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

CFA Institute CFA-LEVEL-1 Online Questions & Answers

• Question 791:

  If r = .65, what does the coefficient of determination equal?

  A. 0.423
  B. None of these answers
  C. 0.577
  D. 0.806
  E. 0.194
  A. 0.423

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  Explanation

  The coefficient of determination is r-squared.

• Question 792:

  A firm's preferred equity has a face value of 100 and a 5. 5% coupon. The equity is trading at $87. 29 per share. The firm is in the 40% tax bracket. Its cost of preferred stock equals ________.

  A. 2. 52%
  B. 3. 30%
  C. 6. 30%
  D. 3. 78%
  C. 6. 30%

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  Explanation

  Preferred dividends are not tax-deductible. Hence, no tax adjustment is made while calculating the cost of preferred equity. The price of a perpetuity that pays C per year, at a discount rate of R, equals C/R. Hence, 87. 29 = 5. 5/R, giving R = 6. 3%.

• Question 793:

  The following information applies to a company's preferred stock: Current price $101.00 per share Par value $100.00 per share Annual dividend $6. 50 per share The company issued the preferred stock at par and incurred a 10% floatation cost. If the company's marginal corporate tax rate is 34%, what is the after-tax cost of preferred stock?

  A. 4. 3%
  B. 6. 4%
  C. 13%
  D. 4. 2%
  E. 6. 5%
  F. 7. 2%
  F. 7. 2%

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  Explanation

  The cost of preferred stock is calculated as the preferred stock dividend divided by the net issuing price. The dividend for this preferred stock is $6. 50, and the net issuing price was $90.00. Thus the cost of preferred stock is 6. 5 divided by 90 or 7. 2%. There are no tax savings associated with the use of preferred stock, therefore no tax adjustments are made when calculating the cost.

• Question 794:

  Which of the following is/are true about Goodwill?

  I. It represents the amount paid for an acquired firm that cannot be identified with tangible assets.

  II. US GAAP prohibits capitalization of Goodwill.

  III.

  IRS does not allow amortization of Goodwill for tax purposes.

  A. I and III
  B. I and II
  C. II and III
  D. I, II and III
  A. I and III

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  Explanation

  When the sum of the fair values of all identifiable assets and liabilities involved in the purchase of another entity is less than the amount paid, the excess is attributed to "intangibles." This excess is referred to as "Goodwill" and is capitalized as an asset. Under US GAAP, only Goodwill generated during acquisitions is capitalized; it does not allow capitalization of internally generated Goodwill

• Question 795:

  The process of planning expenditures on assets whose cash flows are expected to extend beyond one year is known as ________.

  A. Net Present Valuing
  B. Capital Budgeting
  C. Optimal Capital Structure
  D. Payback Period
  E. Weighted Average Cost of Capital (WACC)
  B. Capital Budgeting

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  Explanation

  Capital Budgeting is defined as the process of planning expenditures on assets whose cash flows are expected to extend beyond one year.

• Question 796:

  Delroy McWilliams, a quantitative analyst with Churn Brothers Brokerage, is examining a data sample and has amassed the following information:

  Standard deviation of the sample: 70 Number of observations: 600 Sample mean: 812

  Assume that Mr. McWilliams formulates a null hypothesis that states that the value of the population mean is equal to 800. Additionally, assume that the population standard deviation is unknown. Given this information, what is the standard error of the estimate? Further, what is the test statistic? Choose the best answer.

  A. 8.370; 1.434
  B. 8.370; 4. 148
  C. None of these answers is completely correct.
  D. 0.014; 11.834
  E. 0.014; 857. 143
  F. 2. 858; 1.40
  G. 2. 858; 11.60
  C. None of these answers is completely correct.

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  Explanation

  The standard error and test statistic for this example is 2. 858 and 4. 199, respectively. Therefore, none of these answers is correct. If the population standard deviation is unknown, as in this example, the standard error of the estimate is found

  by using the following equation:

  {Standard error = s / square root of n} where s = the sample standard deviation and n = the number of observations in the sample.

  In this example, all of the necessary information has been provided, and the determination of the standard error of the estimate is found as:

  {Standard error = [70 / 24. 495] = 2. 858}

  Now that the standard error of the estimate has been calculated, the test statistic can be found by using the following equation:

  {Test statistic = [sample statistic - value of the population parameter under the null hypothesis] / standard error of the sample statistic].

  Again, all of the necessary information has been provided, and the calculation of the test statistic is found as follows:

  {Test statistic = [812 - 800] / 2. 858 = 4. 199}

• Question 797:

  An analyst is interested in determining the value of a real estate investment and has estimated the following data for the property:

  Net operating income $50,480 Cost of debt 8.2%

  Depreciation $3,550 Cost of equity 12. 5%

  Interest expense $2,720 WACC 9.6%

  Tax rate 35% Cap rate 11.0%

  Which of the following is closest to the value of the property using the income approach?

  A. $403,900
  B. $458,900
  C. $466,500.
  B. $458,900

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  Explanation

• Question 798:

  Tasty Food, Inc.'s statements have overstated accounts payable by 400 and understated the accounts receivables by 225. Then, which of the following is/are true?

  I. Its income is correctly stated.

  II. Its income is overstated by 175.

  III. Its current assets are overstated by 225.

  IV.

  Its operating cash flows are overstated by 175.

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

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  Explanation

  Current assets are understated by 225. The reported income is not affected since the errors are in the balance sheet items. The operating cash flow is overstated by 400-225=175. Note that current liability is overstated by 400.

• Question 799:

  Gerald Snow is a bond manager for Long Vision Investments. Snow is evaluating potential arbitrage opportunities. He has the following list of bonds:

  Bond X is a I-year zero coupon bond selling at 950.

  All three bonds have a par value of SI,000. if no arbitrage opportunity exists, the price of bond Z is closest to:

  A. S975.
  B. $995
  C. $1,015
  B. $995

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  Explanation

• Question 800:

  As the debt level rises, the cost of equity increases because:

  A. the probability of default increases.
  B. all of these answers.
  C. the variability of EPS increases.
  D. the financial risk increases.
  B. all of these answers.

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  Explanation

  All of the above are reasons why the cost of equity increases as the debt level rises.