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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 661:

  The loss from an uncollectible account is:

  A. an asset
  B. a liability
  C. a regular expense of doing business
  D. a reduction in revenue
  C. a regular expense of doing business

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  Explanation

  The benefit from selling on credit to customers far outweighs the cost of losses from uncollectible accounts. These losses are a regular expense of doing business.

• Question 662:

  The NAV of an open-ended fund is $16. 88. The fund charges a 7. 2% sales charge and no redemption charges. If you invested a $1,000 with the fund, how many shares would you receive?

  A. 55. 26
  B. 54. 98
  C. none of these answers
  D. 59.24
  C. none of these answers

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  Explanation

  The offer price i.e. the price at which you can buy a share equals NAV/(1-load charge) = 16. 88/(1-0.072) = $18.19. Therefore, the number of shares you receive equals 1000/18.19 = 54. 98 Be careful NOT to calculate the offer price as NAV*(1 + load charge). The sales charge is expressed as an percentage of the amount you deposit. In this example, you deposit $1,000 and get shares worth $1,000 * (1-0.072) = $928. Note that the 54. 98 shares are worth 54. 98 * 16. 88 = $928 i.e. this is the amount you would get if you were to sell the shares immediately.

• Question 663:

  You have a 1 year, 10% semi annual coupon bond with a price of $975. If the 6 month T-Bill rate is 6%, what is the one year theoretical spot rate?

  A. 7. 4%
  B. 8.7%
  C. 9.9%
  D. 12. 8%
  D. 12. 8%

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  Explanation

  975 = 50/1.06 + 1050/

  975 - 47. 17 = 1050/

  = 1050/927. 83 = 1.1317

  r =- 1

  r = 6. 4%, note this rate is on a semi annual basis. If you annualized this rate by doubling

  it you would get 12. 8.

• Question 664:

  You are examining a group of 5 mutual funds. Their average annual returns have been 10%, 8%, 13%, 19%, and 15%. What is the range of annual returns?

  A. 12. 0%.
  B. 10.0%.
  C. 11.0%.
  D. 13. 0%.
  C. 11.0%.

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  Explanation

  The range = the maximum value - the minimum value. Here, we have 19% - 8% = 11%.

• Question 665:

  A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of income

  A. after cumulative effect of accounting changes and after discontinued operations of a segment of a business.
  B. before cumulative effect of accounting changes and before discontinued operations of a segment of a business.
  C. after cumulative effect of accounting changes and before discontinued operations of a segment of a business.
  D. before income from continuing operations.
  E. before cumulative effect of accounting changes and after discontinued operations of a segment of a business.
  E. before cumulative effect of accounting changes and after discontinued operations of a segment of a business.

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  Explanation

  A transaction that is unusual and infrequent is classified as an extraordinary item. The following is the order of items to be reported separately in the income statement: income from continuing operations, discontinued operations, extraordinary items, cumulative effect of changes in accounting principle, and net income.

• Question 666:

  Given that a stock is correctly priced at $29.34, has an expected dividend payment of $1.30 in one year, and has a required rate of return of 18%, what should its price be right after that dividend payment in one year?

  A. $35. 68
  B. Not enough information
  C. $37. 74
  D. $29.41
  E. $33. 32
  F. $34. 95
  E. $33. 32

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  Explanation

  In order for the stock to be correctly priced, the present value of next year's dividend plus the present value of the stock price right after the dividend must equal the current price. In this question, 29.34 = (1.3 / 1.18) + (next year's price / 1.18). Rearranging this yields next year's price = [29.34 - (1.3/1.18)] x 1.18 = $33. 32.

• Question 667:

  The primary purpose of the statement of cash flows is to

  A. state the company's financial position at period-end
  B. measure the change in the company's assets
  C. provide information about a company's cash receipts and cash payments during the accounting period
  D. analyze net income during the accounting period
  C. provide information about a company's cash receipts and cash payments during the accounting period

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  Explanation

  Other financial statements are used to analyze revenues, expenses, assets, liabilities, and stockholders' equity. The statement of cash flows summarizes transactions affecting cash; it is the balance sheet that states the company's financial position at a point in time.

• Question 668:

  ________ is a position in which, if a property's return below its debt cost, the investor's return will be less than from an all-cash real estate deal.

  A. Negative leverage
  B. Positive leverage
  C. Excess financing
  D. None of these answers
  A. Negative leverage

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  Explanation

  Remember that, in real estate, the use of debt financing to purchase a piece of property will affect its risk-return parameters.

• Question 669:

  An intern at Smith, Kleen and Beetchnutty has recently been asked to value shares of General Manufacturing, a multinational conglomerate, using the Gordon Model. General Manufacturing is a stable firm which has experienced steady growth for much of the last twenty years, and this growth rate is not anticipated to change. In his assignment, the intern has been provided with the following information:

  Expected dividend at t3: $1.05 Required rate of return on equity: 11.75% per year Growth rate of dividends: 9.00% per year

  Using the information provided, what is the value of General Manufacturing shares?

  A. None of these answers is correct.
  B. The answer cannot be calculated from the information provided.
  C. $32. 14
  D. $34. 45
  E. $37. 63
  F. $28.81
  C. $32. 14

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  Explanation

  Since the growth rate of dividends is not expected to change in the future, the Gordon Model can be applied. The Gordon Model is commonly referred to as the "constant growth dividend discount model." This model of common stock valuation is illustrated as follows:

  P0 = [D1 / (r - g)]

  Where

  P0 = the price of common stock X at time 0

  D1 = the expected dividend at t1

  r = the required rate of return on equity investments and g = the expected growth rate of dividends.

  Since we are not provided the dividend at t1, we must determine it manually be discounting the dividend at t3 by the growth rate of dividends. The determination of D1 is as follows:

  D1 = {D3 / [(1 + g)(1 + g)]}

  D1 = {$1.05 / [1 + 0.09)(1 + 0.09)]}

  D1 = {$1.05 / 1.1881} = $0.8838

  Now that the dividend at t1 has been determined, the given information can be put into the equation provided, leading to the following series of calculations:

  P0 = [$0.8838 / (.1175 - .09)] = $32. 14

  When using the Gordon model, remember that the required rate of return "r" must be greater than the expected growth rate "g." Otherwise, the equation will produce a nonsensical answer.

• Question 670:

  A portfolio manager for Smith, Kleen and Beetchnutty is examining the performance of several of her institutional customers. The following transactions apply to the account of Dotcominous, a fledgling "new media" advertising conglomerate:

  t0: Purchase five Kansas City District 14 General Obligation Bonds for $5,545. 00 t1: Purchase three Kansas City District 14 General Obligation Bonds for $3,229.50 Receive coupon payment of $300.00 t2: Purchase three Kansas City District 14 General Obligation Bonds for $3,185. 00 Receive coupon payment of $480.00 t3: Receive coupon payment of $660.00 t4: Sell eleven Kansas City District 14 General Obligation Bonds for $11,780.00

  Investments with similar characteristics merit an 11.75% required rate of return. Assuming that taxes and commissions have already been incorporated into the cash flows provided, what is the dollar-weighted rate of return for this series of transactions?

  A. 1.68%
  B. 3. 44%
  C. None of these answers is correct.
  D. 5. 44%
  E. The answer cannot be calculated from the information provided.
  F. (3. 34%)
  B. 3. 44%

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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. So said, the required rate of return is not explicitly factored into the calculation of the dollar-weighted rate of return, rather what is being determined is the rate which equates the present value of the cash

  inflows to the present value of the cash outflows. In the determination of the dollar-weighted rate of return calculation, the first step should be to identify the cash flows for each period. In this example, the cash flows have been stated, and little

  calculation is necessary. The cash flows associated with this series of investments are illustrated as follows:

  t0: ($5,545. 00)

  t1: [($3,229.50 paid for the bonds) + $300.00 coupon payment] = ($2,929.50)

  t2: [($3,185. 00 paid for the bonds) + $480.00 coupon payment] = ($2,705. 00)

  t3: $660 coupon payment

  t4: $11,780

  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 3. 44% for this investment