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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 691:

  A firm has just issued 6%, 10-year coupon bonds, which have a yield-to-maturity of 7. 1%. The firm has old debt, which pays a coupon of 8%. The firm is in the 45% tax bracket. Its marginal after-tax cost of debt equals ________.

  A. 3. 3%
  B. 3. 2%
  C. 4. 4%
  D. 3. 9%
  D. 3. 9%

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  Explanation

  Since debt interest is tax-deductible, the after-tax cost of debt equals 7. 1%*(1-45%) = 3. 9%. Note that you must use the yield-to-maturity of the new bonds while calculating the cost of debt since this is the rate at which interest expense is computed in maintaining the accounts. The coupon rate does not enter directly in this calculation (though it does matter since it affects the yield-to-maturity).

• Question 692:

  The least squared regression minimizes the:

  A. adjusted R-square.
  B. absolute value of the distance between the observed points and the regression line.
  C. explained variance.
  D. the square of the distance between the observed points and the regression line.
  D. the square of the distance between the observed points and the regression line.

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  Explanation

  The least squared regression minimizes the square of the distance between the observed points and the regression line.

• Question 693:

  Which of the following usually occurs at the peak of the business cycle?

  A. Wages decrease.
  B. Profit margin increases.
  C. Capacity utilization increases significantly.
  D. Unit labor costs increase substantially.
  D. Unit labor costs increase substantially.

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  Explanation

  During the peak of the business cycle, firms are already operating near full capacity, leading to very small increases or declines in capacity utilization. Inflation tends to be high, resulting in workers' demands for higher wages. Because firms now tend to be using marginal labor and production facilities, productivity increases only slowly. These factors result in substantial increases in unit labor costs, which along with the otherfactors, also help push profit margins lower.

• Question 694:

  Events X and Y are mutually exclusive. P(X) = 0.15, P(Y) = 0.32. The probability of either X or Y occurring equals ________.

  A. 0.048
  B. 0.53
  C. 0.47
  D. 0.17
  C. 0.47

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  Explanation

  Note the relationship, P(X or Y) = P(X) + P(Y) - P(X and Y) Also remember that for mutually exclusive events, by definition, P(X and Y) = 0. Therefore, P(X or Y) = 0.15 + 0.32 = 0.47.

• Question 695:

  When reporting contingencies

  A. disclosure of a loss contingency is to be made if there is a remote possibility that the loss has been incurred.
  B. guarantees of others' indebtedness are reported as a loss contingency only if the loss is considered imminent or highly probable.
  C. disclosure of a loss contingency must include a dollar estimate of the loss.
  D. none of these answers.
  E. a loss that is probable but not estimable must be disclosed with a notation that the amount of the loss cannot be estimated.
  E. a loss that is probable but not estimable must be disclosed with a notation that the amount of the loss cannot be estimated.

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  Explanation

  Contingent losses should be accrued if both probable and reasonably estimable. In this case, the contingent loss is not estimable and, therefore should only be disclosed in the notes since it is probable.

• Question 696:

  Which of the following is not a component of Porter's Five Force Model of industry competition?

  A. All of these are components of Porter's Five Force Model.
  B. Threat of new entrants.
  C. Threat of substitute products.
  D. Bargaining power of buyers.
  E. Bargaining power of suppliers.
  F. Threat of technological obsolescence.
  F. Threat of technological obsolescence.

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  Explanation

  Porter's Five Force Model of industry competition, named after its creator, famed Harvard professor Micheal Porter, is used to measure the amount of competition within industries. The five forces within this model are as follows:

  Threat of new entrants Threat of substitute products Bargaining buyer of buyers Bargaining power of suppliers Rivalry of existing firms

  A shift in any of these threats will lead to a change in industry competition. As you can see, "threat of technological obsolescence" is not named as an explicit threat within the Five Forces Model.

• Question 697:

  The average age of a firm's depreciable assets is 9 years. The firm, subject to a tax rate of 40%, saves 20,000 each year due to depreciation expense. The total depreciation that the firm has accumulated is _______.

  A. 300,000
  B. 180,000
  C. 450,000
  D. 72,000
  C. 450,000

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  Explanation

  Since tax savings from depreciation = (depreciation expense)*tax rate, one obtains depreciation expense = 20,000/0.4 = 50,000. Also, Average age = Accumulated depreciation/Depreciation expense. Hence, total accumulated depreciation = 9*50,000 = 450,000

• Question 698:

  Morgan Inc. was organized on January 2, 1997 with the following capital structure:

  10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000 shares, $100,000

  Common stock, par value $25; authorized 100,000 shares;

  Issued and outstanding 10,000 shares, $250,000

  Morgan had net income of $450,000 for its first year, but no dividends were declared. How much was Morgan's book value per common share at December 31, 1997?

  A. $68.50
  B. $70
  C. $25
  D. $45. 00
  E. $69.50
  A. $68.50

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  Explanation

  The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears. Thus, the book value per preferred share is the $105 liquidation value plus $10 ($100 X 10%) of dividends in arrears, or $115. The total book value for preferred shares is $115,000 ($115 X 1000). The total book value of the company is $800,000 ($100,000 par value of preferred stock + $250,000 par value of common stock + retained earnings equal to $450,000 of net income). Hence, $685,000 ($800,000-115,000) is the book value of the common stock, and book value per common share is $68.50 ($685,000 / 10,000 shares).

• Question 699:

  Stock dividends and stock splits differ in that

  A. stock splits are paid in additional shares of common stock, whereas a stock dividend results in replacement of all outstanding shares with a new issue of shares.
  B. a stock dividend results in a decline in the par value per share.
  C. in a stock split a larger number of new shares replaces the outstanding shares.
  D. stock splits involve a bookkeeping transfer from retained earnings to the capital stock account.
  E. none of these answers.
  C. in a stock split a larger number of new shares replaces the outstanding shares.

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  Explanation

  A stock split does not involve any accounting entries. Instead, a larger number of new shares are issued to replace and retire all outstanding shares.

• Question 700:

  When the economy is in short-run equilibrium below potential output, then

  A. actual unemployment will be greater than the natural unemployment.
  B. the natural unemployment will decline.
  C. the economy will be unable to sustain output in the long run.
  D. actual unemployment will be less than the natural unemployment.
  E. a strong demand for resources will place upward pressure on resource prices.
  A. actual unemployment will be greater than the natural unemployment.

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  Explanation

  An equilibrium below potential output implies that demand for labor and other resources is weak. This implies that the actual rate of unemployment will be greater than the natural rate since the natural rate prevails when the economy is operating at full employment.