8 digit key. This places the HP12C into Begin mode (the HP12C shows the word BEGIN in the display when in this mode). Then press 10 n, 8 i, 350 PMT, 0 FV, PV. To place the HP12C back into ordinary annuity mode (or END mode), press BlueShift BEG (the blue function written on the front of the 7 digit key). Note that the answer is displayed as a negative number. Make sure the BAII Plus has the value of P/Y set to 1.

• Question 622:

  A portfolio manager with Churn Brothers Brokerage has recently been approached by one of its institutional accounts requesting that the dollar-weighted rate of return for the Microspeculative investment be calculated.

  Consider the following series of transactions:

  t0: Purchase 20,000 shares for $0.90 per share t1: Purchase 50,000 shares for $1.13 per share t2: Purchase 50,000 shares for $1.20 per share t3: Sell 20,000 shares of for $1.22 per share Sell 80,000 shares of for $1.20 per share Sell 20,000 shares of for $1.17 per share

  Ignoring commissions, what is the dollar-weighted rate of return for this investment?

  A. (3. 77%)
  B. (1.20%)
  C. 4. 02%
  D. The answer cannot be calculated from the information provided.
  E. 4. 94%
  F. None of these answers is correct.
  C. 4. 02%

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  Explanation

  Remember that the dollar-weighted rate of return uses the IRR equation in the determination of its answer. Further, the dollar-weighted rate of return is another name for the IRR equation, and this nomenclature is commonly used within the

  field of investment management. The logic behind this characterization is the fact that the IRR equation takes into account both the timing and scale of all project cash flows. In the determination of the dollar-weighted rate of return calculation,

  the first step should be to identify the cash flows for each period. This process is illustrated as follows:

  t0: -[20,000 shares purchased * $0.90 per share] = [$18,000]

  t1: -[50,000 shares purchased * $1.13 per share] ] = [$56,500]

  t2: -[50,000 shares purchased * $1.20 per share] = [$60,000]

  t3: [(20,000 shares sold * $1.22 per share) + (80,000 shares sold * $1.20) + (20,000 shares sold * $1.17 per share)] = $143,800

  Now that the cash flows have been determined, incorporating this information into your calculator's cash flow worksheet and solving for IRR will yield a dollar-weighted rate of return of 4. 02% for this investment.

• Question 623:

  An entry made to recognize the cost of using an asset during the period is

  A. a closing entry
  B. a reversing entry
  C. an opening entry
  D. an adjusting entry
  D. an adjusting entry

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  Explanation

  Expenses should be recognized in the period in which they are incurred. In order to be consistent with the matching principle, an adjusting entry must be made to record the expense of using certain assets.

• Question 624:

  Contrary-opinion technicians would view the fact that 85% of stock index futures speculators are bullish as

  A. an unimportant sign.
  B. indicative of an approaching trough.
  C. a bullish sign.
  D. a bearish sign.
  E. indicative of a flat trend channel.
  D. a bearish sign.

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  Explanation

  The percentage of stock index futures speculators who are bullish is a measure used by contrary-opinion technical analysts. If a majority over some decision rule (70%, for example) were bullish, this would be interpreted as a bearish sign.

• Question 625:

  A cumulative frequency distribution on days absent during a calendar year by employees of a manufacturing company is shown below.

  Days AbsentCumulative ## of Employees 0 - 260 3 - 531 6 - 814 9 - 116 12 - 142

  How many employees were absent between 6 and 11 days?

  A. 12
  B. 17
  C. 20
  D. None of these answers
  E. 8
  A. 12

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  Explanation

  This is found by the difference between the 6-8 class and the 12-14 class. In this case: 14 - 2 = 12.

• Question 626:

  Which of the following is NOT typically true for a firm which has adopted the low-cost competitive strategy?

  A. The firm will enjoy above-average rates of return only if its price premium based on its differentiation exceeds the extra cost of being unique.
  B. None of these answers.
  C. All of these answers.
  D. The firm seeks to differentiate itself based on its distribution system, through some unique marketing approach, or by providing an important service to its customers.
  E. The firm seeks to identify itself as unique in its industry in an area that is important to buyers.
  C. All of these answers.

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  Explanation

  The above are all true for a company that has adopted the differentiation strategy. With the low-cost strategy, the firm is determined to become the low-cost producer and, hence, the cost leader in the industry. Cost advantage might include economies of scale, proprietary technology, or preferential access to raw materials. The objective is to charge less for the product or service but still enjoy higher profit margins and returns on capital.

• Question 627:

  Jackson, an analyst, decides not to change a recommendation from buy to sell because she wants to sell her holdings first. Is there a standards violation?

  A. No
  B. Yes, Standard IV (A.2), Research Reports
  C. Yes, Standard III (B), Duty to Clients and Prospects
  D. Yes, Standard IV (B.4), Priority of Transactions
  D. Yes, Standard IV (B.4), Priority of Transactions

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  Explanation

  Jackson violated Standard IV (B.4) - Priority of Transactions Jackson has decided that she did not want to wait until all her clients have had the opportunity to sell first. Thus, her decision not to change her recommendation until she accomplished her own financial aims will result in losses to her clients if the value of the holding subsequently declines.

• Question 628:

  Consider the following information for a company.

  Common Stock Price $75. 50

  Preferred Stock Par Price $100

  Preferred Dividend $4. 0

  Debt Rating BB+

  Owners Equity 12. 27%

  Preferred Stock Flotation Cost 2. 0%

  The Preferred Stock is issued at Par

  Calculate the component cost of this newly issued preferred stock.

  A. 6. 57%
  B. 4. 0%
  C. 7. 0%
  D. 3. 92%
  E. 18.78%
  F. 4. 08%
  G. 12. 27%
  F. 4. 08%

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  Explanation

  The component cost of preferred stock is the dividend divided by issue price minus floatation cost. In this case the component cost of preferred stock = $4. 00 / (100 - 2) = 4. 08%.

• Question 629:

  Although trade-date accounting is recommended, ________ accounting that is disclosed is acceptable for calculating performance.

  A. settlement-date
  B. maintenance
  C. accrual
  D. composite
  E. Performance
  A. settlement-date

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  Explanation

  Trade-date accounting is recommended when calculating performance, although settlement-date accounting is acceptable if disclosed. Because of the volatility and lengthy settlement periods of some markets, trade-date accounting is strongly recommended for calculating the performance of international portfolios.

• Question 630:

  Which of the following events is likely to encourage a corporation to increase its debt ratio?

  A. An increase in the personal tax rate.
  B. An increase in the expected cost of bankruptcy.
  C. Increased uncertainty about the level of sales and output prices.
  D. An increase in the corporate tax rate.
  E. An increase in the company's degree of operating leverage.
  D. An increase in the corporate tax rate.

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  Explanation

  A major reason for using debt is that interest is deductible, which lowers the effective cost of debt. An increase in the corporate tax rate will increase the tax savings from using debt. An interest increase in the personal tax rate will make interest income less attractive. An increase in operating leverage, bankruptcy costs, and uncertainty about sales and output prices will encourage the firm to decrease financial leverage.