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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 61:

  Braun Industries is considering an investment project, which has the following cash flows: tProject Cash Flows 0-$1,000 1 400 2 300 3 500 4 400 The company's WACC is 10 percent. What is the project's payback, internal rate of return and net present value?

  A. I, II, IV, VIII
  B. II, IV, VII
  C. I, II, IV, VIII
  D. III, V, VII
  E. I, II, IV
  F. I, II, IV, VI
  E. I, II, IV

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  Explanation

  The Degree of Operating Leverage (DOL) measures the percentage change in EBIT that results from a given percentage change in sales. Degree of Operating Leverage can be calculated using several methods, including equations based

  upon unit sales and dollar sales. The DOL equation based on dollar sales is illustrated as follows:

  {DOL = [(sales in dollars - total variable costs) / (sales in dollars - total variable costs - total fixed operating costs)]. Of the answers provided, only I, II, and IV are incorporated into this equation.

• Question 62:

  In an investment environment, an initial outlay of $100 grows to $156 in 7 years. The quarterly compounded rate of annual interest implicit in this is:

  A. 6. 56%
  B. 6. 40%
  C. 6. 12%
  D. 6. 73%
  B. 6. 40%

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  Explanation

  There are 28 quarters in 7 years. If the quarterly compounded rate is r, then we have 100*(1+r/4)^28 = 156, giving r = 6. 4%

• Question 63:

  A firm using LIFO accounting has a LIFO reserve of 500, with a LIFO ending inventory of 2,300. It is currently in the 35% tax bracket. If it switches to FIFO accounting, its ending inventory would be reported at ________.

  A. 1,305
  B. 2,800
  C. 1,800
  D. 1,805
  B. 2,800

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  Explanation

  LIFO Reserve = FIFO Ending inventory value - LIFO Ending inventory value Therefore, 500 = FIFO Ending inventory value - 2,300, giving the value of the ending inventory under FIFO = 2,800.

• Question 64:

  The dollar would have appreciated if

  A. the U.S. had a balance of trade surplus under a system of flexible exchange-rates.
  B. under fixed exchange-rates, the number of dollars demanded in the foreign exchange market increased.
  C. it had been exchanging for one mark but can now be exchanged for two.
  D. it had been exchanging for three marks but can now be exchanged for two.
  C. it had been exchanging for one mark but can now be exchanged for two.

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  Explanation

  An increase in the value of a domestic currency relative to foreign currencies defines a currency appreciation. Thus, the value of the dollar in this example has increased since one dollar now buys two marks whereas before it only purchased one mark. The U.S. dollar now "buys" more marks.

• Question 65:

  Miller Mining, a calendar-year corporation, purchased the rights to a copper mine on July 1, 1996. Of the total purchase price, $2,800,000 was appropriately allocated to the copper. Estimated reserves were 800,000 tons of copper. Miller expects to extract and sell 10,000 tons of copper per month. Production began immediately. The selling price is $25 per ton. Miller uses percentage depletion (15%) for tax purposes. To aid production, Miller also purchased some new equipment on July 1, 1996. The equipment cost $76,000 and had an estimated useful life of 8 years. After all the copper is removed from the mine, however, the equipment will be of no use to Miller and will be sold for an estimated $4,000. If sales and production conform to expectations, what is Miller's depletion expense on this mine for financial accounting purposes for the calendar year 1996?

  A. $420,000
  B. $215,400
  C. $105,000
  D. $210,000 E. $430,800
  D. $210,000 E. $430,800

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  Explanation

  Depletion expense is based on the units-of-production method. Based on the estimates, the depletion charge per ton is $3. 50 ($2,800,000 / 800,000 tons). Since 10,000 tons are extracted per month and there are 6 months of operations for 1996, the depletion expense is $210,000 ($3. 50 per ton X 10,000 tons X 6 months).

• Question 66:

  The investment decision hypothesis maintains that the most important portfolio decision is that of

  A. all of these answers
  B. diversification
  C. financing
  D. asset allocation
  D. asset allocation

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  Explanation

  A good portfolio achieves the investor's desired risk/return profile through asset allocation. Typically a more diversified portfolio has lower risk.

• Question 67:

  Standard II includes rules on which of the following?

  A. Professional Misconduct
  B. Prohibition against Plagiarism
  C. All of these answers
  D. Use of Professional Designation
  C. All of these answers

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  Explanation

  Standard II - Relationships with and Responsibilities to the Profession - includes rules on the use of Professional Designation, Professional Misconduct and Prohibition against Plagiarism.

• Question 68:

  Grey recommends the purchase of a mutual fund that invests solely in long-term U.S. Treasury bonds. He makes the following statements to his clients:

  I. "The payment of the bond is guaranteed by the U.S. government; therefore, the default risk of the bonds is virtually zero."

  II.

  "If you invest in the mutual fund, you will earn a 15 percent rate of return each year for the next several years." Did Grey's statements violated AIMR's Code and Standards?

  A. Neither statement violated the Code and Standards.
  B. Statement I and II violated the code and Standards.
  C. Only statement I violated the Code and Standards.
  D. Only statement II violated the Code and Standards.
  D. Only statement II violated the Code and Standards.

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  Explanation

  This question deals with Standard IV (B.6), Prohibition against Misrepresentation. Statement I is a factual statement that discloses to clients and prospects accurate information about the terms of the investment instrument. Statement II, which guarantees a specific rate of return, is an opinion stated as a fact and therefore violates Standard IV (B.6).

• Question 69:

  Congress considered a tax plan that would reduce capital gains tax rates from the existing levels. The current maximum capital gains rate is 28 percent compared with a maximum rate of 31 percent for ordinary personal income. With this tax bill, which of the following statements is least correct for an investor in a high personal tax bracket?

  A. A 2-for-1 stock split is announced for a stock that the investor currently holds. The company had split the stock because the stock price had increased beyond the desired price range and is expected to continue to grow. This is good news to the investor because it means that any gains from increased stock value will be taxed at a new lower capital gains rate when the stock is sold.
  B. None of these statements are correct.
  C. One of the companies in the investor's portfolio recently announced that it will embark on a stock repurchase plan. The lower capital gains tax rate will reduce the investor's taxes if he/she decides to tender some shares of stock in the company.
  D. All of these statements are correct.
  E. The stock of a company that pays high cash dividends and has a dividend reinvestment plan (DRIP) is a good investment for this individual because he/she will receive more money that can then be reinvested in the company's stock.
  E. The stock of a company that pays high cash dividends and has a dividend reinvestment plan (DRIP) is a good investment for this individual because he/she will receive more money that can then be reinvested in the company's stock.

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  Explanation

  In a dividend reinvestment plan, the stockholder must pay taxes on the dividend amount, even though stock and not cash has been received.

• Question 70:

  What is the value of a stock that is expected to pay a $10 per share dividend in a year's time, and to be selling for $30 per share at the end of the year? The appropriate discount rate is 10% per year.

  A. $40.61
  B. $36. 36
  C. $30.35
  D. Not able to compute with the above data.
  B. $36. 36

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  Explanation

  Value = $40/1.10=$36. 36.